Trend-following strategies have proved to add significant value to a portfolio, but there is a problem - what model or managers should I use to represent my trend exposure? This issue is discussed in the paper, "In pursuit of trend-following beta: The promise and pitfalls of replication".
Building your own trend model will have problem because here is a wide dispersion in the performance of different trend strategies. How do you pick the best strategy. However, there also is a problem if you want to pick specific managers. There is wide dispersion across managers. The alternative is to hold an index or attempt to replicate a well-defined index like the BTOP50; however, any replication scheme has issues. One choice is to form a portfolio of managers, but there are ongoing costs with this fund of funds structure. An investor may be able to cut costs with forming a portfolio strategy replication; however, there may be skill leakage. You will not be able to capitalize on the stronger behavior of better managers.
The authors conduct a useful exercise on how to develop a replication strategy using a limited number of markets and simple OLS regression or LASSO regression. While not perfect, the cost savings with careful regression work can add value relative to a trend-following benchmark (more precisely a portfolio of CTA that are mainly trend-followers). My experience suggests that replication is not always easy. There are operational costs that can be high if there is not scale, but the idea of forming a cheaper replication of a manager bundle is useful and can add serve as an alternative to picking a bundle of managers.
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