We are learning more about the qualities of trend-following as a hedge or safe asset. A hedge asset is one with low correlation to a risky asset. A safe asset has low correlation overall, but will have a negative correlation during a drawdown for a traditional risky asset. Trend-following will have the characteristics of a safe asset, but only if an extended drawdown exists. If there is a short-term drawdown, it is less likely that trend-following will generate the desired return pattern. This is a key risk of holding a trend-following manager.
There may be some diversification gains, but a safety effect may not exist. We have seen Treasury yields during the current crisis, so it is hard to say whether there is a true safe asset. Therefore, it may make sense to return to first principles. A safe strategy is one that can hold either long or short positions and adjust those positions based on the direction of trends. It is not a structural safe asset but a behavioral safe asset based on the dynamic actions of market participants.
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