QOTD: Revenge of the Trend Followers

Everyone gives up on strategies that are deemed to be “broken”. It’s human nature. But if a strategy is sound and its recent bout of underperformance falls within a reasonable range of expectations based on history, giving up is probably the worst thing one can do.

Coming into 2014, many investors had thrown in the towel on the black box hedge funds that systematically trade futures – frequently known as trend-followers. They had done terribly during the 2013 bull market and many pointed at their inability to profit as evidence that they were “broken” or “over”.

This year, many of these funds have had their revenge. Some of the bigger shops are up double-digits percent.

You won’t be surprised to hear that investors have become believers again. Amazing how that happens.

I know from firsthand experience that there was probably a lot of pressure on the managers of these funds to toss out their strategies and do things differently – to some clients, months and quarters mean everything (even though in real life they mean absolutely nothing). In the hedge fund world, many of the clients are not even the end clients – they are financial intermediaries with clients or boards of directors of their own to answer to.

It’s all a gigantic beauty pageant, everyone worried every day about how everyone else perceives them. The pressure is extraordinary. Unfortunately, this atmosphere is not conducive to good investing for the simple reason that good investing practically demands some sort of fealty to a time-tested strategy – and there is no such thing as a time-tested strategy that works all the time. 

But alas, the dance continues…