Although tracking trends in financial markets was once a profitable investment strategy, the approach has fallen on hard times due to crowding. This according to an article in The Wall Street Journal.
Trend-following is explained as follows: “If a security is going up—usually measured by a short-term moving average rising about a long-term moving average—then it’s time to buy. If it falls below, it’s time to sell.”
During the 1990s and 2000s, the article reports, these strategies enjoyed double-digit gains and, in 2008, were one of the few strategies to make money. “This performance,” the article says, “led pensions and other hedge-fund investors to pour in money.” But the performance has waned considerably, the article says. In addition to crowding, some attribute poorer performance to the quantitative easing that has “suppressed the volatility these funds enjoy.”
Some firms are offering lower-cost alternatives, including AQR Capital Management and Amundi Asset Management. According to the article, “trend-following is one of the starkest examples of how strategies that once belonged exclusively to hedge funds and earned them huge profits are being copied and commoditized by low-cost replicators.”
For more trends, visit the Portfolio Construction Channel