Highlights

  • Trend following is one of the most well-known dynamic investment strategies.
  • Despite its critics, it remains a popular method for following changing trends in global asset classes, particularly in times of stress.
  • This paper uses a quantitative method for measuring the amount of turbulence an investor may experience with trend following strategies.
  • The authors examine historical periods of high turbulence and classify their driving forces as “magnitude surprise” or “correlation surprise”.
  • For trend following strategies, a magnitude surprise is an event that results in large magnitude of returns where most managers have a similar response, either positive or negative.
  • Correlation surprise often occurs when managers that seem similar behave differently for a wide range of underlying reasons.
  • By decomposing manager returns into these two forces, the authors can examine what drives turbulence, which can help to classify extreme events.
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Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of February 2022 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

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