Here is a bog standard long / short trend following system applied to a well diversified basket of 25 world futures using volatility adjusted position sizing. It’s a simple breakout system using bollinger bands around an 80 day moving average. All the usual suspects are present: energies, bills, bonds, stock indices, metals, grains, currencies, meats, sugar, coffee. Observe the long period of apparent success from 1986 up until 2011. I traded not dissimilar systems and made 16% a year in the 2000s before being “Corzined”.
And then it crapped out. The poor performance from 2011 has also been reflected by many of the trend following CTAs. Many CTAs bite the dust as time progresses. Perhaps most. Bill Dunn (a renowned hero of the trend following world) lost most of his AUM when one of his programs tanked 71% and was closed while another was down 57%. JW Henry went out of business after 30 or 40 years riding the trend following wave.
I won’t even begin to try to explain what happened. Many others have done so, many theories abound. You will NOT make “millions from up and down markets” with this or any other trading methodology. Dunn achieved 13% CAGR in his closed program for a max DD of 71%. Tough stuff – but that is reality.
The lesson may be to follow a simple asset allocation strategy with periodic rebalancing and to forget methodologies which wax and wane. And don’t imagine the asset allocation strategy will result in pure joy either. The more you invest in stocks the rougher the ride. And stocks can go nowhere for 20 years at a time. Most stocks go bust so you need to invest in a self healing index which invests in winners and cuts losers.
The best you can do is to accept what the market can give. “Strategies” will work for long periods and then clap out. Even HFT is struggling with over competition and low volume.
At least if you invest as forecast free as possible and tailor your mix of volatilities to what your temperament can withstand you are likely to survive over the long term and not bottle out when the going gets rough.
How many investors could stand Bill Dunn’s 71% drawdown? Or Crispin Odey’s 60% effort last year? Not many methinks. And even if you can is it worth suffering that misery for the returns on offer?