Trend Following (Managed Futures): The ‘Crisis Alpha’ Strategy That Wins When Markets Crash
Trend Following (Managed Futures): The “Crisis Alpha” Strategy That Wins When Markets Crash
CORE INSIGHTS
- Profit from Chaos: Trend Following can go Long (buy) or Short (sell). It makes money when markets trend strongly in any direction, even down.
- Uncorrelated Returns: In 2022, when stocks and bonds both fell, Managed Futures soared 20%+. It is the only asset class that reliably delivers “Crisis Alpha.”
- The “Smile” Curve: This strategy wins in extreme bull markets AND extreme bear markets. It only loses in choppy, trendless markets.
Most portfolios rely on bonds for safety. But when inflation spikes, bonds fail. Managed Futures offer a third path. By trading futures contracts on commodities and currencies, these funds generate returns that have nothing to do with the S&P 500.
Long: If Price > 200-Day Moving Average.
Short: If Price < 200-Day Moving Average.
*Effect: Automates “Cut losses early, let winners run.”
What-If Scenario: The 2022 Inflation Shock
| Strategy | Components | Result |
|---|---|---|
| 60/40 Portfolio | Stocks (-18%) + Bonds (-13%) | -16% Loss (Panic) |
| Trend Follow Mix | Stocks + Bonds + 20% MF | -7.9% Loss (Stable) |
Visualizing Crisis Alpha
*Figure 1: Crisis Performance. Managed Futures (Green) consistently profit when Stocks (Red) crash.*
Strategic Action Steps
Take 10% from Stocks and 10% from Bonds. This “Capital Efficient” blending reduces volatility without sacrificing returns.
Use liquid ETFs like DBMF or KMLM. These track hedge fund indexes for low fees (~0.85%).
When Managed Futures spike (during a crisis), sell the gains to buy cheap stocks. This rebalancing premium adds to your return.
The Bottom Line: Who Should Choose What?
- Add Trend Following: Retirees and conservative investors who cannot afford a 50% drawdown.
- Skip It: Young accumulators with 30+ year horizons who just want raw equity beta.
Frequently Asked Questions
What is ‘Crisis Alpha’?
An asset’s ability to generate positive returns specifically when the stock market is crashing. Managed Futures achieve this by shorting falling markets.
How does Trend Following work?
It uses a rules-based approach. If price is up, buy. If down, sell short. It trades everything (Stocks, Bonds, Commodities) based on momentum.
Why hold this instead of Bonds?
Bonds fail during inflation. Managed Futures profit from inflation by shorting bonds and buying commodities. It diversifies where bonds cannot.