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
COACHING POINTS
- The Philosophy: Markets are not efficient; they are emotional. Human herding causes prices to trend (go up or down) longer than logic dictates. Trend Following strategies systematically exploit this by buying assets that are rising and shorting assets that are falling.
- The Scope: Unlike stock picking, this strategy trades everything: Crude Oil futures, Japanese Yen, 10-Year Treasuries, Soybean futures, and Gold. It is a truly global macro strategy.
- The “Crisis Alpha”: Trend Following is famous for performing best when everything else crashes (e.g., 2008, 2022). When the stock market collapses, it forms a strong “down trend,” which trend followers short to make massive profits.
“Cut your losses short and let your winners run.” This ancient trading adage is the algorithm behind Managed Futures (Trend Following). It removes prediction. Trend followers don’t care why Oil is going up; they only care that it is going up. By simply following the price, they capture the “fat tails” of market moves. Source: CME Group Education / AQR Capital Management
How Trend Following differs from Buy-and-Hold.
- Buy-and-Hold (S&P 500): Dependent on economic growth. Crashes during recessions. (Convergent).
- Trend Following: Dependent on volatility and persistence.
Scenario A (Bull Market): Long Stocks. (Make money).
Scenario B (Bear Market): Short Stocks. (Make money).
Scenario C (Choppy/Sideways): Whipsawed. (Lose money).
What-If Scenario: The 2022 Inflation Shock
Comparison: 60/40 Portfolio vs. Managed Futures Trend Strategy.
| Asset Class | 2022 Performance | Driver |
|---|---|---|
| 60/40 Portfolio | -17% (Loss) | Stocks and Bonds crashed together. |
| Managed Futures | +27% (Gain) | Shorting Bonds and Long Energy/USD. |
Visualizing Crisis Performance
| Crisis Event | Trend Following Return |
|---|---|
| 2000 (Dotcom Crash) | 12 |
| 2008 (GFC) | 18 |
| 2022 (Inflation) | 27 |
*Trend Following has a history of generating positive returns (Crisis Alpha) exactly when traditional portfolios are suffering double-digit losses.
Visualizing Uncorrelation
| Asset Class | Correlation to Stocks |
|---|---|
| US Equities | 1.0 |
| Real Estate (REITs) | 0.7 |
| Managed Futures | -0.1 |
*A correlation near zero (or negative) means Trend Following moves independently of the stock market, providing true diversification.
Execution Protocol
You no longer need a specialized futures account. Use liquid ETFs like DBMF (iMGP DBi Managed Futures) or KMLM (KFA Mount Lucas Index). These funds replicate the positioning of top hedge funds with lower fees and daily liquidity.
This is an alternative asset class. An allocation of 10-20% is sufficient to provide diversification benefits without dragging down the portfolio during strong equity bull markets (when trend following often flatlines).
Trend following hates sideways markets. If the market goes up 5% then down 5% repeatedly, the strategy will buy high and sell low, bleeding money. You must have the discipline to hold through these “boring” periods to catch the next big crisis trend.
COACHING DIRECTIVE
- Do This: If you want insurance against prolonged bear markets (like the 1970s or 2000s) where stocks go nowhere for a decade. Trend following thrives in these “regime shifts.”
- Avoid This: If you chase performance. Trend following often underperforms the S&P 500 for years (e.g., 2010-2019). If you sell in frustration right before a crisis, you lose the insurance benefit.
Frequently Asked Questions
What are Managed Futures?
An alternative investment strategy where professional managers (CTAs) trade futures contracts on commodities, currencies, bonds, and equities, usually following systematic, computer-driven trend rules.
Is it the same as Shorting?
No. It is bi-directional. It goes Long (buys) when prices are rising and goes Short (sells) when prices are falling. It has no bias; it simply follows the price momentum.
How is it taxed?
Favorably. Most futures trading profits (including many Managed Futures ETFs/Mutual Funds) qualify for 60/40 tax treatment (Section 1256), meaning 60% of gains are taxed at lower long-term rates, regardless of holding period.