What is trend investing, and why do we do it?
Trend investing strategies come in different forms and are referred to by many names. However, they all have in common that they attempt to gain profits from trends.
This is part one in a three part mini-series on the topic of systematic trend investing. In part two we will look closer at what a trend is and how we can identify one. In the last part we will look at how we can design a systematic trend strategy, followed by a practical example.
When the price in a market is moving in one overall direction, such as up or down, that is called a trend.
Traders in the stock and commodity markets have tried to find ways to capture trend profits for at least 200 years.
What’s in a name? That which we call a rose By any other name would smell as sweet
“What’s in a name?”
Trend investing comes in many shapes and forms and is referred to by many names in the academic literature. From time-series momentum (TSM), also known as trend momentum or trend-following, and cross-sectional momentum (CSM) that is often referred to as the momentum factor, to managed futures and CTA.
Time-series momentum is an absolute strategy that looks at the price trends of each asset individually. If the recent price has gone up, then we take a long position, if it has gone down we take a short position. We can compare this to the traditional (cross-sectional) momentum factor that ranks assets on a relative basis, and goes long on the top-most percentile and short on the bottom.
If the momentum strategy is realized using futures instruments, it is usually referred to as a “managed futures strategy” or a CTA, short for “Commodity Trading Advisor”[1]. In the context of trend investing, the acronym CTA is commonly used for asset managers following investment strategies utilizing futures contracts on a wide variety of asset classes.
