We’ve been discussing the challenges facing trend following strategies during April’s market volatility here in our post Paging Mr. Trend Following and in Jeff Malec’s, recent tweet thread. Many investors are understandably frustrated by the performance of trend and other alternatives during this market downturn.
Right on cue, managed futures pioneer Man Group has published a timely piece addressing this very issue. Their analysis offers additional historical context that might help investors maintain perspective during these challenging conditions.
Be Patient?
We’re all familiar with the conventional wisdom about patience in stock markets: “wait out bear markets,” “stocks go up long-term,” “be a patient investor.” But Man Group’s research flips the script with an intriguing take—be patient not just with your stocks, but with your alternatives, particularly trend following strategies.
What makes Man Group’s analysis particularly compelling is their examination of data surrounding three major market crises. They have the receipts, so to speak:
The Dot-Com Bubble (2000-2002)
- Trend strategies initially lost approximately 10% as markets whipsawed
- After recalibration, patient investors were rewarded with returns exceeding 40%
- Even on the path to these impressive gains, trend followers endured another 20% drawdown
Performance of the Société Générale Trend Index and S&P 500 in the three months prior and during the GFC crisis
Past Performance is Not Necessarily Indicative of Future Results.
The Global Financial Crisis (2007-2009)
- Trend strategies suffered a drawdown of nearly 17% during the initial market shock
- However, they had already adapted defensive positions before the S&P entered a prolonged bear market
- These adjusted positions delivered significant crisis alpha as the downturn accelerated
Performance of the Société Générale Trend Index and S&P 500 in the three months prior and during the GFC crisis
Past Performance is Not Necessarily Indicative of Future Results.
The Inflation Episode (2022)
- S&P 500 experienced a sharp 4% drawdown in November 2021
- This triggered a 6% reversal for trend-following strategies
- After positions adapted, trend following delivered strong performance as inflation trends became established
Performance of the Société Générale Trend Index and S&P 500 in the three months prior and during the inflation episode of 2022
Past Performance is Not Necessarily Indicative of Future Results.
The Three-Phase Pattern
The Man piece identifies a bit of a trend across these varied crisis periods:
1.Initial Shock and Position Misalignment – Legacy positions lead to losses as rapid price movements contradict established trends
2.Adaptive Recalibration – Trend models adjust positioning, de-risking where appropriate and identifying emerging trends
3.Delivering Crisis Alpha – Strategies eventually align with sustained market moves, delivering the protection investors seek
Will history repeat this time? Past performance is not necessarily indicative of future results. And the big question is: is this a correction (that’s already over..) or is this the start of a so called ‘crisis period’ for equities. Whatever your answer to that question, April has undoubtdely seen an ‘initial shock’ and ‘position misalignment’. And being here on the front lines seeing different trend followers positioning, we can confirm Man’s thoughts tha trend strategies are already adjusting positions—currently taking a more defensive stance by shorting equities, going long bonds, and shorting energies.
So is crisis next? We could easily argue that the fleeting nature of the tweets and reversals and all the rest represent perhaps just a correction. But as Man says: History suggests that policy shifts tend to have lasting unintended and unexpected consequences that ripple through markets as participants take time to digest their impact.
Whatever way it breaks for trend followers, patience will definitely be key. Whether they catch this downturn or not, does not mean they will not capture the next one, or the one after that. Trend’s diversifying, Non-Correlation, is not negative correlation. It can and will decline during sharp stock market declines. Worried about longer term declines… be patient.
As Man Group aptly puts it: “Trend can indeed be a friend in times of market stress—but it’s a friend that tends to show up just before the real party begins.”
