Tuesday, October 23, 2012

UPDATED--Cliff Asness' AQR Capital: A Century of Evidence on Trend-Following Investing; Since 1903

Update: "UPDATE--More on "A Century of Evidence on Trend-Following Investing""
Original post:

In commodities trend-following is a survival strategy, most CTA's use it so they can survive to collect their fees.
Too harsh? I'll try again:

Commodity Trading Advisors tend to use trend-following approaches because the moves in commods can be so dramatic and reversals so frequent and sudden that trying to anticipate rather than follow can wipe out the 'other people's money' portfolio.

The math for equities is quite different. If  manager eschews margin there is no chance that a reversal could put the entire portfolio at risk so there is more leeway for a "catch the turns, breakouts etc. ...) should one want to risk it.

One of the least noisy trend following techniques is to buy new all-time highs. It either is or isn't setting new highs, there is no interpretation required.

Michael Covel has created a cottage industry of books, seminars tapes etc. around trend-following. I don't know if his stuff works, I've never been interested enough to have it tested. When I saw the AQR capital link I got interested.

From the Trend Following Manifesto:
Synopsis from “A Century of Evidence on Trend-Following Investing” by AQR Capital:
We study the performance of trend-following investing across global markets since 1903, extending the existing evidence by more than 80 years. We find that trend-following has delivered strong positive returns and realized a low correlation to traditional asset classes each decade for more than a century. We analyze trend-following returns through various economic environments and highlight the diversification benefits the strategy has historically provided in equity bear markets.
More:
Using historical data from a number of sources, we construct a time series momentum strategy all the way back to 1903 and find that the strategy has been consistently profitable throughout the past 110 years.
More:
The performance has been remarkably consistent over an extensive time horizon that includes the Great Depression, multiple recessions and expansions, multiple wars, stagflation, the Global Financial Crisis, and periods of rising and falling interest rates....
...MORE 

Here's the abstract of the AQR paper:
 We study the performance of trend-following investing across global markets since 1903, extending the existing evidence by more than 80 years. We find that trend-following has delivered strong positive returns and realized a low correlation to traditional asset classes each decade for more than a century. We analyze trend-following returns through various economic environments and highlight the diversification benefi s the strategy has historically provided in equity bear markets. Finally, we evaluate the recent environment for the strategy in the context of these long-term results.
And here are instructions for accessing it.

See also:
Cliff Asness’s AQR Staff Built Him A Robot Warren Buffett (BRK.B)
Man vs. Machine on Wall Street: How Computers Beat the Market (and should they be banned?)
AQR Capital Management LLC: A $100,000 Prize for Academic Papers in Finance

Here's a nice little paper that über-quant Asness did with Rob Arnott:
Surprise! Higher Dividends= Higher Earnings Growth