Managed futures, CTAs and trend-following

It is no secret that hedge funds have been all the rage in the past decade, epitomized perhaps by this 2005 article in nymag dubbed "Get Richest Quickest." From Dan Loeb's heated exchanges with recruits to Paulson's credit derivative coup, these diverse set of funds have flourished under the legal exemptions of the SEC. However, the swash-buckling nature seen here is far from the only source of excitement. Before quants, fundamental short-selling, hft, there was the cult of trend-following commodity trading advisors (usually synonymous with managed futures).

Trend-following is a set of systematic, medium term strategies (weeks or longer holding period) which trade usually in liquid futures markets and were popular in the 70s and 80s. These funds are regulated by the CFTC (Commodity Futures Trading Commission) and follow a different set of rules regarding disclosure, fees etc.. In fact, performance tables and other details for most ctas are public info at http://www.iasg.com/ (free registration).

In essence, trend-following is almost antithetical to traditional ben-graham value-investing. It buys high, sells higher, shorts low, covers lower. Typically, there is no attempt to "value" assets - it merely judges whether a trend is valid and seeks to ride it until the trend exhausts itself:

 
(source: http://www.tradingopinions.com/wp-content/uploads/2012/11/trend_followers.jpg)

This is of course a highly simplistic description; nonetheless it captures the fundamental beliefs in trend-following which have resulted in outsized returns:

(Source: http://trendfollowing.com/images/comp1.jpg)


This is not an endorsement by any means - like any other strategy group the winners could have just been lucky just as much as there is a successful "school"  a la Graham and Doddsville. Such strategies continue to evolve and some, such as Jerry Parker of Chesapeake Capital continue to manage hundred-million-dollar funds successfully.