Modern Portfolio Theory (MPT) has long served as a foundational framework for asset allocation and portfolio construction. This concept remains influential in both academic finance and practical investment management. But the question investors face today is not whether MPT was revolutionary—it clearly was—but whether its insights still hold up under real-world conditions, decades later.
If one had to invest in buy and hold treasury bonds or trend-followed treasury bonds, it is likely that most investors would prefer the trend-followed bond investment. However, in a broader portfolio context, the analysis suggests that how one 'eats' their bond exposure is largely irrelevant and the portfolio's long-term outcome will be driven by equity market dynamics. Bonds systematically lower an equity-centric portfolio's returns, but they also lower the risk profile of the overall portfolio.
The analysis above highlights that we are in a rare regime when commodities are the only long asset with a positive trend. The last time this happened we entered a long period of high inflation and poor real returns. Will this happen again? Who knows. But we do know that post-1973 we entered a world where, for several decades (at least up to around 2007), both bonds and commodities were an important component of a diversified portfolio. The recent past has arguably made investors complacent in their reliance on a stock/bond portfolio as an end-all-be-all solution. When history tells us that incorporating commodities into a portfolio probably makes sense from a diversification standpoint.
Time Series Momentum in the US Stock Market: Empirical Evidence and Theoretical Implications Valeriy Zakamulin and Javier GinerWorking paper, University of Agder and University of [...]
Trend-following strategies are a lot like stock-picking strategies -- there are endless approaches and varying levels of complexity. In this short piece, we explore the [...]
Consider a market-timing strategy which supposedly predicts the direction of the stock market trend. Such a strategy generates Buy and Sell signals. A Buy signal [...]
The topic of this blog post was inspired by Wes, who said the following: Valeriy, you have done more formal academic research on trend-following than [...]
In our final blog post, that finishes the trend-following series, we briefly review the results of the forward-tests of the profitability of various trend following [...]
The Standard and Poor's (S&P) 500 index is a value-weighted stock index based on the market capitalizations of 500 large companies in the US. This [...]
The difficulty in testing the profitability of trend-following rules stems from the fact that the procedure of testing involves either a single- or multi-variable optimization. [...]
We consider an investor and a financial market that consists of only two assets: one risky asset and one safe (or risk-fee) asset. An example [...]
In our context, a technical trading indicator can be considered as a combination of a specific technical trading rule with a particular moving average of [...]
A trend following strategy is based on switching between a financial asset and cash depending on whether the asset prices trend upward or downward. Specifically, [...]
In this post we aim to give an overview of some specific types of moving averages. Specifically, we cover "ordinary" moving averages and mention some examples of exotic moving averages.
One of the basic principles of technical analysis is that ``prices move in trends". Traders firmly believe that these trends can be identified in a timely manner and used to generate profits and limit losses. Consequently, trend following is the most widespread market timing strategy; it tries to jump on a trend and ride it. Specifically, when stock prices are trending upward (downward), it's time to buy (sell) the stock. Even though trend following is very simple in concept, its practical realization is complicated. One of the major difficulties is that stock prices fluctuate wildly due to imbalances between supply and demand and due to constant arrival of new information about company fundamentals. These up-and-down fluctuations make it hard to identify turning points in a trend. Moving averages are used to ``smooth" the stock price in order to highlight the underlying trend.
Well, it's my birthday today, so I'm getting older, but I'm in high spirits because younger people are so excited to learn new things. Over [...]
Active management has been out of favor for a while--high fees, high tax burdens, and poor long-term performance. But with the slow rise of actively [...]
Investors should know what they are buying and why they are buying it. Unfortunately, more often than not, investment products are jammed down the throats [...]
Over the past 10+ years I've cultivated a laundry list of websites associated with financial economics. My primary focus has been identifying sources for new ideas that [...]
What We Do? We are a research-intensive asset management firm with a focus on high-conviction value and momentum factor exposures, as opposed to "closet-index" factor exposures. More [...]
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