The Resurgence Potential of Trend-Following Strategies Amid Market Volatility

Investors often overlook the cyclical nature of market volatility, mistaking short-term drawdowns for permanent failures. Yet history reveals that trend-following strategies, which profit from sustained price movements, have consistently rebounded from periods of underperformance to deliver outsized gains during crises. Today, with geopolitical tensions, shifting interest rates, and market fragmentation, the stage is set for a resurgence of these strategies. This analysis explores their historical resilience, current macroeconomic tailwinds, and why Man Group's disciplined approach exemplifies the case for patience and strategic rebalancing.

Historical Drawdowns and Subsequent Outperformance

Trend-following strategies thrive on extremes—whether sharp declines or explosive rebounds. During the 2008 financial crisis, Bill Dunn and Kenneth Tropin achieved returns of $80 million and $120 million, respectively, by capitalizing on the synchronized collapse of asset classes. Their success was not a fluke: systematic trend-following systems, which rely on price momentum rather than fundamentals, were primed to short volatile markets.

The recovery phase from 2009–2010 showcased their adaptability. While choppy markets temporarily stalled performance, the strategies' rules-based exits and reentries allowed them to pivot to emerging trends. For instance, the SG CTA Index, which tracks top trend-following managers, delivered significant gains during the 2020 pandemic crash and the 2022 rate-hike selloff. In the latter year, a 5% allocation to managed futures reduced a 60/40 portfolio's loss by 2.3 percentage points—a stark illustration of diversification power.

Current Macro Drivers: Geopolitics, Rates, and Fragmentation

Today's environment mirrors the conditions that historically favored trend-following:
1. Geopolitical Uncertainty: The U.S.-China trade rivalry, Middle East tensions, and European energy crises have created sector-specific dislocations. For example, energy markets swung violently in 2022–2023 due to supply constraints and policy shifts—a playground for trend followers.
2. Interest Rate Volatility: The Fed's aggressive rate hikes and the ECB's divergent path have fractured global bond markets. High-yield spreads near post-crisis tights and inverted yield curves signal prolonged uncertainty, favoring strategies that profit from directional bets.
3. Market Fragmentation: The 60/40 portfolio's decline underscores the need for uncorrelated returns. Trend-following's near-zero correlation to equities and bonds makes it a critical hedge against synchronized downturns.

Man Group: A Case Study in Resilience

Man Group's AHL programs, featured in top indices like the TTU TF and Serenity Ratio portfolio, exemplify the strategy's staying power. Their systematic models, refined over decades, have weathered drawdowns while capitalizing on macro trends. For instance:
- The TTU TF Index (which includes AHL's offerings) achieved a 12.51% YTD gain in 2024, outperforming the S&P 500's 7.31% CAGR since 2000.
- The Serenity portfolio, using AHL's strategies, delivered a 5.94% CAGR with a 14.44% maximum drawdown—far better than the 60/40 portfolio's 33% peak loss.

Why Allocate Now?

The current juncture offers three compelling reasons to rebalance toward trend-following:
1. Valuation: Managed futures remain underallocated in most portfolios, despite their proven crisis resilience. The Serenity portfolio's 14.44% max drawdown versus the S&P's 50.95% highlights asymmetric risk/reward.
2. Interest Rate Dynamics: High rates favor strategies that profit from volatility. Micro-quant and macro quant models, which dominate AHL's toolkit, excel in non-zero rate environments.
3. Geopolitical Volatility: The Ukraine war, Middle East conflicts, and U.S. trade policies are creating prolonged trends in energy, metals, and currencies—prime hunting grounds for trend followers.

Investment Advice

Investors should consider:
- Rebalancing: Replace bonds with 5–10% allocations to trend-following CTAs (e.g., Man AHL's programs) to reduce equity/bond correlation risks.
- Patience: Trend-following's drawdowns are temporary. The 2008 rebound took just 31 days to claw back losses—a reminder that discipline trumps timing.
- Diversification: Use multi-asset trend-following indices like SG Trend or BTOP50 for broad exposure.

Conclusion

History and current conditions align to suggest that trend-following strategies are primed for resurgence. Their ability to turn drawdowns into launching pads during crises, coupled with today's geopolitical and rate-driven fragmentation, makes them a cornerstone of resilient portfolios. Man Group's AHL programs exemplify how systematic, long-term discipline can navigate volatility—and why investors should rebalance now to capture the next wave of outperformance.

Thomas Lott is a pseudonymous analyst specializing in macro-driven investment strategies.