Diversifying Beyond Trend Following: The Case for Relative-Value Strategies in Multi-Strategy Portfolios

In the wake of volatile market environments and shifting macroeconomic regimes, investors are increasingly reevaluating the efficacy of traditional trend-following strategies. While these strategies have historically provided strong returns during sustained directional moves—such as the 2022 inflation spike or the 2008 financial crisis—they falter in range-bound or rapidly reversing markets. From 2023 to 2025, trend-following strategies delivered flat or negative returns amid sharp equity rebounds and sudden policy-driven shocks, such as the 2023 SVB Crisis and the 2025 market correction. This underscores a critical need to diversify beyond trend following by incorporating relative-value strategies, which exploit pricing inefficiencies across related assets to enhance risk-adjusted returns and crisis resilience.

The Limitations of Trend Following in Modern Markets

Trend-following strategies thrive when markets move in a single direction over extended periods. For example, the Société Générale Trend Index surged 27% in 2022 as traditional 60/40 portfolios lost nearly 20% of their value. However, the subsequent years revealed vulnerabilities. In 2024, trend-following strategies struggled as equity markets oscillated between sharp rebounds and sudden sell-offs. The Eurekahedge Long Volatility Index, in contrast, delivered positive monthly returns in all negative equity months since August 2024, highlighting the growing mismatch between trend-following and market dynamics.

The problem lies in the frequency of short-lived market shocks and the rarity of sustained directional regimes. For instance, the initial panic over Trump-era tariffs in 2020 was quickly reversed, and the 2023 regional banking crisis led to a rapid policy response that stabilized markets. In such environments, trend-following strategies often lock in losses during early dislocations before markets rebound. This volatility has eroded investor confidence in trend following as a standalone risk-mitigation tool.

The Rise of Relative-Value Strategies: A Complementary Approach

Relative-value strategies, which focus on exploiting mispricings between related assets, offer a compelling counterbalance. These strategies rely on signals like price convergence rather than directional trends, making them effective in volatile or range-bound markets. In equities, for example, relative-value managers identify overvalued and undervalued stocks within sectors or geographies, profiting from eventual price alignment. During the 2020 pandemic, this approach capitalized on dislocations in sectors like travel and technology, delivering returns even as broader markets fluctuated.

In commodities, relative-value strategies have similarly thrived. The 2022 energy crisis, for instance, created divergences between crude oil and refined products due to logistical bottlenecks. Relative-value managers positioned themselves to benefit from these spreads, generating returns while hedging against macroeconomic uncertainty. By 2025, these strategies had proven their ability to navigate volatile markets, such as the sharp corrections in agricultural commodities driven by climate-related supply shocks.

Case Study: LMR Partners and the Power of Diversification

A notable example of the effectiveness of relative-value strategies is LMR Partners, a multi-strategy firm that has integrated these approaches into its portfolio. From 2010 to 2024, LMR's flagship fund delivered a net annualized return of 11.4%, with standout performance in 2024 (16.04% net return). The firm's success stems from a diversified book of 55 sub-strategies across equities, commodities, and volatility, with allocations typically in the low to mid-single digits. This structure ensures that no single strategy dominates the portfolio, reducing exposure to regime-specific risks.

LMR's emphasis on correlation management further enhances resilience. By actively monitoring and adjusting for overlapping verticals, the firm avoids concentration risks. For example, its use of relative-value spreads in commodities—such as emissions, refined products, and agricultural goods—has provided uncorrelated returns during periods of market stress. The firm's risk team, expanded from three to 30 members since 2020, employs advanced scenario analysis to stress-test strategies, ensuring robustness across market conditions.

Enhancing Crisis Resilience: The Role of Long Volatility

While relative-value strategies offer a strong complement to trend following, combining them with long volatility strategies can further enhance crisis resilience. Long volatility strategies trade volatility directly, outperforming trend following in fast-moving markets. For instance, during the 2025 equity correction, long volatility strategies delivered positive returns, whereas trend following recorded significant losses. This diversification is critical in environments where volatility is elevated, as seen in 2020, 2020, and 2025.

A balanced allocation—combining trend following, relative-value, and long volatility—can optimize risk-adjusted returns. Historical data supports this approach: a 60/40 portfolio in its ten worst quarters since 2005 showed that adding trend following improved performance, but blending it with long volatility further reduced drawdowns. For investors seeking stability, this multi-strategy framework provides a robust defense against market shocks.

Practical Implications for Investors

For investors, the key takeaway is to move beyond a single-strategy allocation. A diversified portfolio that integrates trend following, relative-value, and long volatility strategies can navigate both directional and non-directional regimes. Here's how to implement this approach:
1. Equity Relative-Value Opportunities: Focus on sectors with high dispersion, such as technology or energy, where mispricings are frequent. For example, reveals periods of divergence with broader indices, offering potential for relative-value trades.
2. Commodity Spreads: Exploit divergences in futures contracts or between physical and financial markets. For instance, the crude oil-gasoline spread during 2022 provided asymmetric returns.
3. Long Volatility Hedges: Allocate to strategies that benefit from volatility spikes, such as VIX-linked products or volatility arbitrage.

Conclusion

The post-2020 market environment has exposed the limitations of trend-following strategies in volatile, regime-shifting conditions. By integrating relative-value strategies—alongside long volatility—investors can achieve superior risk-adjusted returns and crisis resilience. Firms like LMR Partners demonstrate that a diversified, market-neutral framework not only mitigates downside risks but also capitalizes on inefficiencies across asset classes. For those seeking to future-proof their portfolios, the time to diversify beyond trend following is now.