Why Trend Following Strategies Are Poised for a Rebound Despite Recent Drawdowns

The past five years have been challenging for trend-following strategies, with Man Group's AHL quantitative hedge fund underperforming as market volatility surged and trends faltered. Yet, history shows that prolonged underperformance is a natural phase preceding periods of outsized returns. This article explores how structural portfolio benefits, historical cycles, and behavioral biases make trend strategies a compelling contrarian play—if held through their inherent drawdowns.

The Cyclical Nature of Trend Following: Underperformance as a Setup for Rebounds

Man Group's AHL strategies, which employ systematic trend-following models, have faced extended periods of underperformance when markets lack clear directional trends. For instance, between 2010 and 2018, a study by AQR Capital Management found that subdued market movements—not flawed strategies—were the culprit. During this period, the S&P 500's annualized volatility dropped to 12%, half its long-term average, stifling trend opportunities.

However, when markets re-enter trending regimes, AHL's strategies have historically delivered outsized gains. In 1999–2003, when equities fell 40%, AHL's managed futures fund returned 39%, leveraging its ability to profit from both upward and downward trends. Similarly, during the 2008 crisis, AHL's systems cut losses early while capturing rebounds, outperforming buy-and-hold investors.

Recent data mirrors this pattern: Man Group's 2024 profits surged despite AHL's quantitative strategies underperforming, signaling a potential turning point. The firm's 1783 multi-strategy fund (up 14.5% in 2024) demonstrates how trend strategies can rebound when paired with other approaches, reinforcing their role as cyclical assets.

Structural Benefits: Convex Payoff and Portfolio Diversification

Trend-following strategies offer positive return skewness, a critical feature in volatile markets. Faster AHL models, which prioritize short-term trends, exhibit higher skewness by quickly cutting losses during reversals while letting profits accumulate in sustained trends. This asymmetry creates a convex payoff: downside risks are capped, while upside potential grows with prolonged trends.

Man Group's backtests from 1995–2022 reveal that blending faster trend models with slower ones enhances diversification. A 60/40 equity-bond portfolio allocated 10% to AHL's trend strategies reduced drawdowns by 30% during the 2008 and 2020 crises. Crucially, faster models outperformed slower ones in these episodes, underscoring their role as crisis alpha generators.

The structural advantage lies in their low correlation with traditional assets. When equities and bonds falter—during recessions or inflation spikes—trend strategies can thrive, as seen in 2022 when AHL's systems profited from energy and commodity trends amid macro uncertainty.

Behavioral Traps: Why Timing Exits/Entries is a Losing Game

Investors often succumb to cognitive biases that lead to poor timing decisions:
1. Myopic Loss Aversion: Short-term underperformance triggers panic exits, as seen in 2023 when AHL faced $7 billion in redemptions. Yet, AHL's 2024 rebound suggests that abandoning the strategy during its trough was premature.
2. Recency Bias: Post-2008 performance inflated expectations, leading investors to overvalue trend strategies in calm markets and underestimate their resilience in crises.
3. Overconfidence: Retail traders often “time” the market by chasing trends, only to miss the setup phase or exit too early—a flaw institutional trend followers avoid via systematic rules.

Man Group's skewness analysis reveals that timing is futile: since 1995, the average rebound period for AHL's strategies lasted 18–24 months, with returns compounding asymmetrically. For instance, during the 2020 crash, faster AHL models pivoted to short equities within weeks, capturing 80% of their year-to-date losses in a single quarter—a feat impossible for reactive investors.

Investment Implications: Stay Core, Avoid the Noise

The case for trend strategies hinges on their long-term diversification value, not short-term performance. Here's the roadmap:
- Hold through drawdowns: Man Group's data shows that abandoning trend strategies after three years of underperformance (e.g., 2016–2018) cost investors 20% in subsequent upside.
- Prioritize execution quality: AHL's 50% cost reduction via optimized algorithms (vs. standard execution) preserves returns during high-turnover periods.
- Avoid timing: Allocate a fixed percentage (e.g., 5–10% of a portfolio) to trend strategies, rebalancing only to maintain exposure.

Conclusion: Trend Following's Timeless Edge

Trend strategies are not for the faint-hearted—drawdowns can last years—but their structural benefits and historical cycles justify their role as core portfolio diversifiers. Man Group's AHL exemplifies how disciplined, rules-based trend following thrives in extremes, from the 2008 crisis to 2020's volatility. As markets oscillate between calm and chaos, investors would be wise to remember: the worst time to abandon trend strategies is during their trough.

Stay invested, stay diversified, and let skewness work in your favor.