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What is Trend Following?

June 2024

Trend following is an investment strategy based on the technical analysis of changing market prices, rather than on the fundamental strengths or weaknesses of the investments. This strategy believes that prices tend to move upwards or downwards over time. Therefore, trend followers try to take advantage of these “market trends” by observing current trends and deciding whether to buy or sell based on these factors.

Potential Benefits for Trend-Following Strategies

Owning trend-following strategies within your portfolio may bring many benefits, such as the potential to:

  1. Improve Portfolio Diversification
  2. Provide Low Correlation to Other Investments
  3. Preserve Capital in Declining Equity Markets
  4. Provide Exposure to a Broad Range of Markets

Potential to Improve Portfolio Diversification

Adding a trend-following strategy to your portfolio has the potential to enhance diversification. As you can see below, by simply allocating 20% to a trend-following strategy, you have the possibility to enhance returns and help diversify your portfolio.

Chart: Potential to Improve Portfolio Diversification

Seeks to Provide Low Correlation to Other Investments

Trend-following strategies have historically shown low or virtually zero correlation to a variety of traditional and alternative investments, providing the ability to further diversify an investment portfolio.

Correlation Table
Time Period: 9/1/2000 – 6/30/2024

Correlation Table

Strives to Preserve Capital in Declining Equity Markets

Trend-following strategies can potentially enhance a portfolio’s overall performance by producing positive returns in bull and bear markets. As the graph illustrates, these strategies have yielded positive long-term performance, even during market downturns.

Performance of Trend-Following Strategies, U.S. Stocks, and U.S. Bonds

Growth of a Hypothetical $1,000 investment – September 1, 2000 through June 30, 2024

Chart: Performance of Trend-Following Strategies, U.S. Stocks, and U.S. Bonds

Exposure to a Broad Range of Global Markets

Trend-following strategies have the ability to provide exposure to a broad range of global markets. This may include, but is not necessarily limited to, sectors such as currencies, stock indices, commodities and fixed income. As you can see below, there are multiple markets within each sector, providing the ability for more diversification as compared to traditional stock and bond portfolios.

Table: Exposure to a Broad Range of Global Markets

 

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