• 
• 
• 

• Performance
• Services
• Company
• Learn About
• My Attain

Is Trend Following Back? You bet your weak dollar !

November 29, 2004

 

What a difference a couple of months make. Just over two months ago we wrote an article on "What's wrong with trend following?" (View the newsletter here: http://www.attaincapital.com/alternatives/alt_oct0404.htm#Topic) The impetus for the article was an environment which saw both trend following CTAs and popular trend following systems at new max drawdowns and multi-month losing streaks.

For example, the CSFB HEDG Managed Futures Index, as good of a barometer for trend following as you'll find, was down -6.99% through the end of August '04, and had seen six straight months of losses, the longest such streak since its inception in 1994. Elsewhere, popular trend following systems like Aberration, Andromeda, and Synergy, were going on close to 18 months without any real gains to speak of - and many with outright losses.

As usually happens with these types of things, right when it seemed things couldn't get any worse for trend followers, at just about the time we were getting no calls or emails about trend following systems, and right when some unfortunate souls gave up on them - some markets started to trend and trend following programs made the turn back to profitability.

Things actually started to change for trend following systems in the final days of September, just before the above mentioned article, as industrial metals and bonds rallied strongly to end the month. This gave nearly all trend following programs gains in September. Since then, it has been more of the same behind a steep decline in the US dollar and other trends in grains and metals. October saw mostly gains across trend following systems, and here we are again enjoying a great month in November. It's now seems safe to say:

Trend following is back!

The stats are impressive, with Aberration at its highest levels since Feb. '03, Andromeda at its best levels since August '03, and Brixx and SEMA4 at new all time equity highs. A recent email from Synergy and Checkmate developer Dean Hoffman, meanwhile, states: "In the last 12 months I have seen my own real money account increase by over 115%! The year-to-date gain has been over 75%, quickly moving out of the doldrums we had previously been in! (I personally had over a 40% Drawdown in this same account last year) - Dean Hoffman."

Trend Following systems aren't the only ones profiting. Many of Attain's recommended CTA programs are enjoying a nice run, with trend follower Meyer Capital Management gaining over 20% in the past three months to gain back the majority of a 22% Max DD, while the SEMA4 CTA program hit new 8 month highs. The CSFB HEDG Managed Futures Index, meanwhile, broke that six month losing streak, and is on its way to posting a third consecutive winning month in November.

Its a bit unfair to say trend following is back, however, as that would imply it had gone somewhere in the first place. Trend following never really left, and despite what many say - trend following wasn't broken. There wasn't a new environment of fear brought on by terrorism that would preclude markets from making trends. It was simply a poor time for trend following earlier this year because of a rare lack of trends across nearly all markets. It's not uncommon for a few markets to chop around for a time - but for nearly every sector to go into a trendless mode at the same time was rare indeed.

This trendless environment lasted what seemed like an eternity for some systems, dating back to the start of the Iraq war in some cases. Many investors - especially those enrolled in a day trading course or with the Compass or Blue Wave developer's' number on their speed dial - will scoff at waiting 10 to 18 months for new equity highs, but they may be missing the point.

Diversify!

In the case of trend followers, its not as much how the money is made, but rather what its made with. I'm sure many readers are saying what's the difference, as long as the money is made - and the difference is that oft heard but rarely heeded word - diversification.

A quick glance at day trading and swing trading systems this month shows many systems with losses, as S&P futures continue to see contracting ranges and lower and lower volatility readings. The answer for many day traders is to find a new day trading system, or try and update the one their trading - when the smart money realizes all systems go through bad environments, and the only way to beat a poor environment in one area is to have diversification in another area.

A trend following system operating across a wide spectrum of markets gives an investor access to markets they may otherwise have no avenue for trading, or no idea how to trade.

Many investors may never have thought to buy Gold four months ago as Andromeda did, sell corn in September as Synergy did, buy Swiss Franc in late September as Checkmate did, go long the Euro Currency on October 1st as Trend Channel did, or go long Crude Oil over a year ago as Brixx has done. Each of these trades was no doubt preceded by more losing trades than winning ones - but each has turned into a home run for their respective systems.

Gold reached $457 in the February contract recently, a mark which hasn't been seen since June of ’88 when prices started decline from all-time highs, giving Andromeda open trade profits of over $3,470 per contract. Synergy is making just over $1,300 in a short Corn position as the grain hits its lowest levels in nearly two decades. Checkmate is making over $9,000 per contract in open trade profits as the Swiss Franc hit 8 year highs against the dollar last week, while Trend Channel was making over $10,000 per contract in open trade equity on its long Euro Currency trade as that foreign currency hit its all time highest levels against the dollar. And finally, Brixx has been holding that long Crude Oil trade for over a year, making over $20,000 per contract on one trade as Crude has been on a historic rise.

The lesson to be learned is that you never know when history will happen. Looking back a few months ago, there didn't seem to be any clues that we would see historic lows in grains and the dollar while at the same time making historic highs in currencies, gold and energies. Trends emerge when you least expect them, and in order to catch them, you have to attempt to capture every breakout from the choppy conditions. The grand majority of those breakouts will end up reversing course to cause small losses for trend followers, but a small number turn into historic trends which can make or break your portfolio's returns for the year. Baseball's equivalent to trend following systems are the home run sluggers, who strike out often, but every fifth time or so hit a game winning home run.

Profits in Corn feel better!

Because of trend following systems home run hitting abilities, Attain recommends every investor's portfolio have exposure to a trend following system. Trend following systems often only make sense if you can apply them to multiple markets, thus there is a larger minimum capital required - usually $100K. But there's just something about making money in corn, crude oil, or Swiss francs that's refreshing. Perhaps its that you often know very little about what makes the corn market go up and down, or the satisfaction of knowing the stock market could go to zero and your corn profits would be OK.

Whatever it is, trend following has been around a very long time, and likely will be for a long time to come. Attain's recommended long term systems and their numbers year to date are listed below. Please note that all long term system percentage gains and losses are calculated by averaging the percentage gain across all accounts trading the respective systems.

- Jeff Malec

Recommended trend Following Systems: (Listed Alphabetically)

Aberration Plus: www.trade-system.com

Andromeda: www.andromedafutures.com

Brixx: www.alfaranda.com

Fusion, Checkmate, Synergy: www.traderstech.net

SEMA4: www.nextdsystems.com

Trend Channel: www.trendchannel.com