Redefining Success in Trend Following: The Superiority of Track Record Over Size

In the realm of trend following, the conventional wisdom that ‘bigger is better’ does not necessarily hold true. This notion is vividly illustrated when comparing the TTU TF Index to the SG Trend Index. You can find information about the TTU TF Index in the monthly report generated in the blog posts of Top Traders Unplugged. Unlike the SG Trend Index, which bases its constituents on the size of their Assets Under Management (AUM), the TTU TF Index selects trend followers based on their long-term track records. This distinction is crucial, as it minimizes survivorship bias, presenting a more accurate and reliable reflection of a manager’s performance over various market conditions.

Comparing the TTU TF Index to the SG Trend Index from January 1, 2000, to the present (refer to Chart below), covering nearly 24 years of performance data, reveals a notable disparity in outcomes. An initial investment of $1000 in the TTU TF Index would have grown to $6100, experiencing a peak-to-trough drawdown limited to 17%. In contrast, the same investment in the SG Trend Index would have increased to $3750, with a slightly higher maximum drawdown of 21% over the identical timeframe.

This significant outperformance by the TTU TF Index is noteworthy, especially considering it consists of around 57 trend-following funds, each boasting a commendable track record of over 15 years. On the other hand, the SG Trend Index is primarily composed of the top 10 largest systematic trend-following CTAs as tracked by Societe Generale, highlighting a stark contrast in their constituent selection criteria and subsequent performance.

The emphasis on long-term track record over AUM size brings to light the importance of adaptability and resilience across diverse market regimes. Managers featured in the TTU TF Index have proven their capacity to navigate through a myriad of market environments, showcasing their robustness and strategic acumen. In contrast, the SG Trend Index’s focus on AUM size might overlook smaller, yet highly effective programs that have demonstrated exceptional adaptability and performance over time.

The analogy of large complex adaptive systems, such as major cities underscores the pitfalls of equating size with superiority. These systems, despite their apparent resilience, often rely heavily on a few critical infrastructures. The failure of key components like electricity, water supply, or transportation can cripple an entire system, revealing its inherent fragility. Similarly, in trend following, larger programs are not immune to vulnerabilities; their size may, in fact, introduce specific risks and inefficiencies that can impede their long-term viability and performance.

This perspective challenges the traditional metrics of success within the trend following community and the broader financial industry. Firms like Bridgewater & Associates and Berkshire Hathaway, or the prominent constituents of the S&P 500, such as the FAANG stocks, may command attention due to their size, but this metric alone does not guarantee superior performance or resilience. Capitalization-weighted indices exacerbate this issue by skewing attention towards size, potentially overshadowing more pertinent indicators of success, such as a firm’s ability to withstand and adapt to unforeseen events.

The creation of the TTU TF Index which you can access on Top Traders Unplugged in the monthly blog posts serves as a testament to the belief that true performance in trend following is not merely a function of AUM size but is better represented by a firm’s track record of survivability and adaptability. This approach advocates for a paradigm shift in evaluating trend followers, suggesting that the multitude of trades and strategic decisions over time is a more accurate barometer of a firm’s competence and potential for long-term success.

The discussion around the TTU TF Index versus the SG Trend Index brings to the forefront a critical re-evaluation of what constitutes success in the trend following domain. It posits that a deep, proven track record of navigating through various market conditions is a far more reliable indicator of a trend follower’s prowess than the sheer scale of its assets. This perspective not only enriches the discourse on trend following strategies but also encourages a more nuanced understanding of resilience and performance in the complex world of trend following.

Trade well and Prosper

The ATS mob

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