Battle of the Trend Following Indexes: January 2025

Battle of the Trend Following Indexes: January 2025 In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks.  January 2025 Result January ushered in a strong start for several trend-following indexes, with the Classic Trend Index once again demonstrating its superiority. Market conditions remained dynamic, testing the adaptability of systematic trend strategies across various asset classes. Performance Highlights January 2025 delivered varied results across trend-following indexes, with some continuing their strong momentum while others lagged. Market conditions remained dynamic, testing the resilience of different strategies. Here’s how each index performed: Classic Trend Index – The standout performer for the month, gaining 3.7% in January. Over the last 12 months, it returned 19.2%, maintaining its position as a leader in systematic trend-following. With a CAGR of 17.9%, a Sharpe ratio of 1.15, and a Sortino ratio of 2.64, it continues to demonstrate superior risk-adjusted returns. SG Trend Index – Recorded a modest 0.2% gain for January, reflecting slower momentum. Its CAGR of 7.6% since January 2020 remains respectable, though it trails top-performing benchmarks. Barclay BTOP50 Index – Posted a 1.2% increase in January, bringing its 12 month return to 5.5%. It had the lowest maximum drawdown (8.7%), making it a relatively conservative performer. TTU Trend Following Index – Delivered a 1.4% gain in January, keeping pace with its peers. Its MAR ratio of 0.52 suggests a reasonable balance between returns and drawdowns. IASG TF Index – Increased by 1.3% in January, supported by strong diversification across asset classes. It maintains a Sharpe ratio of 0.54 and a Sortino ratio of 0.35. Eurekahedge TF Index – Up 0.9% in January, bringing its 12-month return to 4.8%. Systematic Momentum CTA Index – Recorded a 0.9% gain, bringing its 12 month return to 2.8%. While not a top performer, it remains a useful benchmark for evaluating pure momentum strategies. Performance Snapshot The VAMI chart underscores the sustained outperformance of the Classic Trend Index, which continues to reach new highs. Its cumulative return of 131.2% since January 2020 is unmatched, demonstrating the power of traditional trend-following strategies in navigating dynamic markets. Statistical Table The Classic Trend Index remains the top performer, boasting a CAGR of 17.9% and demonstrating resilience with a Sharpe ratio of 1.15 and a Sortino ratio of 2.64. Its ability to capture market outliers while maintaining efficient risk-adjusted returns reinforces its leadership in systematic trend-following strategies. The Barclay BTOP50 Index, while more conservative, recorded the lowest maximum drawdown (8.7%), highlighting its focus on risk mitigation. Meanwhile, the SG Trend Index and TTU Trend Following Index continue to provide steady, diversified exposure, with their CAGR of 7.6% and 6.7%, respectively. While the Eurekahedge TF Index and IASG TF Index demonstrated solid 12-month returns of 4.8% and 5.3%, they remain slightly behind the Classic Trend Index in overall performance. The Systematic Momentum CTA Index, which purely tracks momentum strategies, lags behind with a 12-month return of 2.8% but serves as a useful benchmark for evaluating trend-based momentum models. This table underscores the performance dispersion across different trend-following strategies, with outlier capture and disciplined execution continuing to separate top-performing indexes from the rest. January 2025 reinforced the dominance of the Classic Trend Index, which continues to set the standard for systematic trend-following performance. With a strong 3.7% gain for the month and a 12-month return of 19.2%, it remains the benchmark for disciplined trend-following strategies, leveraging outlier capture and robust risk management. While other indexes showed steady but varied performance, Barclay BTOP50 stood out for its low drawdowns, while IASG TF Index and Eurekahedge TF Index delivered respectable risk-adjusted returns. The Systematic Momentum CTA Index, despite its weaker 12-month return of 2.8%, continues to serve as an important reference for momentum-driven strategies. As we move deeper into 2025, the divergence in performance highlights the importance of strategy robustness and adaptability in evolving market conditions. The Classic Trend Index’s adherence to traditional trend-following principles remains its key strength, proving that disciplined execution and process-driven investing continue to drive long-term success. About the Indexes SG Trend IndexCreated by Société Générale, the SG Trend Index represents the largest trend-following CTA programs, focusing on systematic strategies with significant AUM. It captures broad market movements across various assets. More on SG Trend Index Barclay BTOP50 IndexManaged by BarclayHedge, this index follows the largest investable CTAs, emphasizing diversification across major futures markets. It’s a widely referenced benchmark for managed futures. More on BTOP50 Index TTU Trend Following IndexDeveloped by Top Traders Unplugged, the TTU TF Index includes programs with a 15-year track record, emphasizing resilience through experience and diversification across a large ensemble of programs. More on TTU TF Index SG CTA IndexAnother index by Société Générale, the SG CTA Index covers a broader array of CTA strategies, providing insight into the managed futures landscape beyond trend following alone. More on SG CTA Index IASG Trend Following IndexThis index, managed by IASG, tracks CTAs that primarily use trend-following strategies, offering a focused benchmark within the managed futures space. More on IASG TF Index Eurekahedge Trend Following IndexCurated by Eurekahedge, this index includes hedge funds specializing in trend-following across multiple asset classes, highlighting alternative approaches within trend following. More on Eurekahedge Trend Following Index Classic Trend IndexThe Classic Trend Index, curated by the Aussie Turtles, is a benchmark for traditional trend-following strategies, focusing on consistent, systematic approaches across diversified asset classes. More on Classic Trend Index Systematic Momentum CTA IndexManaged by NilssonHedge, this index tracks CTAs focused on momentum-based strategies, providing a purist view of momentum trading within managed futures. More on Systematic Momentum CTA Index Stay tuned for next month’s Battle of the Trend Following Indexes to see which benchmarks emerge as the top performers in the trend-following landscape.

How Outlier Hunters Exploit Convexity to Achieve Infinite Yield

How Trend Followers Exploit Convexity: The Art of Capturing Outliers In the world of finance, where smooth returns are often seen as the gold standard, trend followers and outlier hunters dare to embrace the chaos of markets. They thrive in uncertainty, leveraging volatility, diversification, and the principles of convexity to turn rare, transformative events into exponential growth. Introduction: Trend Following and Convexity In previous discussions, we explored the fundamental nature of convexity in financial markets (What is Convexity and Why It Matters) and how traditional risk models, such as those in Sharpe World, fail to capture the chaotic, nonlinear dynamics that define real-world markets. Building upon these principles, this article examines how trend followers—those who systematically hunt for market outliers—harness convexity to create resilient, high-potential portfolios. Trend following strategies are designed not to predict, but to react—to identify and capitalize on emerging trends. The key to their success lies in their ability to cut losses short, let profits run, and exploit asymmetry—a hallmark of convexity. While conventional portfolio managers seek smooth, linear returns, trend followers embrace volatility and the fat tails of return distributions, positioning themselves for rare, transformative market moves. Trend Following and Convexity: A Natural Fit Trend following and convexity are inherently aligned. Convexity is about asymmetry, ensuring that small losses are absorbed while massive gains are captured. This is precisely how trend followers operate: Small, controlled losses – A disciplined approach ensures losses are minimized and predefined. Unlimited upside potential – Once a trend is identified, trend followers let winners run, maximizing potential convex payoffs. Diversification – Trend followers operate across multiple, uncorrelated markets, ensuring they are always exposed to potential outlier events. Trend Following vs. Options: Convexity with Limits While trend following is a highly effective convex strategy, unlike options, it does not offer complete protection against all tail events. Short, sharp corrections – Trend-following models, particularly medium and long-term strategies, take time to adjust to new market conditions. When markets experience sudden reversals, trend-following models can get whipsawed, leading to a string of small losses before identifying a new trend direction. Longer-term corrections – When trends persist for an extended period, trend-following fully invests in convexity, riding out trends and maximizing returns from fat-tailed market events. Options provide immediate asymmetry, where downside risk is clearly defined, and upside is theoretically unlimited. Trend following, by contrast, requires active management and model adjustments, leading to some exposure to short-term market noise. Greater diversification potential – Unlike options, which have a relatively restricted set of choices in terms of strikes and expirations, trend-following portfolios typically comprise hundreds of uncorrelated return streams, spreading convexity exposure across a vast range of markets. No insurance cost – Options require a premium to provide tail-risk protection, effectively acting as an insurance cost. Trend following, on the other hand, does not have an equivalent premium cost, making it a cost-efficient way to harness convexity without needing to pay for insurance upfront. How Trend Followers Construct Convex Portfolios Trend followers integrate three key convexity principles into their portfolio construction: 1. Embracing Volatility and Fat Tails Traditional investing penalizes volatility, assuming it equates to risk. As we discussed in The Pitfalls of Sharpe World Thinking, this is a fundamental misunderstanding. Risk is not about historical volatility, but about future unpredictability. Trend following strategies thrive in volatility, recognizing that large price moves drive long-term compounding. The ability to stay in the game through disciplined risk management ensures participation in the fat-tailed events that drive exponential returns. Example: The Cocoa price explosion in 2024—a classic trend-following convexity play where patient traders who endured small losses were rewarded with an outlier move that transformed their portfolio performance. 2. Asymmetry: Small Losses, Big Gains Convexity is about tilting the risk-reward dynamic to one where the potential reward significantly outweighs the risk. Trend followers structure their strategies to capture this asymmetry: Predefined exit points – Losses are cut swiftly to avoid major drawdowns. Trailing stop mechanisms – Profitable trades are held as long as momentum persists. Path dependency is embraced – Unlike Sharpe World models that assume static market behavior, trend following recognizes that future price movements are influenced by prior trends. This approach ensures that a single outlier can offset dozens of small losses, driving long-term compounded wealth. 3. Diversification: Spreading the Convexity Net Wide Unlike options strategies that rely on a specific market outcome, trend following invests heavily in diversification, spreading exposure across multiple assets to capture convexity wherever it appears. Trading across multiple asset classes – Stocks, commodities, currencies, and bonds. Geographic diversification – Ensuring exposure across multiple economies and risk environments. Reducing correlation dependencies – Avoiding over-reliance on any single sector or region. This broad exposure enhances convexity-driven portfolio resilience, allowing for asymmetric return profiles across different market regimes. Trend Following as the Ultimate Convex Strategy In essence, trend following is a convexity-maximization strategy: ✅ Risk is predefined – No single trade can significantly damage the portfolio. ✅ Returns are uncapped – Trend followers allow market forces to dictate how far a trend can run. ✅ Survivability ensures participation – By keeping bet sizes small, trend followers remain in the game long enough to capture market outliers. Key Takeaways: The Convexity Advantage of Trend Following Markets are nonlinear and unpredictable – Trend following doesn’t fight this reality but capitalizes on it. Convexity ensures risk is asymmetric – Small losses are tolerated for the chance to capture extreme payoffs. Diversification amplifies convexity – Exposure to multiple markets increases the chance of catching outliers. Risk management is paramount – Staying in the game is more important than winning every trade. Conclusion: The Power of Convexity in Trend Following Traditional investing tries to smooth returns and eliminate volatility. Trend following embraces uncertainty, harnessing convexity to transform risk into opportunity. By applying convex principles—cutting losses short, letting profits run, maintaining small bets, and diversifying broadly—trend followers have built some of the most resilient and successful trading strategies in history. The path isn’t about predicting what will happen—it’s about positioning

The Pitfalls of “Sharpe World” Thinking: Why It Fails to Capture Convexity

The Pitfalls of “Sharpe World” Thinking “Sharpe World” thinking is inadequate for today’s complex and unpredictable markets. It fails to account for the chaotic, non-linear realities of financial markets. Introduction: The Pitfalls of “Sharpe World” In modern finance, the pursuit of risk-adjusted returns has led to a widespread reliance on measures like the Sharpe ratio, standard deviation, and Value at Risk (VaR). This framework—what David Dredge aptly calls ‘Sharpe World’—has shaped how investors think about risk, yet it is fundamentally flawed. The 2008 financial crisis wiped out nearly $19 trillion in global wealth, yet just months before, risk models showed no indication of an impending collapse. Why? Because they relied on the past to predict the future—ignoring the fundamental reality that the most significant market moves are always unexpected. The regularity of unforeseen market crises that blindside investors is not an anomaly but a direct consequence of this flawed framework. Risk models work until they catastrophically fail, reinforcing a dangerous illusion of control over markets that are inherently unpredictable. The fundamental issue is that risk models tend to measure what has already happened, rather than preparing for what has never occurred before. When the next major crisis arrives, it will not be a variation of past events—it will be something completely different. Refer to the table below that lists some of the most significant financial crashes that blindsided the investment community despite their reliance on traditional risk models. Risk is Not Volatility One of the greatest misconceptions in finance is the belief that risk equates to volatility. This assumption underpins much of Modern Portfolio Theory (MPT), the Efficient Market Hypothesis (EMH), and standard risk management practices. But history has shown us that the most damaging risk events are not the ones we expect, but the ones we don’t see coming. If risk could be forecasted using historical distributions, then risk management would be easy. But every major financial crisis—from Black Monday to the Global Financial Crisis—occurred because the models failed to anticipate the unexpected. As Dredge, describing Nassim Taleb’s insights, puts it: “Understanding is a poor substitute for convexity.” Risk isn’t about predicting the next crisis; it’s about building a portfolio that can survive and exploit uncertainty. The Flawed Assumptions of ‘Sharpe World’ Traditional financial models rest on several assumptions that, while convenient for theoretical frameworks, have repeatedly failed in real-world market conditions. These flawed assumptions create a false sense of security, leading to systemic fragility and underpreparedness for extreme events. Risk can be quantified using historical data. Why it’s flawed: Risk is not static—it evolves dynamically. Using past data assumes that future risks will mirror historical occurrences, but market crises often stem from unprecedented shocks. Models built on past distributions fail to account for the unpredictability of future events. Implication: Investors relying on historical risk metrics are often blindsided when markets deviate from historical norms, leading to severe miscalculations in risk exposure. Markets behave in a linear fashion, following normal distributions. Why it’s flawed: Real-world markets are nonlinear and exhibit fat-tailed distributions, where extreme moves happen more frequently than predicted by normal distributions. Standard financial models underestimate the probability and impact of rare, high-magnitude events. Implication: Risk management strategies based on linearity fail to anticipate market dislocations, exposing portfolios to devastating tail risks. Correlations persist into the future. Why it’s flawed: Correlations are highly unstable and tend to shift dramatically during periods of market stress. Assets that appear uncorrelated in normal times often become highly correlated in crises, negating diversification benefits. Implication: Portfolio designs that assume stable correlations fail when they are needed most, leading to simultaneous losses across supposedly diversified holdings. Expected returns can be estimated with confidence. Why it’s flawed: Markets do not follow predictable patterns, and expected returns fluctuate based on shifting macroeconomic conditions, sentiment, and structural changes. Using historical averages to project future performance ignores the reality of ever-changing market regimes. Implication: Investors who rely on projected returns may over-leverage during favorable periods and under-allocate when opportunity arises, leading to suboptimal compounding over time. All volatility is bad and should be minimized. Why it’s flawed: Not all volatility is detrimental. While downside volatility can be damaging, upside volatility represents opportunity. Attempts to smooth returns by suppressing volatility often reduce exposure to large, outsized gains, capping long-term compounding. Implication: Strategies focused on reducing volatility at all costs often sacrifice convexity, failing to capitalize on beneficial market trends while remaining overly exposed to unseen risks. These incorrect assumptions lead to a fragile approach to risk management—one that attempts to control and predict risk rather than adapt to and exploit it. Markets are inherently nonlinear, unstable, and shaped by extreme events, yet Sharpe World thinking forces investors into models that are precise in theory but dangerously inaccurate in practice. The failure to recognize these flaws leaves investors exposed to sudden shocks and unprepared for the rare but defining market moments that drive long-term performance. The failure to account for fat-tailed events and changing market regimes means that many investment strategies operate without effective brakes. Investors unknowingly rely on historical relationships to contain risk, assuming that what worked in the past will work in the future. But without proper braking mechanisms, these strategies leave investors fully exposed when markets take an unexpected turn. Investment Strategies Without Brakes: A Recipe for Disaster A core problem with many investment strategies is that they lack brakes—mechanisms that prevent catastrophic drawdowns and allow for adaptability in volatile environments. Without brakes, investors are fully exposed to market downturns and rely on historical relationships that may not hold up in the future. Some examples of strategies without brakes include: The 60/40 Portfolio: Relies on historical negative correlation between stocks and bonds to mitigate risk. However, in times of rising inflation or systemic crises, both asset classes can decline simultaneously, removing any perceived protection. Buy and Hold (Long-Only) Portfolio: Has no mechanism for managing downside risk. Investors are fully exposed to extended drawdowns, hoping for a long-term recovery that may take decades. Mean-Reverting Strategies: Assume

Aussie Turtles Cocktails

Aussie Turtles Cocktails An evening with, Jerry Parker, Moritz Seibert & Adam Havryliv with special guest Michael Covel At our Inaugural Aussie Turtles Event we will introduce you to: The most successful Turtle, Jerry Parker from Chesapeake Capital The 2 Quants, Moritz Seibert and Moritz Heiden from Takahe Capital Australian trend following manager, Adam Havryliv from East Coast Capital Management *** UPDATE: We are pleased to also have special guest, Michael Covel, join us for this event via live video link. Michael is a world renowned author best known for popularising the trend following trading strategy in his best selling books, Trend Following and Turtle Trader. *** Time: 6:00pm to 8.30pm Date: Thursday 16 November 2023 Location: Bibo Wine Bar, 7 Bay Street, Double Bay, Sydney Dress: Business Casual A 45-minute panel discussion will be held with Jerry Parker from Chesapeake Capital, Moritz Seibert from Takahe Capital and Adam Havryliv from East Coast Capital Management moderated by Richard Brennan from Aussie Turtles. The panel will discuss the systematic trend following investment style, and Jerry will describe the fascinating Turtle Experiment. The panel will then be available to chat with attendees for the remainder of the event. About Jerry Parker & Chesapeake Capital Corporation Jerry Parker is the founder and Chairman of Chesapeake Capital Corporation, a global investment firm that has been managing client capital for over 30 years. Chesapeake provides investors uncorrelated returns through consistency in approach across a broad range of global markets and variable market conditions. Jerry is a highly respected investor in the industry and is known for his unique trading style, which he developed after years of studying the markets. He is also a strong advocate for risk management and believes that it is essential for any successful investor. Under Jerry’s leadership, Chesapeake Capital has grown to become one of the most successful investment firms in the world. The firm has a long track record of success and has generated significant returns for its investors over the years. Jerry is also a philanthropist and is actively involved in supporting a number of charitable causes. He is a member of the board of directors of the Chesapeake Bay Foundation and the Johns Hopkins University School of Medicine. In addition to his work at Chesapeake Capital, Parker is also a frequent speaker and writer on investing topics. Jerry has been featured in numerous publications, including The Wall Street Journal, The New York Times, and Forbes. Chesapeake Capital Corporation’s trading methodology is long term trend following utilizing robust trading systems across a broadly diversified set of markets; put simply: Classic Trend Following. It is a systematic (i.e. rules-based) investment approach that focuses on capital preservation while attempting to provide positive annual returns. Utilizing diversification and robust systems, our goal is to maximize the profit in each trade by following the system entries and exits regardless of market conditions or temptations. More information on Chesapeake Capital Corporation: https://chesapeakecapital.com/ About The 2 Quants from Takahē Capital Moritz Seibert is the CEO/CIO of Takahē Capital. Moritz started investing in 1998 and began his professional career as a derivatives trader at HSBC in Germany. Later, he worked for RBS in the UK as well as in the USA, where he was responsible for the bank’s equity derivatives structuring business. Subsequent to RBS, Moritz co-founded Aquantum, a Munich-based systematic CTA focused on short-term trend following and commodity spread trading strategies. Between 2017 and 2022, Moritz was the CEO/CIO of Munich Re Investment Partners, a quantitative asset management company serving institutional clients globally. More recently, he was the CIO at Exponential Age Asset Management, a large digital asset fund of hedge funds. Moritz lives south of Munich, close to the mountains, with his wife and two kids. Next to trading he likes reading a good book and enjoys playing tennis. Moritz Heiden is Head of Quantitative Research at Takahē Capital. Moritz had his first glimpse at the investment world at the start of the GFC and quickly decided to return to university to pursue a PhD in statistics. Subsequent to grinding through the academic machine and publishing several papers on machine learning and volatility modelling, he completed his thesis on “asymmetry and nonlinearity in forecasting multivariate stock market volatility.” He started his non-academic career at a large German Asset Manager and moved on to Scalable Capital, Europe’s largest digital wealth manager to spend more time coding and implementing asset allocation strategies and trading algorithms for ETF-based retail portfolios. After Scalable, Moritz served as the Head of Quant Research at Munich Re Investment Partners and where he worked alongside the other Moritz on all research and trading related tasks. Moritz lives in Augsburg, close to one of the oldest private German breweries, with his wife. Takahē Capital offers 3 Programs which includes the Systematic Trend Program, the Spread Momentum Program and a consolidation of these programs into a single portfolio called the Global Quantitative Fund Program. The philosophy of ‘Classic Trend Following’ lies at the heart of all of these Programs.  More information about Takahē Capital: https://takahe.capital/  About Adam and Richard from East Coast Capital Management (ECCM) Adam Havryliv is the founder and CIO of East Coast Capital Management (ECCM) where he is responsible for management and investment. Adam personally developed ECCM’s quantitative trading strategies. Prior to founding ECCM, Adam worked with Citi from 2007 to 2008 in the Investment Banking division where he was responsible for corporate derivatives and structured solutions. From 2005 to 2007, Adam was a Trader at Shell Cove Capital Management, executing global macro trading strategies. From 2004 to 2005, Adam worked at Goldman Sachs JBWere in the Equities Trading division.Adam holds a Bachelor of Commerce (Finance) degree from the University of New South Wales (UNSW), a Master of Business Administration (MBA) from the Macquarie Graduate School of Management (MGSM), and a Graduate Diploma of Psychology from the University of Sydney.In his spare time Adam can be found engaged with his passion for sailing on Sydney Harbour. Richard undertakes quantitative analysis for ECCM and works alongside Adam to market the ECCM systematic rules-based investment

When Stability Deceives: Preparing for Hidden Risks

When Stability Deceives: Preparing for Hidden Risks Periods of calm in financial markets often conceal hidden risks, quietly accumulating until they erupt in disruptive events. This blog explores why traditional risk models, like Value at Risk (VaR) and Sharpe ratios, fail to capture these vulnerabilities.  Introduction Periods of calm in financial markets often conceal hidden risks, quietly accumulating until they erupt in disruptive events. This blog explores why traditional risk models, like Value at Risk (VaR) and Sharpe ratios, fail to capture these vulnerabilities. By drawing parallels to natural systems, it emphasizes the importance of convexity for resilience and advocates for a barbell strategy that balances protection with opportunity. By incorporating techniques used by trend followers, this post highlights how preparation, not prediction, is key to thriving amidst market uncertainty. Hidden Risks Beneath Market Stability Periods of apparent calm in markets or natural systems are often deceptive. Beneath the surface, risks accumulate, building toward a tipping point that triggers disruption. This phenomenon is evident in both financial markets and the natural world, where stability is often a precursor to change. Natural Example: Snowpack Accumulation: A seemingly stable snowpack on a mountain can reach a critical point where a single snowflake triggers an avalanche. Similarly, in financial markets, hidden leverage, excessive correlations, and systemic vulnerabilities grow during periods of low volatility, setting the stage for a disruptive event. Financial Example: The 2008 Crisis: The 2008 financial crisis is a stark example of how systemic vulnerabilities can remain hidden during periods of apparent calm. The widespread adoption of mortgage-backed securities, coupled with interconnected derivatives, created a fragile system. It wasn’t the initial subprime defaults that caused devastation but the systemic contagion that followed. Like an avalanche, the collapse became inevitable once the system reached a tipping point. The Flaws of Traditional Models Traditional risk management models fail to account for hidden vulnerabilities. Their backward-looking nature creates an illusion of stability while ignoring the complexities of real-world systems. Backward-Looking Metrics:VaR and Sharpe ratios rely on historical data, underestimating the likelihood of unprecedented events. For example, prior to 2020, few models considered the potential for a global pandemic to halt economic activity overnight. Volatility Compression:Stable periods encourage risk-taking behaviors, as investors extrapolate calm into the future. This mirrors natural systems like forests, where the suppression of small fires can lead to the accumulation of dry fuel, eventually resulting in catastrophic wildfires. Mispriced Insurance:Stability reduces the perceived need for protection, lowering the cost of instruments like options. Ironically, this is when protection is most valuable, as systemic risks are quietly building. Convexity: Building Resilient Portfolios To address hidden risks, resilience must account for the non-linear nature of both financial markets and natural systems. Convexity ensures that portfolios are positioned to disproportionately benefit from favorable conditions while mitigating losses during downturns. Analogy: Racing with Robust Brakes: Imagine driving a racecar. Without brakes, you’d need to drive cautiously, limiting your speed even on straight sections. With effective brakes, however, you can accelerate confidently, navigating straights and curves with control and precision. For Classic Trend Followers, small bet sizes and disciplined stops serve as our brakes. These practices allow us to embrace the uncertainty of markets and capture upside opportunities while managing downside risks. Although we do not deploy long volatility strategies using options—like purchasing out-of-the-money puts—the results of our approach are similar in principle. Both methods focus on building resilience to catastrophic losses, ensuring that when markets make outsized moves, we remain in the game and ready to capitalize. This dynamic enables Classic Trend Followers to move with confidence, navigating volatile and uncertain environments without succumbing to overconfidence during periods of calm. By combining small, controlled bets with the discipline of stops, we position ourselves to seize outlier opportunities while maintaining the resilience to withstand market shocks. Nature’s Example: Ecosystem Resilience: Convexity in natural systems can be seen in ecosystems that adapt to changing conditions. A coral reef, for instance, survives not by resisting change but by fostering biodiversity. This diversity provides a buffer against shocks, ensuring that some species thrive even when others fail—much like a convex portfolio that balances risks and rewards. The Barbell Strategy: A Blueprint for Resilience Extreme events, both positive and negative, dominate long-term outcomes. Research shows that, in a 40-year study of the S&P 500: The 10 best months accounted for 30% of total compounded growth. The 10 worst months caused a 40% drag. The remaining 460 months contributed little overall.   A barbell strategy mirrors nature’s approach to risk management, balancing: Protection Against Tail Risks: Using tools like stops, small bet sizes, or convex hedging to guard against extreme downturns. High-Upside Positions: Holding positions that thrive in favorable market conditions, akin to opportunistic species flourishing after a forest fire.   This strategy acknowledges the asymmetry of risk and reward, ensuring participation in market growth while safeguarding against catastrophic losses. Moving Beyond Prediction The goal of effective risk management is not to predict every disruption but to prepare for it. Natural systems demonstrate the power of preparation: Earthquakes: While their timing can’t be predicted, understanding fault lines enables building codes that minimize damage. Hurricanes: Early warning systems don’t prevent storms but help communities prepare and reduce impact.   Similarly, in financial markets, preparation involves shifting focus from precision to resilience. Portfolios designed with adaptability and robustness in mind can navigate uncertainty effectively. Thriving Amid Complexity Hidden risks are an inherent part of both natural systems and financial markets. Stability, while comforting, often conceals vulnerabilities that accumulate over time. By embracing convexity, adopting a barbell strategy, and using trend-following techniques such as stops and small bet sizes, investors can build resilient portfolios that balance risk protection with high-upside potential. Nature’s lessons in adaptability, diversity, and resilience provide a blueprint for thriving in uncertain environments. Success lies not in predicting disruptions but in preparing for them—designing systems and portfolios that can weather the inevitable twists and turns of a complex world.

Battle of the Trend Following Indexes: December 2024

Battle of the Trend Following Indexes: December 2024 In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks.  In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks. This report includes a VAMI (Value Added Monthly Index) performance chart and a comprehensive statistical table, allowing readers to stay informed on the performance of popular trend-following indexes and identify standout performers. December 2024 Result December delivered mixed results across trend-following indexes, reflecting diverse market environments. The Classic Trend Index continued to shine, closing the year as the standout performer for 2024. Its traditional trend-following principles, focused on robust risk management and outlier capture, propelled it to outperform its peers significantly. Performance Highlights Classic Trend Index: With a 0.8% return for December and a stellar YTD performance of 18.8%, the Classic Trend Index remains the benchmark for consistent and superior risk-adjusted returns. Its MAR ratio of 1.98 and Sharpe ratio of 0.70 further highlight its efficient use of risk. SG Trend Index: December’s 1.5% gain contributed to a 2.6% YTD return, reflecting stability but lagging behind the top performers. A CAGR of 7.7% since January 2020 remains respectable for this broad-based index. Barclay BTOP50 Index: Delivered a 1.2% gain in December, bringing its YTD return to 4.4%. While solid, it underperformed compared to the Classic Trend Index. TTU Trend Following Index: Recorded a 0.9% gain in December, resulting in a YTD return of 4.4%. Its lower MAR ratio of 0.51 suggests higher relative drawdowns. IASG TF Index: With a 1.7% gain in December and a YTD return of 6.5%, this index showed resilience, supported by notable contributions from diversified asset classes. Eurekahedge TF Index: Posted a 1.7% gain in December, contributing to an impressive YTD return of 16.4%. Its Sharpe ratio of 0.68 and Sortino ratio of 1.52 reflect its focus on risk-adjusted performance. Systematic Momentum CTA Index: Achieved a 0.4% return in December, bringing its YTD return to 2.5%. While lagging behind, it provides a purist view of momentum-focused strategies. Performance Snapshot The VAMI chart showcases the Classic Trend Index’s sustained outperformance, reaching new highs despite the challenging environments faced by its peers. Its cumulative return since January 2020 remains unmatched, underscoring the strength of its systematic and diversified approach to trend following. Statistical Table The Classic Trend Index stands out as the top performer, boasting a 17.3% CAGR and minimal drawdowns, cementing its reputation for superior risk-adjusted returns. Its consistent success is rooted in its adherence to traditional trend-following principles, which emphasize systematic strategies without reliance on volatility adjustments or dynamic position sizing. By maintaining a steadfast focus on capturing market outliers, the Classic Trend Index has demonstrated resilience and efficiency, outperforming peers and setting the standard for effective trend-following methodologies. December concluded a strong year for the Classic Trend Index, solidifying its place as the benchmark for excellence in trend-following strategies. Its ability to consistently capture market outliers while minimizing risk highlights the enduring value of traditional systematic approaches. As we enter 2025, the Classic Trend Index sets a high standard for the trend-following landscape, proving that discipline and adherence to proven methodologies remain key drivers of success in an ever-changing market environment. About the Indexes SG Trend IndexCreated by Société Générale, the SG Trend Index represents the largest trend-following CTA programs, focusing on systematic strategies with significant AUM. It captures broad market movements across various assets. More on SG Trend Index Barclay BTOP50 IndexManaged by BarclayHedge, this index follows the largest investable CTAs, emphasizing diversification across major futures markets. It’s a widely referenced benchmark for managed futures. More on BTOP50 Index TTU Trend Following IndexDeveloped by Top Traders Unplugged, the TTU TF Index includes programs with a 15-year track record, emphasizing resilience through experience and diversification across a large ensemble of programs. More on TTU TF Index SG CTA IndexAnother index by Société Générale, the SG CTA Index covers a broader array of CTA strategies, providing insight into the managed futures landscape beyond trend following alone. More on SG CTA Index IASG Trend Following IndexThis index, managed by IASG, tracks CTAs that primarily use trend-following strategies, offering a focused benchmark within the managed futures space. More on IASG TF Index Eurekahedge Trend Following IndexCurated by Eurekahedge, this index includes hedge funds specializing in trend-following across multiple asset classes, highlighting alternative approaches within trend following. More on Eurekahedge Trend Following Index Classic Trend IndexThe Classic Trend Index, curated by the Aussie Turtles, is a benchmark for traditional trend-following strategies, focusing on consistent, systematic approaches across diversified asset classes. More on Classic Trend Index Systematic Momentum CTA IndexManaged by NilssonHedge, this index tracks CTAs focused on momentum-based strategies, providing a purist view of momentum trading within managed futures. More on Systematic Momentum CTA Index Stay tuned for next month’s Battle of the Trend Following Indexes to see which benchmarks emerge as the top performers in the trend-following landscape.

Battle of the Trend Following Indexes: November 2024

Battle of the Trend Following Indexes: November 2024 In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks.  In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks. This report includes a VAMI (Value Added Monthly Index) performance chart and a comprehensive statistical table, allowing readers to stay informed on the performance of popular trend-following indexes and identify standout performers. November 2024 Result November saw a dramatic turnaround for trend-following strategies, rebounding strongly after October’s challenging environment. This resurgence was fuelled by pronounced trends in soft commodities, US Equities and Bitcoin, the latter gaining momentum after Trump’s public announcement of support. These favourable conditions provided a fertile backdrop for strong gains across all the indexes reviewed. The Classic Trend Index led the pack, delivering a standout 4.0% return, further cementing its position as the benchmark for consistent, risk-adjusted performance rooted in traditional trend-following principles. Performance Highlights Classic Trend Index: Once again emerged as the top performer, posting a 4.0% gain for November. Its superior MAR ratio of 2.05 highlights the efficiency of its risk-adjusted returns, significantly outpacing peers. This consistency reflects the enduring strength of its diversified systematic approach. SG Trend Index: Achieved a robust 3.3% return, benefiting from broad market participation, though its MAR ratio of 1.52 underscored slightly higher drawdowns relative to the Classic Trend Index. Barclay BTOP50 Index: Delivered a steady 2.4% return, demonstrating resilience but underperforming the leading benchmarks. IASG TF Index: Gained 3.4%, with notable contributions from soft commodities and equities, supported by a MAR ratio of 1.65. Eurekahedge TF Index: Added 3.2%, reflecting strength in alternative strategies, though variability remains higher compared to other benchmarks. Performance Snapshot The VAMI chart showcases the Classic Trend Index’s sustained outperformance, with cumulative returns rebased to January 2020. In November, the index reached a new high watermark, reflecting its ability to capture trends effectively while maintaining robust risk management. Unlike its peers, the Classic Trend Index adheres to traditional trend-following principles, avoiding volatility adjustments or dynamic position sizing methods that could dilute the impact of market outliers. The MAR ratio in the accompanying Statistical Table underscores its efficiency as a benchmark for risk-adjusted returns, delivering exceptional cumulative performance with minimal drawdowns since January 2020. While the market regime post-2020 has been particularly favourable for the Classic methodology—owing to its strict mitigation of adverse risk while capitalizing on beneficial volatility—the approach’s significant lifting power relative to its peers gives us confidence in its potential to deliver strong performance over the long term. Statistical Table Our comprehensive statistical table evaluates each index using key metrics, including monthly returns, Sharpe ratios, maximum drawdowns, and more. This data allows readers to track the performance and risk management effectiveness of each index. November’s results highlight the resilience and adaptability of traditional trend-following approaches. The Classic Trend Index, with its emphasis on systematic, diversified strategies that exploit market Outliers, continues to demonstrate why it is the preferred benchmark for trend-following excellence. As we approach year-end, it remains well-positioned to deliver a solid annual performance, outshining its peers across key metrics. About the Indexes SG Trend IndexCreated by Société Générale, the SG Trend Index represents the largest trend-following CTA programs, focusing on systematic strategies with significant AUM. It captures broad market movements across various assets. More on SG Trend Index Barclay BTOP50 IndexManaged by BarclayHedge, this index follows the largest investable CTAs, emphasizing diversification across major futures markets. It’s a widely referenced benchmark for managed futures. More on BTOP50 Index TTU Trend Following IndexDeveloped by Top Traders Unplugged, the TTU TF Index includes programs with a 15-year track record, emphasizing resilience through experience and diversification across a large ensemble of programs. More on TTU TF Index SG CTA IndexAnother index by Société Générale, the SG CTA Index covers a broader array of CTA strategies, providing insight into the managed futures landscape beyond trend following alone. More on SG CTA Index IASG Trend Following IndexThis index, managed by IASG, tracks CTAs that primarily use trend-following strategies, offering a focused benchmark within the managed futures space. More on IASG TF Index Eurekahedge Trend Following IndexCurated by Eurekahedge, this index includes hedge funds specializing in trend-following across multiple asset classes, highlighting alternative approaches within trend following. More on Eurekahedge Trend Following Index Classic Trend IndexThe Classic Trend Index, curated by the Aussie Turtles, is a benchmark for traditional trend-following strategies, focusing on consistent, systematic approaches across diversified asset classes. More on Classic Trend Index Systematic Momentum CTA IndexManaged by NilssonHedge, this index tracks CTAs focused on momentum-based strategies, providing a purist view of momentum trading within managed futures. More on Systematic Momentum CTA Index Stay tuned for next month’s Battle of the Trend Following Indexes to see which benchmarks emerge as the top performers in the trend-following landscape.

Battle of the Trend Following Indexes: October 2024

Battle of the Trend Following Indexes: October 2024 In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks.  In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks. This report includes a VAMI (Value Added Monthly Index) performance chart and a comprehensive statistical table, allowing readers to stay informed on the performance of popular trend-following indexes and identify standout performers. October 2024 Result October was a challenging month for trend-following strategies across the board, with most benchmarks facing headwinds in navigating volatile market conditions. Despite the turbulence, the Classic Trend Index demonstrated its resilience, retaining its leading position across key performance metrics. This consistency highlights the strength of its systematic approach, which remains rooted in traditional trend-following principles. Compared to its peers, the Classic Trend Index outperformed in several critical areas. While other benchmarks, such as the SG Trend Index and Barclay BTOP50 Index, also delivered robust long-term returns, they struggled more visibly in October. The SG Trend Index, representative of large-scale CTAs, experienced notable drawdowns, reflecting the broader challenges in capturing trends across diverse asset classes. Similarly, the Barclay BTOP50 Index, often regarded as a standard for managed futures, showed moderate resilience but fell short of the Classic Trend Index’s risk-adjusted performance. Among the niche indexes, the Eurekahedge Trend Following Index and IASG Trend Following Index exhibited higher variability. These benchmarks, which include funds employing alternative or specialized strategies, faced greater challenges in maintaining consistency. By contrast, the Classic Trend Index’s focus on systematic, diversified strategies allowed it to better weather the month’s market turbulence. The Systematic Momentum CTA Index, with its emphasis on pure momentum strategies, experienced heightened volatility, underscoring the challenges of a single-factor approach in turbulent markets. The TTU Trend Following Index, known for its emphasis on programs with a long-term track record, demonstrated resilience but did not outperform the Classic Trend Index on cumulative returns or Sharpe ratios. The Classic Trend Index’s ability to balance performance with risk management was a standout feature in October. With a smaller drawdown compared to most other benchmarks, it solidified its reputation as a benchmark for traditional trend-following excellence. This performance underscores the efficacy of its methodical approach in capitalizing on trends while effectively managing risk during challenging periods. Performance Snapshot The VAMI performance chart below displays cumulative returns since January 2020, providing a visual comparison of how each index has navigated varying market conditions over the past few years. Statistical Table Our comprehensive statistical table evaluates each index using key metrics, including monthly returns, Sharpe ratios, maximum drawdowns, and more. This data allows readers to track the performance and risk management effectiveness of each index. About the Indexes SG Trend IndexCreated by Société Générale, the SG Trend Index represents the largest trend-following CTA programs, focusing on systematic strategies with significant AUM. It captures broad market movements across various assets. More on SG Trend Index Barclay BTOP50 IndexManaged by BarclayHedge, this index follows the largest investable CTAs, emphasizing diversification across major futures markets. It’s a widely referenced benchmark for managed futures. More on BTOP50 Index TTU Trend Following IndexDeveloped by Top Traders Unplugged, the TTU TF Index includes programs with a 15-year track record, emphasizing resilience through experience and diversification across a large ensemble of programs. More on TTU TF Index SG CTA IndexAnother index by Société Générale, the SG CTA Index covers a broader array of CTA strategies, providing insight into the managed futures landscape beyond trend following alone. More on SG CTA Index IASG Trend Following IndexThis index, managed by IASG, tracks CTAs that primarily use trend-following strategies, offering a focused benchmark within the managed futures space. More on IASG TF Index Eurekahedge Trend Following IndexCurated by Eurekahedge, this index includes hedge funds specializing in trend-following across multiple asset classes, highlighting alternative approaches within trend following. More on Eurekahedge Trend Following Index Classic Trend IndexThe Classic Trend Index, curated by the Aussie Turtles, is a benchmark for traditional trend-following strategies, focusing on consistent, systematic approaches across diversified asset classes. More on Classic Trend Index Systematic Momentum CTA IndexManaged by NilssonHedge, this index tracks CTAs focused on momentum-based strategies, providing a purist view of momentum trading within managed futures. More on Systematic Momentum CTA Index Stay tuned for next month’s Battle of the Trend Following Indexes to see which benchmarks emerge as the top performers in the trend-following landscape.

Battle of the Trend Following Indexes: September 2024

Battle of the Trend Following Indexes: September 2024 In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks.  In the Battle of the Trend Following Indexes, we present a monthly update on some of the most respected trend-following benchmarks. This report includes a VAMI (Value Added Monthly Index) performance chart and a comprehensive statistical table, allowing readers to stay informed on the performance of popular trend-following indexes and identify standout performers. Performance Snapshot The VAMI performance chart below displays cumulative returns since January 2020, providing a visual comparison of how each index has navigated varying market conditions over the past few years. Statistical Table Our comprehensive statistical table evaluates each index using key metrics, including monthly returns, Sharpe ratios, maximum drawdowns, and more. This data allows readers to track the performance and risk management effectiveness of each index. About the Indexes SG Trend IndexCreated by Société Générale, the SG Trend Index represents the largest trend-following CTA programs, focusing on systematic strategies with significant AUM. It captures broad market movements across various assets. More on SG Trend Index Barclay BTOP50 IndexManaged by BarclayHedge, this index follows the largest investable CTAs, emphasizing diversification across major futures markets. It’s a widely referenced benchmark for managed futures. More on BTOP50 Index TTU Trend Following IndexDeveloped by Top Traders Unplugged, the TTU TF Index includes programs with a 15-year track record, emphasizing resilience through experience and diversification across a large ensemble of programs. More on TTU TF Index SG CTA IndexAnother index by Société Générale, the SG CTA Index covers a broader array of CTA strategies, providing insight into the managed futures landscape beyond trend following alone. More on SG CTA Index IASG Trend Following IndexThis index, managed by IASG, tracks CTAs that primarily use trend-following strategies, offering a focused benchmark within the managed futures space. More on IASG TF Index Eurekahedge Trend Following IndexCurated by Eurekahedge, this index includes hedge funds specializing in trend-following across multiple asset classes, highlighting alternative approaches within trend following. More on Eurekahedge Trend Following Index Classic Trend IndexThe Classic Trend Index, curated by the Aussie Turtles, is a benchmark for traditional trend-following strategies, focusing on consistent, systematic approaches across diversified asset classes. More on Classic Trend Index Systematic Momentum CTA IndexManaged by NilssonHedge, this index tracks CTAs focused on momentum-based strategies, providing a purist view of momentum trading within managed futures. More on Systematic Momentum CTA Index Stay tuned for next month’s Battle of the Trend Following Indexes to see which benchmarks emerge as the top performers in the trend-following landscape.

What is Convexity and Why It Matters for Trend Following

What is Convexity and Why It Matters Convexity explains how small changes in certain environments can lead to disproportionately large outcomes. Introduction Financial markets are anything but predictable. Despite the desire for smooth, steady returns, markets inherently exhibit nonlinearity, unpredictability, and fat-tailed distributions. This reality demands a strategy that embraces uncertainty rather than one that attempts to suppress it. The key to thriving in this environment lies in convexity—a principle that transforms volatility into opportunity through asymmetry, dynamic risk management, and compounding power. What is Convexity? Convexity is the concept that small inputs can lead to disproportionately large outcomes—both positively and negatively. Unlike linear relationships, where returns grow proportionally to risk, convexity introduces a curved dynamic, where favorable volatility accelerates gains while unfavorable volatility applies brakes. Markets themselves exhibit convexity, meaning that traders who attempt to force smooth, linear returns onto an inherently wiggly world are destined for failure. All equity curves ultimately reveal either a convex or concave signature, depending on how they respond to market uncertainty. Convex portfolios (positive skew) embrace asymmetry, keeping losses small while allowing for large, outsized gains. Concave portfolios (negative skew) suppress volatility and attempt to smooth returns but ultimately suffer from large, catastrophic drawdowns. Most traders unknowingly operate within a concave framework, where the illusion of stability comes at the cost of hidden risk. Convexity, on the other hand, transforms the frown of concavity into the smile of opportunity, ensuring that portfolios are positioned to benefit from market dislocations rather than be blindsided by them. Convexity and Skew: The Essential Distinction The hallmark of a convex portfolio is positive skew, while a concave portfolio is characterized by negative skew. Positive Skew (Convexity): Frequent small losses, punctuated by rare but disproportionately large gains. This is seen in trend-following, long-volatility strategies, and asymmetric portfolio structures. Negative Skew (Concavity): Frequent small gains, but with occasional, devastating losses. This is typical of mean-reversion strategies, short-volatility positions, and leveraged martingale models. Because markets are inherently nonlinear and fat-tailed, every strategy will eventually reveal a convex or concave profile. Convex strategies thrive by exploiting uncertainty, while concave strategies eventually collapse under its weight. The Goal of Convexity: Optimizing Compounding Many investors fall into the trap of targeting an optimal average speed in a market environment that is anything but smooth. A prime example is the S&P 500, which has an average return of 8% per year—but this average obscures extreme variability: In some years, returns exceed 20%. In crisis years, losses exceed 30%. Attempting to target the average leads to dangerous missteps: Leverage increases exposure during downturns, compounding losses. Profits are taken prematurely in favorable regimes, capping upside. This is akin to a racecar driver maintaining the same speed on all parts of a winding track. Without the ability to brake on sharp turns and accelerate on straights, the driver will either crash or fail to compete effectively. Why Convexity Wins the Compounding Race Convexity prioritizes risk-adjusted adaptability rather than forcing an artificial smoothness onto a chaotic market. The convex trader slows down when uncertainty rises and accelerates when conditions become favorable, creating an optimal trajectory for long-term compounding. Braking (Risk Mitigation): Avoids devastating losses by cutting risks during adverse regimes. Acceleration (Opportunity Capture): Capitalizes on major market trends and dislocations. Non-Predictive Adaptability: Adjusts dynamically rather than relying on fragile forecasts. Those who embrace convexity understand that attempting to force stability in an unstable world is a losing battle. Instead, they design portfolios that thrive on adaptation, asymmetry, and compounding, ensuring that when opportunity arises, they are positioned not just to participate, but to dominate the market landscape.