Thursday, September 13th, 2007
No risk, no reward: trend following’s tough times
I’ve been a bit of a fan of trend following and enjoyed Michael Covel’s book Trend Following: How Great Traders Make Millions in Up or Down Markets, New Expanded Edition, (Paperback)“>Trend Following.
I believe in jumping on a trend and riding it till the end; though I incorporate fundamentals, which is a anathema to hard-core trend followers.
But right now some of its legends are doing it particularly tough.
The first was John W. Henry and now Bill Dunn, both poster boys for trend followers.
These guys have generated big returns in the past and experienced huge volatility. But they’ve always bounced back.
As Michael Covel notes in a recent post, Bill Dunn’s drawdowns has been going on for an unprecedented number of years.
It must be terrifying for them: they’d be asking whether the market changed so their method is redundant?
These guys maintain that trends will always remain in the market; sure they disappear sometimes, but they always come back eventually.
I suspect the market hasn’t changed this time as well. What they’re going through is simply a once-in-a-lifetime funk.
The likes of Henry and Dunn have taken big risks and used concentrated leverage. If you do that over a long period of time, then sooner or later you’re going to be caught by the mother of all drawdowns.
Everyone knows that to get higher returns you have to take on more risk. What most of us can’t accept is that you’ll eventually have to live through that risk.
From this perspective it’s probably a good time to buy trend followers; at the bottom of their most brutal drawdown. Not that I’d have a clue how to go about that!
This entry was posted on Thursday, September 13th, 2007 at 12:16 pm and is filed under Trend following. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
