You do not buy trend following for its unremarkable average return. You buy it for what it does in the years that break everything else, and you pay for that with flat, dull, calm-market years.
Key takeaways
- Trend following funds trade liquid futures across equities, bonds, currencies and commodities using systematic momentum rules, going long markets that are rising and short those that are falling.
- The reason to allocate is crisis alpha: the strategy delivered +20.9% in 2008 and a record +27.3% in 2022, the two years equities fell hard, because sustained equity sell-offs tend to produce persistent trends the system can ride.
- The cost of that protection is mediocre calm-market returns. The SG Trend Index has compounded at about 4.9% a year since 2000, and it can underperform an index fund for years, especially in whipsawing, trendless markets like 2018.
- Judge a trend allocation by what it does for the whole portfolio in the bad years, net of fees, not by its own average return in isolation.
Most of the hedge fund exposure in a private portfolio is quietly long equities. The “absolute return” manager, the multi-strategy book, the credit fund: run the correlations back through 2008 and 2022 and a lot of them fell when shares fell. That is the problem an allocation to trend following is built to solve. It is one of the few liquid strategies with a genuine record of making money in the same months your equity book is losing it.
Trend following sits at the centre of managed futures. It is systematic, traded in deep and liquid markets, and structurally different from most hedge fund styles. You are not underwriting a business or a management team. You are underwriting the tendency of prices to keep moving in the direction they have already been moving, across dozens of futures markets at once. Here is how that works in practice, where the returns come from, and the trade you are really making when you write the cheque: convex protection in the bad years, paid for with flat and sometimes negative returns in the calm ones.
The position worth stating up front, because it changes how you judge the strategy: you do not buy trend following for its average return, which is unremarkable. You buy it for what it does in the years equities break. Judge it on 2008 and 2022, budget for the drought years in between, and it earns its place. Judge it on the long-run average and it looks like an expensive way to underperform a tracker.
What trend following funds are
Trend following funds are systematic managers that trade liquid futures and forwards across the major asset classes: equity indices, government bonds, currencies and commodities. They take positions from trend signals, rules that flag persistent upward or downward price moves, and they scale exposure up or down as those trends strengthen, weaken or reverse. The decision-making is rules-based. You are paying for a repeatable process and execution discipline, not a manager’s discretionary read on the world.
Two distinctions are worth getting right, because both get muddled.
Trend following is not the same as managed futures. Managed futures is the broad category of professionally managed futures accounts run by Commodity Trading Advisors, or CTAs. Trend following is the dominant strategy inside it, but the category also holds relative-value, carry, volatility and other systematic approaches. Our managed futures explainer sets out that wider universe. The focus here is the trend-following core.
Trend following is also not “macro with a model”. A discretionary global-macro manager forms a view and expresses it. A trend follower has no view. The system reacts to what prices have already done and takes the position the rules dictate, whether or not it makes intuitive sense at the time. If you want the fuller split, we cover it in discretionary versus systematic investing.
How the strategy works in practice
The signal: momentum expressed as rules
Almost every trend system is a variation on one observation: prices that have been moving in a given direction tend to keep moving for a while. Managers capture that idea over different horizons, using lookbacks such as one to three months (faster signals) or six to twelve months (slower ones), or a blend of several.
The common building blocks are simple:
- Time-series momentum: go long a market if its own past return over the lookback is positive, short if it is negative.
- Moving-average crossovers: when a faster average of price crosses a slower one, the crossing point triggers or flips a position.
- Breakout rules: when price makes a new high or low over a set window, that break signals a trend worth following.
The signal is the easy part, and it is largely commoditised. The differentiator between a good manager and a mediocre one is rarely the raw signal. It is how they standardise signals across markets that trade at very different volatilities, how they stop the system over-trading itself into a fee-and-slippage hole, and how they manage risk at the portfolio level when correlations spike and everything starts moving together.
The portfolio: many small bets, not one big call
A trend fund typically runs positions across four broad blocks at once:
- Equity index futures (S&P 500, Euro Stoxx, FTSE, Nikkei and others)
- Government bond futures (US Treasuries, German Bunds, UK Gilts, Japanese government bonds)
- Currency forwards (the major and liquid crosses)
- Commodity futures (energy, industrial and precious metals, and agriculture)
The point is breadth. The fund is not betting that any one market trends. It is betting that at any given time, some markets somewhere are trending, and that a rules-based system holding dozens of positions will be on the right side of enough of them. A rates trend can pay when equities are going nowhere. An energy trend can pay when bonds are choppy. Diversification across trend sources is doing as much work as the signal itself.
Risk budgeting: volatility targeting and position sizing
Most managers size positions by risk rather than by capital. They set a target volatility for the portfolio and scale each position so a more volatile market gets a smaller allocation and a calmer one gets a larger allocation. It matters because these funds trade futures, where margin lets a fund hold large notional exposure against a limited cash outlay, so uncontrolled sizing can turn a modest signal into an outsized loss.
This is where the outcome is actually decided. The signal gets the attention, but the results are driven by how quickly the system cuts a position when a trend breaks, how it manages correlation when previously unrelated markets start moving as one, and how tightly it controls execution. Many trend systems trade often enough that transaction costs and slippage are the difference between index-like numbers and genuinely investable performance. Execution is a cost centre, and it is one worth asking any manager about directly.
Where the returns come from
Trend-following returns are not carry, and they are not stock-picking. They come from capturing medium-term directional moves and cutting losses fast when a move fails to develop. Academics call this divergent risk-taking, the mirror image of the convergent, buy-the-dip logic most investors run on. A value investor adds to a position as it falls and gets cheaper. A trend follower does the opposite: it closes losers quickly and lets winners run.
That behaviour produces a specific and unusual return shape. Trend following has positive skew: a lot of small losing periods, punctuated by occasional large gains. Most asset classes, equities included, have the reverse, small steady gains punctuated by occasional large losses. It is why the strategy behaves so differently in a crisis. When a sustained sell-off in equities coincides with a sustained rally in bonds or a sharp move in commodities, a trend follower that has already positioned into those moves keeps adding to them rather than fading them.
That crisis behaviour has a name in the literature. Kathryn Kaminski, who wrote the book on the subject with Alex Greyserman, defines crisis alpha as the profit gained by exploiting the persistent trends that appear across markets during periods of stress (*Trend Following with Managed Futures: The Search for Crisis Alpha*, 2014). The mechanism is not magic and it is not a market call. Equity crises tend to be slow-moving and persistent rather than instant, which gives a trend system time to detect the move and position into it, usually short equities and long bonds, and ride it while it lasts.
The evidence: crisis years versus calm years
The best-known proxy for the industry is Société Générale’s SG Trend Index, which tracks the ten largest trend-following CTAs open to investment and is equal-weighted and reconstituted each year (Société Générale Prime Services). Its record is the clearest way to see the trade you are making. The table below sets the crisis years against the calm ones.
| Year | Market context | SG Trend Index return |
|---|---|---|
| 2008 | Global financial crisis; S&P 500 down ~37% | +20.9% |
| 2018 | Whipsaw year; no sustained trends; most constituents finished in the red | negative |
| 2019 to 2021 | Three consecutive positive but modest years | positive |
| 2022 | Inflation shock; bonds and equities fell together; energy rallied | +27.3% (record year) |
| 2023 | Trend reversals; a difficult, roughly flat-to-down year | negative / ~flat |
| 2024 | Choppy, low-conviction year | ~+2.4% |
Sources: 2008 return via Société Générale index history; 2022 record +27.3% via AlphaWeek’s 2022 CTA review and Hedgeweek; 2018, 2023 and 2024 context and the +2.4% figure via Man Group’s trend deep dive and Société Générale CTA updates. Figures are index-level and net of the underlying managers’ fees; individual funds vary widely.
The two biggest numbers, +20.9% in 2008 and +27.3% in 2022, both landed in the years equity investors were losing serious money. That is the convex payoff: the strategy was there precisely when a balanced portfolio needed something to be. The cost is the rest of the rows. Whipsaw years like 2018 and reversal years like 2023 are where trend following gives money back or grinds sideways while equities quietly compound. The long-run number reflects both sides: the SG Trend Index has compounded at roughly 4.9% a year since 2000 (Top Traders Unplugged).
That 4.9% is the figure that trips people up. Taken alone it looks mediocre against equities. But an allocator does not hold trend following alongside cash. They hold it alongside stocks and bonds, where its job is to pay out in the exact years the rest of the book does not. The longer-running Barclay BTOP50 managed futures index makes the point in hard numbers: since 1986 it has returned around 7% a year, close to world equities, but with materially lower volatility (roughly 9.6% versus 14.4%) and a far shallower worst drawdown (about -16% versus -50%) (AIMA).
Where trend following struggles: the whipsaw problem
The weakness is the flip side of the strength. Trend following needs trends. In sideways, mean-reverting, headline-driven markets, the system repeatedly enters a position on a signal, gets stopped out when the move reverses, flips to the other side, and gets stopped out again. Each round is a small loss plus trading costs. Stack enough of them together and you get a year like 2018, when whipsawing markets left most constituents of the SG Trend Index in the red despite no single large drawdown.
This is the discomfort a trend allocation demands. The strategy can underperform a simple index fund for years at a stretch, and the years it underperforms are usually the calm, rising ones when underperforming feels worst. From 2009 to 2013, in the low-volatility recovery after the financial crisis, trend following was a genuinely painful hold. The investors who kept the allocation through that stretch are the ones who were positioned when 2022 arrived. The convex payoff and the drought are the same allocation. You cannot keep one and skip the other, and any pitch that implies you can is selling the upside without the ticket price.
What to look for in a fund
If the strategy fits the role you want it to play, the differences between managers come down to a handful of structural questions worth putting to any fund before you allocate:
- Speed of the signals. Faster systems react quicker but trade more and whipsaw harder in choppy markets; slower systems ride bigger moves but give more back at the turn. Know which end you are buying.
- Market breadth. More markets means more independent chances for a trend to appear somewhere. A fund trading a narrow set is more dependent on those specific markets cooperating.
- Fees and net returns. These are hedge fund vehicles with a management fee on assets and a performance fee on profits. On a strategy whose long-run average is modest, fees eat a large share of the return, so the net-of-fees record is the only one that counts. Ask too how the manager controls transaction costs and slippage, which are a real recurring drag on a frequently trading system.
- The role in your portfolio. Trend following is a portfolio tool, not a standalone bet. Its value shows up in what it does to the whole portfolio in a crisis, not in its own return line read in isolation.
For where this strategy sits in the broader landscape of hedge fund styles and how it compares with the equity-sensitive strategies it is meant to offset, see our core guide to hedge funds.
FAQs
Is trend following the same as managed futures?
No. Managed futures is the broad category of futures accounts run by CTAs. Trend following is the dominant strategy within it, but the category also includes carry, relative-value and volatility approaches that are not trend-based.
Why did trend following make money in 2008 and 2022 when equities fell?
Because both were sustained, persistent moves rather than instant crashes. That gave the systems time to position short equities and long bonds (2008) or long energy and short bonds (2022) and ride the trend while it lasted. This crisis-period gain is what practitioners call crisis alpha.
What is the main weakness of trend following?
Whipsaw. In sideways, mean-reverting markets with no sustained trends, the system repeatedly enters positions that reverse, taking a string of small losses plus trading costs. 2018 was a textbook example, with most SG Trend Index constituents finishing the year down.
Is trend following a good diversifier?
Historically, yes, because of its low-to-negative correlation with equities in stressed markets and its positive return skew. Over the long run the Barclay BTOP50 managed futures index has matched equities’ return with lower volatility and a much shallower worst drawdown. The SG Trend Index itself has compounded at roughly 4.9% a year since 2000, an average that understates the point: the value of the allocation is what it does to a whole portfolio in a downturn, not its standalone return. This is general information, not financial advice.