01 Jan Learning From ISAM's "The Fallacy of Trend-Following Trend-Following"
Trend following portfolio’s returns are mean-reverting.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
By trend following a market, we have implicitly de-trended its price series. What is left would essentially be noise. Intuitively trying to trend follow a trend following strategy would not work.
The paper confirms empirically that serial correlation between the daily profit and loss of a trend following portfolio is close to zero. This means that trying to trend follow a trend following portfolio would never outperform the original trend following portfolio regardless of parameter choice. In fact a trend following portfolio’s returns is mean reverting.
Research Paper: The Fallacy of Trend-Following Trend-Following
Author: International Standard Asset Management
Company: International Standard Asset Management