CPD: Trend following investments – patience is a virtue

Understanding trend investing and a trend following strategy can add value investor portfolios.

Trend following strategies have several properties desirable to investors, particularly during periods of market volatility. In this article from GSFM’s investment partner Man Group explains why patience is a virtue when it comes to trend following.

A trend following strategy is designed to take advantage of persistent movements in financial markets. Rather than trying to predict future price directions, it responds to recent market behaviour, operating on the belief that assets tend to move in sustained trends. When prices are rising, the strategy typically takes a long position, expecting the upward momentum to continue; when prices are falling, it goes short, anticipating further declines.

These strategies rely heavily on technical analysis tools and indicators to detect trends and generate trading signals. Trend following strategies tend to be systematic and quantitative in nature and apply a variety of technical signals across a wide range of instruments. These can include futures, forward contracts and highly liquid over-the-counter options. They often span multiple asset classes such as equities, bonds, currencies, commodities, interest rates, energy, utilities and credit, and frequently involve positions across hundreds of markets simultaneously.

Importantly, trend following does not aim to catch the top or bottom of the market. Instead, the strategy seeks to capture the core of a trend, profiting from extended price moves.

Part one: 2025 so far

All good things come to those who wait. After the dramatic volatility driven by President Trump’s on-again-off-again tariff policies, trend followers may well feel unsettled. Yet historical crises show that staying invested is required to reap the rewards.

However, recurring historical patterns during equity crises generally show that trend following often wobbles before delivering on its crisis alpha credentials.

To say market uncertainty is high is an understatement. By market close on 11 April 2025, the S&P 500 Index had fallen 8.1 percent over the year, NASDAQ 10.0 percent and crude oil 12.3 percent. There have been few places to hide, with historic ‘safe havens’ such as the dollar and developed government bonds failing to deliver returns to offset April’s equity rout. For traditional multi-asset investors, this has been a painful ride so far, as shown in figure one.

Trend following has historically performed positively during large market moves, so why is it seemingly not working in 2025?

Correction or crisis?

Perhaps a better question would be: why isn’t trend following working yet? At the onset of a downturn, investors often look expectantly toward trend-following strategies, only to find themselves asking: “Where is my convexity?” This natural question highlights an important nuance in how trend strategies respond to market dislocations.

Trend following strategies are frequently characterised as being ‘long volatility’. While this description holds merit when evaluated over extended timeframes of weeks or months, the relationship becomes more complex during sharp, short-lived volatility spikes.

The critical distinction lies in the nature of the selloff, and whether it is a correction or a crisis. As illustrated in figure two, trend strategies have historically delivered robust performance during sustained market drawdowns^[1] However, their behaviour during compressed, highly volatile episodes more closely resembles a roll of the dice – heavily dependent on positioning at the moment volatility erupts.

Full-blown market crises rarely manifest as clean, straight-line moves. Instead, they typically develop through distinct phases marked by significant whipsawing before a clear direction emerges. These violent reversals can temporarily wrong-foot even the most robust trend models, although these initial periods of heightened volatility serve as a recalibration mechanism, where market participants assimilate new information into prices. This is observed in figure three, which shows that prior to the official start (high watermark) of each crisis, equities had already shown signs of whipsawing.

Part two: Recurring patterns

While each crisis unfolds differently, we observe recurring patterns in how trend strategies adapt and eventually deliver crisis alpha:

1. Initial shock and position misalignment

When market dislocations first emerge, trend models typically carry legacy positions calibrated to the pre-crisis environment. This initial misalignment can result in losses as rapid price movements contradict established trends. Performance during this early phase depends heavily on pre-existing positions and can vary significantly across different crisis periods. What remains consistent, however, is that trend models require time to adjust to the new market reality.

2. Adaptive recalibration

As a crisis develops, trend models begin their adaptation process — de-risking where appropriate and identifying emerging trends. This recalibration period often includes both gains and losses as positions are adjusted to align with evolving market directions. The speed of adaptation and robust risk management become critical during this phase. Recent examples include the tactical repositioning in US 10-year Treasury futures over the past week, where trend-following breakout models quickly identified and capitalised on new directional moves.3

3. Delivering crisis alpha

Following this period of recalibration, trend following strategies eventually align with the sustained market moves that typically characterise crises, sizing up positions accordingly and help deliver the crisis alpha that investors desire. This phase has historically coincided with stronger returns as strategies leverage clear directional moves across multiple asset classes.

Indeed, looking at major equity market dislocations of the past several decades, from the dot-com bubble, to the GFC, to 2022’s inflation spike, initial sharp moves can be observed. These are frequently followed by counter-trend rallies or reversals before markets go into an all-in capitulation and eventual recovery.

The dot-com experience (September 2000 – October 2002)

During the dot-com bubble, trend following strategies (as proxied by the Société Générale Trend Index) initially struggled to find their footing as equities whipsawed, losing approximately 10 percent before finding their stride. Once models recalibrated, investors who maintained their allocations were eventually rewarded with returns exceeding 40 percent, as the crisis fully developed.

Notably, even on the path to these impressive gains, trend followers endured another 20 percent drawdown, illustrating that the journey to crisis alpha is rarely linear. This pattern underscores the importance of patience and conviction when allocating to trend strategies during market stress.

The GFC pattern (October 2007 – March 2009)

The onset of the GFC also presented a similar pattern. The S&P 500 Index suffered a 9 percent drawdown within one month during the summer of 2007 before rebounding to a fresh high in October 2007. As illustrated in figure six, trend strategies initially failed to deliver convexity, suffering a drawdown of nearly 17 percent. However, trend strategies had already adapted, with defensive positions in place to deliver crisis alpha once the S&P entered a more prolonged bear market, rewarding those with the patience to hold the strategy.

The inflation episode (January 2022 – October 2022)

Beyond the two growth-driven crises, we can also draw parallels to inflationary crises, specifically focusing on the most recent episode. The S&P 500 experienced a fairly sharp ~4 percent drawdown in November 2021, triggering a contemporaneous ~6 percent reversal for trend following.

However, risk in the strategy was subsequently cut and positions began to adapt, with trend following experiencing more muted performance during this recalibration phase. Once equities resumed their decline in early 2022, the continuous upside surprises in inflation led to the formation of trends, and trend following was able to benefit.

It is worth highlighting that, much like in the dot-com bubble, the path to crisis alpha was not linear. Trend following strategies endured a mini-correction in June-July 2022, prior to delivering further gains as the equity sell off deepened from August onwards.

Bringing this all together in figure ten, the common thread across different crisis periods is that patience was rewarded. While investors must endure periods of drawdown and volatility along the way, historical evidence suggests that trend following ultimately can deliver meaningful crisis protection for those willing to maintain their allocations through the full cycle. Each crisis may follow a unique trajectory, but the pattern of initial pain followed by eventual gain remains remarkably consistent.

Conclusion: Laws of unintended consequences

Trend following has several desirable properties: comparable long-term returns to equities, zero long-term correlation to traditional assets and historically observed strong performance in crisis periods (aka crisis alpha). Many advisers recommend trend following strategies to their clients for these exact reasons. However, as illustrated in this article, the delivery of crisis alpha is not linear.

Current market moves are testament to the fact that we are currently witnessing a profound transformation that is reshaping the global economic order, driven by the US administration’s sweeping policies. History suggests that policy shifts tend to have lasting unintended and unexpected consequences that ripple through markets as participants take time to digest their impact.

If the current level of uncertainty and volatility – from both a price and policy perspective – persists, there is an elevated chance of disruption. Trend following has so far borne the brunt of the initial market shock and misalignment, but positions have undergone a period of adaptive recalibration. As per the Société Générale Trend indicator, trend-following is currently positioned towards a more defensive stance – short equities, long bonds and short energies, for example. Perhaps one may take the view that the initial drawdown can be regarded as a cheapening of the entry point for this crisis alpha strategy, in contrast to traditional defensive strategies, such as puts.

While Man Group makes no claims as to be able to predict the future path of returns, if markets do find their way into a more protracted period of weakness, the prevailing positions may be well-positioned to deliver crisis alpha. As history has repeatedly shown, trend can indeed be a friend in times of market stress – but it’s a friend that tends to show up just before the real party begins.

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Notes:
[1] Past performance does not guarantee future results.
[2] Best of Strategies for the Worst of Times‘. Trend-following represented as SG Trend index. Chart is show

Important information: The information included in this article is provided for informational purposes only and is general advice only. It does not take into account an investor’s own objectives. The information contained in this article reflects, as of the date of publication, the current opinion of Man Group plc and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Man Group plc, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. Past performance does not guarantee future results.