Education Resource Libary

This was one of the first papers to demonstrate that applying a simple moving average strategy to each asset in an internationally diversified portfolio of assets, an investor is able to increase risk adjusted returns in a diversified portfolio. In addition, the investor would have also been able to avoid many of the protracted bear markets in various asset classes. Avoiding these massive losses would have resulted in equity-like returns with bond-like volatility and drawdown.

This article documents significant ‘‘time series momentum’’ in equity index, currency, commodity, and bond futures for each of the 58 assets they consider. It shows that a diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns and performs best during extreme markets.

This article provides a more mathematical demonstration of how trend following provides risk reduction in a diversified portfolio in bad times.

They find that over a historical period of 60 years, a range of fairly simple rules, including the popular 200-day moving average trend-following rule, dominate just passively holding an investment in the S&P index.

Wes Gray at Alpha Architect is an advocate of trend following strategies and in this paper he presents a lot of evidence for different assets that using trend following as an investment strategy provides the possibility of lowering maximum drawdown risk, while also offering a chance to participate in a majority of the upside associated with a given asset class.