GAEA Investment Research Center — “Trend following” is an investment principle followed by numerous investors. Today, we are examining a paper from AQR, A Century of Evidence on Trend-Following Investing, co-authored by Brian Hurst, Yao Hua Ooi and Heje Pedersen. Using historical returns data of about a hundred years under examination, the paper succeeded in proving that trend-following strategies have been consistently profitable over various assets. The GAEA Research Team has employed some typical strategies in digital currency investment and also gains good performance therefrom. We can find those trend-following strategies useful in digital currency asset during a relatively short-term period.

Trend-Following Strategies

The paper adopts a very simple trend-following strategy, the time series momentum strategy (1-month momentum, 3-month momentum and 12-month momentum). 1-month momentum refers to an investor that compares the current asset price with the price a month ago so if the current price is higher he will buy more assets, or otherwise, he will not open a position.

In this paper, three authors constructed an equal weighted combination of the three mentioned momentum strategies for 67 markets using historical returns data.

Performance of Time Series Momentum Strategy

As shown by results in the exhibit, the time series momentum strategy achieved the positive Sharpe Ration (which means an investor earns more than the risk-free return) in all markets.

The strategy is tested decade-by-decade and results in no single loss (after fee deduction) in every statistical period. Moreover, it is worth noticing that return performance of the strategy has a relatively weak correlation with equity assets (stocks) and bond assets, thereby leading to a better risk spreading.

By comparing the trend-following strategy with the 60/40 portfolio (which invests 60% in US stocks and 40% in US bonds), we can find that the returns of time series momentum strategy outperformed the 60/40 portfolio excessively in each US stock market disaster. To conclude, the trend-following strategy keeps largely unaffected by stock disasters.

The Theoretical Basis of Trend-Following

When it comes to why trend-following investing performs so well over long term, the academia has already put forward many theories based on behavioral finance, such as the Anchoring effect, the Herding effect and the Disposition effect. Investors interested in them could search for more related information.

Performance of Trend-Following Investing in Digital Assets

The GAEA Research Team has tested some typical trend-following strategies, including momentum, EMA and breakout in the BTC market, and excellent performance has been seen. It follows that though digital assets exist for a relatively short time, there are also trends in the digital asset market as there are in others.

Conclusion

Even though the forever existence of trends can not be ascertained by strict theoretical proofs, the examination of trend-following strategies using historical returns data from over a hundred years will provide considerably strong confidence to trend-following investors. After all, in terms of a phenomenon lasting for more than 100 years, it is less risky to believe in its continuance instead of its volatility.