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Mean-Reversion in Trend-Following Performance Using a 120-day Lookback

September 19, 2019

In the last post we showed that trend-following tends to be mean-reverting in the short-term. Data analysis also shows that trend-following has an even stronger mean-reverting effect using a 6-month or 120-day window using the same methodology. Take a look at the chart below using the BarclayHedge SG Trend Index:

In the last post I hypothesized that the mean-reversion effect exists because investors tend to chase recent performance. But there is obviously a lot more going on that drives the performance of trend-followers including lower interest rates, higher correlations, and generally less pronounced trends. Certainly monetary policy worldwide has also played a factor. A very good paper by Spring Valley analyzes some of the factors that have affected trend-following performance. Ultimately the data suggests that you need to incorporate this effect into your strategy or asset allocation methodology in order to be more consistently profitable using a trend-following approach.

2 Comments leave one →
  1. juan duran permalink
    September 19, 2019 2:23 pm

    David, thank you for your great work.
    In this latest post, instead of using the 5 day moving average of the 10 day returns you are looking for the returns achieved in the last 120 days? I mean you are moving from very short term mean-reversion to 6 months mean-reversion.
    I´m surprised that you can still find mean-reversion after such a long period

    • david varadi permalink*
      September 20, 2019 5:00 pm

      Thanks Juan, I was also surprised- but most lookbacks indicate mean-reversion suring the testing period. best regards,
      David

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