You need to throw away the backtest as a guiding benchmark during these unpredictable regimes. History won’t necessarily save you. Rather, you need to rely on a robust investment process that cuts losses short at all times to limit adverse risk during uncertainty yet exploits the new opportunities that arise in these regimes by simply letting profits run. Unlike most other forms of investment style, trend following shines when novel regimes emerge from the conditional and correlated nature of world events. (View Highlight)
For whatever the reasons, we at least can say that the current regime we are now experiencing is a novel one and despite the relative lack of volatility, trends have been ubiquitous. This therefore means that those investment strategies which were reliant on past behaviour floundered during 2022. (View Highlight)
But many investors might ask, if we don’t predict, then how do we derive our edge from market uncertainty? There is an alternative to prediction that allows us to strictly manage risk associated with adverse price variation. It is a game we have all played as children and it is called ‘follow the leader’. If we simply follow price like a glove and limit the degree to which we allow our systems to stray beyond the shadow of price, then we are well equipped to follow price into realms of uncertainty. (View Highlight)
A diversified systematic trend follower follows price like a shadow. Our systems react to price as opposed to predicting its next move. In our game of follow the leader, we let the markets decide our fate rather than let the tendency of our brains want to predict its next move and for 2022 this philosophical approach to investment has paid off. (View Highlight)