January 19, 2016
Whitepapers and Publications
Return Chasing and Trend Following: Superficial Similarities Mask Fundamental Differences
Article Preview
A thriving investment manager started his presentation to a roomful of potential investors saying: ‘Before I tell you what I do, I’m going to ask and answer the most important question you should put to me. “Who is losing the money that I’m going to make for you?”
The answer: return chasers.
At first, this sounds reasonable, at least with regard to investment returns which are not explained by risk. But then, on further reflection, one has to ask: What about trend following, arguably the best systematic investment strategy of all time? Why was he silent on what many consider the ‘the premier anomaly’. More troubling still, how can trend following have worked so well, while ‘return chasing’, which sounds like the same thing, be so misguided as to be the primary source of the superior returns of the smart investors? What follows is an attempt to answer that question, which may be useful both in making sense of history and thinking about the future.
Previous