Trend following is a systematic implementation of the momentum concept applied primarily to futures markets — commodities, currencies, and interest rates. It has been implemented commercially by managed-futures firms and commodity trading advisors (CTAs) for decades. The long-term aggregate record is respectable but characterised by specific patterns that are worth understanding before evaluating any specific implementation.
The basic mechanism
Trend-following strategies attempt to identify sustained directional moves in prices and take positions in the direction of the identified trend. The specific identification methods vary widely across implementations — moving average crossovers, breakout systems, various technical filters — but the underlying principle is consistent: buy assets whose prices have been rising, sell (or short) assets whose prices have been falling.
The strategies typically apply to diversified portfolios of futures markets rather than to individual equities. The diversification across many markets is essential because any specific market can produce extended periods of unfavourable conditions.
The historical record
Managed futures firms have produced long-term aggregate returns in the mid-to-high single digits (percent annually) over multi-decade periods. The specific returns of any given firm vary substantially, but the industry as a whole has produced returns that combine reasonably attractive absolute levels with specific risk characteristics.
The specific risk characteristic that has attracted institutional allocation to trend-following is its behaviour during equity market crises. Trend-following has historically produced its best returns during periods when equity markets have produced their worst returns — sometimes called "crisis alpha."
The 2008 financial crisis produced extraordinary returns for trend-following firms. Many produced returns in the 20-40% range during a year when equities lost more than a third of their value. The pattern was similar (though less dramatic) during other equity market crises — 2000-2002 tech bust, 1998 LTCM crisis, various smaller episodes.
The mechanism for this crisis behaviour: during equity crises, extended trends often develop in bonds (typically rallying as yields fall), currencies (dollar strength typically), and specific commodities (typically declining as demand expectations fall). Trend-following strategies capture these extended moves in ways that provide diversification against the equity losses.
The frustrating periods
The tradeoff for the crisis alpha is that trend-following typically underperforms during extended range-bound market conditions. Markets that oscillate without extended directional trends produce poor results for trend-following.
The 2011-2018 period was particularly frustrating for many trend-following firms. Markets across many asset classes traded in ranges without extended trends. Aggregate returns for the industry were poor. Multiple firms closed or reduced strategy allocation.
This is not a failure of the specific strategy design but a specific characteristic of trend-following in specific environments. The strategy works when trends persist and fails when they do not.
Understanding this cyclical character is essential to evaluating trend-following. The strategy is not designed to produce consistent returns across all market conditions; it is designed to capture returns during trending conditions and to accept losses during range-bound conditions. Long-term investors in the strategy must accept the specific cyclical pattern.
Implementation variations
Trend-following firms differ substantially in their specific implementations, and the differences matter for return patterns.
Time-frame variations. Some strategies operate on shorter time-frames (days to weeks), attempting to capture shorter-duration trends. Others operate on longer time-frames (weeks to months), targeting longer-duration moves. The two produce different return patterns and different sensitivities to different market conditions.
Market diversification. Strategies applied to broader universes of markets typically produce smoother return patterns than strategies concentrated in fewer markets. The diversification across markets provides some smoothing of the strategy's aggregate returns.
Risk management approaches. Different firms use different specific risk management systems. Some use fixed stop-losses; some use volatility-targeting; some use various trailing-stop approaches. The specific choices affect both returns and risk characteristics.
Position sizing methodology. How positions are sized relative to available capital affects overall strategy characteristics. Aggressive position sizing produces higher returns during trending periods but larger drawdowns during range-bound periods.
Firms marketing trend-following as an aggregate strategy category obscure these substantial variations. Different firms with different specific implementations produce very different specific results.
The specific asset class applications
Trend-following applied to specific asset classes has specific characteristics.
Commodities. The classic trend-following application. Commodity markets often show extended directional trends driven by supply and demand imbalances that take time to resolve. Trend-following in commodities has produced some of the most reliable long-term returns for the strategy.
Currencies. Currency markets show trends driven by interest rate differentials, current account patterns, and various policy factors. Trend-following in currencies has produced meaningful returns during specific dollar strengthening and weakening cycles.
Bonds and interest rates. Interest rate markets show trends driven by monetary policy cycles. Trend-following in bonds captures the extended moves that occur during specific policy shifts.
Equities. Trend-following applied to equity indices has been more mixed than to other asset classes. Equity indices are subject to specific patterns (mean-reversion at some frequencies, momentum at others) that make simple trend-following less consistently effective.
The individual stock version
Trend-following can also be applied to individual stocks rather than futures markets. This is closer to the "momentum" strategies in the equity factor literature. The specific patterns differ:
Individual stock momentum has been well-documented as an anomaly with excess returns but also with severe drawdowns during specific reversal periods.
Stock momentum is more susceptible to specific events (earnings announcements, corporate news) than futures-market trend-following. The individual-stock version requires more specific risk management around these events.
The tax implications of high-turnover individual stock momentum are meaningful in taxable accounts. Futures-based trend-following has different tax treatment that can be more favourable in specific tax situations.
The current environment
Trend-following has performed variably through 2024-2026. Aggregate industry returns have been positive but modest. Specific opportunities in bond, currency, and specific commodity markets have produced returns; specific range-bound conditions in equity indices and some other markets have limited overall performance.
Whether trend-following is currently in a favourable or unfavourable phase of its own cyclical pattern is one of the ongoing debates in the strategy community. The strategy's long-term aggregate returns depend on the specific mix of conditions across the various markets and periods.
Access options
Retail investors can access trend-following strategies through several vehicles.
Managed futures ETFs. Multiple ETFs implement systematic trend-following strategies. Expense ratios are typically higher than passive equity ETFs but lower than institutional managed futures fund fees.
Managed futures mutual funds. Available through most major broker platforms. Typically higher expense ratios than ETFs but sometimes provide access to specific manager approaches not available in ETF form.
Individual futures implementation. Sophisticated retail investors can implement basic trend-following in liquid futures markets themselves. This requires substantial understanding of futures markets, risk management, and execution.
The rule to internalise
Trend following is a systematic implementation of momentum principles primarily applied to futures markets. It has produced respectable long-term aggregate returns with specific characteristics — cyclical performance patterns, meaningful drawdowns during range-bound conditions, and strong performance during specific crisis periods. Understanding the specific characteristics is essential to using the strategy well. It provides genuine diversification benefits when combined with equity portfolios but should not be evaluated in isolation from its cyclical nature. The strategy is well-established with substantial academic and practical foundation but requires specific patience with its performance patterns.
Educational content only. Not investment advice.