Truth or Trend: Separating Signal from Noise

Trump, Truths and tariffs

"IT'S LIBERATION DAY IN AMERICA!". Donald J. Trump, Truth Social, 3:27pm, 2 April 2025

“THIS IS A GREAT TIME TO BUY!!! DJT”. Donald J. Trump, Truth Social, 9:37am, 9 April 2025

Two ‘Truths’ which, in the space of six days, had driven the S&P 500 to post its worst day since March 2020, as well as its best day since October 2008. For those that had held firm and saw out the month, the moves were an aberration, although it encapsulated the sheer uncertainty markets currently face. What is true and what isn’t?

Undoubtedly it is hard to look beyond the noise, however, policy shifts of this magnitude tend to have unintended and unexpected consequences which filter through markets, resulting in greater divergence. Guessing in which direction, however, is a mug’s game. What matters is how you can stay diversified, ride market cycles, and take advantage of the dispersion.

Dispersion across markets is fertile ground for systematic strategies, and trend-following in particular, although the path of asset class returns never follows any conceivable pattern, varying from year-to-year. To illustrate this, we plot the annual returns of several markets over time, normalised to 10% return volatility, in Figure 1. In danger of stating the obvious, its clear markets can go up, down or sideways, in any given year. Taking gold and Euribor as examples, both markets have had their moments in the sun, with pronounced price trends in 2024 and 2022 respectively. Yet, in both cases, these trends have been preceded or followed by periods of rangebound movement with a high incidence of reversals. So how can we best navigate this?

Figure 1. Market returns per calendar year across key asset classes

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Source: Man Group database and Bloomberg. Date range, January 2020 to December 2025.

Here, there and everywhere

Trend-followers seek to capture trends in all these markets simultaneously, by taking many bets across asset classes, either long or short. The result of this diversified approach is highlighted in Figure 2, which shows how trend-following returns have varied by year and asset class. Sometimes they’re predominantly generated from long stocks (2017) or long commodities (2021) and other times long (2019) or short fixed income (2022).

Figure 2. Trend-following performance by asset class

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Source: Man Group database. Date range, January 2000 to December 2024. Trend-following is represented by a generic strategy which trades 150 futures and forward markets.

Perhaps more surprising, is that this observation holds during crisis periods, when equities are at their worst and trend-following performs best, providing investors with ‘crisis alpha’. Many would expect that during these periods of sustained equity weakness it would be short equity positions which stand out. The reality, however, is that crisis alpha has historically come from fixed income, commodities or currencies, as the decomposition is Figure 3 shows.

Figure 3. Trend-following crisis performance by asset class

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Source: Man Group database. Date range, January 2000 to December 2024. Trend-following is represented by a generic strategy which trades 150 futures and forward markets.

The mechanics of trend-following

Not only is diversification a feature of trend-following, but it is also an integral part of the equation, as trend-following's information ratio (IR) is a combination of the IR of each individual market and their correlations. In other words, the higher the diversification, whether through expanding the set of markets traded or greater dispersion across markets, the higher the IR.

Forecasting expected returns or ‘trendiness’ when selecting markets is as futile as attempting to forecast the returns of markets themselves. This further underscores the need for diversification in order to capture unpredictable trends across markets, whenever and wherever they may arise. Cocoa was a prime example, with the market seemingly trendless until its blistering rally in 2024 (Figure 4). This is true to trend-following’s positive skew, where small losses are contrasted with a few large gains.

Figure 4. Trend-following market contributions over five years - normalised to 15% volatility

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Source: Man Group Database. Date range, January 2018 to March 2024.

So, if we can’t control for the IR of markets, what can we control?

The power of adding markets

As we have observed, dispersion translates to lower correlation between markets, which in turn has resulted in a more profitable environment for trend-following. Short-term moves aside, the current trajectory is indicative of markets moving into this environment. Although, as is the case with the IR of individual markets, we can’t control for the environment. One area trend-followers can, however, control is the set of markets traded. Here increasing the number of markets, irrespective of the level of inter-market correlation, translates to a higher overall IR of the portfolio. Simply put, the more markets traded, the more bets you can take and the more trends you can take advantage of. The benefits of increasing the number of markets traded is further amplified as inter-market correlations decrease, whether that be a function of the environment we find ourselves in, or by the nature of the markets added.

Time in the market(s) vs timing the market(s)

The unpredictability of price trends makes timing an allocation to trend-following a dubious exercise. Especially as the strategy has a well-defined utility function, despite this being less clear cut during short sharp market crises. Its utility comes from being genuinely diversifying to traditional asset classes, most notably in extended crises, while not having a negative cost of carry during normal times. You wouldn’t try and time your flood insurance based on weather forecasts, so why try and time your portfolio protection?

We recently wrote that patience matters during crises, although this maxim can be applied more broadly. Much like with crises, we can never know where or when trends will emerge. This unpredictability naturally requires patience, and the decades of utility which trend has provided, suggests that patience is worthwhile.

Bibliography

Robertson, G, Goodall, R. (2023), “Trend-Following: A Different Point of Skew”, Man Institute, Available at: https://www.man.com/maninstitute/trend-following-different-point-skew

Robertson, G. (2023), “What's Trending: Trend-following - What's Not to Like?”, Man Institute, Available at: https://www.man.com/maninstitute/trend-following-what-not-to-like

Robertson, G. (2022), “Gaining Momentum: Where Next for Trend-Following?”, Man Institute, Available at: https://www.man.com/maninstitute/gaining-momentum-trend

Korgaonkar, R. (2025), “The Big Picture: Divergent Policies, Divergent Markets”, Man Institute, Available at: https://www.man.com/insights/the-big-picture-divergent

Korgaonkar, R. (2024), “The Big Picture: Forecast Fatigue - Diary of a Quant”, Man Institute, Available at: https://www.man.com/insights/the-big-picture-forecast-fatigue

Abou Zeid, T., Panjabi, Y. and Moore, H. (2025), “Why Patience Matters During Market Stress”, Man Institute, Available at: https://www.man.com/insights/why-patience-matters-during-market-stress

Goodall, R. (2024), “Trend-Following and Long-Short Quality: Loading the Dice”, Man Institute, Available at: https://www.man.com/insights/trend-following-loading-the-dice