"Our research makes several new contributions to the literature on trend following. First, we demonstrate a link between the returns of a trend following portfolio and the business cycle. Typically the performance of the portfolio is higher in economic expansions than recessions. Second we show that, while a linear macroeconomic factor model has little explanatory power, a conditional model, which allows the coefficients to vary through time, does result in several of the macroeconomic factors having a statistically significant relationship with trend following. Third, we show that when trend following portfolios are formed on either the explained or unexplained portions of financial futures returns, unlike cross sectional momentum, they generate statistically and economically significant excess returns in both cases. Finally, using a new estimation approach we find that in general trend following generates higher returns in periods when economic uncertainty is lower."

"Our evidence suggests that there is a link between trend following and the state of the economy, measured using either GDP or NBER definitions. While returns are highly positive in both expansions and recessions we find that the average return in an expansionary period is approximately 8% higher than the return generated in recessions. This evidence is supplemented by data on changes in interest rate spreads – proxies for shorter term and longer term economic peaks and troughs. Trend following returns are generally higher at cyclical peaks than troughs. We also present evidence of a time varying relationship between the performance of trend following portfolios and the returns of equity and bond markets. This variation allows the strategy to generate positive returns across different bond and equity market cycles."