Trendfollowing

The US dollar is the world’s primary reserve currency, is the most widely traded currency in the world (making up over 85% of all foreign exchange transactions), and is used as the benchmark currency for pricing many commodities such as oil and gold. We can say that the US dollar is the blood of the current financial system. A few months ago, we shared how to build a really long-term (nearly 100 years long) history of the USD exchange rate. Therefore, as we already have the data, we can now perform the cross-asset analysis to study the impact of the US Dollar’s strength or weakness on the performance of other asset classes, notably US equities, US treasury bonds, and commodities.

What’s the performance of a balanced portfolio during rising rates? How does it behave when inflation is high? What about a combination of these market states? And how do trend-following strategies fare in such an environment? These and even more questions we will attempt to resolve in our today’s article. We will be looking at different market cycles and how a balanced portfolio and a typical trend-following strategy perform over these different market states.

When someone mentions a financial crisis, most people immediately think of the global financial crisis of 2007-2008. Even though this is the most significant economic crisis in recent years, there have been many more significant crisis periods in the past 100 years. This article examines the biggest crises in three asset classes: stocks, bonds, and commodities, during the past century. Additionally, we analyze the behavior of our trend-following strategy during each of the crisis periods and propose it as a hedge for the stock, bond, and/or commodity markets.

Trend-following strategies have gained extreme popularity in the recent decade. Almost every asset manager utilizes trend following, or momentum, in some form – whether consciously or subconsciously. We at Quantpedia are convinced that each and every strategy has to be scrutinized thoroughly before it’s put into use. This is one of our motivations why we will introduce to you our framework for building a 100-year daily history of a multi-asset trend-following strategy today.

Diversification is one way of minimizing the risk of a portfolio. A well-diversified portfolio contains numerous assets from various sectors, each having a small weight so that a crash of any individual security does not hit the entire portfolio. The authors behind this paper came up with a new idea for diversifying stock portfolios. They examined new emerging asset, carbon futures.