Trend Following with Managed Futures: The Search for Crisis Alpha

Author: Alex Greyserman & Kathryn Kaminski | Categories: Trend Following, Managed Futures, Quantitative Finance, Portfolio Management

Executive Summary

"Trend Following with Managed Futures" by Alex Greyserman and Kathryn Kaminski, published by John Wiley & Sons, is an academically rigorous yet practically oriented exploration of trend following strategies in the managed futures space. The book examines the empirical evidence for trend following across more than a century of data, presents the theoretical underpinnings of why trend following works, and demonstrates its role as a source of "crisis alpha" -- the ability to generate positive returns during market crises when traditional investments are losing value.

The authors bring both academic and practitioner credentials: Greyserman as CIO of ISAM, a systematic investment management firm, and Kaminski as a researcher at MIT Sloan. This dual perspective produces a book that is simultaneously research-grade and applicable to real-world portfolio management. The extensive use of long-term historical data (some dating back to the early 1900s) provides a uniquely comprehensive evidence base for trend following strategies.

Core Thesis & Arguments

The central thesis is that trend following strategies provide genuine "crisis alpha" -- consistent positive performance during market dislocations -- because they systematically capture the behavioral and structural market dynamics that create and sustain trends. This crisis alpha makes trend following (through managed futures) an essential component of any well-constructed investment portfolio.

Key arguments include: (1) Trend following has demonstrated positive returns across more than a century of data, suggesting the phenomenon is persistent rather than ephemeral. (2) The sources of trend following returns are rooted in behavioral biases (herding, anchoring, slow information processing) and structural factors (central bank policy, capital flows) that are unlikely to be arbitraged away. (3) Trend following's greatest value is its negative correlation to equity markets during crises, providing genuine diversification when it is needed most. (4) The managed futures industry provides the most efficient vehicle for accessing trend following returns.

Key Concepts & Frameworks

• Crisis Alpha: The ability of trend following strategies to generate positive returns during market crises, providing portfolio protection when it is most valuable.
• Divergent Risk Premium: The return earned by trend followers for providing liquidity during market dislocations, analogous to an insurance premium collected over time.
• Behavioral and Structural Sources: The two categories of market dynamics that create trends -- behavioral (human psychological biases) and structural (institutional flows, policy actions).
• Time Series Momentum: The academic formalization of trend following, showing that assets that have performed well tend to continue performing well over intermediate horizons.
• Portfolio Allocation: The optimal role of managed futures in a diversified portfolio, including the risk-reduction benefits of including trend following alongside traditional equity and bond allocations.

Practical Trading Applications

1. Include trend following (through managed futures or CTA allocation) as a core portfolio component for its crisis alpha properties -- not just as a return enhancer.
2. Evaluate trend following strategies over full market cycles, including crisis periods, rather than judging them solely on returns during bull markets.
3. Understand that trend following's greatest value emerges during market crises -- expect underperformance during calm, range-bound markets.
4. Use the negative correlation between trend following and equity markets to reduce portfolio-level drawdowns and improve risk-adjusted returns.
5. Maintain allocation to trend following through underperforming periods, as the crisis alpha benefit disappears if the allocation is removed before the next crisis.

Critical Assessment

Strengths: The depth of historical data analysis is exceptional and provides compelling evidence for the persistence of trend following returns. The academic rigor combined with practical relevance is rare. The crisis alpha framework provides a clear rationale for portfolio allocation to managed futures.

Weaknesses: The academic style may be challenging for readers without a quantitative background. The book focuses heavily on managed futures as a vehicle and may underemphasize individual implementation. Some may find the arguments overly favorable to the managed futures industry.

Best for: Portfolio managers, institutional investors, and sophisticated individual investors who want to understand the evidence for and mechanics of trend following, particularly its role in portfolio construction and crisis protection.

Key Quotes

"Trend following provides crisis alpha precisely because it is designed to profit from the dislocations that cause losses in traditional portfolios."

"The evidence for trend following spans more than a century and across virtually all liquid asset classes."

"The greatest mistake investors make with managed futures is removing the allocation after a period of underperformance, just before the next crisis."

Conclusion & Recommendation

"Trend Following with Managed Futures" is the most academically rigorous and data-driven book available on trend following as an investment strategy. Greyserman and Kaminski's combination of long-term empirical evidence, theoretical framework, and practical portfolio application makes this essential reading for anyone involved in portfolio construction or risk management. The crisis alpha framework alone justifies reading the book, as it provides a clear, evidence-based rationale for including trend following in any diversified portfolio.