Trends Watch: Trend Following Strategies

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Jerry Parker, CEO, Chesapeake Capital Corporation.  

What is your outlook for investing in trend-following long/short equities and managed futures? 

As trend followers, we don't make market predictions or forecast performance. Positions taken in a trend-following strategy, whether long or short, are a reflection of rules employed (i.e., based on moving averages, crossovers, breakouts, etc.) rather than a fundamental or technical outlook. With that said, historically, changing economic, geopolitical, and interest rate regimes have led to robust, sustained, and directional trends, which could set up a suitable environment for trend-following strategies.  

Where do you see the most significant opportunities and why? 

Commodity markets present intriguing opportunities, and businesses linked to commodities can offer valuable diversification. Additionally, in an environment of high government debt, uncertainty in interest rates, and inflation concerns, commodities can often act as a hedge and a source of non-correlated returns. Data shows that various market segments (currencies, commodities, fixed income, and/or equities) can present strong trends anytime. The most significant opportunity comes from casting a wide net and applying rules across as many segments as possible. Employing a system that can capitalize on strong trends in any sector or position regardless of direction is what captures the winning outliers that carry a portfolio.  

What are the most significant challenges you face and why? 

On the strategy side, our main challenge is identifying new positions or markets with sufficient liquidity. From an investor perspective, continuous education is crucial. Our return streams are unique and non-correlated to equities. While it's easier for investors to stay engaged during down or flat equity markets, they may need reminders of the benefits of diversification during sustained bull markets. Highlighting the historical rough patches in equities can reinforce the importance of a diversified portfolio. Moreover, navigating the uncertainty of interest rate directions, inflation pressures, and potentially overvalued stock markets adds to the complexity of managing a trend-following strategy. 

What keeps you up at night? 

Our strategy involves managing over 400 positions, with success hinging on identifying "outlier" trades—those significant winners that drive performance. The constant question is whether there's a position we haven't entered yet that could be the next 10-20x winner. This perpetual search for outliers is both a challenge and a key component of our strategy. Additionally, broader economic issues such as high government debt, fluctuating interest rates, inflation, and current stock valuations require continuous monitoring as they can impact market trends and opportunities. 

The views and opinions expressed above are of the interviewee only and do not/are not intended to reflect the views of EisnerAmper.