The Long and Short of Trend Followers

Abstract

We propose the use of short and long portfolios of trend-following strategies to analyze their risk and return characteristics. We find that their exposures are time-varying, depend on the market state, and that returns to their long and short sides in the same asset are not comparable. In addition, we present evidence for occasional long-biased discretion by CTA managers. Our findings are in line with the adaptive markets hypothesis, and the main lesson of our study is that the long and short sides should be differentiated in the analysis of dynamic investment strategies.