Why Systematic Investing and Trend Following Should Be on Every IFA’s Radar

Here’s something most IFAs already know: telling clients their portfolio is “diversified” doesn’t mean much when everything falls together during a crisis.

We’ve all been there. 2008. March 2020. The bond-equity correlation breakdown of 2022. Those moments when diversification seems to exist only in textbooks, and you’re fielding anxious calls, wondering why the “alternative” allocation didn’t actually provide an alternative.

But what if there were strategies that consistently generated positive returns during the worst equity drawdowns? Not hypothetically. Actually.

That’s exactly what we explored in our recent webinar with Professor Toby Moscowitz, Senior Partner at AQR Capital Management and Yale professor. Over 45 minutes, Toby broke down the mechanics of systematic investing and why trend following strategies have delivered during every major market crisis over the past century—with one notable exception.

The Problem with Most “Alternatives”

Let’s start with an uncomfortable truth.

When you look at the performance of most alternative strategies during the ten worst six-month periods for the S&P 500, something becomes clear: they don’t provide much alternative at all.

Private equity? It suffers almost as much as public markets during severe downturns. Makes sense when you think about it—it’s still equity exposure, just with a lag and less transparency.

Generic equity market-neutral strategies? They live up to their name by staying… neutral. Flat performance. Better than nothing, but hardly the defensive ballast clients need when markets are in freefall.

But trend following strategies tell a different story entirely.

When Equities Fall 16.5%, Trend Followers Rise 12%

Here’s the headline finding from AQR’s research: during the 10 worst 6-month periods for equities over the past 25 years, when the S&P 500 averaged losses of 16.5%, trend-following strategies delivered average gains of 12%.

Not just positive. Meaningfully positive.

The data goes back much further. Looking at every major market crisis over the past century—the Great Depression, the 1973-74 bear market, the dot-com crash, the financial crisis, and COVID—trend following strategies generated substantial positive returns during almost all of them.

The exceptions? The 1987 crash (too sharp and fast to catch the trend) and the 1938 recession (flat performance). Otherwise, remarkably consistent crisis alpha.

What Actually Makes Systematic Investing Different?

Toby opened with a simple framework that’s worth understanding. Systematic investing isn’t about replacing human judgment—it’s about removing human error from the execution.

Here’s how it works:

Start with theory. Economics, behavioural science, and fundamental principles. AQR begins with ideas such as loss aversion and the tendency for markets to underreact to information.

Test with data. Build models, run the numbers, and see if the theory holds across different markets and time periods.

Let data inform theory. Adjust based on what the evidence actually shows, not what you hoped it would show.

Repeat. Constantly iterate between theory and evidence.

Toby’s golf example perfectly illustrates the behavioural edge. Professional golfers putt significantly better for par than for birdie—same distance, same hole, same conditions. Why? Loss aversion. They’re more afraid of dropping a stroke than they are motivated to gain one.

That 3% performance gap from suboptimal decision-making? It compounds over a career. And it happens in markets too, where investors hold losing positions too long (anchoring) and sell winners too early (loss aversion).

Systematic strategies are designed to be on the other side of those behavioural mistakes.

The Basketball Analogy That Explains Everything

One of the most memorable moments in the webinar was Toby’s basketball comparison.

First shot: Damian Lee takes a contested long two-pointer over Paul George, one of the NBA’s best defenders. He makes it. Two points scored.

Second shot: Luke Kennard gets a wide-open corner three. He misses. Zero points scored.

Which was the better play?

Traditional discretionary investing looks at outcomes. Lee made his shot, Kennard missed. Easy decision.

Systematic investing looks at the process. Lee’s shot had a 17% probability of going in. Expected value: 0.34 points. Kennard’s shot had a 50% probability. Expected value: 1.5 points.

The second play was better by a factor of four, regardless of the outcome.

This is the fundamental difference in philosophy. Systematic managers make decisions based on expected value and probabilities, not on whether the last trade worked out. Over thousands of decisions across hundreds of markets, this approach compounds into an enormous edge.

How Trend Following Actually Works (Without the Jargon)

At its core, trend following is pretty simple: follow the uptrends, go short the downtrends.

Markets tend to underreact to information. When bad news hits, prices don’t immediately adjust to reflect the full impact. Investors anchor to previous prices, hoping things will bounce back. The bad news gradually gets incorporated through a trend.

The same happens with good news. Rather than piling in immediately, investors remain cautious. The positive information slowly gets priced in.

Trend-following strategies systematically exploit this underreaction across futures markets—equities, bonds, currencies, commodities, and, increasingly, alternative markets like Malaysian palm oil or South African maise.

James, one of our portfolio managers at Fusion, explained the mechanics brilliantly in the second half of the webinar. The key insight: even though you’re trading linear instruments (futures contracts), you can create nonlinear payoffs through position sizing.

Start small when a trend begins. You’re not sure yet if it’s real or just noise. As the trend develops and proves itself, you gradually increase position size. This creates convexity—you make increasingly large profits as trends extend, while keeping losses small when you’re wrong.

It’s a long volatility strategy using linear instruments. Pretty clever.

The Research Is Almost Embarrassingly Consistent

Toby shared a chart from his research paper that I’d never seen presented quite so starkly. They tested trend-following across every primary futures market, going back to 1880. Yes, 1880.

The results? Positive returns in essentially every single market—equities, fixed income, currencies, commodities. Some performed better than others, but the uniformity of positive results across 140+ years and dozens of markets is difficult to dismiss as luck or data mining.

This isn’t a strategy that works in US equities but fails in Japanese bonds. It’s a genuine cross-market, cross-century phenomenon rooted in persistent behavioural patterns.

What About When Everyone Knows About It?

This is the question every IFA should ask about any factor or strategy: if it’s so good and so well-documented, why hasn’t the opportunity been arbitraged away?

Toby addressed this head-on. The barrier isn’t knowing about trend following—it’s having the infrastructure to execute it properly across 200+ futures contracts, managing the rolls, minimising transaction costs, and maintaining discipline during the inevitable drawdown periods.

Interestingly, while assets in CTA strategies have grown substantially over the past two decades, the number of NFA-registered members has been declining at about 3% per year. The market is consolidating. Those with the expertise and infrastructure are capturing more assets while less sophisticated players exit.

It’s become a game that requires institutional-grade resources to play well.

AQR’s Edge: Economic Trends + Price Trends

One section of the webinar that particularly stood out was AQR’s innovation in traditional trend-following.

Most managers focus purely on price trends. AQR spent four years developing models that also incorporate economic trends—growth forecasts, inflation expectations, monetary policy shifts, and risk aversion measures.

When you combine economic trend signals with price trend signals, the results improve materially. This is part of why AQR’s trend following performance has shown “distinct differences” compared to other managers over recent years, as Toby diplomatically put it.

They’ve also expanded into alternative markets that many managers don’t touch—obscure commodity futures markets where trend-following works just as well, but with less competition.

The Correlation That IFAs Actually Care About

Let’s cut to what matters for portfolio construction.

What is the correlation between the trend following index and global equities over the past 25 years? -0.1

That’s not just low correlation. That’s slightly negative. And it’s not manufactured through hedging or derivatives—it’s the natural result of the strategy’s construction.

When you add a 20% allocation to trend following to a traditional 60/40 portfolio (admittedly more than most IFAs would use, but it illustrates the effect):

• Volatility drops significantly due to the diversification benefit
• Sharpe ratio improves materially
• Maximum drawdown figures improve substantially

At Fusion, we typically use around 5% in alternatives within our MPS portfolios, but even at that level, the impact during crisis periods is meaningful.

The 2022 Litmus Test

If you needed any recent evidence of trend following’s defensive properties, look no further than 2022.

While the S&P 500 fell by more than 20% and bonds failed to provide their traditional ballast, trend-following strategies had one of their best years in decades. The AQR trend index was up significantly during this period.

Why? Because the strategy was short equities (following the downtrend) and captured the rising-rate environment through fixed-income positioning. Exactly what you’d want in a portfolio when traditional diversification breaks down.

What About the Drawbacks?

Toby was refreshingly honest about the limitations.

Mean reversion periods are painful. When markets oscillate rather than trend, you’re repeatedly buying high and selling low as you get stopped out. These periods of “death by a thousand cuts” are inevitable and frustrating.

The strategy is expensive not just in terms of management fees, but in opportunity costs. Active trading across hundreds of markets generates transaction costs and requires sophisticated infrastructure.

Tail overlays are tempting but tricky. Adding explicit tail hedging to capture sharp volatility spikes sounds good in theory. Still, it’s expensive and can interfere with capturing the longer-term volatility trends that trend following naturally exploits.

Forecasting when trends will work is nearly impossible. You know they’ll work eventually, but you can’t predict when. This demands client education and realistic expectation-setting.

How Fusion Uses AQR’s Managed Futures

We currently include the AQR Managed Futures fund in two of our MPS ranges: Fusion Active and Fusion Proactive Planet.

The allocation sits within our alternatives bucket, typically around 5% of the portfolio. That might sound small, but remember—this is about asymmetric impact during drawdowns, not about generating bulk returns.

We review and, if needed, adjust our allocation quarterly based on our volatility forecasting models. When we expect higher volatility ahead, we increase exposure to these long-gamma strategies. When we forecast calmer markets, we may reduce or tilt toward other alternative strategies.

The goal isn’t to time the market—it’s to dynamically adjust exposure based on the risk regime we’re likely entering.

The Honest Question Every IFA Should Ask

Here’s what this really comes down to: when markets are falling apart and clients are panicking, do you want to be explaining why everything fell together, or do you want to be pointing to the strategy that actually made money during the crisis?

I’m not suggesting trend following is a silver bullet. Nothing is. But the century of evidence, combined with the behavioural logic that underlies its effectiveness, makes a compelling case for inclusion in client portfolios.

The question isn’t whether systematic investing and trend following should be on your radar. It’s whether you can afford to ignore strategies that have consistently delivered when traditional diversification failed.

Watch the Full Webinar

This post only scratches the surface of what Toby and James covered. The full 45-minute webinar includes:

• Detailed breakdowns of systematic processes vs. discretionary management
• How AQR deconstructs famous investors like Warren Buffett using quantitative factors
• Technical details on position sizing and convexity in trend following
• Discussion of correlation forecasting and risk management
• Q&A covering mean reversion, allocation across asset classes, and industry dynamics

If you’re serious about understanding alternatives that might actually help your clients during the next crisis, it’s worth your time.

Contact our investment team. 

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