The traditional 60/40 portfolio allocation has come under increasing scrutiny since surging inflation and the breakneck interest rate hiking cycle of 2022 exposed its flaws.
While the industry has yet to (and may never) settle on a single successor asset allocation framework, it is clear wealth managers and advisers are embracing new ways to diversify portfolios and enhance risk-adjusted performance.
In many cases, they are turning to liquid alternatives that promise uncorrelated sources of returns. This makes sense in light of the steep drawdowns that blighted 2022, a year in which a typical 60/40 portfolio declined 16% as equity valuations fell and bond yields rose.
The question is, what type of liquid alternative would have improved this outcome?
One would have been trend-following, a systematic absolute return strategy that can trace its roots back to the early 1800s. Trend-following strategies are often the least correlated to major asset classes, yet they still deliver a similar return to equities over the long run and can significantly outperform during periods of stress – what has become known as ‘crisis alpha’.
In 2022, for instance, the S&P 500 returned -20.28% while the Soc Gen Trend Index, which follows traders of trend following methodologies, delivered 27.35%. Being directionally agnostic – alpha can be generated whether the economic climate is one of growth or recession – allows trend-following funds to perform in any global market scenario.
Keeping it simple
While its history goes back further than most, trend-following investing remains something of a minority sport as other forms of absolute return funds have assumed greater prominence.
The concept is, however, simple. Trends are a recurring phenomenon in financial markets due to behavioural biases such as herding, feedback loops, overreaction and confirmation bias.
Once established, trends tend to last longer and extend further than most market participants anticipate. Trend-following strategies simply apply rules-based quantitative systems to capture these trends, whether up or down, in highly liquid global futures markets.
A key advantage of trend-following is its lack of correlation with global asset classes. For instance, the Barclay BTOP50 Index (comprised largely of trend-following strategies) has virtually no correlation to global equity indices or other major markets.
The Global Alpha trend-following fund managed by our strategic partner Bowmoor Capital has a correlation ratio of 0.10 relative to the MSCI World Index and -0.16 relative to the Bloomberg Global Aggregate Bond Index.
This is a key advantage when the correlation within asset classes can be shockingly high; for instance, between US equities and world equities (perhaps no surprise when the former dominates the composition of the latter) and even between equities and bonds, whose correlation since the post-Covid period has remained elevated by historical standards amid heightened global bond market volatility.
Simply adjusting the weighting between correlated asset classes will not provide true diversification.
Part of the reason trend-followers can provide strong diversification benefits is that most strategies today trade globally diversified portfolios of futures across asset classes, including commodities, interest rates, currencies and equities.
Markets are typically selected to avoid correlation (these can include grain, metals, energy, livestock and soft commodities) while portfolio construction is designed to further minimise correlation and maximise diversification.
Cutting losses and running winners
Trend followers initiate a long position when an instrument starts trending up (they buy high with the aim of selling back higher) or initiate a short position when the instrument starts trending down (they sell low with the aim of buying back lower).
If prices start to move unfavourably, the aim is to exit positions swiftly to avoid large losses from any one trade. This means most trades are losing ones.
However, trend followers also ‘let profits run on’, which gives room to stay with existing positions by only exiting them once the trend is clearly over. This results in the winning trades far outsizing losing trades, making strategies profitable on balance.
In many ways, this is the inverse of conventional portfolio management. A discretionary fund manager is more likely to follow a process that essentially involves forecasting the market, predicting price movements and expecting profits. In trend-following, the process is following the market, reacting to price movements, and accepting profits.
Portfolio benefits
Trend-following strategies can and do, of course, suffer drawdowns. 2025 has not, to date, been a banner year for trend-following; strategies have struggled with the whipsaw markets caused by erratic US policy pronouncements.
Yet drawdowns often set the stage for better times to come through the development of new trends. Every drawdown of 10% or more in SocGen CTA index history has been followed by a double-digit 12-month rebound.
In subsequent years after the initial rebound, returns have touched or exceeded 40% in many cases. Returns are never guaranteed, of course, but snapbacks in trend-following can be powerful.
Investors with the patience to hold through periods of choppy markets are often rewarded as better conditions emerge. And the risk of waiting is relatively low: large drawdowns (more than 15%) are very rare, while periods of strong positive performance (more than 20%) are comparatively frequent.
Moreover, positive returns of over 30% are far more common than drawdowns of more than 10%. This asymmetric positive skew in trend-following is a natural phenomenon which stacks the odds in investors’ favour.
Traditional absolute return strategies have divided investors as many have failed to live up to their billing. But for investors seeking a strategy that complements other asset classes with the proven ability deliver strong risk-adjusted returns, trend-following deserves a more prominent place in balanced investment portfolios.
Charles Bamford is co-founder of Fairlight Capital Partners. The views expressed above should not be taken as investment advice.