Trend-Following Research Series Part 2: Rising Rates and Trend-Following
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All asset classes have benefited from 30 years of falling interest rates, as future cash flows have been discounted at steadily lower rates, boosting present values. Trend-Following strategies, which take long and short positions across equity, interest rate, commodity, currency, and volatility futures markets, have also benefited from the long downward trend in rates since the inflation of the 1980s. However, unlike most passive strategies (and many active ones), trend-followers have no fixed directional bias. Whether markets are rising or falling, if trends are persistent and strong, trend-following strategies are designed to earn profits from letting winners run and cutting losers systematically. A question that investors frequently ask is how Trend-Following, a strategy that seeks to generate positive returns by capturing momentum across major asset classes, performs in a period of rising interest rates that accompanies rising inflation? With a resurgence in global inflation recently, this question has become timely and relevant.
