Systematic Trend Following and the Value of Risk Management

February 2016

This paper examines systematic trend following and the role of risk management in it, using early live experience alongside long-run simulations. Trend following trades a broad set of liquid futures across commodities, equities, fixed income, and currencies, taking long or short positions as prices move. The analysis shows that a disciplined, systematic process can capture the same return characteristics as CTA hedge funds, with high correlation to CTA benchmarks but a different cost profile. Because the approach carries no performance fee, it can retain more of the return during strong periods. The paper’s central point is that risk management, sizing positions by the volatility of signals, contracts, and asset classes, contributes materially to results, not just to lower risk. It also notes why a provider without a competing high-fee product may be better aligned with investors. It is written for allocators evaluating managed futures, and it frames its conclusions as analytical perspective.

What This Paper Examines

How a systematic trend process compares with CTA hedge fund returns.
Why fee structure affects what investors keep during strong periods.
How risk management contributes to trend-following results.
How trend following can complement a hedge fund allocation.
Why provider alignment and the absence of competing products matter.

Key Findings

A systematic process can capture CTA trend returns. A disciplined trend approach has shown high correlation with CTA benchmarks, which suggests it captures the same underlying return characteristics.
Risk management adds return, not just safety. Sizing positions by the volatility of signals, contracts, and asset classes has materially improved simulated results over naive, equal-weighted trend exposure.
Fee structure shapes what investors keep. Without a performance fee, more of the return is retained during strong periods, which matters most when the strategy does well.
Trend following can complement a hedge fund allocation. A liquid, transparent trend exposure can be scaled up or down more easily than a hedge fund allocation.
Provider alignment matters. Choosing a provider without a competing high-fee product avoids a conflict over where the best ideas are used.

The Authors

Deepak Gurnani, Founder and Chief Investment Officer

Deepak Gurnani is the Founder and Chief Investment Officer of Versor Investments. Deepak has three decades of experience in applying quantitative methods to uncover alpha across global equity markets. Over the past decade, he has focused on pioneering the use of AI and alternative data in equity investing.

Ludger Hentschel, Founding Partner, Investment Advisor

Ludger Hentschel joined Versor Investments as a Founding Partner and is based in New York. Ludger has over 20 years of experience in quantitative research and investing.

Disclaimer: Past performance is not necessarily indicative of future results. Not an offer to sell or a solicitation of any type with respect to any securities or financial products.

Methodology: The analysis uses a systematic trend strategy invested in more than sixty liquid futures contracts across commodities, equities, fixed income, and currencies, with a collection of trend signals spanning roughly one month to one year. Early live returns are compared with CTA benchmarks such as the HFRX Systematic Diversified CTA index and a widely cited trend indicator, and long-run simulations extend the comparison back to 1990. A key exhibit contrasts long-only, unmanaged trend, and risk-managed trend portfolios on the same universe. Results rely on simulated and early live data with the usual back-test limitations.

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