It is easier to work with core strategies that fall into one of these extremes:
- low volatility / low max-drawdown that can be levered to achieve higher returns without blowing up, or
- high volatility / high max-drawdown and high returns that can be managed through asset-allocation and rebalancing.
The worst ones are those that have neither low volatility nor high returns.
Trend-following techniques deliver on (1). However, not everything trends.
Case in point are the Trendpilot ETFs PTLC over the S&P 500 (SPY) and PTNQ over the Nasdaq 100 (QQQ).
The methodology makes intuitive sense.
However, performance is a different matter.
The trend ETFs have worse Sharpe ratios than their benchmarks.
The silver lining is that the ETF versions are better than naïve trend strategies using only SMAs and would work out to be more cost and tax efficient than rolling your own.
However, the naïve versions all have Sharpe ratios less than 1.0 and high drawdowns. This tells us that the indices themselves may not amenable to trend-following and that they belong to (2) above?
Strategy design should follow the “first make it work then make it better” philosophy. If the simplest approach doesn’t work, then adding bells-and-whistles to it is unlikely to make it any better. If something is not trending, then what exactly are you following?
Code and charts are on github.