This episode explores the complexities of systematic investing, particularly trend following, against the backdrop of a challenging and unpredictable market environment. The conversation begins with a discussion of the "long bond bias" in trend-following strategies, a phenomenon where historical data may unintentionally skew system design, limiting the ability to capitalize on opportunities like the 2022 bond market downturn. More significantly, the discussion pivots to differentiating between market "crises" and "corrections," highlighting how trend-following strategies perform differently in each scenario; for instance, trend followers often struggle during rapid corrections but can thrive during sustained crises. As the discussion expands to broader market trends, the hosts analyze the current state of the market, noting the disconnect between the prevailing narrative of rising bond prices and the actual price action, suggesting a potential bias towards a return to historically low interest rates. This leads to a discussion of the importance of diversification and the role of trend following in a portfolio context, emphasizing the need for strategies that adapt to changing market dynamics. Ultimately, the episode underscores the enduring relevance of trend-following strategies in navigating unpredictable markets and the need for investors to adapt to a new normal characterized by higher and more volatile interest rates.
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