Reasons don’t matter!

We live in truly historical times. Turn on your TV and watch the latest news from Ukraine which – more than anything else – exemplify the unpredictable world we live in. But it’s not just the Russia-Ukraine conflict that is reshaping our world.

The Covid-pandemic shattered existing supply chains and reversed back decades of globalization efforts. Digital conglomerates from the Silicon Valey work on new software, applications, artificial intelligence, and metaverses all of which promise to change the way we live, work, and interact with each other. Blockchain and digital currencies have the potential to revolutionize not just the financial world but much more beyond it. The global climate change poses severe risks to our societies and economy and the magnitude of these risks is still to be properly understood.

All these factors overlap each other. They interact with each other in a reflexive manner. They build a highly complex system that is difficult to model and understand. That difficulty has one name – uncertainty. Yes, the level of uncertainty has been rapidly increasing over the last few years and this stands in stark contrast to the prevailing stability that characterized the Western World for most of the last 70 years.

How does all of that tie back to Trend Following?

Well, as may know, the Trend Following industry had one of the strongest quarters on record in Q1 2022. To the naked eye, the explanation for this seems simple and obvious – the war in Ukraine led to spikes in commodities and various other assets, which Trend Followers were able to capitalize on.

While this may be true in itself, how would you react if we told you that some of the most profitable positions for Trend Following in Q1 2022 were entered months, if not years, before the Russia-Ukraine crisis?

“This is quite interesting” – you may be thinking – “what was the reason for taking these positions so far back in time and why are they performing so well?”

Well, if we go back in time, you may have heard us citing the disrupted global supply chains that put pressure on some commodities. A few months later, we may have given you an explanation that involves inflation and monetary policy. Now, we may be speaking about the repercussions from the conflict in Ukraine.

In reality, none of these reasons matter. As you know, Trend Following is only ever concerned about the price level of assets – it does not attempt nor care to understand what is driving prices. But Trend Following is perfectly tuned to take advantage of the many overlapping cyclical and secular factors that may interact and intensify each other.

Yes, Trend Following is a divergent investment strategy, which is just a fancy way of saying that it thrives in a world full of change and uncertainty. And as the level of global uncertainty has materially increased over the last few years, you should not be surprised when we tell you that Trend Following’ performance has been strong not just in Q1 2022, but for at least three years in a row.

If you are curious to find out more about this strategy, we warmly invite you to tune into this week’s episode of our Systematic Investor podcast series. This week’s guest was Richard Brennan who not only spoke about the ability of Trend Following to thrive in a highly uncertain environment but also touched upon many more topics.

As usual, we promise it will be a good investment of your time.