STOP Doing Research...say what!

Long-time listeners of our Systematic Investor podcast series know that one of the more frequent topics we cover is how Trend Followers go about changing and improving their systems.

This is indeed a very important topic because changing one’s Trend Following system comes both with a potential for better returns but with the risk of underperformance.
Let’s start with a brief discussion about how professional Trend Followers implement changes to their trading systems. Typically, a Trend Following firm employs a team of researchers whose sole task is to study the markets, run tests and come up with ideas to improve their Trend Following system. The team of researchers tends to be comprised of highly numerate people, proficient in programming, and more often than not with a Ph.D. degree in a hard-science subject such as Mathematics or Physics.

Doing research is an exciting and work-intensive job but one that doesn’t yield frequent results. In fact, the vast majority of novel ideas generated by the research team fail in the first testing and evaluation stages. The few investment ideas that make it through the initial hurdles are then tested in a rigorous and long validation process that includes paper trading, operational testing and (subsequently) real-money proprietary trading to name a few. If, and only if, the validation process is fully and successfully completed, does the new approach eventually get integrated into the existing Trend Following strategy.

This summary of the Trend Following research process hopefully conveys one simple message – to change a Trend Following system, you have to clear a great number of hurdles. Therefore, Trend Followers very rarely do it in practice.

Which brings the very controversial and quite provocative question – if the typical Trend Following system changes so little over time, why should Trend Followers bother with doing research at all? Why spend all this energy, money, and time on something that yields few results and only marginally improves what is already a very robust and profitable system?

If you ask most Trend Following managers, you will hear a lot of reasons in favor of doing research. Some of these reasons would be investment-related and therefore very legitimate. Others could be business and marketing-related, but before you mock and disregard them, remember that CTAs are also profit-seeking firms, hence anything that grows their business has a legitimate reason to exist…most of the time.

However, there is also the flip side of this argument which, coincidentally, was voiced by one of the most successful and prominent Trend Followers out there. Yes, yes, we are talking about Jerry Parker who was a guest at this week’s episode of the Systematic Investor podcast series and who explained why he has stopped doing more research.

Are you curious to find out why Jerry considers Trend Following research obsolete? If you are, we warmly invite you to tune into this week’s episode and find out yourself.

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