The 5 Types of Trend Followers: How to Choose the Right Strategy for Your Portfolio

---

• Trend following isn’t a single strategy, but rather a spectrum of managers with very different objectives.
• This guide breaks down the five key archetypes of trend followers and what sets them apart.
• Learn how to match the right type of trend follower to your portfolio goals and avoid costly misalignment

To most outsiders, trend following sounds simple: ride trends, cut losses, repeat. But anyone who has spent time inside the world of systematic investing knows this isn’t the full story.

The reality is that “trend follower” is not a single species, but a label encompassing a spectrum of managers, each with distinct objectives, rules, and trade-offs. Two managers can both be called “trend followers” yet behave so differently that an investor would barely recognize them as cousins.

For allocators, this distinction matters. Choose the wrong type of trend follower for your purpose and you risk disappointment, mismatched expectations, and even portfolio damage. Choose the right one, and you can unlock the specific benefits (including diversification, crisis alpha, or long-term convexity) that trend following uniquely provides.

This guide will walk you through the four primary archetypes of trend followers, plus a possible fifth category. By the end, you’ll know how to classify trend following strategies, match them to your portfolio needs, and avoid costly misunderstandings.

Why Classification Matters

Before we get into the archetypes, let’s step back. Why does it matter to classify trend followers at all?

The answer lies in objectives. Most debates in the trend following world aren’t about facts. They’re about purpose. One manager may optimize for smooth returns and low drawdowns. Another may optimize for catching rare, life-changing outliers, accepting choppier equity curves along the way. Both are right for their intended purpose, but incorrect if applied outside of it.

For investors, the first step is clarity: What role do you want a trend follower to play in your portfolio? Once you answer that, the archetypes below can guide you to the right match.

The Archetypes

1. The Replicators

Objective: To track a benchmark index (like the SocGen CTA) as closely as possible.

Replicators are the “index huggers” of the CTA world. Their mandate is not to reinvent the wheel, but to provide low-tracking-error exposure to the trend-following universe.

Key features:

• Trade 10–30 of the most liquid markets.
• Heavy use of cross-sectional momentum to stay close to benchmark leaders.
• Daily volatility targeting to keep risk tightly controlled.
• Focus on operational efficiency and predictability.

What investors can expect:

• Returns that look and feel like the benchmark.
• Minimal surprises (relative to CTA peers).
• Outperformance unlikely, but underperformance also contained.

Best suited for: Investors who want index-like CTA exposure without paying higher fees for unique alpha.

2. The Core Diversifiers

Objective: They aim to add a diversifying sleeve to a multi-asset portfolio, thereby boosting Sharpe ratios and smoothing returns.

Core diversifiers see trend following as one part of a bigger picture. Their role is not to dominate but to zig when other assets zag.

Key features:

• Similar liquid markets as replicators, often 20–40 names.
• Emphasis on drawdown control and smoother equity curves.
• Use of cross-sectional momentum to allocate toward the strongest trends.
• Designed to play nicely with equities, bonds, and alternatives.

What investors can expect:

• Strong correlation benefits.
• More predictable contribution to overall portfolio metrics.
• Less likelihood of wild swings, but also fewer moonshot trades.

Best suited for: Asset allocators who want incremental diversification rather than standalone fireworks.

3. The Crisis Risk Offsets

Objective: To provide convex payoffs during equity drawdowns. Essentially, it acts as a form of crisis alpha.

These managers are the firefighters of the trend following world. Their strategies are designed to light up when risk assets burn.

Key features:

• Shorter-term trend models or option overlays.
• Bias toward assets that historically shine in crises (government bonds, gold, safe-haven currencies).
• May accept years of small losses in exchange for explosive gains in stress periods.

What investors can expect:

• Flat or negative performance in calm markets.
• Outsized gains in tail events (2008-style crashes, 2020-style liquidity shocks).
• High value as a portfolio insurance mechanism.

Best suited for: Portfolios that prioritise protection over returns.

4. The Outlier Hunters

Objective: To maximize the odds of catching rare, extreme, multi-month trends.

Outlier hunters are the explorers of the CTA world. They cast the widest possible net, knowing that just a few monster trades each year can define their long-term equity curve.

Key features:

• Trade 100+ markets, including smaller or less liquid ones (e.g., cattle, cocoa, rubber).
• Absolute momentum only. No trimming winners based on relative performance.
• Static, small position sizing: no volatility targeting mid-trend.
• Willingness to endure higher noise for the chance of catching fat tails.

What investors can expect:

• Long stretches of mediocrity punctuated by massive wins.
• Higher drawdowns and choppier paths.
• Long-term convexity that shines across decades.

Best suited for: Investors with patience, tolerance for noise, and a desire for fat-tail exposure.

However, there is one more, in my humble opinion…

5. The “Pure Trend” Follower

Objective: To deliver the best long-term compounding from trend following, without tailoring for any sub-purpose.

This category is harder to define but worth considering. Pure trend followers focus on compounding capital over decades, using only systematic trend models. They are not optimizing for index tracking, diversification, or crisis protection. Their goal is to develop the most robust pure-play trend-following strategy possible.

Key features:

• May resemble outlier hunters but with different design quirks.
• Rules designed strictly around trend, no overlays or hybrids.
• Focused on transparency and longevity.

What investors can expect:

• Less role-specific behavior (no guarantee of crisis alpha).
• More straightforward “trend exposure” over time.

Best suited for: Investors seeking dedicated trend-following exposure for the long term.

Key Debates That Shape Archetypes

These archetypes differ not just in purpose but in the design debates they resolve differently:

• Diversification vs. Concentration: Outlier hunters crave maximum breadth; replicators settle for 20–30 markets.
• Absolute vs. Cross-Sectional Momentum: Outliers want to hold winners at all costs; core diversifiers tilt toward the strongest leaders.
• Volatility Targeting vs. Static Bets: Replicators smooth risk; outliers refuse to clip the wings of their fat tails.
• Symmetry vs. Asymmetry: Some apply the same rules long and short; others design differently for structural realities (e.g., commodity shocks vs. equity crashes).
• Speed of Execution: Short-term managers react quickly; long-term managers sit through noise to capture big waves.

Each trade-off reflects a philosophical choice tied to the archetype’s North Star objective.

How Investors Should Use This Framework

So, what should investors do with this classification?

1. Clarify your purpose: Do you want crisis protection, smoother portfolio stats, or long-term convexity?
2. Match the archetype: Don’t expect an outlier hunter to deliver low drawdowns, or a replicator to hit home runs.
3. Diversify across archetypes: Many investors benefit from mixing types. For example, pairing a replicator with a crisis offset manager and an outlier hunter.
4. Look beyond Sharpe: Metrics like tracking error, convexity ratios, or skewness often tell a more accurate story than headline Sharpe ratios.
5. Demand survivability: Whatever the archetype, a validated long-term track record of surviving multiple regimes is the ultimate proof.

Conclusion: Pick the Right Trend Follower for the Right Job

The biggest mistake investors make with trend following is assuming it’s a single approach. In reality, it’s a family of strategies with distinct design choices, trade-offs, and objectives.

The replicator, the core diversifier, the crisis offset, the outlier hunter, and the pure trend follower all wear the “trend following” badge, but they play different roles in a portfolio.

The lesson: alignment matters. Know what you want trend following to do for you, then pick the archetype that matches that purpose. When purpose and design are aligned, trend following delivers on its greatest promise: long-term, systematic returns.

---

This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletter or subscribe on your preferred podcast platform so that you don't miss out on future episodes.