Man AHL: Are Trend-Following Strategies Well-Suited To Future Inflationary Environments? June 2021
June 2021 - Managed Futures
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Quantitative trend-following strategies have been in existence for around 40 years. Over this period, we have experienced only two bursts of inflation. As a result, trend-following investors have scant evidence for the effect that inflationary regimes might have on their strategy.
At the time of writing, inflation remains low but is showing signs of ticking higher. Much of this fear can be seen in the increase in the US 5-year, 5-year forward inflation expectation rate, from a low of 0.86% in February 2020 to above 2.25% in April 2021 (Figure 1). The goal of this article is not to predict the direction of inflation, but rather to analyse the impact of higher inflationary regimes on the performance of the trend-following industry. We do this by examining academic studies covering historic periods of high inflation, as well as performance of the Barclay BTOP50 (‘BTOP50’) Index of trend-following managers over two of the most recent inflationary regimes.
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