Trend Following’s Bond Problem

Trend-following strategies have faced a dramatic reversal in institutional perception following nearly two years of underperformance that directly contradicts the asset class's most compelling diversification narrative. The 2022 performance—when the Société Générale Trend Index returned 27% while traditional 60/40 portfolios declined roughly 20%—established trend-following as a portfolio stabilizer during equity distress. However, the subsequent performance path has systematically undermined this credibility. Through 2023 and 2024, as equities rallied, trend-following remained flat or negative, a departure from expectations that proved inconsequential when equity risk remained dormant. The real deterioration arrived with the 2025 equity correction, which generated negative returns for trend-following strategies precisely when they were expected to provide offset—a critical failure of the core diversification thesis.

The bond market environment has emerged as a primary culprit in trend-following's recent struggles. Rather than exhibiting the sustained directional price movements that trend-following algorithms depend upon, bond markets have been characterized by five years of range-bound trading, reversals, and false starts. This structural regime shift has deprived CTAs of reliable signals in what typically represents a substantial allocation within trend-following portfolios. The absence of durable trends across fixed income has compressed the opportunity set for systematic price-following strategies, particularly during periods when bond market dislocation would traditionally benefit trend-followers as equity correlations shifted.

Critical incidents have further damaged confidence in the strategy's reliability. The SVB Crisis in March 2023 exposed operational vulnerabilities, with trend-followers initially misreading the volatility spike and subsequently locking in meaningful losses near market lows. This pattern of being "wrongfooted" by sudden dislocations contradicts the narrative of adaptive, rules-based strategies designed to capitalize on persistent price behavior. The subsequent two years saw trend-following correlations turn sharply positive during equity weakness in 2024, further eroding the promised negative correlation benefit during equity drawdowns.

Institutional investors are now confronting a fundamental strategic question: whether trend-following's exceptional 2022 performance was an outlier overstating the strategy's true diversification properties, or whether the current market regime simply lacks the structural characteristics—particularly sustained bond market trends—necessary for systematic trend-following to function as advertised. With CTAs underperforming for three consecutive years while equity volatility has increased, asset allocators face pressure to either restructure trend-following allocations, reduce position sizing, or acknowledge that current market conditions may be structurally incompatible with the strategy's core mechanisms.