Key Takeaways
- • CFM President Philippe Jordan describes trend following as a strategy with a long-term Sharpe ratio of roughly 0.5, valuable for diversification but not designed to pay for portfolio crashes.
- • Jordan says the firm's risk approach shifted from intuition-driven risk management toward diversification across strategies, correlations and tail structure, combined with a collective process for identifying unknown risks.
- • CFM, described as one of Europe's leading quantitative investment firms with about $36 billion in assets under management, was founded in 1991 by Jean-Pierre Aguilar and has since expanded beyond its trend-following roots.
- • Jordan identifies crowding as a core risk, pointing to the August 2007 quant crunch, when forced deleveraging by bank balance sheets triggered losses across statistical strategies.
- • Jordan argues that the frequency and turnover of a strategy determine its potential to erode its own edge as capital flows in, with high-frequency, high-turnover approaches most exposed.
Summary
In an episode of the Top Traders Unplugged podcast titled "Why Trend Following Isn't Crash Insurance," CFM International president Philippe Jordan outlined his view on trend following and quantitative risk management. Jordan said trend following has a long-term Sharpe ratio of about 0.5, which he characterized as strong over the long run and better than the stock market over long horizons. He said the strategy plays a valuable role in investor portfolios and provides diversification, but it is not designed to fund losses during market crashes.
On the question of how to identify a lasting edge before capital flows reverse, Jordan said the answer depends on strategy frequency and turnover. He said strategies operating at a horizon of days to a month would have a high impact on edge decay, while lower-turnover strategies would have less impact.
Jordan recounted CFM's history, noting that he first did business with the firm in 1991 as one of its brokers and joined in 2005. He described founder Jean-Pierre Aguilar's early vision of using data and computers rather than newspapers and narratives to trade, and said the firm later expanded into strategies such as statistical arbitrage and volatility arbitrage. Jordan said the 1994 Mexican fixed income crisis was painful for CFM's trend business and prompted the firm to seek strategies decorrelated from trend following. He also described the 2000 shift to fully electronic execution as a turning point that made trading more scalable.
Jordan said his thinking on risk evolved from relying on statistical models and diversification toward recognizing that high-impact events can occur outside those frameworks. He cited counterparty failure and the September 2001 attacks as examples of events requiring preparation. He identified crowding as a key risk, recalling the August 2007 quant crunch, when deleveraging of mortgage books by Wall Street banks forced quantitative managers to reduce positions. According to Jordan, CFM responded by stepping back from the market and then re-entering, though not perfectly. Today, Jordan said, a group of 11 people meets every two weeks to examine potential unknown risks spanning operational, portfolio, and regulatory dimensions.
On the question of how to identify a lasting edge before capital flows reverse, Jordan said the answer depends on strategy frequency and turnover. He said strategies operating at a horizon of days to a month would have a high impact on edge decay, while lower-turnover strategies would have less impact.
Jordan recounted CFM's history, noting that he first did business with the firm in 1991 as one of its brokers and joined in 2005. He described founder Jean-Pierre Aguilar's early vision of using data and computers rather than newspapers and narratives to trade, and said the firm later expanded into strategies such as statistical arbitrage and volatility arbitrage. Jordan said the 1994 Mexican fixed income crisis was painful for CFM's trend business and prompted the firm to seek strategies decorrelated from trend following. He also described the 2000 shift to fully electronic execution as a turning point that made trading more scalable.
Jordan said his thinking on risk evolved from relying on statistical models and diversification toward recognizing that high-impact events can occur outside those frameworks. He cited counterparty failure and the September 2001 attacks as examples of events requiring preparation. He identified crowding as a key risk, recalling the August 2007 quant crunch, when deleveraging of mortgage books by Wall Street banks forced quantitative managers to reduce positions. According to Jordan, CFM responded by stepping back from the market and then re-entering, though not perfectly. Today, Jordan said, a group of 11 people meets every two weeks to examine potential unknown risks spanning operational, portfolio, and regulatory dimensions.
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