Has Trend Following Changed Forever? | Systematic Investor | Ep.408

Summary

Alan Dunne and Niels Kaastrup-Larsen discuss summer reading on Jeremy Grantham, shrinking retail products, CTA first-half performance, and commodity markets. They explore potential changes in Fed communication under Chair Warsh and the implications for volatility. The core of the conversation is a deep dive into a new research paper arguing that the decline of short-term trend following is linked to volatility-adjusted tick size and liquidity changes in micro contracts, with fast trend still working in large-tick markets.

• Jeremy Grantham's early quant and trend-following efforts provide timeless lessons on model tinkering and factor decay.
• CME plans a micro-sized oil contract to attract retail, raising concerns about costs and inexperienced speculation.
• CTA industry had a solid first half in 2024, with non-trend strategies outperforming and alternative markets struggling.
• Copper emerges as a clear AI demand proxy, driven by escalating hyperscaler data center investments.
• Fed Chair Warsh may reduce forward guidance, potentially increasing volatility and benefiting trend following.
• A new paper shows fast trend following has degraded in small-tick-size markets (equities, FX) but persists in large-tick markets like rates and some commodities.
• The decline is attributed to reduced liquidity provision and fewer large momentum-creating trades after the rise of HFT.
• Alternative explanations, like the growth of pod shops and execution algorithm changes, may also influence short-term market behavior.