In this note, we show that abrupt market reversals, while impossible to predict, are by construction an integral risk associated with a medium-term trend-following strategy. Such a reversal happened in March 2023 when a quick and significant upheaval in short-term interest rates and government bond yields across all durations led to one of the most challenging months in years for the trend-following industry.

We revisit those events from a medium-term trend-following perspective, providing an estimate of the positioning dynamics throughout March as well as the asset class return attribution for the SG Trend Index. We show that March 2023 had all the attributes of a classic trend reversal shock with nowhere to hide. While the reversal was extreme in many ways, we compare the results with past trend reversal shocks, highlighting their similarities.

Additionally, we outline the importance of a reactive risk management process, which is responsible for a large part of a trend-follower’s position adjustments in response to such extreme market moves.

We show that the rewards for accepting such short-term reversal risk are best quantified over a longer-term, typically quarterly timeframe. Indeed, unlike equities, trend-following offers an attractive long-term positive return combined with a highly desirable right-skewed quarterly return distribution.

We conclude that the attractive long-term positive and right-skewed return characteristics of trend-following can be viewed as an economic compensation for accepting the painful risk of unpredictable short-term price reversals.