Why speed matters

An analysis on how the speed of trend-following models can explain return dispersion in times of fast market corrections and over the long-term

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Return dispersion between trend-following managers is the result of large variations in the design specifications of a systematic investment process. In this note we focus on one aspect of the model design only – the speed or look-back period of trend-following signals. We show that different look-back specifications can lead to a return dispersion of up to 30% over just a few weeks in an extreme scenario as witnessed during the first quarter of this year. Even a relatively moderate increase of the look-back period from one month to one quarter can explain an underperformance of more than 12% within one month. We further demonstrate that the beneficial drawdown protection of faster models comes at a price, or a long-term premium.

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Quantica Capital
April 20, 2020