The Friend of Your Trend

Abstract

Standard performance attribution to beta and alpha is not simple without full transparency into the investment process. This article develops an analytical framework to shed light on ex-ante stylized characteristics of a simple trend following strategy. Our analytical results show that rewards from the trend following strategy embed different degrees of underlying asset beta, which are determined by the asset’s return-to-volatility ratio, in addition to the trending behaviors that the strategy is built to harvest. We compare the results to ex-post realized returns-based style analysis of a CTA index. We discuss practical implications of our results with respect to fees and allocations to trend following strategies.