Trend Following with Managed Futures by Alex Greyserman and Kathryn Kaminski is all about the search for crisis alpha.
After reading Michael Covel’s Trend Following, I was definitely intrigued by this tactical and technical investment strategy. So I wanted to dive deeper. While I’m primarily an equity investor, I wanted to learn more about futures trading and trend following.
So in this book review, I’ll give you a summary of Trend Following with Managed Futures. By the time you’re done reading, you’ll know everything you need to decide if this is the right trading book for you.
Trend Following with Managed Futures Summary:
Trend Following with Managed Futures starts with an 800 year history of trend following. That’s right, 800 years! The authors collect data on commodity and financial markets going well back in time to help establish that not only has trend following been around for centuries, but that’ it’s also performed well during this entire time. Compelling, right?
After the fascinating history lessons, the authors talk briefly about the futures markets in general before digging deeper into trend following itself. Next there are a few chapters that look at the different facets of trend following trading strategies. I think the authors did a good job breaking down the different parts of this trading strategy, and how they contribute to your returns.
Notably, one part of the trend following performance puzzle is what the authors call crisis alpha. This essentially means that trend following has historically outperformed during times of market crisis. This may be appealing because trend following can act as a hedge compared to the other strategies you could be running in your portfolio.
From there, the book spends some time looking at the risks of trend following compared to other alternative trading strategies. In most cases, trend following stacks up well as a low-risk approach to earning steady returns. Finally, Trend Following with Managed Futures looks at how trend following fits into bigger institutional portfolios and different strategies for allocating money to a trend following manager.
Overall, this is a very in-depth look at trend following in the managed futures space. And even if you’re only trading stocks and/or options, trend following strategy can still be incorporated to your approach.
Now let me share my favourite things about this book.
The Best Parts of Trend Following with Managed Futures:
There were two things that I really liked about Trend Following with Managed Futures
The book touched a lot on behavioural finance. Since I recently read Thinking Fast and Slow, which is a wonderful behavioural economics book, I really appreciated seeing how trend following strategies are designed to work against our cognitive biases and position us for success.
This was neat to see in practice. I was also encouraged to see the authors, both successful academics, talking about the merits of behavioural finance and it’s real-world implications.
Another thing I really liked about Trend Following with Managed Futures was the discussion of convergent vs. divergent risk taking. This wasn’t a topic I was previously familiar with. But it’s a powerful one. In short…
Convergent strategies believe the market is efficient and things will revert to the mean. Value investing strategies are convergent risk-taking, as are mean reversion and arbitrage trades. Convergent strategies are correlated with short volatility.
On the other hand, divergent risk taking strategies believe the markets are periodically inefficient and you can capture massive market moves every once in a while. Divergent strategies are long volatility. And as you might have guessed, trend following is a divergent strategy.
If you haven’t learned about these different kinds of risk taking, I really encourage you to learn more about them (either in this book or with a quick Google search) because it added an important element to my understanding of investment strategies.
Now, before I get too carried away, there’s one caveat I’d like to mention…
Trend Following with Managed Futures – A Word of Warning:
One thing I do want to point out is that while Trend Following with Managed Futures is incredibly educational, it’s not a book written for the retail investor. In fact…
Trend Following with Managed Futures is actually written for institutional investors. So if you’re just looking for a lazy summer read, then this might not be it. While the book is incredibly informative, at times it felt a bit dense.
The book is packed with graphs and formulas that relate trend following to academic finance, which the institutional audience surely would appreciate. But you might not care so much about how Sharpe ratios change over time and across asset classes compared to other hedge fund strategies. For retail investors looking to get up to speed I’d first recommend Covel’s book, Trend Following.
In the end though, Trend Following with Managed Futures is definitely a rigorous analysis of trend following, and in the end the book gives this investment strategy a passing grade.
So let’s wrap this book review up.
Trend Following with Managed Futures – The Final Word:
Trend Following with Managed Futures was a great read. It really pulls the curtain back on trend following. And if you’re seriously interested in learning more about this investment approach then I encourage your o buy a copy of Trend Following with Managed Futures
Of course, if you’re still looking for more information then I encourage you to watch the video book review below to learn more about this investing book.