How can trend following (intrinsic or absolute or time series momentum) beat the market, while ostensibly similar return chasing transfers wealth from naive to smart investors? In their January 2016 paper entitled “Return Chasing and Trend Following: Superficial Similarities Mask Fundamental Differences”, Victor Haghani and Samantha McBride offer a plausible and testable definition of return chasing and explore its differences from trend following. They characterize trend followers as mechanical and decisive and return chasers as discretionary and slow moving. For quantitative comparison, they consider three long-only, no-leverage strategies:
- 50-50 (benchmark): 50% equities and 50% U.S. Treasury bills (T-bills), rebalanced monthly.
- Trend following: 100% stocks (T-bills) when real stock market return over the past year is greater than (less than) 2.5%.
- Return chasing: increase (decrease) exposure to stocks each month by 20% of however much real stock market return exceeds (falls short of) 2.5% over the past year, holding the balance in T-bills.
They test these strategies with Robert Shiller’s long-run U.S. stock market data spanning 1871 through 2015 and with separately specified Monte Carlo simulation (5,000 runs of 20 years based on weekly simulated prices). Using these two approaches, they find that: Keep Reading