Dynamic Allocation to Trend Following

This chapter presents several simple approaches for dynamically allocating to trend following over time: momentum seeking, mean reversion, and buy‐and‐hold. The profitability of these approaches depends on the underlying distribution that governs trend following performance. The implementation of a buy‐and‐hold strategy requires an investor to simply invest and forget. Momentum seeking investment strategies seek to invest when the strategy starts to perform well and divest when it starts to lose money. The existence of mean reversion in a return series suggests that momentum‐seeking approaches would be ineffective. Both serial autocorrelation and Sharpe ratios represent two statistical properties of returns that may help to classify when dynamic allocation is appropriate. To examine the performance of dynamic allocation strategies, an autoregressive AR(5) model can be used to generate return series.