Trend Following & Factor Investing – Unexpected Cousins?

Questioning diversification benefits

Nicolas Rabener
10 min read
11 Apr 2022

SUMMARY

  • Trend following and beta-neutral factor investing are considered diversifying strategies
  • However, since 2009 their correlations to stocks moved in tandem
  • Both strategies had related performance drivers and risk exposures

INTRODUCTION

Asset classes seem easy to distinguish at first. For example, stocks and corporate bonds provide different exposure to the capital structure of companies. However, both suffer when the economy enters a recession as corporate earnings decrease and defaults increase. Perhaps not at the same time, but the exposure is more similar than most investors assume.

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