Trend Following & Factor Investing – Unexpected Cousins?

Questioning diversification benefits

April 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • 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


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.

In other cases, the differences are less clear from the start. Take trend following and momentum investing, which seem to be pursuing the same strategy, ie following up and down trends of securities. Technically trend following is applied to a variety of asset classes via future contracts, while momentum means going long the best-performing and short the worst-performing stocks, although the latter can also be applied to other asset classes. The theme is the same, just the implementation is different.

In a previous research note (Building a Diversified Portfolio for the Long-Term), we came across data that indicated there might be a relationship between trend following and factor investing, which are usually regarded as uncorrelated strategies. If indeed they were correlated, then this would give rise to concerns as diversification benefits were less than commonly assumed.

In this research note, we will analyze the relationship between trend following and factor investing.


We focus on trend following in the classic sense, which implies going long and short a variety of asset classes like oil, gold, sugar, and so on. It is a systematic approach to exploiting trends and results in a diversified portfolio of asset classes. We use the SG Trend Index as a proxy, which is comprised of ten strategies that are equally weighted and rebalanced annually.

For factor investing we create a multi-factor portfolio compr