Trend Following in Equities II

As good as in other asset classes?

July 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • It is debatable whether CTAs should trade equities
  • Trend following in equities performed poorly since the GFC
  • However, diversification benefits were generated

INTRODUCTION

One of the most debated questions in the managed futures industry is whether to include equities. Originally, these managers focused on exploiting commodity trends – hence their other name, commodity trading advisors (CTAs). As exchanges like the CME and CBOT introduced futures on other asset classes, including currencies and fixed income, the same trend-following approach was applied to these markets. The S&P 500 futures contract was launched in 1982, and other major equity index futures followed.

Although the CTA industry originated in the United States, European managers such as Winton were particularly aggressive in expanding their programs into new markets. The rationale is straightforward: more tradable markets mean more trading opportunities and greater risk diversification.

However, some managed futures managers continue to argue for excluding equities on two grounds. First, most investors already hold the majority of their assets in equities – additional equity exposure through CTAs is therefore redundant, and short equity positions can inadvertently reduce an investor’s overall equity allocation at precisely the wrong moment. Second, equity markets tend to feature prolonged bull markets punctuated by sharp but short-lived bear markets, making it structurally difficult to exploit them systematically through trend following.

In previous research, we examined CTAs with and without equity markets and concluded that equities were not needed for generating diversification benefits (read CTAs: With or Without Trend Following in Equities?).

In this article, we evaluate trend following in equities on a standalone basis.

TREND FOLLOWING IN THE U.S. STOCK MARKET

The basic trend-following strategy is to go long an asset class when the trend is positive and short when it is negative. We simulate this using the U.S. stock market, determinin