Trend-Following (Crisis Alpha)

A mechanical overlay that steps aside during protracted downtrends. Crashes are usually months-long, so trend rules detect the downtrend and move to cash/bonds — historically positive in 8 of the 10 largest 60/40 drawdowns over 137 years (AQR). It is a positive-expected-return diversifier, not just insurance.

Mandatory framing

• Rules-based, not a forecast or personalized advice.
• Known weaknesses: (1) fast V-shaped crashes (Feb-Mar 2020) — monthly signals are too slow and get caught long; (2) choppy/range-bound markets — repeated whipsaw. Pair with a small convex tail sleeve (see portfolio-construction) to cover the fast-crash gap.
• Behaviorally hard: it lags for years in strong bull markets. Decide you'll hold it before you start.

The three variants