The Challenges of Trend Following in Traditional Asset Allocation

Recorded 25th February, 2025. Audio-only edition embedded below and is also available in the usual ‘Blind Squirrel Macro: The Pod’ podcast feeds.

Introducing Jerry

Jerry Parker's adventures in trend following is a case study in the power of disciplined adherence to a systematic, rules-based trading methodology over a successful 40+ year career in financial markets.

His trading journey began in 1983 when, having grown dissatisfied with a career in accounting, he responded to a Wall Street Journal ad from the legendary commodity trader Richard Dennis. This was his first step to becoming a 'Turtle Trader', a group of individuals trained in the principles of trend following. Jerry never looked back. He founded Chesapeake as soon as the ‘Turtle’ program completed in 1988.

I wrote about this ‘Turtle’ program when I introduced my own trend allocation last May.

Topics covered in the interview:

* The role of trend following in diversified portfolios.

* Evolution of trend following strategies over time.

* Challenges when selling trend following to asset allocators.

* The importance of systematic trading and strictly following the rules.

* Diversification across markets and timeframes.

* Psychology of letting profits run and cutting losses.

* Accessibility of trend following through ETFs.

* How trend followers traded the Nasdaq during the dot-com bubble.

* Managing multiple trading systems with different parameters.

* Dealing with drawdowns and maintaining discipline.

* The current market environment for trend following.

* The impact of economic regimes (and government intervention!) on markets.

Some broader takeaways from the 🐿️:

* Rules-Based Trading: The Turtle program instilled in him the importance of following a predefined set of rules. These rules dictate entries, exits, and risk management, removing emotional decision-making from the trading process. Parker emphasizes that while the rules themselves may seem simple, the psychological discipline to adhere to them is the real challenge. He believes that anyone can learn the rules, but the difficulty lies in consistently following them, especially during periods of drawdown.

* Trend Following as a Core Strategy: Parker is an advocate for 100% trend following, rejecting all other investment strategies. He believes that a portfolio of various markets and asset classes, with both long and short positions offers ample diversification. He argues that trend following is a robust strategy that can generate profits across most market regimes.

* Risk Management: Risk management is fundamental to Parker’s approach. He stresses the importance of limiting losses through predetermined stop losses. He also uses volatility to size positions, ensuring that each trade carries a similar level of risk. The goal is to keep losses small while allowing profitable trades to run.

* Psychological Discipline: The emotional aspect of trading is a major focus for Jerry, acknowledging that the process is psychologically demanding. He believes that successful trading requires a mindset that is counterintuitive to human nature. This involves accepting periods of drawdown and resisting the urge to deviate from the system. He notes that the most difficult part of trading is not getting out of profitable positions too quickly.

* Long-Term Perspective: Jerry stresses that trend following is a long-term game. He acknowledges that there may be periods of underperformance or choppy return. However, he is committed to staying with his system, believing that it has a ‘dealer’s edge’ that will generate profits over time.

* Adaptability: While Parker emphasizes sticking to the system, he also acknowledges the importance of some evolution, particularly in response to changing market conditions (as well as competition from ‘the machines’ of quant shops and high frequency traders).

Charts that we discussed on the call

Jerry’s Listed ETFs

$TFPN is the ETF we own in the trend allocation of the BUSHY™ portfolio:

Jerry also just started managing the $MFUT ETF for Meb Faber at Cambria:

Introducing the 🐿️’s Trend Allocation

Introduction piece of our trend following basket from last May:

Further recommended viewing on Jerry and the Turtle Program

The full ‘Turtle Trader’ story via Niels Kaarstup-Larsen’s terrific Top Traders Unplugged podcast:

Jerry chatting with the 🐿️’s good friend, Kevin Muir:

Squirrel out!

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