A Unified Framework for Optimal Trend-Following Portfolios

Summary

The paper develops a portfolio framework built around trend-following signals. It combines an autocorrelation model with the covariance of trends and risk premia, and specifies models for the trend covariance matrix. The resulting optimal portfolio is decomposed into four components, corresponding to Markowitz allocation, risk parity, agnostic risk parity, and trend following applied to a risk-parity portfolio. This provides a theoretical way to relate several portfolio approaches within one setting.

The authors report that empirical backtests across a cross-asset trading universe confirm outperformance for the proposed portfolio. The excerpt does not state the universe composition, test period, benchmark, performance measures, transaction costs, or robustness procedures. As a result, it conveys the model structure and the authors’ reported backtest conclusion, but not enough evidence to independently assess the size, persistence, or investability of the claimed advantage.

Key ideas

• The framework combines trend autocorrelation, trend covariance, and risk premia.
• The optimal allocation is decomposed into four recognizable portfolio components.
• The components include Markowitz, two risk-parity variants, and trend following on risk parity.
• Cross-asset backtests are reported to support outperformance, though key test details are absent.

Tags

# Optimal trend following portfolios


# Optimal trend following portfolios









This paper derives an optimal portfolio that is based on trend-following signal. Building on an earlier related article, it provides a unifying theoretical setting to introduce an autocorrelation model with the covariance matrix of trends and risk premia. We specify practically relevant models for the covariance matrix of trends. The optimal portfolio is decomposed into four basic components that yield four basic portfolios: Markowitz, risk parity, agnostic risk parity, and trend following on risk parity. The overperformance of the proposed optimal portfolio, applied to cross-asset trading universe, is confirmed by empirical backtests. We provide thus a unifying framework to describe and rationalize earlier developed portfolios.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.