How Trend-Following Skew Changes Across Return Horizons
Summary
The document explains positive skew as a return pattern with frequent small losses and less frequent large gains, then examines whether trend-following strategies display that pattern. It relates trend following to a lookback straddle: both can benefit from large price moves and struggle when prices stay range-bound. The author also describes diversification and tail protection as reasons investors may value trend following, while noting that positively skewed strategies can have deeper drawdowns.
The evidence comes from exponentially weighted moving-average crossover rules applied to a set of futures contracts. The author compares skew in daily, weekly, monthly, and annual returns, and reports negative median skew for every rule when measured daily, especially for slower rules. Conditional analysis suggests skew can change sign after a position is taken: fast and intermediate rules may end up holding positions that produce negatively skewed returns, while the slowest rule appears more likely to capture the drift of negatively skewed assets. These findings depend on the sample and measurement horizon; the proposed explanation involving mean-reverting skew is presented as a possibility, not a proven mechanism.
Key ideas
- Positive skew can mean many small losses and a few larger gains.
- Trend following can resemble a lookback straddle because both may benefit from substantial price moves.
- The observed skew of trend-following returns depends on the horizon used to measure returns.
- Daily results in the tested futures sample show negative median skew across the moving-average rules.
- Skew may change after a rule takes a position, potentially leaving faster rules exposed to the opposite skew than expected.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.