Macro Credit and Relative Value · Hedge Funds

Systematic trend following uses defined signals to adjust market exposure. It does not need to predict the next economic announcement, but it remains exposed to market reversals and implementation costs.

A rule is a process, not a guarantee

A simple illustrative signal buys when price is above a chosen historical average and sells when below it. Real programs can combine many horizons and markets. The signal, position sizing, contract selection and trading rules together form the strategy. Different settings can create substantially different outcomes.

Managed futures is broader than trend following. Some managers use other systematic or discretionary approaches. Do not infer a particular return pattern merely from a fund’s use of futures or a commodity trading adviser label.

Distinguish notional from cash

Suppose a fund has $1 million of capital and a futures position with $2 million of notional exposure. A 1% adverse move in the underlying produces roughly $20,000 of loss for a linear position, or 2% of capital, before costs. The initial margin deposit is collateral, not a limit on possible loss.

A volatility scaling rule might reduce exposure when measured volatility rises. That can help maintain a target risk budget, but it can also require selling after a decline. Historical volatility may understate the size of a sudden move, so additional stress limits and cash planning are needed.

Understand whipsaw and roll costs

Trends can reverse before a signal adjusts. Repeated direction changes in a sideways market can generate a series of small losses and trading costs. Returns also depend on futures curve behavior, contract rolls, collateral income and execution, not just the direction of spot prices.

Evaluate several market regimes and ask whether reported performance includes realistic transaction costs and actual trading. A diversified set of contracts can still share exposure to the same inflation, growth or liquidity shock. Portfolio risk must be measured across the complete program.

Try it yourself

A linear futures exposure is $750,000 against $500,000 of fund capital. What is the approximate capital loss from a 2% adverse move?

Show the worked answer

The price loss is $15,000, or 3% of capital, before costs and other portfolio positions. Margin requirements may also change during the move.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.

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