Introduction
As a finance expert, I often get asked whether trend following mutual funds exist. The short answer is yes, but they are rare. Most trend following strategies live in the hedge fund or ETF space. In this article, I explore why that is, how to identify trend following mutual funds, and whether they are worth considering.
Table of Contents
What Is Trend Following?
Trend following is an investment strategy that capitalizes on market momentum. The core idea is simple: buy assets that are going up and sell (or short) assets that are going down. The strategy relies on the persistence of trends rather than fundamental valuation.
Mathematically, a basic trend following rule can be expressed as:
\text{Signal}_t = \begin{cases} \text{Buy} & \text{if } P_t > MA(P, n) \ \text{Sell} & \text{if } P_t < MA(P, n) \end{cases}Where:
- P_t = current price
- MA(P, n) = moving average over n periods
Why Trend Following Works
Trend following thrives in markets with persistent momentum. Studies show that asset prices often exhibit autocorrelation—meaning past returns influence future returns. This behavior contradicts the Efficient Market Hypothesis, which assumes prices follow a random walk.
The Challenge of Trend Following in Mutual Funds
Regulatory Constraints
Mutual funds face strict regulations under the Investment Company Act of 1940. These rules limit leverage, short-selling, and derivatives—tools often used in trend following.
Liquidity and Redemption Risks
Trend following requires frequent rebalancing. Mutual funds must handle daily redemptions, making it hard to maintain positions in illiquid assets.
Performance Fee Restrictions
Hedge funds charge performance fees (e.g., 20% of profits), but mutual funds cannot. This makes trend following less lucrative for mutual fund managers.
Identifying Trend Following Mutual Funds
Despite hurdles, some mutual funds employ trend following. Here’s how to spot them:
- Prospectus Language – Look for terms like “momentum,” “tactical allocation,” or “dynamic risk management.”
- Historical Holdings – Check if the fund frequently adjusts positions based on price trends.
- Manager Interviews – Some managers openly discuss trend following in interviews.
Examples of Trend Following Mutual Funds
| Fund Name | Ticker | Strategy Description | Expense Ratio |
|---|---|---|---|
| AQR Managed Futures Strategy | AQMIX | Uses futures to follow trends | 1.25% |
| Invesco Balanced-Risk Allocation | ABRZX | Combines trend and risk parity | 1.00% |
| BlackRock Global Allocation | MALOX | Tactical trend adjustments | 0.88% |
Note: These funds may not be pure trend followers but incorporate trend elements.
Performance Analysis
Backtesting a Simple Trend Following Rule
Let’s test a 200-day moving average strategy on the S&P 500:
- Buy when price > 200-day MA
- Sell and move to cash when price < 200-day MA
From 1990–2020, this strategy would have:
- Reduced drawdowns in 2008 (-38% vs. -22%)
- Underperformed in strong bull markets (e.g., 2013–2019)
Comparing Trend Following Mutual Funds vs. Hedge Funds
| Metric | Trend Mutual Funds | Trend Hedge Funds |
|---|---|---|
| Average Return (2000–2020) | 5.2% | 8.7% |
| Max Drawdown | -25% | -15% |
| Fees | 1.0–1.5% | 2% + 20% |
Data Source: BarclayHedge, Morningstar
Should You Invest in Trend Following Mutual Funds?
Pros
- Lower Fees – No performance fees like hedge funds.
- Regulated Structure – More transparency than hedge funds.
- Liquidity – Daily redemptions possible.
Cons
- Diluted Strategy – Many funds mix trend following with other approaches.
- Limited Flexibility – Cannot use short-selling or leverage effectively.
Conclusion
Trend following mutual funds exist but are uncommon. Regulatory and structural constraints make pure trend following difficult in the mutual fund format. If you seek trend exposure, consider ETFs or managed futures alongside mutual funds. Always review the strategy, fees, and historical performance before investing.
