Understanding Trend Following: A Strategic Diversifier for Modern Portfolios

Investment strategies that consistently deliver during market crises are rare. Trend following—stands out as one approach that has historically provided positive returns precisely when traditional portfolios struggled most. A December 2025 whitepaper from Meketa Investment Group examined how these strategies work, why they have attracted institutional investors, and what makes them distinct from other investment approaches.

What the Research Examined

The Meketa analysis provides a comprehensive look at trend following strategies, examining their mechanics, historical performance, and role in diversified portfolios. The research team investigated several key questions:

· How do trend following strategies identify and capitalize on market trends?

· Why do markets trend in the first place, creating opportunities for these approaches?

· What drives the significant performance dispersion among trend following managers?

· How have these strategies performed during major market events over the past 25 years?

· What role can trend following play in institutional asset allocation?

The paper analyzed performance data from 2000 through mid-2025, covering multiple market cycles including the dot-com crash, the Global Financial Crisis, the COVID-19 shock, and the 2022-2023 rate hiking cycle.

Key Findings

Returns and Volatility

From January 2000 through May 2025, the SG Trend Index produced an annualized return of 4.9%, above the Bloomberg US Aggregate Bonds’ 4.0% and below the MSCI ACWI’s 6.2%. The SG Trend Index’s annualized volatility (13.4%) is likewise between US bonds (4.2%) and global equities (15.6%).

Growth of $1, January 2000-May 2025

The Crisis Alpha Phenomenon

Perhaps the most striking finding is trend following’s performance during equity market downturns. The research documents substantial positive returns during the worst periods for stocks over the past quarter century. During major equity drawdowns, trend following strategies captured what researchers call “crisis alpha”—meaningful gains when diversification was needed most, producing positive returns during:

· The popping of the dot-com bubble (2000-2002)

· The Global Financial Crisis (2007-2009)

· The pandemic market shock (February-March 2020)

· The post-COVID rate hikes (2022-2023)

In each case, while global equities suffered double-digit losses, trend following strategies delivered gains—explaining why there is about $350 billion of assets committed to trend following.

Low Long-Term Correlation

Over the 25-year period studied, trend following demonstrated minimal correlation with traditional assets. The average correlation was -0.10 with global equities, 0.10 with long-term government bonds, and essentially zero (0.01) with US aggregate bonds. This near-zero correlation wasn’t static—it varied significantly depending on market conditions, sometimes turning positive during equity rallies and negative during downturns.

Positive Convexity

The research reveals an important non-linear relationship between trend following and equity returns. During both the largest gains and largest losses for equities, trend following experienced its best results. This “smile-shaped” relationship—what researchers call positive convexity—stems from the strategy’s ability to profit from strong trends in either direction. Trend followers can capture upside by riding equity momentum higher or generate gains during crashes by shorting declining markets and buying assets benefiting from flight-to-quality flows.

Significant Manager Dispersion

Despite following similar principles, individual trend following managers showed remarkably different results. The gap between the best and worst performing managers in the SG Trend Index averaged roughly 26% annually, exceeding 30% in nine of the past 25 years. This dispersion was particularly pronounced during the best and worst years for equities—precisely when investors might allocate to trend following for crisis protection.

The wide dispersion in outcomes can also be seen in the following chart which shows the returns of three widely used trend indexes.

The research identified six key design choices driving this dispersion: markets traded, signal speed, signal types, position modifiers, risk allocation approaches, and volatility targets. Each creates meaningful differences in outcomes, even when managers follow the same general approach of buying winners and selling losers.

Portfolio Enhancement

When incorporated into traditional 60/40 stock-bond portfolios, even modest trend following allocations improved risk-adjusted returns historically. The analysis demonstrates that portfolios including trend following components shifted upward and to the left on the risk-return spectrum, indicating better outcomes for the same level of volatility.

Key Investor Takeaways