Credit Suisse

Credit Suisse

Trend-following strategies for investors

Major investment bank launched a product based on investment strategies developed by Cass academics.

A simple trend-following approach to investing can help to reduce volatility and downside risk dramatically without having a significant impact on returns.

Synopsis

Much of the investment industry relies on the idea that fund managers can pick winners, avoid losers and beat their return benchmarks for investors. But research by Cass academics found that a simple trend following strategy can help to reduce volatility and downside risk dramatically without having a significant impact on returns. Credit Suisse has just launched a product based on this research.

Background

Volatility in markets since 2000 has led to drawdowns for many people with money invested in pensions. Two of Cass's researchers wondered whether simple trend-following techniques might help to reduce the downside risk that all investors fear. They believed that their simple, transparent strategy would not only help to reduce losses, but would also appeal to savers alienated by complex products. They also wanted to investigate whether such strategies could be applied in such a way as to take advantage of the well known benefits of diversification to avoid the sorts of losses incurred by Diversified Growth Funds in the mid 2000s, and whether there was sufficient variety in liquid assets to populate them.

Research

Professors Andrew Clare and Steve Thomas began by applying trend-following strategies to over 30 global equity markets in the form of MSCI country indices. They found that trend-following produced returns that were similar to those achieved by an equivalent, passive investment equity over long periods of time, but with around two thirds the volatility and with a huge reduction in maximum losses. The risk-adjusted performance of their strategy was therefore far superior to that produced through passive investing. They found that the best results came from trading only once a month, on the last trading day of the month.

Given the importance of diversification in a portfolio, and using the same trend following techniques, they also created a multi-asset strategy comprising commercial property, commodities, bonds, emerging and developed economy equities. Once again they found that their simple technique reduced volatility without sacrificing returns. The results have also now been extended in single asset class context and applied to emerging market equities, commodities and currencies - with similar impressive results.

Outcomes

In February 2013 Credit Suisse launched a series of structured products derived from the Cass findings, which are largely aimed at institutions and family offices. Structured products offer investors a guaranteed return based on an underlying financial instrument. This is the first time in the UK that an academic institution has associated its brand with an investment strategy on a commercial basis.

Cass consultants

Professor Andrew Clare

Professor Clare is the Professor of Asset Management at Cass Business School. He was previously a Senior Research Manager in the Monetary Analysis wing of the Bank of England, which supported the work of the Monetary Policy Committee. He was responsible for equity market and derivatives research at the Bank. He serves on the investment committee of the £4bn GEC Marconi pension plan, and is a trustee and Chairman of the Investment Committee of the £2.3bn Magnox Electric Group Pension scheme.

Professor Steve Thomas

Professor Thomas is a Professor of Finance and Course Director for EMBA and Dubai MBA, and previously was Professor of Financial Markets. In a recent review was ranked 11th in Europe for finance research. He is a director of Bear Stearns' Global Alpha (hedge) fund, and since 1988 has been consulting a editor for FT Interactive Data.