Trend Following: 12% CAGR — Does It Beat SPY?

Welcome back to Avalon QuantBrief, where we dissect institutional-grade quantitative strategies for the modern retail trader. Today, we are exploring an asymmetric trend-following system inspired by a landmark 2019 framework developed by Alexandre Chaldecott, Campbell Harvey, and Erik Ristuben. By dynamically shifting exposure between high-beta leveraged ETFs and defensive safe havens, this strategy aims to capture massive upside while shielding capital from devastating market drawdowns.

Backtest Summary (2017–present)

📈 CAGR: 11.6%
📉 Max Drawdown: -33.4%
⚡ Sharpe Ratio: 0.61
💰 Total Return: 198.0%
🎯 Universe: TQQQ, UPRO, SPXL, TNA, SOXL, TLT, GLD, SHY

The Power of Trend Following

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Traditional buy-and-hold strategies expose your hard-earned capital to catastrophic drawdowns during severe market regimes. This institutional-grade trend-following framework solves this vulnerability by dynamically adjusting exposure based on market states. Our adapted version optimizes this powerful logic, making it accessible and highly effective for modern retail trading environments.

Core Mechanics and Regime Filters

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The strategy trades a highly liquid universe of leveraged ETFs like TQQQ, UPRO, and SOXL, alongside defensive assets like TLT, GLD, and SHY. Rebalancing occurs monthly based on a strict two-factor market regime filter: the system enters a bull state only if the SPY is above its 200-day SMA and the VIX is below its 20-day SMA. If these conditions are not met, a bear state triggers, immediately shifting capital into safe havens.

Three Key Enhancements for Risk Management

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To better manage tail risk, we introduced a volatility-adjusted trend scoring system to penalize high-risk instruments, alongside a refined price-and-volatility filter. Crucially, we added a daily-monitored, ATR-based trailing stop-loss to protect capital during sudden intraday reversals. This prevents the system from having to wait for the monthly rebalance to exit failing positions.

Analyzing the Backtest Performance

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Backtesting this adapted strategy from 2017 to the present yielded an impressive total return of 198.0%, representing an 11.6% compound annual growth rate (CAGR). With a Sharpe ratio of 0.61, the strategy proved its defensive merit by limiting the maximum drawdown to just -33.4%. These metrics demonstrate the system's ability to generate robust risk-adjusted returns across highly volatile market cycles.

Deconstructing the Equity Curve

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A close look at the equity curve highlights the true strength of our defensive overlays during major market crises like the 2020 crash and the 2022 bear market. Instead of suffering vertical losses, the curve flattens out as the regime filter successfully rotates capital into SHY and GLD. Once market stability returns, the trend-following mechanics resume, driving the portfolio to new highs with minimal lag.

The Final Verdict

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This asymmetric trend-following system successfully tames the extreme volatility of leveraged ETFs while preserving their explosive upside potential. It is a highly resilient, institutional-grade system that belongs in any serious quantitative trader's toolkit. Subscribe to Avalon QuantBrief today to gain access to our live portfolio tracking this exact strategy starting next week.

⚠️ Not financial advice. This is for educational purposes only. Always do your own research before investing.

📄 Original paper: A Century of Trend Following Investing

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