TAILIEUCHUNG - Does Trend Following Work on Stocks?

Based on a SEBI-NCAER survey which found 80 per cent of equity investor households to be first generation investors and majority of equity-owning households having an inadequate diversification of portfolio – only about 5 per cent invested in more than 5 companies, the National Stock Exchange (NSE) concluded that the households lacked “experience of stock market operations”. About 84 per cent of the households invested in equity shares through the primary market – in the all-enveloping euphoria investors probably flocked to new issues to make quick money rather than making informed long term investments. These observations show. | Does Trend Following Work on Stocks Author s Cole Wilcox Managing Director Blackstar Funds LLC cole@ Eric Crittenden Research Director Blackstar Funds LLC eric@ The authors would like to acknowledge Bob Bolotin of RDB Computing Inc. for the software and programming that made this project possible. November 2005 Updated January 11 2009 Abstract Over the years many commodity trading advisors proprietary traders and global macro hedge funds have successfully applied various trend following methods to profitably trade in global futures markets. Very little research however has been published regarding trend following strategies applied to stocks. Is it reasonable to assume that trend following works on futures but not stocks We decided to put a long only trend following strategy to the test by running it against a comprehensive database of . stocks that have been adjusted for corporate actions1. Delisted2 companies were included to account for survivorship bias3. Realistic transaction cost estimates slippage commission were applied. Liquidity filters were used to limit hypothetical trading to only stocks that would have been liquid enough to trade at the time of the trade. Coverage included 24 000 securities spanning 22 years. The empirical results strongly suggest that trend following on stocks does offer a positive mathematical expectancy4 an essential building block of an effective investing or trading system. Introduction Our firm Blackstar Funds LLC manages a multi-advisor commodity pool that invests primarily in systematic5 long-volatility6 programs. We focus mainly on trend following programs from the commodities financial futures and currency trading arenas as they tend to be the most systematic in terms of trading and portfolio management. Years of searching for systematic trend following programs that focus on stocks however has left us empty handed. Having spent literally .

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