Paper: arXiv 2412.14361

Abstract

We revisit the long-only trend-following strategy presented in A Century of Profitable Industry Trends by Zarattini and Antonacci, which achieved exceptional historical performance with an 18.2% annualized return and a Sharpe Ratio of 1.39. While the results outperformed benchmarks, practical implementation raises concerns about robustness and evolving market conditions. This study explores modifications addressing reliance on T-bills, alternative fallback allocations, and industry exclusions. Despite attempts to enhance adaptability through momentum signals, parameter optimization, and Walk-Forward Analysis, results reveal persistent challenges. The results highlight challenges in adapting historical strategies to modern markets and offer insights for future trend-following frameworks.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper involves advanced mathematical modeling with formal definitions of indicators (Keltner/Donchian channels, volatility scaling) and empirical testing using multiple data splits, point-in-time compliance, and robust validation techniques like Walk-Forward Analysis.

Research Flowchart

  flowchart TD
  Goal["Research Goal: Test Robustness of<br>100-Year Industry Trend Strategy"] --> Inputs
  subgraph Inputs ["Data Inputs"]
      I1["Historical Industry Returns"]
      I2["Treasury Bill Data"]
  end
  Inputs --> Method
  subgraph Method ["Key Methodology"]
      M1["Long-Only Trend Following"]
      M2["Walk-Forward Analysis"]
      M3["Parameter Optimization"]
  end
  Method --> Comp
  subgraph Comp ["Computational Processes"]
      C1["Simulate Strategy &<br>Calculate Metrics"]
      C2["Analyze Drawdowns<br>& Risk"]
      C3["Test Adaptations<br>excl. T-Bills"]
  end
  Comp --> Find
  subgraph Find ["Key Findings & Outcomes"]
      F1["Challenge: Declining<br>Performance in Modern Markets"]
      F2["Issue: Reliance on<br>Safe-Haven Assets"]
      F3["Outcome: Framework for<br>Future Robustness Testing"]
  end