In today’s unpredictable financial landscape, investors are always on the lookout for strategies that can safeguard their portfolios during turbulent times. One approach that’s gained traction is trend-following within managed futures—a strategy that trades futures contracts across diverse asset classes like commodities, currencies, and equities to capture sustained market movements. Known for delivering “crisis alpha” (positive returns during market downturns), trend-following promises resilience when traditional investments falter. But here’s the catch: its success hinges on the type of market downturn. A fascinating analysis by AlphaSimplex, set against a hypothetical 2025 trade war, reveals a crucial lesson: Trend-following thrives in prolonged crises but often stumbles in short-term corrections.
The 2025 Trade War Scenario
Picture this: it’s April 4, 2025, and aggressive tariffs have ignited a trade war, sending equity markets into a tailspin. The S&P 500 has plummeted 17% over 31 days since its February peak, driven by extreme risk-off sentiment, fears of recession, and inflationary pressures. Markets are reeling, and trend-following strategies are adjusting—shifting from risk assets to defensive positions. But as AlphaSimplex notes, these strategies don’t always shine at the onset of a downturn. Their strength lies in riding extended trends, not reacting to sudden shocks.
Correction or Crisis? The Line That Matters
The document draws a vital distinction between two types of market declines:
- Corrections: Brief, sharp drops (typically under 15%) that recover quickly.
- Crises: Deeper, longer-lasting downturns (often beyond 15%) with sustained economic impact.
Why does this matter? Because the performance of trend-following strategies pivots on this divide. In corrections, trends haven’t had time to solidify, leaving these strategies vulnerable. In crises, however, prolonged market movements provide fertile ground for profit. With the current 2025 drawdown at 17%, we’re teetering on the edge—making it a pivotal moment to assess what’s next.
History Tells the Tale
AlphaSimplex backs this up with hard data, analyzing the SG Trend Index (a benchmark for trend-following performance) against S&P 500 drawdowns from 2000 to April 2025. The findings are striking:
- Short-Term Struggles: In drawdowns between 5% and 17%, especially those under 12.5%, trend-following often posts negative returns. Think of the COVID-19 crash (February-March 2020): a 33.79% drop in just 23 days yielded a -2.44% return for the SG Trend Index.
- Crisis Champions: During extended crises, the story flips. The Great Financial Crisis (2007-2009) saw a 55.25% S&P 500 decline over 367 days, with trend-following soaring to a 32.11% gain. The Tech Bubble (2000-2002) was even more dramatic: a 47.41% drop over 545 days delivered a whopping 62.26% return.
This pattern holds across other major events. The 2022 Ukraine Crisis (24.49% drawdown over 202 days) generated a 35.64% gain, while shorter, sharper drops like Q4 2018 (-19.36% over 67 days) saw losses (-3.32%).
The 2025 Outlook: Which Path Ahead?
As markets grapple with the trade war’s fallout, two scenarios loom:
- Quick Rebound: Like the post-COVID recovery, where swift intervention stabilizes markets.
- Prolonged Crisis: A deeper economic unraveling, amplifying the downturn.
If the 17% drawdown extends, trend-following could find its footing, capitalizing on emerging trends as it did in past crises. But if it’s a fleeting correction, history suggests it may lag. The key takeaway? Timing and duration are everything.
Why This Matters for Investors
For those eyeing managed futures, this insight is gold: Trend-following isn’t a one-size-fits-all shield. It’s a strategy tailored for endurance, not quick fixes. In a world of escalating trade tensions and market uncertainty, distinguishing between a blip and a breakdown could mean the difference between loss and crisis alpha. The AlphaSimplex analysis reminds us to look beyond the headlines and focus on the trajectory.
Want to dive deeper into the data and visuals—like the SG Trend Index’s performance plots or detailed drawdown tables? Check out the full report by Kathryn M. Kaminski and Yingshan Zhao: Trade War Crisis or Correction: Managed Futures and Crisis Alpha in 2025
