Charles Bamford of Fairlight Capital Partners explains why trend-following strategies are an under-utilised tool in family office portfolios and deserve a larger role.
Family offices around the world continue to embrace alternatives as they prepare to deploy more capital to risk assets despite fears over geopolitical conflict and economic recession.
According to Goldman Sachs, allocations to alternatives in family office portfolios topped 40% in 2025, dominated by private equity, private real estate and infrastructure. Despite market volatility, allocations to hedge funds were relatively modest, however, having averaged 6% since 2023. Indeed, hedge funds could soon be overtaken by private credit, an asset class to which a quarter of family offices intend to increase their current allocation.
In many ways, this makes sense. Family offices are often seen as ‘patient’ capital and have no concerns over illiquidity, often investing directly where they have the expertise. However, for those seeking more liquid diversified sources of alpha, there is an argument that hedge funds – in particular quantitative strategies – could have a larger role to play in portfolios.
One such strategy is trend-following, a systematic absolute return approach that can trace its roots back to the 1800s. Trend-following strategies are often the least correlated to major asset classes, yet deliver equity-like returns over the long term, often significantly outperforming during periods of stress – what is known as ‘crisis alpha’.
In 2022, for instance, the S&P 500 returned -20.28% while the Soc Gen Trend Index, which follows traders of trend following methodologies, delivered +27.35%. Being directionally agnostic - alpha can be generated whether the economic climate is one of growth or recession - means trend-following funds can perform in any global market scenario.
Capturing trends
Trends develop and recur in financial markets due to behavioural biases including herding, feedback loops, overreaction and confirmation bias. Trends tend to last longer and extend further than most market participants anticipate. Trend-following strategies apply rules-based quantitative systems to capture these trends, up or down, in highly liquid global futures markets. Unlike discretionary traders, they do not get FOMO or cling on to losing trades.
Indeed, the advantage of trend-following comes from a strict policy of cutting losses and running profits, which means the returns have a positive skew.
If two out of every three trades result in a loss, which is possible, the breakeven profit on the third trade needs to be double the size of the losses. If a trend reverses quickly and sharply and no profit is generated, the position must be cut quickly to limit the loss and not detract too much from positions generating profits. It is not about being right about trends 100% of the time; it’s about making sure the trends the system gets right generate the biggest returns.
A key advantage of trend-following is its lack of correlation with global asset classes. For instance, the Barclay BTOP50 Index (largely comprised of trend-following strategies) has virtually no correlation to global equity indices or other major markets. This is because most strategies trade globally diversified portfolios of futures across asset classes including commodities (like grain, metals, energy, livestock and soft commodities), interest rates, currencies and equities.
For family offices seeking diversification, this lack of correlation could be a key benefit. Most still have a significant allocation to public equities and, despite fears over high valuations in tech or AI-related stocks, are expected to increase it. If the current bull market does turn into dotcom crash 2.0, it is worth considering what happened during that period. While the S&P 500 fell -49.7% in 2000-2002, the SocGen Trend Index returned +58.1%.
Here, we can see a clear difference with equity long/short strategies, long a mainstay of family office alternative allocations. While an equity long/short (ELS) fund may reduce overall market exposure compared to a traditional long-only fund, most remain fundamentally linked to the stock market's direction.
Indeed, ELS returns are more correlated to the equity market than many investors appreciate, particularly during periods of acute financial stress. During the 2008 financial crisis, the S&P 500 index fell by over 38% while the average ELS fund returned approximately -19%, a relative outperformance but a painful absolute loss.
Trend-following strategies do not, of course, always deliver strong returns. Whipsaw markets, like those unleashed in April after Liberation Day, do not favour trend-following, nor do sideways markets where strong trends are scarce. These can result in periods of flat or negative performance. However, for long-term investors, patience is often rewarded, particularly after drawdowns when new trends have developed.
Every drawdown of 10% or more in SocGen CTA index history has been followed by a double-digit 12-month rebound. In subsequent years after the initial rebound, returns have often touched or exceeded 40%. History does not always repeat itself, of course, but snapbacks in trend-following can be powerful.
Today, increasing numbers of family offices are expressing interest in strategies that leverage AI, big data and machine learning. While many traditional discretionary absolute return strategies have failed to live up to their billing, quantitative systematic strategies could be well placed to win a more prominent place in family office portfolios.
Charles Bamford (pictured) is co-founder of Fairlight Capital Partners
