Nov 11, 2026 · 1h 7m
Trend following diversifies portfolios but cannot insure every crash
TTU154: Why Trend Following Isn't Crash Insurance ft. Philippe Jordan
The episode reframes trend following as a useful but uneven diversifier, while showing how CFM broadened its approach to manage risks beyond a single strategy.
- 1Trend following offers diversification over long horizons, but its returns and crisis performance vary substantially.
- 2CFM expanded beyond trend after recognizing the limits of relying on one price-based strategy.
- 3Systematic investing depends on complementary signals, robust risk management, technology, and disciplined research rather than attractive backtests alone.
Don't miss
Philippe Jordan closes by putting trend following’s long-run performance in perspective: valuable for diversification, but not dependable crash insurance.
The brief
Philippe Jordan argues that trend following still earns a place in portfolios, but its modest long-term returns and uneven crisis performance make diversification—not crash insurance—the central case.
Jordan traces CFM’s evolution from a 1991 price-based approach into a broader quantitative firm, shaped by scientific research, computing power, richer data, and human judgment.
The 1994 Mexican fixed-income crisis exposed the limits of relying on trend alone, prompting CFM to add complementary strategies including statistical arbitrage and volatility arbitrage.
CFM’s research process tests assumptions repeatedly, discounts apparent Sharpe ratios, and weighs robustness against diversification while examining crowding, counterparty risk, and unknown unknowns.
The closing lesson is deliberately restrained: trend’s roughly 0.4-to-0.5 long-run Sharpe can help diversify portfolios, but investors should not expect it to reliably pay for every crash.
What was said on this episode
31 statements · 19 positive · 7 negative · 4 mixed · 1 neutral
- Philippe Jordanon Investment strategy flowsNegative1:27
Short-frequency strategy flows have a substantial impact on returns.
“If you're talking about something that's operating two to three or four days or a month in frequency, that would have a pretty high impact.”
Listen at 1:27
- Philippe Jordanon Trend followingPositive4:22
Trend following has approximately 0.5 long-term Sharpe ratio.
“It has a sharp over the long term of probably 0.5, which over the long term was very good.”
Listen at 4:22
- Philippe Jordanon Trend following versus stock marketPositive4:29
Trend following outperforms stocks over the very long term.
“That's actually better than the stock market over the long term.”
Listen at 4:29
- Philippe Jordanon Systematic tradingNeutral6:11
Systematic trading became fully electronic after 2000.
“Post-2000, this business went fully electronic.”
Listen at 6:11
- Philippe Jordanon Portfolio diversificationPositive8:29
Broad diversification is the best response to negative portfolio outcomes.
“The best path to deal with the negative outcomes is to further diversify your book as much as you can.”
Listen at 8:29
CFM has 11 people meeting biweekly to discuss unknown risks.
“we now have a point of convergence where we today have a group of, I think it's 11 people that meet every two weeks to discuss potential unknown unknowns.”
Listen at 12:49
CFM should add strategies fundamentally uncorrelated with trend following.
“I need other strategies that are fundamentally decorrelated from this one.”
Listen at 14:53
An apparent 1.5 Sharpe ratio may represent only approximately 0.7 after adjustment.
“After a long process, it says it's 1.5. Well, after doing this for many, many years, we know that even at the end of that process, that's probably 0.7, not 1.5.”
Listen at 17:25
- Philippe Jordanon Computing power per dollarPositive19:26
Computing power per dollar has steadily increased for 35 years.
“The trend for the last 35 years has steadily been up and has surprised everyone at every stage.”
Listen at 19:26
- Philippe Jordanon Successful systematic firmsPositive20:56
Successful systematic firms adapt to and leverage technological change.
“the most successful ones are the ones that adapt to the technological changes, the ones that know how to leverage new technology.”
Listen at 20:56
- Philippe Jordanon CFM AI trading agentsPositive25:00
CFM will develop AI agents that begin trading.
“There's going to be a point where I think we'll go to another level where we actually have agents that we're developing that are starting to trade.”
Listen at 25:00
Most people will manage AI agents in the future.
“I think everybody is going to be a manager of agents.”
Listen at 25:20
AI technology will become ubiquitous across society.
“This technology is going to become totally ubiquitous for everybody, not just CFM.”
Listen at 26:14
AI will have a major impact on society.
“It will have an immense impact on many aspects of our society.”
Listen at 26:21
CFM’s 35-year proprietary trading dataset is valuable for AI deployment.
“we have something that is extraordinarily important when you have access to AI, is 35 years of data that we've collected of our own trades.”
Listen at 26:41
- Philippe Jordanon Model robustness and diversificationMixed28:13
Model robustness and diversification trade off against each other.
“There's a trade-off between robustness and diversification.”
Listen at 28:13
- Philippe Jordanon CFM alpha enginesPositive29:00
CFM may diversify across hundreds or thousands of alpha engines.
“If you have hundreds, if not thousands, of different alpha engines over half a dozen or a dozen different strategies”
Listen at 29:00
- Philippe Jordanon Technology-driven portfolio managementNegative33:14
Within seven years, non-technological portfolio management will seem exotic.
“within probably seven years, it's the contrary that's going to be thought of as being exotic.”
Listen at 33:14
- Philippe Jordanon U.S. equity market flowsPositive36:44
Recent U.S. equity-market success was substantially driven by investment flows.
“The S&P's magnificent success or the U.S. equity market's magnificent success is in large measure due to, yes, flows.”
Listen at 36:44
- Philippe Jordanon Leveraged ETFs and passive flowsNegative37:32
Passive-flow reversals are especially risky when leveraged ETFs are involved.
“Absolutely, especially if they're in 4X ETFs on top of it.”
Listen at 37:32
- Philippe Jordanon Western demographicsMixed39:53
Western baby-boomer retirement will alter the social contract.
“We're rapidly running into the retirement age of, you know, folks like me and maybe a little older than me.”
Listen at 39:53
- Philippe Jordanon Chinese marketsPositive43:50
Chinese markets were the only true alternative markets meeting CFM’s criteria.
“the only true alternative markets were the Chinese markets.”
Listen at 43:50
- Philippe Jordanon Trading frictionNegative46:36
Trading friction is a central consideration in CFM’s business.
“And friction is everything in our business.”
Listen at 46:36
- Philippe Jordanon CFM portfolio risk regimePositive51:14
CFM aims to maintain a stable portfolio risk regime.
“we want to run at as fixed a risk regime as we can”
Listen at 51:14
- Philippe Jordanon Portfolio risk reductionPositive51:54
Reducing portfolio risk functions as insurance against major events.
“By risk reduction, we're buying insurance.”
Listen at 51:54
CFM continuously stress-tests portfolios against five-sigma events.
“we test against Five Sigma events across the portfolio all the time.”
Listen at 52:37
CFM’s current trend program incorporates statistical-arbitrage and PCA insights.
“We're doing, you know, the... The advanced version 35 years later that's informed by the fact that we also run, you know, very large statistical arbitrage books that have very sophisticated PCA techniques that are deployed and other strategies.”
Listen at 54:28
CFM currently has substantial unused capacity in trend following.
“we also have plenty to do with the capacity that we have in trend.”
Listen at 56:43
- Philippe Jordanon Trend following crash hedgingMixed58:53
Trend following can hedge crashes only when its frequency matches the crash.
“trend following could perform this sort of crash hedge. And it can, but it's frequency dependent”
Listen at 58:53
- Philippe Jordanon Trend following crash hedgingNegative59:09
Cost-efficient crash hedging through trend following is unlikely over time.
“it's unlikely over time that you're going to be able to do that at a cost-efficient price point.”
Listen at 59:09
Trend following’s strongest periods will not persist indefinitely.
“when it's the best time for trend, it's probably not going to last forever either.”
Listen at 1:03:18
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
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