Trend-Following Fund Beats Rivals With Rules That Mimic Human Judgment

Graham Capital Management's Tactical Trend Fund returned 27% this year through the end of August, according to figures compiled by Societe Generale. Over the same period, peers in commodity-fund rankings gained 10%, and funds in the systematic diversified category gained just over 3%, according to HFR, which tracks hedge-fund performance. Tom Feng, chief investment officer for Graham's quantitative strategies, told MarketWatch that September was another "solid month."

The fund's edge this year came from adjusting how its models act on trends, adding rules that resemble the judgment a human trader would apply.

How trend-following works

Trend-following funds, also known as systematic or managed-futures funds, use models and trading algorithms to detect price trends in markets such as commodities, currencies, bonds and stock indexes, and then bet on those trends continuing, up or down. In principle, rigid adherence to the model's rules removes the emotion and biases of human judgment.

These strategies do best when prices move persistently in one direction, which Feng described as "momentum persistence." They struggle when prices are choppy or trade in a narrow range. This year has suited them: oil and other commodity prices have moved steadily higher, and government bonds around the world have been in a pronounced downtrend.

What Graham changed

The main adjustment was the addition of profit-taking and stop-loss rules, so the models no longer simply followed whatever the market signaled. The idea came from Ken Tropin, who founded Graham Capital in 1994 and is its chairman. Feng said the change helped in several asset classes.

"Metals had a strong upward movement around the end of January while energy markets shot up in March," Feng said. "We had long positions in both cases and the models actively reduced exposures to lock in more profits through subsequent choppy market environments."

Graham also added new signals to its models. Two pick up tactical trends, and a fundamental indicator went into the firm's more diversified quant macro strategy. A carry signal, which follows differences in interest rates between currencies, has also contributed.

Feng traced part of the improvement to a period of weak performance across the industry. In April 2025, the "Liberation Day" tariff announcements caused an abrupt reversal in risk assets that whipsawed systematic strategies. As the AI boom accelerated, Graham used such dips to hire AI specialists, which Feng said has led to "prolific model development" that is now contributing to returns.

The role of trend funds in a portfolio

Trend-following funds thrived in 2022, when both stocks and bonds struggled as the Federal Reserve raised interest rates to fight rapid inflation.

Bruno Schneller, managing partner of wealth manager Erlen Capital Management, said such strategies "can be particularly valuable when investors discover during periods of stress that assets which appeared diversified in normal markets become much more correlated when conditions deteriorate." Because their positions adapt to changes in the market, he said, "that ability to participate in both rising and falling markets can provide a source of diversification precisely when a traditional portfolio may need it most."

The strategy has clear weak spots. Beyond sudden reversals like April 2025, periods of very low volatility and highly correlated markets, such as the zero-interest-rate era of the 2010s, have tended to favor passive investing over trend-following.

Graham Capital manages about $23 billion, split roughly evenly between systematic and discretionary strategies. The Tactical Trend Fund, launched in 2006, accounts for $4 billion of that total.

Commodity and bond trends, and full-year results

• Whether the trends in commodities and global government bonds persist, the conditions Feng said suit the strategy.
• Full-year results for Graham and for HFR's systematic categories, to see whether the gap with peers holds.
• Any abrupt reversal in risk assets similar to April 2025, the kind of move that has hurt trend-following funds.