Ask any self-respecting trend follower what kind of market environment favors their strategy, and you’ll get the usual suspects: volatility, uncertainty, macro and geopolitical stress, inflation, deflation, recession. But here’s the thing—those are just the conditions. The real driver? Signal versus noise. Trend needs signal.

In 2022, the signal was deafening: inflation fears, war in Ukraine, and ultimately, realized inflation. Since 2023? More like a symphony of noise. Just look at U.S. rates: 10-year yields dipped below 3.5% in April ’23 on recession fears… then hit 5% by October on “higher for longer.” They slid below 4% in Jan ’24 (soft landing), bounced to 4.5% by April (higher for longer again), dipped back under 4% in September (post-Yen carry unwind, recession vibes), then shot above 4.5% in Jan ’25 (pre-inauguration pro-growth Trump trade), and—you guessed it—dropped back under 4% in April (DOGE, tariffs, not pro-growth but outright recessionary).

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2022 was a fantastic year for showcasing the benefits of adding Managed Futures to the portfolio. Inflation rears its ugly head after 40 years and commodities rip higher during the Ukraine War. Managed Futures, offering exposure to both the long and short sides of return distributions, got you long commodities and short bonds. No other asset class brought you that kind of protection in 2022. Not Gold, not TIPS, not Bitcoin. However, after down single digits in 2023, and another flat to down year in 2024 amid strong stock market results, the naysayers return.

Managed Futures – computers love us! Humans…not so much. Why is that? Take pretty much any sufficiently long Managed Futures track record, or index, run it through asset allocation models and efficient frontiers, the answer is pretty much always the same. Uncorrelated returns, with strong negative correlations in periods of market stress, lowers overall portfolio volatility and drawdowns. The efficient frontier goes up and to the left, improved returns, lower volatility, better portfolio Sharpe. The quants, and CFAs, and nerds all agree…on paper it works. For the seasoned veteran, the RIA, the institutional consultant, holding Managed Futures in a portfolio through time, not so easy with the clients.

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We speak with a diverse range of investors—domestic and international, institutional and retail, alternatives-focused and equity-centric. Typically, they have a variety of questions and concerns driving their current thinking. However, in recent weeks, there’s been a singular focus: the return of President Trump. It’s remarkable how much of a Rorschach test he has become.

For macro topics like inflation or growth, we usually see a fairly narrow range of opinions—around 10-15% of people expecting slightly lower inflation, 10-15% anticipating it to be a bit higher, with most clustered near the target, expecting the status quo. Currently, not a single person thinks we are in a state of equilibrium. On one side, 50% believe we’re headed for runaway inflation fueled by exploding deficits, Fed pressure, eroding confidence in the USD, and soaring commodity prices due to global turmoil. The other 50% foresee a deflationary crisis spurred by the deportation of 10 million immigrants, a $2 trillion reduction in the federal budget, and a rampant USD disrupting emerging markets and driving commodity prices down. Adding to this uncertainty, President Trump, the world’s largest one-man volatility machine, has teamed up with perhaps the only person who could rival him, Elon Musk. Volatility squared.

These factors, among others, have realigned market assumptions, significantly increasing the likelihood of problematic inflation or deflation over the next twelve months. Investors face a FLATION complication.

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The past few years have seen large moves in global yields. To (very briefly) recap, at the end of 2018, US 10-year yields were around 3% on the heels of recent rate hikes. Late in 2019, the escalation of trade tensions between the US and China led the Fed to enter a mid-cycle course correction taking yields down under 2%. The pandemic at the start of 2020 prompted emergency cuts everywhere and moves to record low yields close to 0.5%. Yields started rising again as the economy reopened, and as inflation reared its ugly head in 2022 global central banks found themselves behind the curve. The US 10-year touched 5% for a hot second in late 2023 before falling to 4% at year-end. Rates bounced around in 2024 as markets grappled with several rounds of “the Fed needs to cut” to “rates will be higher for longer.” Now, inflation near target and the balance of worries has shifted from the inflation to questions of soft landings and slowdowns.

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We’ve highlighted a few times on this blog on how trend following can be helpful in portfolio construction with its ability to access a diverse set of markets as well as both sides of the return distribution (long and short) in those markets. Diversification is driven by both of those features. 2022 saw bond prices fall and commodity prices rise as inflation, war and interest rates rattled through the global economy and asset markets. The ability to get short exposure to bonds and the Japanese Yen as interest rates rose, coupled with long positions directly in the commodity markets that stoked inflationary fears, enabled trend following allocations to cushion traditional portfolios of stocks, bonds and credit. Direct exposure to the factors hurting traditional portfolios is a key benefit of trend following, as well as its adaptability in different environments. Indeed, in previous difficult periods for traditional markets the opposite exposures were the most helpful – long bonds and short commodities in the GFC were the right positions for trend to take.

On the commodity side in particular, we have long thought that owning commodities as a long only investment was a mistake, and that due to human ingenuity and product substitution prices would go down in real terms over time. The short side is too important to ignore. This can be true in financial crises like 2008/09 when crude oil dropped some 75%, but also in quieter times. The risk premium in Managed Futures comes from taking on risks producers and consumers want to shed, making participation on both the long side and short side necessary. Commodities are particularly useful as they are much less correlated to each other than something like bond markets. Crude oil, grains, softs and meats all have their own cycles driven by their own unique drivers and supply/demand curves. Current grain markets are a good example.

In 2022 grain markets spiked upwards as the Ukraine war directly impacted the wheat market. Prewar, Ukraine harvested some 33m tons of wheat as one of the larger global producers. Prices of US wheat had been trending higher through 2021 and were sitting around $8/bushel; by May they were 50% higher at $12/bushel. Wheat competes for acres with corn and soybeans, as farmers optimize a planting mix in part based on market prices. If wheat – which grows like a weed – is trading 50% higher than usual some acres shift to wheat and away from corn and soybeans, reducing expected crop sizes, pushing those prices higher. Long only caught that move. The best cure for high prices though is high prices, and possible crop shortages and fears of the same can be solved with a couple of good harvests. As those fears and shortages abate, prices fall again. This is what we have seen in 2024. Planting conditions were perfect, the growing season weather has been perfect. Seed technology and farming advances keep improving. Record yields for corn and soybeans this year. What happens when high prices meet record yields? Lower prices. It’s times like these you need your shorts.