Tail protection for long investors: trend convexity at work

The performance of trend-following strategies can be ascribed to the difference between long- and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This explains the positive convexity of the aggregate performance of commodity trading advisors, which, when adequately measured, turns out to be much stronger than anticipated. We also highlight interesting connections with so-called risk parity portfolios. Finally, we propose a new portfolio of strangle options that provides a pure exposure to the long-term variance of the underlying, offering yet another viewpoint on the link between trend and volatility.