Sometimes, a contrarian approach means listening to how the waves are breaking rather than swimming against the tide. 

Value and momentum have long been understood as two key components of price formation. First, assets outperforming and underperforming in the past tend to continue doing so in the coming weeks, forming a momentum effect. Second, assets showing elevated (or respectively low) prices compared to their historical norm tend to generate negative (or respectively positive) returns, forming a value effect. 

Both effects correlate negatively. On that basis, reversal strategies pair very naturally with their trend-following alter egos and, as such, are natural components of our investment toolkit as systematic investors. 

The question, however, remains as to the choice of econometric model. For our part we have adopted economist  James D. Hamilton (2018)’s proposed decomposition of price dynamics² between the trend and cycle components to create our cross-asset value signals. Implemented at the end of Q2 2024 in our portfolios, it is too early to draw meaningful conclusions about its performance. But early signs are positive and the interaction with our trend-following strategies is as expected, i.e., diversifying and therefore accretive to risk-adjusted returns, our ultimate yardstick. 

Interestingly and anecdotally over Q3, value and trend both flagged duration as a buying opportunity. Although this is no longer the case – as the value overlay has exited its position – the lesson is simple: having a contrarian bent does not always dictate swimming against the tide.