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TrendBands™ Long/Short Equity Hedge Fund

TrendBands is a trend-following technique I developed using volatility bands in combination with a proprietary set of trading rules. The Bands can be applied to a variety of approaches, including both long-term and short-term equity systems, as well as short to intermediate-term commodity trends. In fact, the Trendbands indicator is a primary tool within the strategies used for my CTA clients.

The TrendBand parameters are customized for each asset and time frame, and trading rules vary slightly, depending on volatility characteristics of the asset in the given time frame. For the purpose of demonstrating TrendBands as applied to long-term equity trading, a hypothetical $1 million account was initiated on January 1, 2015. The long-term system requires a weekly view, and so trades will be executed based on Friday closing prices.

Details are expounded in the tabs below.

Candidates for long or short equity trades will be generated with a weekly scan for proper TrendBands criteria. Potential long trades will be further filtered based on some basic fundamental criteria such as ROE, sales growth, debt, etc. while short trades will rely solely on technical setups. Given a long-term upward bias for equities, criteria for opening shorts differ from those of longs and so the portfolio is likely to carry a long bias most of the time.

Money management is an important aspect of the TrendBands system. In fact, most master traders would say money management is everything. After all, exposure is the only aspect of trading we really control. Long and short signals for individual equities will carry an initial 2.5% weighting, being augmented as a trend develops. ETFs may carry larger initial positions, depending on measured risk. Finally, positions in SPY, trading for which operates under unique rules, may be weighted up to 100%, depending on market conditions and contrary weightings in the portfolio.

Although the TrendBands technique is designed to catch intermediate to long-term equity trends, the system is anticipated to generate many more small losses than big wins. In fact, a 20-25% win rate should be sufficient to produce outsized returns over the long run.

For example, a 2.5% position that loses 20% will cost the portfolio 50 basis points. A growth stock forming a basing pattern may whipsaw this system several times before developing a solid uptrend. When the stock finally hits a trend, however, a gain of 1000+ basis points could be generated (see Tesla or Biogen).

Extended uptrends will also provide more opportunities to stack postitions than downtrends. The long-term performance of the portfolio is therefore expected to depend more heavily on long trades.

Portfolio performance will be compiled quarterly. (Given the long-term nature of the strategy, monthly figures are insignificant.) Performance includes dividends and estimated commissions. Closed positions will also be listed under the performance table. Keep in mind the TrendBands portfolio is hypothetical. This portfolio is a forward test of the TrendBands methodology as applied to a long-term equity horizon.The faux portfolio was initiated with a $1 million cash balance as of January 1, 2015.

Quarter Quarterly
2015 Q1 +2.60% +2.60%
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