In a challenging year for global financial markets, trend-following hedge funds are experiencing their most significant losses since at least 1998, driven by rapid market shifts and geopolitical uncertainties.
According to data from PivotalPath, a leading hedge fund research firm, trend-following strategies have declined by 9.6% in the first half of 2025, putting them on track for their worst annual performance in over two decades.
This downturn contrasts sharply with the broader hedge fund industry, which has returned an average of 4% net of fees, while the S&P 500 has continued to reach record highs.
Trend-following hedge funds, also known as commodity trading advisors (CTAs), rely on systematic models to capitalize on sustained market movements.
These strategies typically thrive in volatile environments, as seen in 2022 when funds like Graham Capital Management and AQR Capital Management posted gains exceeding 40% amid high inflation and interest rate hikes.
However, 2025 has proven to be a different beast.
The introduction of aggressive tariff policies by President Donald Trump has led to unpredictable market swings, catching many systematic models off guard.
A report from Reuters highlights that the CBOE Volatility Index, often referred to as Wall Street’s “fear gauge,” has remained elevated since August 2024, but the erratic nature of price movements has disrupted the ability of trend-following algorithms to lock onto consistent trends.
The U.S. dollar index, for instance, has plummeted nearly 11% since January 2025, while assets like gold and bitcoin have surged as investors seek hedges against trade uncertainties.
These rapid reversals have left trend-following funds struggling to adapt.
Broader Hedge Fund Industry Outperforms
While trend-following funds falter, other hedge fund strategies have shown resilience.
A Goldman Sachs prime brokerage note reported that hedge fund stock pickers gained over 3% in June 2025, contributing to a year-to-date return of 6%.
Systematic equity hedge funds, despite a 0.68% decline in June, are still up 11.91% for the year.
Multi-strategy funds like Schonfeld Strategic Partners have also posted positive returns, with a 1.1% gain in June alone, underscoring the divergence in performance across hedge fund categories.
The broader market’s strength has been a double-edged sword.
The S&P 500’s 5.2% rise since January 2025, fueled by robust corporate earnings and optimism around trade deal negotiations, has supported traditional equity-focused funds.
However, the same market dynamics have proven treacherous for trend-followers, whose models are less effective in choppy, trendless markets.
The core issue lies in the design of trend-following strategies, which depend on sustained directional moves in asset prices.
Yao Hua Ooi, co-head of macro strategies at AQR Capital Management, noted in 2022 that these strategies perform best when volatility is high and trends are clear.
In 2025, however, markets have been whipsawed by conflicting signals—initial fears of a bear market in April gave way to a rapid recovery, with the S&P 500 climbing 8 record highs since June 27.
This volatility, coupled with sudden policy shifts, has led to significant drawdowns for funds reliant on predictive algorithms.
Additionally, the scale of tariff-related disruptions cannot be overstated.
President Trump’s “Liberation Day” tariffs, announced earlier in 2025, initially sent markets into a tailspin, with the S&P 500 hitting its lowest level in over a year in April.
While subsequent softening of these policies has spurred a market rebound, the uncertainty has made it difficult for trend-following models to maintain profitable positions.
What It Means For The Industry
The current losses mark a stark contrast to the historical performance of trend-following funds, which manage approximately $297 billion of the $4.9 trillion hedge fund industry, according to BarclayHedge.
In 2022, an index of the 10 largest trend-following funds compiled by Société Générale soared nearly 37%, far outpacing the broader hedge fund index’s 3.8% gain.
The 2025 downturn, however, signals a rare misstep for an industry segment known for its diversification benefits.
Posts on X reflect growing concern among investors, with some noting that the 9.6% loss in the first half of 2025 is unprecedented for trend-following funds since 1998.
This sentiment underscores the pressure on fund managers to recalibrate their models or risk further capital outflows, a challenge the industry has faced in recent years with $75 billion in net withdrawals in 2023 alone.
Despite the grim outlook, some analysts remain cautiously optimistic.
The potential for central banks to inject liquidity, as seen in China’s recent 10 trillion renminbi stimulus, could stabilize markets and create new trends for systematic funds to exploit.
Additionally, the upcoming August 1 tariff deadline looms as a critical test for markets, with investors closely watching whether President Trump will escalate or moderate his trade policies.
For now, the hedge fund industry as a whole continues to navigate a complex landscape.
While trend-following funds face their toughest year in decades, the resilience of other strategies highlights the diversity of approaches within the sector.
As markets brace for further volatility, the ability of trend-followers to adapt to this new era of uncertainty will be crucial to their survival.
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