Buying and holding Bitcoin has, for believers in the flagship cryptocurrency, been a profitable strategy this year with BTC moving up over 56% year-to-date. However, a growing number of quantitative hedge funds and academic researchers are proposing a different approach to take better advantage of the cryptocurrency’s swings: trend following.

This quantitative strategy, which capitalizes on market momentum, appears particularly well-suited to Bitcoin’s notorious price fluctuations. Major hedge fund managers like Man Group Plc and scholars from institutions like Cambridge University are finding evidence to support this, according to a recent Bloomberg report.

Quantitative  funds like the $2 billion Florin Court Capital have been putting trend-following strategies into practice since 2017, with their exposure to crypto boosting their overall performance, the report notes.

Tarek Abou Zeid of Man AHL was quoted saying:

  • The risk-adjusted returns of a momentum type strategy, regardless of the speed, have historically been better than one of buy and hold. Trend following is all about extracting behavioral biases. In crypto, you see excesses, you see FOMOs, you see panics — which can be captured with those systematic strategies.

Research conducted by Man Group’s Man AHL division indicates that a long-short trend strategy applied to both BTC and ETH has outperformed buy-and-hold strategies for these coins since 2017, when adjusted for volatility.

This strategy captures gains during market rallies and takes short positions when the trend reverses. Man Group, with record assets under management exceeding $167.5 billion at the end of 2023, has previously acknowledged incorporating cryptocurrencies into their existing strategies.

AQR Capital Management, another quantitative investment giant, has also publicly stated their use of trend-following strategies for cryptocurrency futures while Florin Court, specializing in alternative and exotic markets, has seen a significant performance boost this year after incorporating Bitcoin and Ether trading into their strategies, which began in 2017.

A 2023 study by Monash University researchers found that trend-following strategies generally outperformed buy-and-hold approaches for Bitcoin and Ether, while another study, conducted by researchers affiliated with Cambridge University, identified “consistent and attractive returns” for a similar strategy applied between 2011 and 2019.

The strategy isn’t limited to sophisticated hedge funds as an exchange-traded fund, the Global X Bitcoin Trend Strategy ETF (BTRN), started offering exposure to it last month. The ETF allocates investments between BTC futures contract and U.S. Treasury bills with maturities between one and three months based on trends.

Featured image via Unsplash.