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FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies

A risk manager at a multi-strategy allocator reviews a managed futures fund that uses a 12-month moving-average crossover rule across 40 futures markets. Which environment would most likely produce the fund's worst performance?

Range-bound, choppy markets with frequent reversals hurt trend-following managed futures most, because signals are triggered near turning points and generate repeated whipsaw losses. Sustained trends, even downward ones such as equity declines or rising rates, tend to help since the strategy can go long or short.

  1. AA prolonged, sustained trend in commodity prices
  2. BA volatile, range-bound market with frequent reversals after apparent breakoutsCorrect
  3. CA sharp equity market decline lasting several months
  4. DA persistent rise in interest rates over two years

Explanation

Trend-following earns returns from persistent price moves. In choppy, range-bound markets, signals trigger entries just before reversals, producing repeated small losses (whipsaws). Sustained trends in any asset class, including falling equities or rising rates, are generally profitable because the model can go short.

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