Revisiting the Structure of Trend Premia: When Diversification Hides Redundancy

TL;DR

This paper challenges the traditional view that combining multiple trend horizons enhances diversification by showing that a simplified barbell approach focusing on short- and long-term trends often yields better performance and reduces redundancy.

Contribution

It introduces a Bayesian optimization framework to dynamically allocate trend exposure across assets and horizons, revealing the limited benefit of medium-term trends and proposing a simplified, more effective trend structure.

Findings

Medium-term trend contribution is minimal when short- and long-term trends are included.

Removing the 125-day horizon improves Sharpe ratios and reduces complexity.

A barbell structure effectively captures performance while minimizing redundancy.

Abstract

Recent work has emphasized the diversification benefits of combining trend signals across multiple horizons, with the medium-term window-typically six months to one year-long viewed as the "sweet spot" of trend-following. This paper revisits this conventional view by reallocating exposure dynamically across horizons using a Bayesian optimization framework designed to learn the optimal weights assigned to each trend horizon at the asset level. The common practice of equal weighting implicitly assumes that all assets benefit equally from all horizons; we show that this assumption is both theoretically and empirically suboptimal. We first optimize the horizon-level weights at the asset level to maximize the informativeness of trend signals before applying Bayesian graphical models-with sparsity and turnover control-to allocate dynamically across assets. The key finding is that the medium-term band contributes little incremental performance or diversification once short- and long-term components are included. Removing the 125-day layer improves Sharpe ratios and drawdown efficiency while maintaining benchmark correlation. We then rationalize this outcome through a minimum-variance formulation, showing that the medium-term horizon largely overlaps with its neighboring horizons. The resulting "barbell" structure-combining short- and long-term trends-captures most of the performance while reducing model complexity. This result challenges the common belief that more horizons always improve diversification and suggests that some forms of time-scale diversification may conceal unnecessary redundancy in trend premia.