Systematic Trend-Following with Adaptive Portfolio Construction: Enhancing Risk-Adjusted Alpha in Cryptocurrency Markets

TL;DR

This paper introduces AdaptiveTrend, a novel cryptocurrency trading framework that combines high-frequency trend-following with adaptive portfolio management, significantly improving risk-adjusted returns and resilience across various market regimes.

Contribution

The paper presents a multi-component adaptive trading system with innovative volatility calibration, asset selection, and asymmetric allocation, advancing systematic crypto trading strategies.

Findings

Achieved an annualized Sharpe ratio of 2.41

Maximum drawdown of -12.7%

Outperformed benchmark strategies and buy-and-hold portfolios

Abstract

Cryptocurrency markets exhibit pronounced momentum effects and regime-dependent volatility, presenting both opportunities and challenges for systematic trading strategies. We propose AdaptiveTrend, a multi-component algorithmic trading framework that integrates high-frequency trend-following on 6-hour intervals with monthly adaptive portfolio construction and asymmetric long-short capital allocation. Our framework introduces three key innovations: (1) a dynamic trailing stop mechanism calibrated to intra-day volatility regimes, (2) a rolling Sharpe-ratio-based asset selection procedure with market-capitalization-aware filtering, and (3) a theoretically motivated asymmetric 70/30 long-short allocation scheme grounded in the empirical positive drift of crypto markets. Through extensive out-of-sample backtesting across 150+ cryptocurrency pairs over a 36-month evaluation window (2022-2024), AdaptiveTrend achieves an annualized Sharpe ratio of 2.41, a maximum drawdown of -12.7%, and a Calmar ratio of 3.18, significantly outperforming benchmark trend-following strategies (TSMOM, time-series momentum) and equal-weighted buy-and-hold portfolios. We further conduct rigorous robustness analyses including parameter sensitivity, transaction cost modeling, and regime-conditional performance decomposition, demonstrating the strategy's resilience across bull, bear, and sideways market conditions.