Because of the adaptive nature of position sizing, trendfollowing strategies can generate the positive skewness of their returns, when infrequent large gains compensate overall for frequent small losses. Further, trendfollowers can produce the positive convexity of their returns with respect to stock market indices, when large gains are realized during either very bearish or very bullish markets. The positive convexity along with the overall positive performance make trendfollowing strategies viable diversifiers and alpha generators for both longonly portfolios and alternatives investments.
I provide a practical analysis of how the skewness and convexity profiles of trendfollowers depend on the trend smoothing parameter differentiating between slowpaced and fastpaced trendfollowers. I show how the returns measurement frequency affects the realized convexity of the trendfollowers. Finally, I discuss an interesting connection between trendfollowing and stock momentum strategies and illustrate the benefits of allocation to trendfollowers within alternatives portfolio.
Interested readers can download the pdf of my paper Trend following strategies for tailrisk hedging and alpha generation or access the paper through SSRN web
Key takeaway
1. Riskprofile of quant strategies
The skewness and the convexity of strategy returns with respect to the benchmark are the key metrics to assess the riskprofile of quant strategies. Strategies with the significant positive skewness and convexity are expected to generate large gains during market stress periods and, as a result, convex strategies can serve as robust diversifiers. Using benchmark Eurekahedge indices on major hedge fund strategies, I show the following.

 While long volatility hedge funds produce the positive skewness, they do not produce the positive convexity.
 Tail risk hedge funds can generate significant skewness and convexity, however at the expense of strongly negative overall performance.
 Trendfollowing CTAs can produce significant positive convexity similar to the tail risk funds and yet trendfollowers can produce positive overall performance delivering alpha over long horizons.
 On the other spectrum, short volatility funds exibit significant negative convexity in tail events.