Maybe I’m totally lost on this one, but as a trend follower of equities, I would only use a benchmark (such as the S&P) to prove “buy and hold” doesn’t work. However, it seems to me a manager could only use a benchmark that includes positions they track. And even then, it probably doesn’t make sense, because some managers take different levels of risk. For example, trying to compare Abraham Trading and Dunn Capital to a benchmark would leave one scratching their head. I think it would be better to stick with Sharpe and MAR ratios.

But again, I may have misunderstood the question.

I think it is best to compare to stock indices. In the longer run absolute returns are what we all want whether we admit it or not…so comparing to a typical “hold stocks” investment is proper. That’s the baseline.

Michael you make a good point.

The whole question of how much you make or lose is based on an average that comes from your trading years and from historical testing, but i think a most important indicator is the downside volatility, and usually has direct correlation with the upside…

No one can make a lot but lose little, so most important is the stability in your equity up trend, the risk management controls that factor in diversity, moments of uncertainty (when price movement doesn’t conform to mathematics). Other than these risks, the rest is acceptable in a risk management system that adjusts exposure according to these factors.

So let’s say your whole portfolio is stocks and you compare with the S&P, any trend following system can match the S&P and outperform it, but the swings you take until you have reach to that point is what matters and how you decide your exposure is at each point.

Also to promise a certain average of winning based on the S&P or what ever might lead the client to find it as a benchmark, which in reality you are trading long and short so the S&P might decline slowly with high short term volatility that would not result in any significant trend because you would strike out a lot, and after sometime it has declined a lot but your equity has not gained as such because of good risk control, so I suggest not to promise profit, but to promise stability.

In my view, you should benchmark against an index that has approximately the SAME or LESS risk than your portfolio. Assuming that you then beat the benchmark, this will demonstrate in a clear fashion your ability to produce superior risk adjusted returns.

The question, is how do you measure risk in order to do such a selection. You would need to look at factors like Maximum Drawdown, Downward Standard Deviation of returns, Ulcer Index, etc. in order to find the best fit.

One thing I was thinking of doing for myself was actually inspired from your book “Trend Following”, Michael (one of many inspirations

You mentioned (pg 15) Dr Patrick Welton who constructed 120 trend following models (reversal or not, price/volatility breakout, different durations, etc.) to show that trend following was working.

I am thinking of building a collection of (basic) trend following systems and measure their different performance (aggregated by various metrics) to get an overview of “the state of trend following”. By comparing the performance of the system that you want to trade with that “aggregated benchmark” (adjusted for risk, leverage and underlying instruments) should give you a good idea of hwo you are doing.

Alternatively I have started compiling monthly performance of what I call Trend Following Wizards (in there: http://www.automated-trading-system.com/resources/trend-following-wizards-fund-performance/)to get a pseudo Trend following index (since various CTA indexes are not solely dedicated to trend following funds)