In an interview about the setting up AHL Michael Adams made the following quote (the quote relates to their pre AHL days when they acted as consultants):
I think because we we re doing work for Gilt market makers who were really struggling with the fact that they'd lost their franchises and no longer had a protected access to that market. We did some work for them and discovered that we could model their P&L to within +/ 1/2% p er quarter by simulating it using a trend following trailing strategy. I always saw that as a huge insight because it told us that trend following is really a systematic way of thinking about market making.
I would have thought that market making and trend following would be negatively correlated, trend following benefits from price volatility while market making does not. Is this correct?
However using a negative correlation like this (if it exists) does not appear a very natural way to approximate the PnL generated from a market making strategy.
So my questions are is my interpretation of how the PnL from the market making strategy is inferred from the tend following strategy correct?
If not how how did they appreciate the market making PnL from the trend following PnL?