Andreas F. Clenow 
Following the Trend 
Diversified Managed Futures Trading

During bull and bear markets, there is a group of hedge funds
and professional traders which have been consistently outperforming
traditional investment strategies for the past 30 odd years. They
have shown remarkable uncorrelated performance and in the great
bear market of 2008 they had record gains. These traders are
highly secretive about their proprietary trading algorithms and
often employ top Ph Ds in their research teams. Yet, it is possible
to replicate their trading performance with relatively simplistic
models. These traders are trend following cross asset futures
managers, also known as CTAs. Many books are written about
them but none explain their strategies in such detail as to enable
the reader to emulate their success and create their own trend
following trading business, until now.

Following the Trend explains why most hopefuls fail by
focusing on the wrong things, such as buy and sell rules, and
teaches the truly important parts of trend following. Trading
everything from the Nasdaq index and T-bills to currency crosses,
platinum and live hogs, there are large gains to be made regardless
of the state of the economy or stock markets. By analysing year by
year trend following performance and attribution the reader will be
able to build a deep understanding of what it is like to trade
futures in large scale and where the real problems and
opportunities lay.

Written by experienced hedge fund manager Andreas Clenow, this
book provides a comprehensive insight into the strategies behind
the booming trend following futures industry from the perspective
of a market participant. The strategies behind the success of this
industry are explained in great detail, including complete trading
rules and instructions for how to replicate the performance of
successful hedge funds. You are in for a potentially highly
profitable roller coaster ride with this hard and honest look at
the positive as well as the negative sides of trend following.

Table of Content

Foreword xi

Preface xiii

Acknowledgements xvii

1 Cross-Asset Trend Following with Futures 1

Diversified Trend Following in a Nutshell 2

The Traditional Investment Approach 4

The Case for Diversified Managed Futures 7

Criticism of Trend-Following Strategies 8

Managed Futures as a Business 10

Differences Between Running a Trading Business and Personal Trading 12

Marketability of your strategy 13

Volatility profile 13

Subscriptions and redemptions 15

Psychological difference 15

2 Futures Data and Tools 17

Futures as an Asset Class 17

Futures exchanges 21

Futures and currency exposure 22

Futures Data 24

Dealing with limited life span 24

Term structure 26

Basis gaps 28

Futures Sectors 30

Agricultural commodities 31

Non-agricultural commodities 33

Currencies 37

Equities 38

Rates 39

Required Tools 42

A word about programming 42

Development environment 42

Data vendors 44

Data storage 44

3 Constructing Diversified Futures Trading Strategies 45

They Are All Doing the Same Thing 45

Cracking Open the Magic Trend-Following Black Box 49

Investment universe 52

Position sizing 53

Slippage, commission and other costs 56

Interest on liquidity 56

Strategy personality 56

Anatomy of a trend-following strategy 57

4 Two Basic Trend-Following Strategies 61

Strategy Performance 63

Correlations between strategies 68

Parameter stability 70

Conclusions from the basic strategies 72

Improving the Strategies 72

Trend filter 73

An improved stop loss mechanism 75

Controlling the risk level 80

Parameter stability check 84

A solid foundation for futures trading 86

Core strategy rules 87

5 In-Depth Analysis of Trend-Following Performance 89

Strategy Behaviour 89

As a Complement to an Equity Portfolio 91

Trading Direction 94

Sector Impact 97

Cash Management and the Effect of Free Government Money 101

Putting Leverage into Context 104

6 Year By Year Review 109

How to Read this Chapter 110

1990 110

1991 117

1992 122

1993 127

1994 132

1995 138

1996 142

1997 148

1998 153

1999 158

2000 163

2001 168

2002 174

2003 178

2004 184

2005 189

2006 194

2007 200

2008 205

2009 211

2010 216

2011 221

Conclusions of Year by Year Review 227

7 Reverse Engineering the Competition 229

Investment Universes 230

Comparing the Investment Universes 234

Replicating Existing Funds 235

Campbell Composite 236

Sunrise Capital Diversified 239

Palm Trend Fund 240

Transtrend Standard Risk Program 242

Mulvaney Capital Management Global Markets Fund 243

More funds 245

Conclusions 248

8 Tweaks and Improvements 249

Trading Multiple Time Frames 249

Trading Synthetic Contracts 251

Adding a Counter-Trend Component 252

Intraday Stops 253

Correlation Matrices, Position Sizing and Risk 255

The Rollover Effect 257

Optimisation and its Discontents 258

9 Practicalities of Futures Trading 261

Required Asset Base 261

Going Live 262

Execution 263

Cash Management 264

Higher Volatility in Drawdown Mode 266

Portfolio Monitoring 267

Strategy Follow-Up 268

10 Final Words of Caution 269

Diminishing Returns of Futures Funds 269

Ending Up in the Soup Bowl 271

Setting the Initial Risk Level 272

Bibliography 275

Official Book Website 275

Research Papers, Articles and Websites 275

Books 276

Index 277

About the author

Andreas F. Clenow CMT, is a principal at ACIES Asset Management with headquarters in Zurich, Switzerland, which he joined after having successfully established his own hedge fund. He specialises in developing and trading quantitative strategies across all asset classes. Prior to his role as a hedge fund manager he had a lightning career with Reuters, where he, as Global Head of Equity and Commodity Quant Modelling, was one of the youngest ever in such a role. He was also the Global Head of Institutional Charting and Technical Analysis for Equis International before departing for the hedge fund world.