Following the Trend

An up-to-date and practical roadmap for diversified futures trading using CTA fund strategies

In the newly revised second edition of Following the Trend: Diversified Managed Futures Trading, renowned hedge fund founder and asset manager Andreas F. Clenow presents a systematic asset management methodology in a way that allows readers to emulate the success of CTA industry professionals. In the book, you’ll find performance and attribution details for every year between 2002 and 2021 and detailed explanations of how the markets, industry, and strategy have evolved between the publication of the first edition and today.

The author also offers:

• Detailed discussions of whether CTA hedge funds continue to show high internal correlation and exhibit homogeneous behaviour
• The impact of low and negative interest rate environments, massive inflows into equity markets, and the rise of quant trading firms
• Explorations of the combination of different types of trading models to enhance performance, complete with rulesets and fulsome analyses

A ground-breaking and thoroughly incisive examination of the commodity trading advisor industry, Following the Trend: Diversified Managed Futures Trading is an essential volume for sophisticated retail traders, day traders, private investors, investment managers, portfolio managers, and institutional investors.

1. Foreword by Jerry Parker 1

2. Forewords to the First Edition 2

3. Preface 4

1. Cross Asset Trend Following with Futures 1

Diversified Trend Following in a Nutshell 3

The Traditional Investment Approach 5

The Case for Diversified Managed Futures 9

Managed Futures as a Business 14

Differences between Running a Trading Business and Personal Trading 19

Marketability of Your Strategy 19

Volatility Profile 20

Subscriptions and Redemptions 22

Psychological Difference 23

2. Futures Data 25

Futures as an Asset Class 25

Futures Exchanges 25

Futures and Currency Exposure 25

Futures Data 28

Dealing with Limited Life Span 28

Term Structure 31

Basis Gaps 33

The Change in how Continuations are used 36

Futures Sectors 37

Agricultural Commodities 37

Non-Agricultural Commodities 40

Currencies 44

Equities 46

Rates 49

3. Constructing Diversified Futures Trading Strategies 53

They are all doing the Same Thing 54

Cracking Open the Magic Trend Following Black Box 58

Investment Universe 58

Position Sizing 61

Slippage and Commission 64

Strategy Personality 65

Anatomy of a Trend Following Strategy 66

4. Two Basic Trend Following Strategies 69

Strategy Performance 72

Correlations Between Strategies 80

Conclusions from the Basic Strategies 82

Combining the Strategies 83

Trend Filter 83

A Core Trend Following Strategy 85

Controlling the Risk Level 87

Cash Management and the Effect of Free Government Money 90

Loading Fees 96

5. In-Depth Analysis of Trend Following Performance 98

Strategy Behaviour 98

Strategy Long Term Performance 100

Crisis Alpha 103

Trading Direction 105

Sector Impact 108

Putting Leverage into Context 111

As a Complement to an Equity Portfolio 117

6. Year by Year Review 121

How to read this chapter 122

2002 123

2003 132

2004 139

2005 145

2006 151

2007 156

2008 162

2009 169

2010 174

2011 179

2012 185

2013 191

2014 195

2015 200

2016 205

2017 209

2018 215

2019 220

2020 226

2021 232

Year by Year Conclusions 239

7. Counter Trend Trading 244

Building a Counter Trend Model 245

Counter Trend Performance 249

8. Systematic Trading without Time-series 252

Tem Structure 253

Measuring Term Structure 255

Using Term Structure for Trading 258

Limitations of Term Structure Models 260

9. Tweaks and Improvements 262

Trading Synthetic Contracts 263

Correlation Matrices, Position Sizing and Risk 265

Optimisation and its Discontents 267

Style Diversification 269

Volatility Based Stop Loss 272

10. Practicalities of Futures Trading 275

Required Asset Base 275

Going Live 277

Execution 279

Cash Management 281

Higher Volatility in Drawdown Mode 284

Portfolio Monitoring 285

Strategy Follow-Up 285

11. Modelling Futures Strategies 287

Why you need to do your own research 288

A Word about Programming 289

Settling on a research environment 289

Python and Zipline 291

Sourcing your data 293

Data Storage 295

The Dangers of Backtesting 295

12. Does Trend Following work on Stocks? 297

Define Trend Following 297

What about ETFs? 300

13. Trading for a Living 302

How much does a good trader make? 302

Getting a Trading Job 305

Trading your own Money 308

Trading OPM 309

Reasons not to Trade OPM 311

14. Final Words of Caution 313

Diminishing Returns of Futures Funds 313

Setting the Initial Risk Level 314

Going Live 316

15. Bibliography 318

Author Website 318

ANDREAS F. CLENOW is a Swedish Swiss author, financier, and entrepreneur based in Zurich, where he is the Chief Investment Officer of a family office. He has been a tech entrepreneur, a financial consultant, hedge fund manager, financial engineer, quantitative trader, financial advisor, board member, and a middle management corporate bureaucrat during his illustrious career.
He is the author of the global best sellers Following the Trend, Stocks on the Move, Trading Evolved and A Most Private Bank and he can be reached though his website, www.clenow.com

For the past 40 or so years, during bull and bear markets, there has been a group of hedge funds and professional traders which have consistently outperformed traditional investment strategies. 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 PhDs in their research teams. Yet, it is possible to replicate their trading performance with relatively simple models. These traders are trend-following cross-asset futures managers, also known simply as CTAs. Many books are written about them. No other explains their strategies in such detail as to enable the reader to emulate their success and create their own trend-following trading business.

Following the Trend explains why most 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 lean 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 at a large scale and where the real problems and opportunities lie.

This second edition of the global best seller tells the story of what happened to the strategy and industry in the ten years since the first publication with an updated year-by-year review explaining how trend following coped with changing market environments. Further adding to the trader’s toolbox, you will be introduced to valuable and complementary futures trading styles, showing how the industry has adapted and combined trading styles to achieve higher risk-adjusted results in the long run. These advanced trading techniques are outlined in detail with complete rule sets and in-depth analysis.

“Following the Trend is an absolute must read for anyone with an interest in systematic trend following whether as an investor, trader, or aspiring manager. The book is at the same time comprehensive and easy to read. As someone who has designed these types of systems, it is absolutely clear to me that Clenow writes as a knowledgeable practitioner, not an armchair theoretician. I admired Clenow’s repeatedly pointing out real life difficulties and drawbacks and his refusal to use optimization or well-chosen examples as virtually all other books of this type tend to do. In short, this is a real life presentation of the subject matter. In one particularly innovative chapter, Clenow creates close replications of some of the best and largest trend-following funds by combining his set of simple, non-optimized rules with variations in portfolio composition and volatility level.”

— Jack Schwager, Author of the Market Wizards and Schwager on Futures series, and Market Sense and Nonsense

Praise for the first edition

“Andreas F. Clenow has written a very unique book that provides a rare insight into how an actual CTA hedge fund manager trades. Backing up all his claims with hard research, he cuts right to the point and educates the reader about how the real value of trend-following futures trading is achieved and how to replicate the success of the major hedge funds. A must read and an essential part of any serious trader’s library!”

—Carl Gyllenram, CEO, Ability Asset Management and Author of the Trading with Crowd Psychology

“Following the Trend truly captures what it is to be a systematic manager day in and day out. It is a must read for someone with ambitions to create his own systematic fund; highly recommended for everyone who is planning to invest in or understand the intricacies of systematic strategies.”

—Sanjiv Kumar, Principal, Fort LP.

“In this excellent work, Andreas has shed light on some very important and previously undocumented aspects of trend following. This book should be of great interest to Managed Futures managers and investors alike.”

—Nigol Koulajian, Founder, Quest Partners, LLC

“This is a must-read for anyone involved in trading markets. The thoughtful analysis of how models work and fail will help anyone interested in trading futures. This book adds to the short list of intelligent analysis available for investors to beat the market.”

—Robert Savage, CEO, Track.com

“If you want to trade professionally by managing other people’s money, then this is one of the first books I recommend that you read.”

— Van K. Tharp, Ph.D., Author of the Trade Your Way to Financial Freedom, Super Trader, and The Definitive Guide to Position Sizing Strategies.

“Trend following is the largest sub-category of managed futures, driven by the market environment of price persistence. Andreas has taken a complicated topic and provided an insightful viewpoint.”

— Mark H. Melin, Author of the High-Performance Managed Futures and Editor of Opalesque Futures Intelligence

“A no- nonsense view into the real world of trend following and how it can be done.”

—Kathryn M. Kaminski, PhD, CIO and Founder, Alpha K Capital