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Following the Trend


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Table of Contents

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 Offi cial Book Website 275 Research Papers, Articles and Websites 275 Books 276 INDEX 277

About the Author

Andreas 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 trader 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.


?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 trendfollowing funds by combining his set of simple, non-optimized rules with variations in portfolio composition and volatility level.??Jack Schwager, Author of Market Wizard and Schwager on Futures series and Market Sense and Nonsense

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