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 PhDs 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.
Foreword xi Preface xiii Acknowledgements xvii 1 CROSS-ASSET TREND FOLLOWING WITH FUTURES 1 Diversifi ed Trend Following in a Nutshell 2 The Traditional Investment Approach 4 The Case for Diversifi ed 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 profi le 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 fi lter 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 Diversifi ed 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
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