Andreas F. Clenow, CMT
Principal ACIES Asset Management
Author of Following the Trend
THIS TIME IT’S DIFFERENT HOW YIELDS ARE CHANGING TREND FOLLOWING
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
SEMINAR OVERVIEW 1. Demonstration that most trend followers are the
same. • Basics of professional trend following. • A solid system to approximate the CTA industry. • Replicating CTA hedge funds.
2. Demonstration of the yield problem. • Return attribution over time. • Why yields have been key. • Potential problem.
3. The future.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
BASICS OF PROFESSIONAL TREND FOLLOWING • Simple Rules
• Enter in the direction of the trend.
• Stay for as long as it lasts.
• Get out fast when prices goes against you.
• Expect to lose 60-70% of all trades.
• Winners win big. Losers lose small.
• Trade a large number of diverse markets.
• Tilt probabilities slightly in your favor and keep repeating.
• Almost all trend followers do the exact same thing.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
EXAMPLE CHARTS
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
KEYS TO TREND FOLLOWING • Buy rules are not important.
• Indicators are not important.
• The concept is what matters.
• Enter every potential trend.
• Never miss a breakout.
• Follow enough markets in enough asset classes.
• The key to professional trend following is diversification.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
WHY MOST FAIL AT TREND FOLLOWING • Focus on the wrong things: Entry rules and indicators.
• Perception that entry rules are important.
• Excessive risk.
• Focus on single asset class.
• Failure to properly diversify.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
A SINGLE SET OF RULES • Almost all CTA funds can be replicated
and reverse engineered using a single set of simple rules.
• The exact rules are not important. Only the concept.
• The rules used here:
• Enter only in the direction of the trend. 50/100 day EMA used as filter.
• Buy open 50 day highs. Sell open 50 day lows.
• Trailing stop at 3 ATR.
• Positions volatility adjusted using ATR, targeting 20 basis points impact.
• Fees of 1.5% + 15% loaded.
• Round trip cost of 10 USD + realistic slippage.
• Excess capital in <=2 Yr notes.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
INVESTMENT UNIVERSE • Without diversification, trend following is likely to
fail.
• A broad universe is required.
• For demonstration, equal weighted universe is used.
Agricultural Commodities
Non-agricultural Commodities
Currencies Equities Rates
Cotton Gasoil AUD/USD Cac 40 Bund Corn Crude Oil GBP/USD Dax Schatz Lumber Heating Oil EUR/USD FTSE 100 Long Gilt Live Cattle Natural Gas JPY/USD HS China Ent. Canadian Bankers’
Acceptance Lean Hogs Gasoline NZD/USD Hang Seng US 2 Year Oats Gold EUR/CHF Nasdaq 100 US 10 Year Rough Rice Copper EUR/GBP Nikkei 225 Eurodollar Soybeans Palladium EUR/JPY S&P 500 Euroswiss Sugar Platinum CHF/USD EuroStoxx 50 Euribor Wheat Silver CAD/USD Russel 2000 Short Sterling
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
STRATEGY CHARACTERISTICS Strategy MSCI World
Compound Annual Return 12.5% 5.1% Max Loss -26.5% -53.7% Skew 0.99 -0.62
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
ALL TF MODELS ARE THE SAME • The variations in trend following models are
minor.
• There are not that many different ways this can be done.
• The simple model presented can be used to approximate most CTA funds.
• Three main ways that CTA funds differ.
• Asset Mix.
• Risk Level.
• Time Frame.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
PROVING THAT THEY ARE THE SAME • Three moving parts only.
• Choose between three investment universes.
• Large Set
• Commodity Focus
• Financial Focus
• Risk level – Toggle position sizes up or down.
• Time frame – Move stop distance.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
THE SINGLE SYSTEM INDUSTRY
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
PROVING THAT THEY ARE THE SAME
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
CONCLUSIONS SO FAR • Trend Followers are doing the same thing.
• They’re all using minor variations of the same trading model.
• Over time, they have been highly profitable for everyone involved.
• Massively outperforming traditional investment methods.
• Still, a single and simple strategy can replicate them.
• If we can replicate them, we can understand their allocations and attributions.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
TOTAL ATTRIBUTION – 23 YEARS • Rates Trading + Interest Income ~
50%
• Despite equal weighed allocation, rates dominated the PnL.
• Equities the least profitable.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
RETURN ATTRIBUTION OVER TIME
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
HOW DID RATES DOMINATE THE RETURNS • Interest income
• Free money from your friendly neighborhood government. • Could add 5-6 percent return per year in the 90s.
• Long Rates • Declining yields in the Western world. • Prices trending up for decades. • Declining yields + roll yield provided optimal trend following
environment.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
WHY ARE THINGS DIFFERENT NOW • Yields approach zero
• No more free money on excess capital.
• Limited upside potential for prices.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
LOW YIELD IMPACT ON TREND MODELS • Yields wobbles around at low levels.
• Less volatility in prices => Larger position sizes.
• Constant false upside breakouts.
• Asymmetric risk situation.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
CONCLUSIONS SO FAR • Traditional trend following models will struggle in low yield
environment.
• Most CTA funds use traditional trend following models.
• => Most CTA funds will have to adapt their strategies.
• Systematic trading rule #1:
• Always Follow Your Trading Rules.
• Systematic trading rule #2:
• Know When to Override Your Trading Rules.
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
• Many CTA funds have compounded at 20%+ in the past.
• Realistically, returns will go down across the board.
• The outperformance against traditional investments has been massive.
• Outperformance will likely continue, albeit not as extreme.
• Some CTA Funds will struggle.
• Large funds are mainly confined to financial futures. Without FI/STIR, they will be forced to concentrate on FX.
• Advantage for smaller funds who can trade more commodities.
WHAT CAN WE EXPECT FROM THE FUTURE
Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
OH, DID I MENTION THAT I WROTE A BOOK? • #1 International Best Seller in Futures / Commodities.
• Top Reviews by
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Andreas F. Clenow, CMT Tradersplace.net – The Professional Network for Serious Traders
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