Clenow

Andreas F. Clenow, CMT

Principal ACIES Asset Management

Author of Following the Trend

[email protected]

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.


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.


EXAMPLE CHARTS


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.


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.


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.


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


STRATEGY CHARACTERISTICS Strategy MSCI World

Compound Annual Return 12.5% 5.1% Max Loss -26.5% -53.7% Skew 0.99 -0.62


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.


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.


THE SINGLE SYSTEM INDUSTRY


PROVING THAT THEY ARE THE SAME


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.


TOTAL ATTRIBUTION – 23 YEARS • Rates Trading + Interest Income ~

50%

• Despite equal weighed allocation, rates dominated the PnL.

• Equities the least profitable.


RETURN ATTRIBUTION OVER TIME


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.


WHY ARE THINGS DIFFERENT NOW • Yields approach zero

• No more free money on excess capital.

• Limited upside potential for prices.


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.


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.


• 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


OH, DID I MENTION THAT I WROTE A BOOK? • #1 International Best Seller in Futures / Commodities.

• Top Reviews by

• Jack Schwager Larry Connors

• Curtis Faith Sanjiv Kumar

• Mebane Faber Nigol Koulajian

• Van Tharp Robert Savage

• Mark Melin Kathryn Kaminski

• And many more.

• Just back in stock on Amazon after the first edition sold out in less than half a year!


OH, AND DID YOU NOTICE THE WEBSITE PLUG AT THE BOTTOM OF EACH SLIDE? • Tradersplace.net is a completely free website

for professional traders.

• Tradersplace is a friendlier and more professional site.

• Real profiles only. Real names, real backgrounds.

• Discuss real trading with the best.

• Discount deals on market data, simulation software and brokerage services.

• A new, modern network far from the anonymous bulletin sites of the past.

Clenow

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