Following the Trend: Diversified Managed Futures Trading

Author: Andreas F. Clenow | Categories: Trend Following, Futures, Trading Systems, Quantitative Finance

Executive Summary

"Following the Trend" by Andreas F. Clenow, published in 2013 by Wiley, is a transparent, data-driven examination of trend following strategies applied to diversified futures portfolios. Clenow, a hedge fund manager based in Zurich, wrote the book as what he describes as a "300-page research paper" -- a completely disclosed, rigorously tested trend following system that readers can verify and implement. The book demystifies the managed futures industry by showing exactly how trend following works, why it works, and what realistic expectations should be.

The book is notable for its intellectual honesty: Clenow makes no extravagant claims about returns, honestly discusses drawdowns and losing periods, and provides complete rules so that readers can reproduce his results. It became a surprise bestseller in the finance book world, landing Clenow in the top 5% of finance book authors.

Core Thesis & Arguments

Clenow argues that cross-asset trend following with futures is one of the most robust and well-documented trading strategies available, offering genuine diversification benefits and "crisis alpha" -- the tendency to perform well during equity market crises. His central contention is that simple trend following systems, applied across a diversified portfolio of futures markets, have produced consistent positive returns over decades, and that the core reason is behavioral: human beings systematically over-react and under-react to information, creating trends that persist longer than rational models predict.

Chapter-by-Chapter Analysis

Chapter 1: Cross-Asset Trend Following with Futures

The case for trend following: historical performance, the crisis alpha property, and why diversified futures trend following works.

Chapters 2-3: Futures Data and Strategy Construction

Practical considerations for futures data: continuous contracts, roll methodology, back-adjustment, and the construction of diversified portfolios across sectors (bonds, currencies, commodities, equities).

Chapters 4-5: Two Basic Strategies and Performance Analysis

Presentation of two complete trend following strategies (one using moving average crossovers, one using breakouts) with full rules, backtested performance, and in-depth statistical analysis.

Chapters 6-7: Year-by-Year Review and Reverse Engineering

Detailed annual performance analysis from 1990-2012, plus reverse engineering of major CTA (Commodity Trading Advisor) returns to show how they map to simple trend following models.

Chapters 8-10: Tweaks, Improvements, and Practicalities

Practical considerations including position sizing, portfolio construction, brokerage costs, margin requirements, and the reality of running a trend following program.

Key Concepts & Frameworks

• Cross-Asset Diversification: Trading across bonds, currencies, commodities, and equity index futures for maximum diversification.
• Crisis Alpha: The documented tendency of trend following to profit during equity market crises.
• Moving Average Crossover Systems: Using dual moving average crossovers for trend identification.
• ATR-Based Position Sizing: Sizing positions based on Average True Range to equalize risk contribution.
• Continuous Contract Construction: The critical importance of proper futures data handling for backtesting.

Practical Trading Applications

1. Trade a diversified portfolio of futures across multiple sectors to capture trends wherever they occur.
2. Use ATR-based position sizing to equalize risk contribution across different markets.
3. Accept extended periods of drawdown as the price paid for crisis alpha and long-term returns.
4. Keep the system simple -- complexity does not improve robustness.
5. Properly construct continuous futures contracts to avoid backtesting errors.

Critical Assessment

Strengths: Complete transparency with fully disclosed rules. Rigorous backtesting methodology. Honest about drawdowns and losing periods. Practical guidance for implementation. Outstanding data quality discussion.

Weaknesses: Returns may be lower than some readers expect from a "hedge fund strategy." Extended drawdowns require strong discipline. Futures trading requires significant capital and expertise. Some market-specific details may need updating.

Best for: Serious traders and investors interested in managed futures and trend following who want a verified, implementable strategy with realistic expectations.

Key Quotes

"The simple ideas are usually the ones that stand the test of time."

"Trend following is not about being right. It is about being positioned correctly when large moves happen."

"If you want to verify my work, here are the complete rules. I encourage you to do so."

Conclusion & Recommendation

"Following the Trend" is one of the most honest and transparent trading books ever written. Clenow's willingness to completely disclose his strategy, his rigorous backtesting methodology, and his frank discussion of drawdowns set a standard that few authors match. For anyone interested in systematic trend following, this book is essential reading.