Simplicity in Trend Following | Andreas Clenow

Finance-Focused Summary

Andreas Clenow argues that systematic trading generally benefits from simplicity. Adding indicators and fine-tuning parameters can make a strategy harder to execute and more vulnerable to overfitting recent data. Traders should focus on finding a robust approach within a strategy style—not on discovering a supposedly “best” set of rules. Clenow also stresses that a model that works in a simulation is not necessarily easy to operate in practice.

Strategies and Frameworks Discussed

• A simple trend-following reference model for futures

  • Compare the latest price with its price 12 months earlier.
  • Go long if the latest price is higher; otherwise, go short.
  • Apply the rule across a diversified basket. Clenow cites 50–100 futures markets as the kind of broad universe required.
  • Use a volatility-based method for position sizing.
  • The model is presented as a learning and reference tool, not as a ready-to-trade system. Because it holds positions across markets, it can require substantial margin capital.

• Momentum selection for stocks

  • Clenow distinguishes stock momentum from diversified futures trend following. Stocks tend to become highly correlated during market declines, so holding many names may not provide the same diversification.
  • Systematically rank or select stocks, rotate out of holdings when better-performing candidates emerge, and use a filter for the overall market environment.
  • He cautions against buying stocks indiscriminately during a bear market and generally advises retail investors against short-selling individual stocks. He acknowledges that experienced professionals may use stock or index shorts, including in market-neutral strategies, if they understand and monitor the risks.

• Counter-trend entries within a dominant trend

  • Clenow prefers pullback models that trade in the direction of the prevailing trend, rather than trying to call a turning point against a strong trend.
  • One example measures the distance from a recent trend extreme in ATR (average true range) units and enters when the pullback reaches 3 ATR. This is an entry concept, not a complete system; an exit method and other rules are still needed.

Risk Management and Market Observations

• Diversification matters. Futures trend following relies on different markets generating returns at different times. Clenow warns that applying a broad-market approach to only one or a few markets can produce highly unpredictable results.
• Do not rely mechanically on historical volatility. The Swiss franc exchange-rate floor was abandoned, causing extreme moves. Clenow says artificially low volatility can lead volatility-based sizing models to take dangerously large positions. The discussion mentions some funds experiencing 25–30% moves during the month, depending on their exposure.
• A minimum volatility assumption was cited as a way to prevent position sizes from becoming excessive when measured volatility is unusually low.
• Clenow also flags asymmetric risk in European short-term interest-rate markets. Prices above 100 can imply an unusual rate setting, with limited upside relative to potentially large downside. He cautions that trend models may not account for such structural risks.
• Trend-following drawdowns can be emotionally difficult. Clenow says investors should not assume that following rules blindly will address situations not represented in the historical record.

Performance Expectations and Business Economics

Clenow says sustained annual compound returns of 10–15% would be very good. He warns that promises of 50–100% returns are unrealistic and may encourage excessive risk-taking.

In discussing a possible trading business, he says to budget around dependable management-fee revenue, not performance fees. Fixed costs may include offices, data services, brokers, administrators, and custodians. Bloomberg or Reuters access is cited at roughly $2,000 per month.

He describes management fees of around 1–2% as an example when discussing the scale needed to support a firm. In his view, a substantial asset base is needed: in Europe, $1 million in managed assets may not make the economics viable, while $10 million may still be insufficient to provide a decent salary.

Clenow notes that regulations and compliance costs have made launching a fund much harder than 10–15 years ago. He advises against managing money without complying with applicable rules, warning that regulatory breaches can end a career in the industry. Reasons not to manage outside capital can include disliking investor relations and compliance, or running a strategy that cannot scale.

Assets, Markets, and Instruments Mentioned

• Futures: Diversified futures markets, including commodities, currencies, and bonds; euro, Swiss franc, and euro–Swiss franc futures; European short-term interest-rate futures.
• Stocks and equities: Technology stocks, individual stocks, and broad stock-market indexes.
• Indexes and related exposure: The S&P index, index funds, and beta-neutral strategies.
• Other references: Oil, short-term bonds, interest rates, the US rate-hike environment, and China’s slowdown.
• Methods and metrics: 12-month momentum or return, moving averages, ATR, volatility-based position sizing, drawdowns, correlation, margin requirements, and management and performance fees.

Disclosures and Cautions

The program states that investment-performance discussions refer to the past, and past performance does not guarantee or imply future results. It also warns of significant risk of financial loss and says investors should request and understand product-specific risks from an investment manager before making decisions. Clenow’s illustrative rules are not presented as personalized financial advice or as a guarantee of results.

Presenters and Sources

• Host: Niels Kaastrup-Larsen, Top Traders Unplugged
• Guest: Andreas Clenow, investment director and systematic-trading author
• Other people mentioned: Jerry Parker and Nicole Collian (as rendered in the subtitles)