More insights from Andreas Clenow author of Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies
I thoroughly enjoyed reading Andreas Clenow’s book Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies.
What I liked most about the book was his no-nonsense approach to investing.
For example, when he discussed trading parameters in the book he was completely honest saying that the parameters were not exact but good enough.
That is so true.
There is no exact recipe for investment success
Many so called experts try to sell you the exact recipe to investment success – but as you know it does not exist.
What does exist is a lot of time tested strategies that work – over the long term in a lot of different markets. And if you apply these in a good enough way you will have great returns.
I enjoyed Andreas’ book so much I asked him if he would be willing to answer a few questions to share more of his investment insights, luckily he did.
Before we get to the interview first a bit of information on Andreas.
He is Chief Investment Officer of Zurich based ACIES Asset Management AG (Absolute Return Capital Management) which was founded in 1994 and since 2010 has focused on quantitative and absolute return strategies.
Over to Andreas…
How did you get started in investing?
Andreas Clenow: I started out trading tech stocks in the 1990s. It was quite a fun time, and it all seemed so easy. Of course, as we all found out, things always seem easy in a bull market. Everyone's a trading wizard during extreme bull runs like that.
I was very lucky to stumble upon this field at that particular time. Buying tech stocks in the mid-90s was fun and easy.
Like everyone else who started trading in a bull market, I thought I was a skilful trader. Naturally, I was simply lucky to be at the right place at the right time.
Had I started trading in 1999 instead of 1994, I might have had a very different career development.
We had a great trading room in my university, stocked with all the best market data software, live feeds and such. The major market data firms provided free access to the school.
It was a good time to learn, and very valuable later on to be familiar with the relevant industry software and terminology.
Describe your personal investment approach and how it developed over time?
Andreas Clenow: I started out with simple tools early on, like most. My initial approach, back in the 90s, was very much based on throwing stuff at the wall to see what sticks. That is of course not a recommended approach.
Early on, I used mostly classic technical analysis tools. I attempted to predict the future, as most novice traders do. Building trading systems full of technical indicators to find the best way of trading the NASDAQ and such. I had a wall full of printed charts, with lines and predictions, which I updated and taped to the wall weekly.
None of this was a very good idea, but it seemed like it at the time.
Having spent a couple of decades in the financial industry, my approach to the market is now quite different. I approach the market in a scientific manner, formulating hypotheses, testing them, rejecting them, adapting them.
The quant finance field has developed at high speed in the past decade, and it has in many ways changed the systematic trading game.
When did you discover momentum investing and how has your thinking on momentum developed over time?
Andreas Clenow: Momentum investing has been one of my core approaches for the past 15 years or so. It's a well-known market phenomenon, and well documented by both practitioners and academics.
Momentum stocks tend to outperform in normal to bullish market conditions. But they tend to underperform in adverse market conditions.
The trick is in how you limit the downside during bear markets.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Andreas Clenow: The retail trading community tends to overly focus on individual positions. In a properly diversified portfolio, any given individual position shouldn't really matter.
On an individual position level, there is always an element of luck. But properly diversified, the luck factor is greatly reduced and you can focus on the overall portfolio.
How do you size position size in your portfolio? (Equally weighed / Volatility weighted?)
Andreas Clenow: Generally, I prefer volatility parity models by default. That becomes much more important when you are dealing in instruments of very different base volatility.
For stocks, it has quite a small impact over time as the volatility differences are not too large. For diversified futures, a volatility based approach is vital.
Can you describe your top investing mistakes and what you've learned from them
Andreas Clenow: Starting out trading, again back in the 1990s, I often made the mistake of believing the hype of trading.
The stories about famous traders, colourful trading systems and indicators, and about incredible trading results.
Hobby traders are bombarded with such stories, and the fact of the matter is of course that almost all of it is made up.
Be careful what you believe.
How concentrated is your portfolio? Do you follow any key risk-management guidelines in managing your portfolio?
Andreas Clenow: Diversification is key to everything I do. Diversification across instruments, across sectors, across asset classes, across time frames, across strategies, etc.
We are not in the business of predicting the future. You just don't know what will perform next year. So you do everything.
Each component of the overall strategy has a slightly higher than average chance of outperforming, and if you keep doing all of it all the time, you will outperform in the long run.
Risk is a very complex topic, and one all too often misunderstood by hobby traders. It is probably the number one topic which hobby traders would benefit the most from learning about.
Actual risk management and risk control of course, not so called money management and other gambling systems.
What is your view on the use of stop-loss strategies?
Andreas Clenow: Some types of strategies require stop loss points, others do not. There is no answer that covers all types of investment strategies. While a firm stop loss can be vital to some models, other models would be adversely impacted by it.
What do you think of short selling?
Andreas Clenow: Short selling is much more complicated than simply reversing the sign.
Very few people make money on short selling, in the long run.
In the systematic trend following field, the short side is primarily for skew management. As it can improve the return skew of the overall strategy, it can be a valuable portfolio component even if it makes little to no money on its own in the long run.
Most people do best by simply not shorting.
What are the advantages to adding managed futures (trend) as a part of any investment portfolio?
Andreas Clenow: Diversification is always a good idea.
If you take strategies with have a positive expected long term result and a low to negative correlation to each other, you can achieve a stronger combined result. You can achieve higher return at the same risk, or lower risk for the same return.
Putting all your eggs in one basket is rarely a good idea, no matter how stable that basket looks at the time.
Are managed futures better than adding a bond component to a portfolio (the typical 60% equities 40% bond portfolio for example)?
Andreas Clenow: It's hard to label anything as better in this field.
It all depends on what you would like to achieve, and comparing bonds to manage futures is a bit of a stretch.
Buying bonds and holding to maturity is in most cases practically risk free, but at a very low yield. Managed futures are certainly not risk free, but it has the potential for much higher returns.
Anything else you would like to mention?
Andreas Clenow: The number one reason why most retail traders fail is that they come into this field with unrealistic expectations.
If you want to improve your trading, step one is to have a realistic expectation, and then adjust your risk taking accordingly.
The best traders in the world average a little more than 20% per year in the long run. If you are able to average at 15% over time, over decades, you are very good and you can make a fortune in this field. But if you aim at 50% p.a. or more, your probability of sooner or later losing everything rapidly approaches one.
Professional trading is not gambling. This field can be very profitable, but the money is not made by aiming for extreme returns.
Andreas, thanks for your time!
Your interviewing analyst wishing you profitable investing
Tim du Toit
PS As Andreas mentioned momentum is a great indicator to add to your investment strategy. The screener contains 1 month to 5 year momentum indicators you can start using with your investment strategy right now – click here to sign up
We have implemented the trading indicators Andreas used in the book in the screener. You can read about them (and how to use them) here:
How to find stocks on the move with a better momentum indicator - exponential regression
Target Weight position sizing added to the screener
10 myths about momentum investing, squashed