This issue represents both a not-so-great look at the recent past, and an optimistic glimpse of the future. First, the past: Attain Capital summarizes a “turbulent” 2012. SeekingAlpha asks, “Why have managed futures strategies underperformed recently?” And a TrimTabs/BarclayHedge report says that pension funds pulled over $6 billion in assets from hedge funds this year. The future, however, looks brighter. Editor-in-Chief Jim Kharouf, who spent last Thursday at the Emerging Manager Forum in Miami, writes of the rise of Latin America and managed futures “40 Act” funds. China’s financial regulator has expedited the emergence of managed futures in the country, sparking a mad dash among existing funds to partner up. And, finally, in keeping with the past/future theme, in a commentary entitled “A Radical Choice,” publisher John Lothian describes such a battle brewing in the upcoming NFA Board of Directors election.
Quote of the Day
“The new start-ups tend to be algorithmic, putting their faith in the black-box model. Algo trading seems to be the flavour of the month again, not just in Switzerland but in the US and the UK too.”
Andrew Rubio, chief executive of Throgmorton, a mid- and back-office service provider to hedge funds in the FT’s piece, “Quant fund launches at record high.”
Observations – Statistics – Commentary
Managed futures mutual funds and Lat Am showing promise
By Jim Kharouf
Among the doom and gloom of the fiscal cliff, low volatility and frozen interest rates, there are some green shoots that appear to be emerging from the managed futures space.
The CTA Expo, Emerging Markets Forum in Miami last week covered two areas that continue to show promise. One area that is getting more traction is the managed futures mutual fund space. Another is the potential business in Latin America, particularly Brazil and Chile.
A panel discussion which drew that largest crowd of the conference was on managed futures 40 Act funds. Such funds have grown substantially in terms of assets under management. A CME Group list of the top 23 managed futures mutual funds totaled $8.6 billion as of November 27, a touch up from $8.4 billion on March 31, 2012. Breaking those numbers down further, the top 10 funds accounted for $7.82 billion, even for both the November and March timeframes.
The top three funds as of November were, AQR Managed Futures Strategy, with $2.13 billion, Guggenheim Managed Futures Strategy A, $1.27 billion and Altegris Managed Futures Strategy A, $990 million.
CME Group’s David Lerman, senior director, asset managers, said the potential for this product is enormous. The oldest managed futures mutual fund on the list was launched in June 2009 with most launched in 2011 and 2012.
“I don’t think we’re even in the first inning,” Lerman said. “When track records of these [funds] get established, these numbers will look small.”
The focus of the conference was largely on Latin America, and it too shows that the investment potential in the alternative space is strong. Laura Moore, a Latin American expert for Newedge, said Brazil has come a long way toward embracing alternative investments. Chile is still emerging as well in terms of its interest in alternatives. She said the top six Chilean pension funds now manage $145 billion, with $51 billion allocated to foreign assets.
While that requires CTAs to make some contacts and take some trips, the lure of institutional money may pay off.
**Also, a special note of thanks to Bucky Isaacson and Frank Pusateri for inviting me to speak at their CTA Expo – Emerging Manager Forum in Miami last week. For its first event in Miami, the conference featured some great speakers and displayed the talent and opportunity in south Florida as well as Latin America. – Jim Kharouf
A Radical Choice in NFA’s CTA/CPO Election Category
by John Lothian, JLN
Turnover on the NFA’s Board of Directors comes infrequently. I can’t remember a single instance where a non-Nominating Committee slated candidate succeeded in being elected. This year could be different with two high profile write-in candidates on the ballot. James Koutoulas and John Roe, the two co-founders of the Commodity Customer Coalition (“CCC”), are write-in candidates on the ballot for positions on the board of directors of the National Futures Association representing CTAs and CPOs. These two customer-focused media-savvy upstarts square off versus two representatives of the futures industry establishment, George E. Crapple of Millburn Ridgefield Corporation and Tom Lloyd of Campbell & Company, Inc.
A Turbulent ‘12
Attain Capital Management
As the year draws to a close, we find ourselves reflecting on all that has happened. Programs have launched into the limelight while others have shuttered their doors. Managed futures as an asset class has struggled, prompting some to declare trend following prematurely dead. PFGBest shook the industry to its core, and spurred a series of reforms that have made customers safer than ever. Europe continued to plague the markets, with this little thing called the fiscal cliff looming large on the horizon. So as you prepare to celebrate the holidays and head into the New Year, we’ve prepared the following list of the 10 most popular Attain newsletters in 2012 based on reader favorites, staff picks, and the amount of views each newsletter had.
**DA: I don’t want to spoil the ending, but here is my answer to the question raised in Attain’s #1 entry: As Michael Palin said in the famous “Dead Parrot Sketch,” “It’s not dead. It’s resting.”
Analysis: The scramble for China
By William Mitting, FOW
The Chinese financial regulator has approved 18 FCMs to start offering asset management services. The move has sparked a scramble for international partnerships among CTAs as the newly appointed managers seek to leverage international expertise and pioneer managed futures in China. Last month, the China Securities Regulatory Commission (CSRC) issued its first batch of asset management licences to 18 domestic futures brokers paving the way for the launch of managed futures in China.
What is a “risky” investment?
If you think of risk in terms of investment, that is loss of your money or portfolio volatility, the issue is not directly related to insurance-linked products so much as the underlying investments. The product is just a platform through which you can invest but the investor or advisor must choose the underlying investments.
**DA: A risky investment is one in which losses cannot be transferred to someone else.
|Managed Futures Scorecard||12/13/2012|
|Newedge Indices||MTD Return||YTD Return|
|Newedge CTA Index||0.76%||-2.33%|
|Newedge CTA Trend Sub-Index||1.46%||-3.38%|
|Newedge Trend Indicator||1.25%||-15.65%|
|Newedge Short-Term Traders Index||0.14%||-5.46%|
|Barclay Indices||MTD Return||YTD Return|
|Barclay CTA Index||-1.45%|
|Barclay UCITS Index||7.69%|
|BTOP FX Index||0.03%||1.96%|
|BTOP 50 Index||0.69%||-1.58%|
|Other Indices||MTD Return||YTD Return|
|Altegris 40 Index||-5.21%|
|Morningstar Long/Short Com. Index||-0.69%||-10.90%|
Why Have Managed Futures Strategies Underperformed Recently?
Managed futures strategies have put in a stellar performance since their advent in the early 1980s. But, recent history has not been so good. After a stellar 2008, when the managed futures index was up 14% and the S&P 500 dropped 45%, the managed futures index has lagged the S&P 500.
**DA: We cannot have our cake and eat it, too. Non-correlation means there will be years where the equity markets rally and one’s managed futures component is flat or down. That should be a source of value, not hand-wringing.
Newedge restructures to meet costs, vows job cuts
An environment of sustained low interest rates and falling commissions for derivatives broking has compelled Newedge into a restructuring that it sees as a necessary step towards consolidating its business lines. http://jlne.ws/ZcTCbc
**DA: The desire of Newedge’s parents to sell the firm is one of the worst kept secrets in the industry. Maybe the sum of the parts is greater than the whole.
Black Box Hedge Funds Buy Exchange Seats to Dodge Brokers
Reuters via Wall Street & Technology
Some of the world’s top computer-driven hedge funds are buying exchange memberships to trade directly on the biggest commodities and financial futures markets, saving on the sizeable commissions normally paid to brokers. Eager to improve returns and keep details of their ‘black box’ trading strategies as secret as possible, so-called CTA (commodity trading advisor) funds are buying exchange membership seats for hundreds of thousands of dollars.
**DA: According to Cantab Capital, who recently bought three seats on the CME, “We estimated what we have executed over the past year and worked out that we would make back the cost of the three seats in less than six months.”
Hedge Fund Executives to Meet With White House on Budget
Hans Nichols – Bloomberg
The Obama administration is continuing its outreach to Wall Street executives in pressing for a resolution of the U.S. budget dispute, with a meeting planned today between Valerie Jarrett and hedge fund managers, according to an administration official.
Quant fund launches at record high
Ruth Sullivan – FT
Trend-following quantitative “black-box” hedge funds are accounting for their highest-ever proportion of hedge fund start-ups, despite weak returns since the financial crisis.
A record 187 quant, or algorithmic funds, launched last year and account for 12 per cent of all hedge fund start-ups, another record, according to Preqin, a data provider whose figures go back to 2000. http://jlne.ws/12kaoUx
**JK – And what’s the big deal? FT’s story correctly points out that systematic funds have lost 3.2 percent this year, while the average hedge fund is up 4.5 percent.
Managed Futures/Managed Funds
What exactly are managed futures?
As alternative investments go mainstream, it’s time to acknowledge that the broad universe of alternatives is another asset class, alongside stocks, bonds, cash, real estate and commodities. Each of those asset classes comprise myriad categories, and that is precisely where managed futures fits.
**DA: Words of wisdom from Altegris’ Jon Sundt.
Family Office Shows Managed-Futures Fund
Hedge Fund Alert
An investment advisor that runs $550 million for several wealthy families will soon open a quantitative managed-futures vehicle to outside investors. Promus Capital of Chicago plans to offer its Triad Futures fund in the first quarter, pending registration with the CFTC. One of Promus’ founding families has been running the strategy for 20 years. The firm is showing a 12-year track record with a 13% average annual return. This year, the fund is down about 13%, following gains of 16.4% last year and 25.1% in 2010.
**DA: Timing is key.
Possibility of float for specialist funds
Steve Johnson – FT
Investment funds specialising in leasing shipping containers and lending money to UK farmers could be floated in London next year, according to Dexion Capital.
Why you should hold on to your commodities funds through the slowdown
Commodities funds still have an important role to play in investors’ portfolios despite the threat posed to the sector by the Chinese slowdown, according to Jason Hollands, managing director of communications at Bestinvest.
Two New Hires at Hedge Fund Association
The Hedge Fund Association has appointed April J. Rudin as chairperson at a new High Net Worth Advisory Board. Rudin has over 20 years of marketing experience in both corporate and financial services settings. In a separate move, the HFA promoted Ryan Mitchell to HFA West Coast Chapter Regional Director. http://jlne.ws/Yctsnn
Pensions & Institutions
Raise or hold on real assets proves tough call
Pension & Investments
Pension executives and other institutional investors are split between raising allocations to real assets or maintaining their allocations amid concerns about equity market volatility and inflation, a Pensions & Investments’ survey shows. The survey of P&I’s Research Advisory Panel showed 51% respondents plan to maintain their current target allocation to real assets in the next three to five years, while 46% plan to increase their targets. (The remaining 3% plan to decrease targets.)
Pension funds pulled $6.4B from hedge funds last month
New York Post
Pension funds’ love affair with hedge funds is cooling off. They yanked a collective $6.4 billion from hedge funds in October, the third month this year they have pulled out money, according to a new Trim Tabs/Barclay Hedge report released December 11. Although pensions have handed $15.7 billion directly to hedge funds so far this year, that’s still a far cry from last year’s $78.5 billion and $65.7 billion in 2010.
**DA: The bloom is off the rose?
Investors urged to find new sources of collateral for derivatives trades
Investments & Pensions in Europe
Institutional investors should explore alternative sources of collateral for derivatives trades at a time when regulatory reforms are expected to be a new “cost burden” for market players, BNY Mellon has warned.
J.P. Morgan’s McNamara explains why real assets are growing popular
Pensions & Investments
Prospects of a continuing weak economy, unstable equity markets and low interest rates are upending traditional asset policy and will drive investors to raise allocations to real assets, said Bernard McNamara, executive director, global real assets, J.P. Morgan Investment Management Inc., New York.
**DA: He cites low-yielding bonds, and volatility and high correlation among global equities. Oh, yeah. And looming inflation.
Review portfolio but beware drastic change
That was one of the conclusions that William Bernstein, a financial adviser and author, made in his new e-book, “Skating Where the Puck Was: The Correlation Game in a Flat World. “Bernstein found that even among institutional investors — the pros who manage university endowments and public pension funds — there is a tendency to chase after the next “big idea.”
**DA: The only trading advice you’ll ever need, whether you are a retail investor on a multi-billion dollar fund, is to not get caught on the wrong side of a pump-and-dump.
Are Investment Pros Too Smart for Their Own Good?
Defined Contribution plans actually lost less money than professionally managed defined benefit plans in the recession.
**Here is the report – Retirement Plan Assets
Rothstein Kass Brings Together Leading Hedge Fund Professionals to Create New Operational Due Diligence Best Practices
In an effort to help establish a better framework for the hedge fund operational due diligence (ODD) process, Rothstein Kass (http://www.rkco.com), a leading national professional services firm, today unveiled a set of “best practice ODD guidelines.”
New Initiative, New Leaders, for Hedge Fund Association
The Hedge Fund Association today announced that it has created a new High Net Worth Advisory Board focused on developing educational programs and networking events globally for HNW investors. Its chairperson will be April J. Rudin, who has over 20 years of marketing experience in both corporate and financial services settings. In a separate move, the HFA promoted Ryan Mitchell to HFA West Coast Chapter Regional Director. http://jlne.ws/YcuFet
**JK – Education is key to the development of this sector. Nice move HFA.
AIFMD not enough to protect investor welfare
Increased complexity, as the number of service providers and third parties rapidly increase in the alternative investments industry is an unproductive cost. Regulation, targeted to protect investors, is necessary explains Mick McAteer, Founder and Director of Financial Inclusion Centre
**DA: McAteer sees an “oversupply of financial products and institutions today that has not added value to the industry. I challenge [managers] to demonstrate that the complex industry structure has made productive use of investor capital.”
Here Comes the CFTC: The Regulators Keep Coming Back for More
By Matt Grinnell, Fidessa
The latest batch of rules from the US Commodity Futures Trading Commission (CFTC), which come into effect this month, will require many firms currently outside the CFTC’s supervision to register as Commodity Pool Operators.
ESMA proposals to impact CTA UCITS assets
The Hedge Fund Journal
Alix Capital, the Geneva-based investment boutique specialising in regulated alternatives investments, is publishing a paper which reveals that ESMA proposals limiting the use of indices by UCITS funds will require a change in investment approach for EUR 3 billion of CTA UCITS assets. The paper discusses the impact of the regulation and examines the options available to CTA managers to ensure compliance with the ESMA proposals.
Futures trading, peppered by controversy
Hindu Business Line
The recent price manipulation detected in pepper futures contract on NCDEX has once again kicked off the debate on whether futures trading in narrow commodities should be allowed. Narrow commodities are those that are largely grown in a particular state or region, with their production being comparatively low. Being the first-level regulator, the exchange did well to identify the cartel involved in the price rigging and issue a show-cause notice to eight brokers. A handful of 10-15 traders (clients) acted in collusion to corner the pepper available in the futures market and pushed up the prices. This also led to spike in prices in the spot market.
**DA: Market manipulation of this type is nothing to sneeze at.