A recurring theme in the current issue is that of “chasing performance.” First, Attain Capital introduces the “toxic cycle sync” and reminds us that investors who let emotions get the better of them in investment choice will ultimately underperform. Sure enough, we are seeing signs that investors are doing exactly that. Clients of Winton Capital have pulled over a billion dollars out of its portfolios. Pension funds are cutting back on alternatives in favor of equities, which did well last year. Even Bridgewater Associates says it is bullish on equities and oil, two classes that have just had quite a run. In other news, a white paper by Campbell & Co. aims to lay to rest questions about CTA performance if and when interest rates rise again. But first, John Lothian explains how a rule proposed by the CFTC could bring about “monumental” change to the FCM model.

Quote of the Day:

“You want to be borrowing cash and hold almost anything against it. We are at a possible inflection point right now with respect to the pricing of economic conditions in markets and then the actual conditions that are likely to occur.”

-Bob Prince, Bridgewater Associates’ co-chief investment officer, from the InvestmentNews article “Hedge fund giant Bridgewater bullish on stocks, oil, some commodities.”

Observations – Statistics – Commentary

The Toxic Cycle Sync: Investing and Managed Futures Performance Cycles
Attain Capital Management
As is the case in every asset class under the sun, managed futures investors love to chase performance. The sustainability of a strategy often comes second to double or even triple digit returns. We do our best to discourage such decision making, because in our experience, this is uniquely damaging in managed futures allocations. http://jlne.ws/11GBxn1
**DA: Always great to see the work of Barry Ritholtz in print. His blog is on my list of daily must-reads.

Altegris CTA Challenge 2013 Update
Altegris Clearing Solutions
The first month’s results are in and the leaderboard has been posted. Some of the names may surprise you. To learn more about the participants, current leaders and the scoring methodology,visit the Challenge site.
**DA: Quite a unique game they have set up. I think there are, like, 11 herbs and spices in the scoring recipe.

CTA performance historically invariant to interest rates changes, says Campbell & Company
In a new white paper, Prospects for CTAs in a Rising Interest Rate Environment, the firm provides a quantitative evaluation of CTA performance in relation to the direction of rates and concludes that the strategy has not historically been rate regime-dependent.  This conclusion is positive news for investors who may wonder if CTAs, many of whom have spent their entire existence operating in a bull market for fixed income, can weather a secular uptrend in rates.
**DA: An uptrend in interest rates? What’s that? I’m not familiar with the concept.

Lead Stories

Exclusive: Investors pull $1 billion from hedge fund giant Winton
Winton Capital, one of the world’s most successful hedge fund firms, has seen clients pull $1 billion of cash out of its portfolios amid falling returns from computer-driven fund managers.
**DA: Is the bloom coming off the rose? Perhaps capital flows are mean-reverting. Harding has had a nice run, but some have been grumbling about a natural limit to the scalability of a firm like Winton.

Barclay Hedge Fund Index gains 2.84 per cent in January
Sixteen of Barclay’s 18 hedge fund strategies began 2013 with a gain. On the losing side, equity short bias dropped 8.06 per cent in January and merger arbitrage lost 1.34 per cent. Equity short bias suffered a record loss in 2012, giving up 24.18 per cent for the year.

Hedge fund giant Bridgewater bullish on stocks, oil, some commodities
Bridgewater Associates LP, the $140 billion hedge fund founded by Ray Dalio, is betting on global stocks and oil as it expects money to move into equities and other assets amid increased economic confidence. Bridgewater, the world’s biggest hedge fund, is bullish on stocks, oil, commodities and some currencies as it expects cash to shift to riskier assets, co-chief investment officer Bob Prince said on a client conference call on Jan. 23.
**DA: Borrow dollars, short them, and buy pretty much anything else. 2008 all over again.

Evaluating ‘Better Beta’ In Commodity Related Funds
By Carolyn Hill,
Seeking Alpha In futures-based commodities investing, picking the right ETP is harder than it looks. A lot of exchange-traded products try to beat the market, but it’s only in commodities that the more active products are often more popular than their plain-vanilla counterparts.

Managed Futures/Managed Funds

Voices: Greg Anderson, on Managed Futures
Wall Street Journal
When advisers think of managed futures, they tend to think of moments like 2000 or 2008, when futures performed extremely well as short-term hedges in the face of a stock market crash. But they don’t think of them as long-term components of a well-balanced portfolio.
**DA: Says who?

Ramius Releases White Paper: Allocating to Managed Futures: Performance Considerations within the Risk Parity Framework PYMENTS.com
Ramius LLC, the global alternative investment management business of Cowen Group, Inc., provided a review of recent managed futures performance, the nature of certain market phenomena impacting trend following strategies, and the role these strategies have within the asset allocation framework. The review was co-authored by Ramius Trading Strategies Chief Executive Officer, William (“Bill”) Marr and Director of Investment Research, Alexander Rudin, PhD.

Lillian Nicola Asset Management Announces the Launch of the LNAM Managed Forex Strategy
Gate 39 Media
Lillian Nicola Asset Management is proud to announce the launch of the LNAM Diversified Forex Strategy, a discretionary, directional trading methodology which enters and disposes of currency pairs within the spot forex market to capture price trends lasting anywhere from 2 weeks up to 6 months within these markets. The program utilizes a trading approach based upon the tenets of chaos theory, Elliot Wave theory, fractal geometry and price momentum.

Novus Ranked #1 by Autumn Gold
Novus Precious Commodities, a managed futures program offered by Novus Investments LLC, is proud to announce its ranking of Top Performing Commodity Trading Advisor (CTA) in the United States for the 5 year period of 2008-2012 according to Autumn Gold.

United States Commodity Funds LLC announces four of its Exchange Traded Commodity Funds are available to trade commission-free in the new Schwab ETF OneSource program
Charles Schwab & Co. announced earlier today that Schwab clients can now buy and sell 105 ETFs with $0 online trade commissions. They also stated that all major asset classes are included in the offering, with funds from six leading providers, including the United States Commodity Funds. Schwab clients who buy and sell ETFs on the Schwab ETF OneSource platform will pay the exact same operating expense ratio (OER) they would elsewhere, but without paying a commission.

Smaller hedge funds may exit industry on fee pressures, says Agecroft Partners’ Don Steinbrugge
Investment Europe
Don Steinbrugge, managing member of Agecroft Partners, says that pressure remains on the hedge fund industry to lower fees, despite a 15% average decline in management fees on net assets received by hedge funds since 2008.

Pensions & Institutions

Kazakhstan’s National Investment Corp. wants alternatives managers
National Investment Corp. of the National Bank of Kazakhstan issued RFPs for hedge fund-of-funds and private equity managers in several different categories, according to a source at the bank. The hedge fund-of-funds portfolios will range between $50 million and $150 million per manager. The strategies are global macro, event driven, credit, long/short equity, multistrategy, fixed-income arbitrage and managed futures.
**DA: Hello. My name-a Borat. I new in town. I sell-a thousand-a soybean-a future. Verrry nieeece!

Farmland, loan portfolio drive 11% return at Sweden’s AP1
Investments&Pensions in Europe
AP1, one of the Swedish national buffer funds, returned 11.4% for the full year 2012, with farmland in Australia and New Zealand boosting its fortunes. The fund’s ‘new investment’ portfolio also includes exposure to subordinated and mezzanine debt, as well as agricultural land.
**DA: Fund has a 2.3 percent allocation to managed futures and macro hedge funds.

Pension Funds Cut Back On Commodity Indexes
Wall Street Journal
Pension funds and other institutions are retreating from popular investments linked to commodities after finding they did little to protect their portfolios against inflation risk and the unpredictable returns of stocks. Investors have yanked nearly $10 billion from tradable indexes tied to energy, food, metals and other commodities after two years of record outflows. That leaves about $133 billion, said Kevin Norrish, a managing director at Barclays PLC.

SEC Complaint Filed over City of Atlanta Pension Investment
Atlanta Progressive News
The complaint, filed on January 18, 2013, alleges that the investment consultant for the Pension Fund, Larry Gray, steered some 28 million dollar investment from the Pension Fund into a hedge fund company that he owns, without full disclosure to the Board of the conflict of interest.
**DA: What do you mean “inadequate disclosure?” It’s right there in paragraph 42, section J, subsection 12(a)(4)(gggg).

CalSTRS board to forward options for saving teacher pensions
Later this week the board of the California State Teachers Retirement System, or CalSTRS, will forward to the Legislature a report laying out options for raising higher contributions into the pension system to ensure its long-term viability. The Legislature has avoided action for a decade, and Gov. Jerry Brown’s  budget forecast for education, with healthy projections for revenue, doesn’t take into account the daunting cost of teachers’ pensions on the expense side of the ledger.
**DA: Unfortunately, none of the options allow current and future retirees to have their cake and eat it, too.

Pensions: Public Choices and Investor Caution
A new study by EDHEC-Risk Institute urges investors to be more vigilant about pension liabilities when making investment decisions concerning sovereign instruments.  Perhaps the most intriguing part of this discussion involves the “political risks,” that is, the reasons pension reform however necessary is politically always very difficult. That portion of the study is a contribution to public choice theory, the use of economic tools to re-conceive political-science issues. Two of the key conclusions of this study, each expressly political, are: that European institutions should work toward more transparency in regard to their public finances, and that Europe needs explicit criteria on pension liabilities, in addition to the existing goals of growth, stability, and specified budgetary constraints.


SEC scrutiny blamed for stifling active ETF market
The US Securities and Exchange Commission (SEC) lifted its moratorium on reviewing actively managed exchange-traded funds (ETFs) that make use of derivatives last December. But industry sources say sponsors wishing to list the products still face long waiting periods with the regulator’s Division of Trading and Markets.
**DA Plan on 9-12 months, unless you would like to use OTC derivatives, in which case plan on waiting even longer.

NFA’s credit card ban proposal – another malicious nail in the retail forex coffin
FX Street
NFA has gone a long way trying to completely kick retail forex out of the US eventually reducing the number of retail forex brokers from several dozens to just 11. With FX Solutions heading out as well the number of  US forex brokers may fall below 10 within few months. The latest proposal to ban the use of credit cards and ewallets as a funding method is just another nail in the retail forex coffin. However what makes it special is that NFA is bluntly ignoring its own members, namely the Forex Committee and makes a proposal exclusively concerning forex brokers however without even consulting with them.
**DA: Retail investors must be protected from themselves at all cost. In fact, what we need is a similar proposal covering Ebay purchases.

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