Observations – Statistics – Commentary

Now that we have entered the latter half of January 2012, we possess all of the data necessary for an objective look back at 2011, and we can use that data to identify key trends for 2012. In this issue of JLN Managed Futures, several recurring themes have manifest themselves:

  • 2011 was a bad year for returns on managed futures funds, and on hedge funds in general. However, net capital flows into managed futures, and of hedge funds in general, continue to grow.
  • Access to managed futures continues to trickle down to retail investors through managed futures funds and ETFs. Now, private fund managers are lobbying regulators to sever the “information firewall” between accredited and non-accredited investors.
  • The fallout from the MF Global bankruptcy continues to affect the industry. Money is still missing, clients are still angry and the calls for reform are getting louder.
  • Pensions, endowments, and other institutions are increasing allocations to alternatives. Is this an indication of the importance of diversification, or is it a “Hail Mary pass” to stay in the game after a decade of flat equity returns and ultra-low interest rates? Probably a little of both.

As 2012 progresses, some trends will continue; some will reverse. Other trends will come into play. It should be an interesting year.

Quote of the Day

“Managers generally take a cautious approach and strictly limit all types of communications about their business. For example, private fund managers generally will not respond to press enquiries, even to correct inaccurate reports.”

Richard Baker, MFA’s president in the FT story: “Hedge funds lobby SEC over secrecy rule.”


Hedge funds lobby SEC over secrecy rule
Hedge fund lobbyists have petitioned the US Securities and Exchange Commission to repeal the rule that lies behind one of the industry’s most notorious traits: its secrecy. The Managed Funds Association, which counts George Soros, John Paulson and Louis Bacon as members of its founding council, has implored the SEC to eliminate rule 502(c) of Regulation D – an arcane piece of Depression-era legislation that defines how the modern hedge fund industry operates.
**DA: I have always been a critic of Regulation D. Really, for a non-qualified purchaser, is there any harm in receiving information about hedge funds? I can’t afford to buy a Ferrari, but should that preclude me from reading the spec sheet or watching a Ferrari commercial on TV?

Hedge fund indices down -5.28 in 2011 on average
The Dow Jones Credit Suisse Core Hedge Fund Index was down -0.41% in December, (-7.40% in 2011); The IndexIQ Hedge Composite Beta Index returned -0.17%, (-2.32% in 2011); The HFRI Fund Weighted Composite Index declined -0.18% (-4.8% in 2011); The HFRX Global Hedge Fund Index declined -0.42% (-8.87% in 2011).

Agecroft Partners Predicts Hedge Fund Industry Trends for 2012
Hedge Fund News “Based on several dominant and emerging trends Agecroft has identified through their conversations with more than 300 hedge fund organizations and 2,000 institutional investors during 2011, Agecroft Partners predicts 2012 will be the best year for net flows into the hedge fund industry since 2007 despite the lackluster investment performance for the industry in 2011.

RenTech Best, Paulson Worst In 2011
It may go down as the second-worst year in hedge fund industry history, but 2011, like all other years, produced a mixed-bag of hedge fund returns for the biggest names in the business.
**DA: Paulson Advantage Plus down 52 percent in 2011. Ouch.

Billionaire Paulson Persists With Property
Mortgage securities are drawing buyers after tumbling last year and handing billionaire hedge fund manager John Paulson his first loss in the bond market.
Paulson, who made $15 billion in 2007 betting against U.S. subprime mortgages, is sticking with bullish investments in residential and commercial mortgage securities, helping his Credit Opportunities Ltd. fund gain about 1 percent last quarter to narrow its 2011 decline to 18 percent.
**JK – Question, is he looking at the very ratings that brought down the real estate market in 2008? Just asking.

China and Japan offer best options for hedge funds in terms of talents and opportunities
Tony Morrongiello – Opalesque
Asia is offering the most fertile space for hedge funds opportunities, particularly China and Japan which could become the biggest talent pool in the world in the next five or 10 years next to the United States, agreed panellists in the recent Opalesque Geneva Roundtable sponsored by Custom House Group and Taussig Capital and held at the offices of Caliburn Capital Partners.

Managed Futures Scorecard 1/17/2012
Newedge Indices MTD Return YTD Return
Newedge CTA Index 0.29% 0.29%
Newedge CTA Trend Sub-Index 0.61% 0.61%
Newedge Trend Indicator -0.06% -0.06%
Newedge Short-Term Traders Index -0.06% -0.06%
Newedge Macro Trading Index -1.49%
Newedge Commodity Trading Index -3.61%
Newedge Volatility Trading Index 0.86%
Barclay Indices MTD Return YTD Return
Barclay CTA Index -3.05%
Barclay UCITS Index -8.55%
Barclay Hedge Fund Index -5.33%
BTOP FX Index -0.31% -0.31%
Morningstar Long/Short Com. Index 1.49% 1.49%

Lead Stories – MF Global

MF Global Probe Focuses on Back Office
Investigators on the hunt for an estimated $1.2 billion in customer money missing since MF Global Holdings Ltd. collapsed are zeroing in on the securities firm’s back-office operations in Chicago, people familiar with the situation said. One back-office employee has told people she disputes congressional testimony by Jon S. Corzine, MF Global’s former chairman and chief executive, that she provided assurance that a $200 million transfer was proper, according to people familiar with the matter.

MF Global Trustee’s Presentation to Customers and Clients, January 12, 2012
Epiq Systems
The Trustee’s presentation to former MF Global Inc. customers and other creditors. During the meeting, held on January 12, 2012, the Trustee provided information about the customer claims process and an update on the progress of the court-mandated liquidation of MF Global Inc.
**DA: Reading between the lines on page 9 of the presentation: $6 bn in customer claims, less $5.283 bn in “assets marshalled” equals $717 million in missing funds.

MF Global Customers Wrapped in Red Tape
Stanley Haar says he knew how much money MF Global Holdings Ltd. owed him after about five minutes reviewing old account statements. But completing a claim form, he said, took more than two days. “That’s nuts,” said Mr. Haar, a Boca Raton, Fla. commodity-fund manager, who had about $10 million in customer money—about 10% of the total fund—with MF Global when the firm sought bankruptcy protection on Oct. 31.

National Futures Association Board of Directors Contested Election
With regulatory issues faced by the National Futures Association (NFA) punctuated by the MF Global saga, two well-known industry veterans are running for two separate slots on the NFA board, jointly proposing a fresh look at the managed futures regulatory structure. Ernest Jaffarian and Doug Bry are challenging two other well-known industry participants Aleks Kins and Craig Caudle. Mr. Kins and Mr. Caudle were the only candidates recommended by the NFA nominating committee while Mr. Bry and Mr. Jaffarian successfully petitioned to be on the ballot. Ballots are being sent out and must be returned by January 17, 2012.

Managed Futures/Managed Funds

361 Capital Launches Two New Mutual Funds
361 Capital, a provider of alternative investment portfolios to institutions, financial intermediaries, and high-net-worth investors, today announced the launch of two mutual funds built on two of the firm’s existing alternative strategies, the 361 Long/Short Equity Fund and the 361 Managed Futures Strategy Fund. http://jlne.ws/wxG3YP
**DA: BarclayHedge estimates around 100 managed futures fund launches in 2010-11. Here is another.

Horizon Cash Management seeks to expand in Europe
Investment Europe
Chicago-based Horizon Cash Management has announced plans for an extended drive for European business.
The 20-year old operation, which manages some $2.5bn in cash deposits and near assets, said its intentions reflect manager and investor recognition on both sides of the Atlantic of the importance of the cash process within investment portfolios, and the value of independent, third party cash management services to maximize investment returns.
**DA: Third party cash management services also provide an additional layer of collateral protection. Not a bad idea.

Asian hedge fund size increasing as managers embrace better corporate governance
Hedge Funds Review
**Subscription required.

European hedge funds line up bets on China downturn

European hedge fund managers are betting that China’s once red hot economic growth will cool dramatically in 2012, hitting companies, economies and commodity prices that have been fuelled by the world’s second largest economy in recent years.

How Managed Futures Fit Into Your Portfolio
Managed futures assets add juice to a portfolio in times of economic stress because they are uncorrelated to the broader markets, explains fund manager Dave Kavanagh. He also details how his fund makes investment decisions, and why he avoids making sector bets.

Pensions & Institutions

Institutional investors in $1bn club set to allocate even more money to hedge funds in 2012
Hedge Funds Review
Data and intelligence provider Preqin says institutional investors allocating $1 billion or more to hedge funds will be key to shaping the industry. Many are allocating to emerging hedge fund managers. A group of 150 investors representing over $430 billion in assets invested into hedge funds are key to shaping the industry as it evolves into an institutional quality market, according to research* from Preqin.

2012: What lies ahead
Hedge Fund Manager
In what promises to be an unpredictable year for hedge funds, HFMWeek takes on the unenviable job of predicting the main themes to look out for in the coming 12 months

Pensions turn to alternative investments
It’s no secret that pensions, facing cringing future liabilities as the ranks of pensioners grow, are near-desperate for returns. They have turned aggressively to alternative investments, much to the cheer of hedge funds and private equity funds. But is this a mistake?
**DA: Flat stock market, zero interest rates, and mass retirement of baby boomers on the horizon. Many pension funds have no alternative to alternative investment.

Commentary: Is Rube Goldberg managing state pension funds?
by Phil Troyer, Indiana Policy Review
It wasn’t mentioned in his State of the State message, but Gov. Daniels will leave for his successor a frustratingly complex and under-performing pension-management system.
**DA: The author obfuscates the nature of portfolio construction and benchmarking, but one fact from the article was quite interesting. “The system shelled out more for “investment expenses” during 2011 than it paid in actual retirement benefits for police officers, firefighters, judges, excise police, gaming officers, conservation enforcement officers, prosecutors and legislators – combined.”


The Volcker Rule Will Kill Government Bond Markets
It looks like more than just one part of Dodd Frank needs fixing, not just the rules on conflict minerals. The Volker Rule is producing a certain amount of disquiet as well. The essential problem is that the rule stops banks from engaging in proprietary trading. But proprietary trading is the way that government bond markets work, through market makers. So the ban will, if not kill, at least seriously reduce liquidity in government bond markets and thus make the whole process, both of borrowing and investing in them, more expensive.

The 2012 Regulatory and Market Landscape
Depending on whom you ask, the so-called Volcker rule will mean either the end of banking as we know it or toothlessly allow banks to continue to bet the house—with the backing of the U.S. taxpayer. Neither of these extremes are true, of course.

Custodians get to grips with new rule for private fund managers
Financial News (subscription required)
Custodians and fund administrators are setting up new services to deal with the latest reporting rule put in place by regulators, concerning the managers of non-mutual funds.

CFTC Final Rule: Protection of Cleared Swaps Customer Contracts and Collateral
On January 11, 2012, the CFTC approved its final rule on the protection of cleared swaps customer contracts and collateral. Under the final rule, swaps customer funds will be legally separated, but operationally commingled (the “LSOC Model”). Cleared swaps customer collateral will be segregated from the FCM’s own property, but cleared swaps collateral of all FCM cleared swaps customers will be permitted to be kept together pre-bankruptcy in one account.

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