Happy New Year from JLN Managed Futures. In this first issue of 2013, Attain Capital offers a two-part defense of managed futures indices. Two major alternatives players, Winton and Fortress, celebrate the new year by announcing big change at the top. In a year where fundamentals ruled, old-line ag firms such as Cargill and Louis-Dreyfus outperformed the machines. Finally, several commentators, beginning with yours truly, take a look back at 2012 and try to handicap 2013.

Observations – Statistics – Commentary

Goodbye, 2012. Don’t let the door hit you on the way out
By Douglas Ashburn, John Lothian News

One could say that 2012 was a watershed year for the futures industry. That is not necessarily a good thing. In fact, quite a number of us would say the water shed represents tears rolling down our collective faces. The year began with uncertainty surrounding the MF Global debacle – would futures customers be made whole and, if so, when? Then, in July, amid the MF thumb-twiddling and nail biting, we received word of the fraud and subsequent bankruptcy at PFG. As if these two bankruptcies were not enough to shatter customer confidence, on August 1, a major algo glitch, this time at Knight Capital, gave us yet another black eye.

As the year ends, MF Global customers are still waiting. The PFG trustee is requesting more time to wrap things up. And, with about an hour left in the trading year, there was apparently another trading glitch at the New York Stock Exchange.

Meanwhile, global regulators continue the slow march toward a new regime. Until such rules are finalized and (hopefully) homogenized across jurisdictions, confusion and uncertainty remain. Not only do we not know the full structure of these rules, but we do not know how much it will cost to implement and comply with them. We do not know how much capital will be required. Preliminary estimates have not painted a pretty picture. To what extent will they depress volume?

Speaking of volume, it is no secret that the numbers were down significantly. For an industry that has been built upon healthy year-on-year growth, any downturn in volume is cause for alarm.

From a managed futures standpoint, I think we could live with (or at least work around) the above challenges, IF the CTA community was making money. While we are still awaiting the final tallies (we plan to include a performance summary in the next issue of JLN Managed Futures), here is a spoiler: on a scale of one to ten, 2012 was, shall we say, “not so good.” Virtually all of the major CTA/managed futures indices were down on the year.

It was not all doom and gloom, though. Though futures did not fare well in terms of fund performance or exchange volume, the sector has managed to continue to attract new investors. In each issue of this year’s newsletter, we ran at least one story of a new fund launch, or of an entity upping its allocation to alternatives. Non-correlation with traditional asset classes continues to work in our favor.

Innovation has always been the key driver of success in the futures industry, and 2012 was no exception. NYSE Liffe launched its DTCC GCF Repo Index futures contracts just as the LIBOR scandal was coming to light; volume has been brisk. An even bigger product trend has been the futurization of swaps. The migration from swaps to futures in the energy market happened virtually overnight with CME and ICE products. In December, CME Group launched deliverable interest rate swap futures, and the initial buzz has been quite positive. One volume bright spot among the prior generation of innovative products, VIX futures, slaughtered previous volume records.

In terms of market structure innovation, the market seems to like the ICE/NYSE deal proposed December 20. It appears that there may be synergies to be unlocked that will further facilitate the industry’s recovery.

Finally, out of the MF and PFG disasters came some vibrant dialogue and promising ideas for restoring customer confidence. John Lothian News captured a number of these ideas on video and have been releasing them periodically on Marketswiki.tv. I encourage you to check it out, and watch the newsletter for new video releases.

So, goodbye 2012 and, in a way, good riddance. Hello 2013. Nice to meet you.

Quote of the Day

“These large houses have a pretty good understanding of the agriculturals markets and these markets were really driven this year by fundamental reasons, supply-demand issues, and not by the macro environment.”

-Gabriel Garcin of Europanel Research & Alternative Asset Management, on the success of multinational ag firms in 2012, from the Reuters article “Commodity trader hedge funds outsmart stand-alone rivals.”

In Defense of Managed Futures Indices – Part One
Attain Capital Management
When we begin to explain an asset class as complex as managed futures to investors, the first place many turn is the world of managed futures indices. The whole idea behind these indices – and really ANY financial index – is to provide a snapshot of an investment world. It gives you a glimpse of performance, and provides a starting point for further investigation into the allocation opportunities. For alternatives such as hedge funds and managed futures, there aren’t stock tickers like AAPL that you can punch into your computer, and you aren’t going to hear “managed futures was up 2% today” on the nightly news. With individual program data more difficult to obtain than it is in the stock world, the indices perhaps take on an even greater role in generalizing the asset class’s performance.

In Defense of Managed Futures Indices – Part Two
Attain Capital Management
Financial indices are useful, albeit imperfect, tools for understanding asset class performance, but managed futures indices are criticized far more frequently than traditional indices are, and we’d had enough of the poorly founded saber rattling. The defense wound up much longer than we’d anticipated, and rather than bombard you one enormous piece, we decided to split the defense into two parts.

Best Commodity Trades From Jim Rogers, John Arnold, Jay Gould, Louis Bacon, & Paul Tudor Jones
ETF Daily News
Warren Buffett, Jesse Livermore and Peter Lynch are household names around the world, but equity traders aren’t the only ones that have amassed fortunes. George Soros is well known for his billion-dollar bet on the devaluation of the British Pound, John Arnold made billions trading natural gas, Jay Gould cornered the gold market, and Louis Bacon predicted the Gulf War. In this article, we’ll take a look at these and other famous commodity traders that amassed fortunes trading these hard assets.
**DA: Looking back in awe or disgust? Perhaps a bit of both.

Lead Stories

Winton CEO to step back
Financial News
The chief executive at hedge fund manager Winton Capital Management is to step down early next year, Financial News has learnt, but will remain at the firm. Anthony Daniell will make way for Tony Fenner-Leitao in the chief executive role, according to a person familiar with the mov.
**DA: More big news from the top of the managed futures world. In 2012 we witnessed pullbacks of George Soros and John Henry; now this.

Fortress Announces Retirement of Co-Founder and Principal Robert Kauffman
On December 24, Fortress Investment Group announced that Principal and Director Robert Kauffman has elected to retire from the company and its Board of Directors after a 15 year career at the firm.
**DA: More movement at the top.

Despite 2012 commodities slump emerging market demand set to fuel higher, more volatile prices
A new online report from McKinsey & Company claims that commodities prices are destined to rise higher and become more volatile as demand from emerging markets comes more prominently into play. According to the report the economic growth of emerging markets will lead to prodigious gains in demand for resources, with growth in demand for energy and steel projected to rise 33% and 80% for the period from 2010 to 2030.

Hedge Funds Cut Bullish Bets to Lowest Since June: Commodities
Hedge funds cut bullish commodity bets to a six-month low as mounting concern that slowing economic growth will erode demand drove prices toward the first fourth-quarter retreat since the global recession.
**DA: The fiscal cliff deal seems to favor short term stimulus over long term discipline. Looks to me like an invitation to pile on.  

SEC Approves U.S. Commodity Fund Betting on Demand From Asia
United States Commodity Funds LLC, manager of $3.4 billion in exchange-traded securities, got approval from the U.S. Securities & Exchange Commission to start a fund that will bet on Asia’s demand for raw materials.
**DA: Just what the market needs – another long-only commodity fund.

Managed Futures/Managed Funds

Commodity trader hedge funds outsmart standalone rivals
Hedge funds owned by commodity giants including Cargill and Louis Dreyfus have outwitted their standalone rivals in a year of market volatility that has disrupted traditional models for oil and metals trading.
**DA: I was better at taking tests when I had access to the answer sheet ahead of time.

AHL survives crisis via liquidity, diversification
The Asset
The lack of trends in major markets in 2012 plagued managed futures funds, an asset class that has been reeling from poor performance in the previous years. The US$16.3 billion AHL, the managed futures flagship of the Man Group, is no exception. Its Hong Kong authorized fund suffered from redemptions earlier in the year and negative returns of 6.7% year-to-date as of November 30 2012 and 8.7% in the 12 months to November 30 this year.
**DA: 2012, I bid thee adieu.

Hedge fund industry loses out again
Financial Times
Bearish hedge fund managers have lost out in 2012, with the $2tn industry suffering another year of disappointing returns as traders were wrongfooted by a change in fortunes for the eurozone. According to Hedge Fund Research, slight gains in December were likely to mean the average hedge fund manager made just more than 5 per cent over the year – a period watched closely by many investors after disappointing returns in 2011, when the average hedge fund lost 5 per cent.
**DA: If you are short a market, and it goes up, you lose money. Got it. Thanks, FT.

Pensions & Institutions

Fiscal cliff deal leaves U.S. economy on slippery slope
The fiscal cliff resolution approved by Congress provided a short-term boost to markets on Wednesday, but did little to offer long-term solutions on the national debt and spending reductions or to alleviate concern about future tax bills that could put retirement and investment tax incentives at risk.

MAULDIN: Long-Term Economic Growth Has Downshifted, And It’s A Game-Changer For Stocks
Business Insider
Even if yo
u have no investments in the stock market, [expectation of market returns] is an important question, in part because the pensions funded by state and local governments are heavily invested in US equities. In fact, they are often projecting returns in excess of 10% per year. How likely is that to happen? Who will make up the difference if it doesn’t? In nearly all states and jurisdictions, it is against the law to change the terms of a public pension plan once it is agreed upon.
**DA: John Mauldin’s weekly newsletter, which I have been reading since its inception. Toward the bottom, Mauldin explains the pension problem and suggests that prudent investors open up more to alternatives, including managed futures.

EU economies tap pension funds as financing source
Governments throughout the eurozone are making huge strides in tapping into pension fund assets as a potential source of financing domestic economic growth. While some are using the carrot approach, others are wielding the stick to access pension assets. http://jlne.ws/VxwboQ
**DA: This is where it starts. Anyone thinking this will end well is delusional.


CFTC mutual fund rule appeal sought by Chamber of Commerce
Futures Magazine
The U.S. Chamber of Commerce is seeking to appeal a judge’s decision to uphold a rule by the Commodity Futures Trading Commission requiring mutual funds with commodities investments to register with the agency.

Hedge funds should not rush launches to avoid summer 2013 AIFMD compliance deadline, warns expert
COO Connect
Start-up hedge funds should not to rush their launches to avoid full compliance with AIFMD in July 2013, warned a senior executive at KB Associates, the boutique hedge fund consultancy. The UK Financial Services Authority’s (FSA) consultation paper on AIFMD Level 1 confirmed existing managers would be granted a one year grace period until July 2014 to make right their AIFMD compliance obligations. Managers launching after July 2013 will, however, not be afforded this luxury.

CTA giants under threat from ESMA proposal, says Alt Ucits manager
Major proposed changes to the way commodities indices can be used in Ucits-compliant vehicles could force some of the largest CTA funds in existence to dramatically change their approach.

CFTC staffers graduating to Wall Street
Futures Magazine
The Wall Street Journal reported Wednesday on a trend of Commodity Futures Trading Commission (CFTC) employees moving to the private sector to firms who will be affected by Dodd-Frank rules these employees have just recently helped to write.
**DA: Nice work if you can get it.

The final curtain falls on AIFMD drafting
The EU Commission published the finalised AIFMD this Wednesday ending the suspense filled hedge fund arena. Managers however remain vociferous; “a disappointing outcome that arises out of a flawed process.”
**DA: For a complete summary of AIFMD, with draft documents embedded, and links to more info, visit MarketsReformWiki.

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