First Impressions

Can Options-based funds compete?
By Jim Kharouf – John Lothian News

The CBOE announced the release of a new study today, “Highlights of Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs,” which analyzed the growth and performance of exchange-listed options-base funds. What is notable about the chart-laden report, is the growth of options-based funds from just 10 in 2000, to 119 in 2014 with a total of $46 billion in AUM.

The report looked at 80 options-based equity funds, 51 mutual funds, 22 closed-end funds and seven ETFs with a total of $27.6 billion in AUM. The study found that options-based funds had higher risk-adjusted returns than the S&P 500 Index.

However, it should also be pointed out that options-based funds typically outperform the S&P 500 in down markets but underperform in strong markets. The study showed that the annualized return from January 2000 to December 2014 was 4.21 percent in options-based funds, 4.07 percent for the BXM and 4.24 percent for the S&P 500.

Some would say, “So what?” A simple long-only position still outperforms the options-based funds. But what should be pointed out is that drawdowns were less severe with the options-based funds which posted a maximum drawdown of -42.2 percent over that period, while the S&P 500’s largest drawdown was -50.9 percent. The BXM’s maximum drawdown was -35.8 percent. Investor time horizons and strategies should be considered.

**The full white paper can be found at:

Quote of the Day

“We’re in the money-management business, we’re not in the mind-changing business. We’ve thought for a very, very long time that the bond yield could go to 2 percent, or slightly lower, and that remains our view.”

Lacy Hunt, the chief economist at Hoisington Investment Management Co. in the story, ” Bond Market’s Biggest Bull Says 30-Year Gains Far From Over”.

Lead Stories

Today’s Number: More Than $1 Quadrillion Traded in 2014
Evan Peterson, CME Group OpenMarkets
Today’s Number 2014 Volume
At the start of 2014, any discussion about trade volumes usually referenced a “return to volatility.” Futures volumes were relatively low, and most asset classes were not moving much on a daily basis. Fast forward a few months and the market was awash in volatility. The Fed first cut back quantitative easing, then anticipated a rate increase; demand in China continued to slow; conflict in the Middle East and Ukraine emerged; and suddenly the world looked different. Higher volatility contributed to higher volumes across CME Group asset classes, which ultimately led to the highest volume year in the company’s 160-year history ? an average daily volume of 13.7 million contracts. To put this in U.S. dollar terms, the total value of contracts traded at CME Group in 2014 added up to more than $1 quadrillion. That’s 15 zeros.

Long Bond Auction Demand Proves Resilient With Record Low Yields
Susanne Walker and Daniel Kruger – Bloomberg
Record-low yields failed to deter bidders at the Treasury’s auction of $13 billion in 30-year bonds as investors continue to prize the world’s safest assets with inflation expectations falling along with global economic growth forecasts.
The securities drew a yield of 2.430 percent, below the previous record of 2.580 percent in July 2012. The decline in oil prices prompted traders to push back expectations for the timing of the first Federal Reserve interest-rate increase into December less than a month after central bank officials discussed raising rates as soon as after the April policy meeting.

Bond Market’s Biggest Bull Says 30-Year Gains Far From Over
Daniel Kruger – Bloomberg
The bond market’s most unwavering bull, who has ignored conventional wisdom in the relentless pursuit of long-term U.S. debt, is undeterred by yields at record lows.
“We’re in the money-management business, we’re not in the mind-changing business,” said Lacy Hunt, the chief economist at Hoisington Investment Management Co. by phone from Austin, Texas. “We’ve thought for a very, very long time that the bond yield could go to 2 percent, or slightly lower, and that remains our view.”

Spoofers Tricked High-Speed Traders by Hitting Keys Fast
By Matt Levine, Bloomberg
Spoofing, sometimes called “layering,” is a form of market manipulation where you pretend you want to sell a lot of stock, and everyone’s all, “Oh in that case I want to sell a lot of stock too,” and the stock goes down, and you actually buy a bit of stock instead, and you wait like a second and then pretend you now want to buy a lot of stock, and everyone’s all, “Oh well now I want to buy a lot of stock too,” and the stock goes up, and you actually sell back the stock you bought, and you make some money because people are sheep.

Landmark Ruling Restricting Insider Trading Prosecutions Is Dead Wrong, U.S. Says
By Patricia Hurtado, Bloomberg
A federal appeals court ruling that makes it harder to obtain insider-trading convictions was called “dramatically” wrong in the U.S. government’s first formal response to the sweeping decision.

Pressure Rises on Tax-Trading Strategies; Detailed Trading Records Requested From Bank of America’s London Unit
By Jenny Strasburg, WSJ
Fallout from government investigations into controversial trades used by investors and banks to reduce taxes is mounting, with a London hedge fund recently closing and Bank of America Corp.’s European investment-banking unit being pushed for information about the trades.

Mortgage Bonds in Worst Start Against Treasuries in 18 Years
Jody Shenn – Bloomberg
Government-backed U.S. mortgage bonds are off to their worst start to a year relative to Treasuries since at least 1997 as investors in the $5.5 trillion market brace for a surge in homeowner refinancing.
Returns on mortgage securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae were 0.6 percentage point less than those on similar-duration government debt this month through yesterday, according to Bank of America Merrill Lynch index data. Ginnie Mae securities, which package Federal Housing Administration loans, have underperformed Treasuries by 0.9 percentage point.

BofA Said to Oust 150 Hedge Fund Clients Under New Rules
By Kelly Bit and Michael J. Moore, Bloomberg
Bank of America Corp. cut ties with about 150 hedge funds last year in its prime brokerage group because new regulatory requirements designed to make the financial system safer are forcing lenders to reduce costs.

HSBC Struggles in Battle Against Money Laundering; Report Is Expected to Criticize British Lender’s Bid to Overhaul Controls After $1.9 Billion Settlement
By Rachel Louise Ensign And Max Colchester
HSBC Holdings PLC has spent hundreds of millions of dollars to overhaul its anti-money-laundering system, including hiring a former British spy and a tobacco-spitting former drug-enforcement official from the U.S.

Withering regulations will make for shrivelled banks
Simon Samuels, FT
Europe has no Frederica Mac to finance mortgages, writes Simon Samuels
Bankers are not stupid. For all the controversy surrounding the financial sector, everyone can agree on that. For decades banks have shaped their businesses to maximise profits, given the regulatory rules that exist at the time. And when the rules change, smart bankers change what they do.

Regulators Want Data on Bond-Trade Fees; SEC, Others Scrutinize Markups Paid by Retail Bond Investors
By Katy Burne and Aaron Kuriloff
As Sherry Dixon was researching her retirement in 2010, the 63-year-old home builder from Albuquerque, N.M., asked her broker to buy her municipal bonds for safety.

SEFs 2015 outlook: industry sees more flexible execution rules; harmonization
By Henry Engler, Reuters
Regulatory efforts to simplify existing swap mandate rules in order to reduce fragmentation between the U.S. and Europe are likely to dominate the focus of participants in the swaps execution facility (SEF) market in 2015.

Opinion: How you can beat David Einhorn and Bill Ackman at their own game; Portfolios with Purpose charity competition lets you do well and do good
By Stacey Asher, MarketWatch
How would you stack up against the world’s best investors? How would you perform against David Einhorn, Bill Ackman and Leon Cooperman, for example?

Boaz Weinstein Said to Post Worst Year in 2014, Down 11%
Kelly Bit and Katherine Burton – Bloomberg
Boaz Weinstein’s Saba Capital Management posted its worst year in 2014 with a loss of 11 percent, its third consecutive annual decline.
The credit firm’s main fund fell 1.2 percent in December, its 10th monthly loss last year, according to a person familiar with the returns, who asked not to be identified because the information is private.

Former Goldman Sachs banker joins bond trading venture TruMid
Tracy Alloway, New York, FT
Veteran Goldman Sachs banker Ravi Singh has joined a new electronic bond trading platform in a move that underscores the rush to establish new ways for large investors to exchange debt as banks retreat from trading fixed income.

Central Banks

ECB’s bond plan is legal ‘in principle’
Claire Jones in Frankfurt, FT
A top adviser to the European Court of Justice has said the European Central Bank’s crisis-fighting plan falls within the mandate of policy makers, removing a major legal hurdle to purchases of government bonds.

Market madness started with the end of Federal Reserve’s QE
Jeff Cox – CNBC
For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington.
Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring.

Here’s The Starkest Evidence Central Banks Are Losing And Deflation Risk Is Going Global
Greg McKenna – Business Insider
Since the depths of the global financial crisis in 2009 central bankers around the world have sought to fight the troubles of main street by pumping up the tyres of global stock markets with super-low interest rates and quantitative easing across the globe.

European Central Bank primes markets for imminent QE
The Economic Times
The European Central Bank on Wednesday prepared financial markets for an imminent programme of sovereign bond purchases, with president Mario Draghi saying the bank had few other options at its disposal to counter the risk of deflation.
A day after ECB executive board member Benoit Coeure had said that the central bank’s governing council was in a position to announce such a programme at its first policy meeting of the year next week, Draghi upped the ante still further.

U.S. Federal Reserve Jan. Beige Book Summary (Text)
The following is the summary text of the Federal Reserve’s Summary of Commentary on Current Economic Conditions.
For the full report text:


CFTC Warns Court against Granting Investor Protections to FX Traders
Forex Magnates
The American Commodity Futures Trading Commission (CFTC) came out in court against a hedge fund’s demand for priority repayment from Lehman Brothers of its OTC FX trading under the Securities Investor Protection Act.

JPMorgan Currency Trader Said to Be Suspended for Actions at RBS
Gavin Finch and Suzi Ring – Bloomberg
JPMorgan Chase & Co. (JPM) has suspended a foreign-exchange trader over allegations of wrongdoing related to his work at Royal Bank of Scotland Group Plc, according to a person with knowledge of the decision.
London-based currency dealer Gordon Andrew was suspended last week, according to the person, who asked not to be identified because the matter isn’t public.

Yen Chart Patterns Give Three Reasons to Buy: Technical Analysis
Kevin Buckland and Hiroko Komiya – Bloomberg
The yen is poised to extend this year’s gains versus the dollar, with three different analysts giving three separate reasons to be bullish based on trading patterns.
Dollar-yen has exited a symmetrical triangle formation, and may drop to 111.40, according to Commerzbank AG. The pair has broken from a bullish channel, raising the risk of a slide to 114.54 or lower, Skandinaviska Enskilda Banken AB said.

Indexes & Index Products

In Vanguard’s Shadow, Small Firm Scores Tweaking Indexes
By Charles Stein, Bloomberg
When Molly Bernet Balunek expressed interest in putting money into mutual funds run by Dimensional Fund Advisors, she didn’t know she was in for a rigorous courtship ritual.

CBOE Begins Disseminating Volatility Index Values on Three of CME Group’s FX Options Contracts: Dollar/Euro, Dollar/Bp and Dollar/Yen
The Chicago Board Options Exchange announced that it began disseminating values for three new volatility indexes that CBOE calculates using the prices of CME Dollar/Euro, Dollar/British Pound and Dollar/Japanese Yen futures options.

Funds Europe on “Counterparty politics”
Despite the growing relevance of CCPs in OTC markets they are yet not common practice in the securities lending market. But the cost-efficiencies that central clearers can provide and a transforming regulatory environment are predicting a changing trend.


Campaign aims to raise awareness of Fairtrade gold
The Guardian
A human ‘ring of gold’ will be formed outside St Paul’s Cathedral on Wednesday to mark the start of a new campaign encouraging couples to tie the knot with Fairtrade wedding bands.
The “I Do” campaign backed by top designers including Katharine Hamnett will urge brides and grooms to buy Fairtrade gold to help improve the lives of the people who mine gold, and the environment.

Marc Fabers Big Bet: Gold to Rise 30% in 2015
Famed investor Marc Faber, famously known as “Dr Doom” for correctly forecasting market crashes and for having a perennially bearish outlook, expects gold prices to rise by 30 per cent in 2015.
In Indian rupee, gold could surge from Rs. 27,000 to Rs. 35,000 per 10 gram, without adjusting for exchange rate and duties, if his forecast comes true.

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