Observations/Commentary

Today’s NFA: Have you Noticed Anything Different?
By Doug Ashburn – JLN

We recently did a two-part video interview with Dan Roth, CEO of the National Futures Association. He offered up an honest assessment, in my opinion, of the state of the agency in the wake of the MF Global and Peregrine Financial Group bankruptcies that rocked the industry in 2011 and 2012.

In Part 1, Roth summarizes the internal changes made at the NFA, from its audit and hiring practices to the delivery of information to NFA members and market participants.

Watch Part 1

Part 2 is a summary of changes made to the agency’s rules to restore customer confidence, namely on audit confirmations, residual interest (which differs from the CFTC‘s residual interest rule), and the treatment of customer segregated funds (the “Corzine Rule”).

Watch Part 2

The role of a self-regulatory organization consists of threading the needle between overall effectiveness and over-burdening members and member firms. While there is always room for improvement, I see today’s NFA as a much different organization than it was five years ago.

NFA Board Update—May 2016 Meeting
NFA
NFA President and CEO Dan Roth discusses highlights and other notable information from NFA’s May Board meeting, including the Fiscal Year 2017 budget approval, margin requirements for uncleared swaps, and his plan to retire in the coming year
goo.gl/mxU5My

****** Is that a Timothy Massad baseball player bobblehead in the background?

Alternatives Monthly: Andrew Lo’s Strategy
Barron’s
Does evolutionary biology offer better insight into today’s markets than the immutable laws of physics? Andrew Lo, director of the Laboratory for Financial Engineering at the Massachusetts Institute of Technology, thinks so.
Lo, also a finance professor at MIT’s Sloan School of Management, has spent decades in academia melding economics with behavioral finance and neuroscience. His research has made him a respected voice on hedge funds and risk management. As chairman of AlphaSimplex Group, part of Natixis Asset Management, Lo oversees $7 billion in five mutual funds that use hedge fund strategies.
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***DA: Buy Lo, sell high.

Lead Stories

‘$1bn Club’ Managers Hold 88% of all Hedge Fund Capital
Preqin
Preqin’s annual report on the ‘$1bn Club’ of the world’s largest hedge fund managers finds that in the past year, the number of eligible firms has risen by 98. Despite this, the total assets controlled by firms in the $1bn Club have decreased from $2.78tn to $2.75tn.
jlne.ws/22y3Ori

Distribution Of Alternative Investments Through Wirehouses
ValueWalk
After years of steady growth, wirehouse alternative investment assets fell about 4% in 2015 from $205 billion to $195 billion with all of the decline attributable to a $12 billion drop in liquid alternative mutual funds and ETFs, according to a study released today by the Money Management Institute (MMI), the national association representing the $4.1 trillion investment advisory solutions and wealth management industry.
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***DA: That’s the first downtick since the financial crisis, I believe.

Liquid alternative mutual funds leave investors disappointed; Strategy falls short as assets in US have stagnated and many are losing money
by: Stephen Foley and Mary Childs in New York – FT
The asset management industry’s hopes of bringing hedge fund strategies to the American mass market have stalled in the face of miserable returns and scepticism from investors.
/goo.gl/1k5iSw

***DA: Most of these investors have never seen liquid alts fund performance in an equities bear market.

Is Your Alternative Investment Doing What It Should Be Doing?
RCM’s Attain Alternatives Blog
While it may take years to correctly assess the abilities of a program to react in both good and bad periods – the current condensed volatility cycle with a nicely defined up move, and near mirror image down move is giving us the rare opportunity to evaluate programs in both environments.
You can see in the chart below that managed futures as a whole, as represented by the SG CTA Index index – has returned roughly to where it was about 6 months ago, after running up a little more than 10% and then proceeding to give back -9% (the fact that you can earn 10% and give back 9% and be in the same place is a mathematical oddity we’ll cover another day).
jlne.ws/22xZS9W

***DA: Reconciling these last two stories is the big challenge facing the managed futures asset class.

BlackRock’s Fink Expects Consolidation Among Asset Managers
Sabrina Willmer – Bloomberg
Predicts a ‘massive shift’ into more passive investing; Says too many investment firms struggle to deliver alpha
BlackRock Inc.’s Laurence D. Fink said he expects consolidation in the asset management industry as firms struggle to beat benchmarks and new U.S. rules favor passive strategies.
goo.gl/ZYW6M

Money managers seek AI’s ‘deep learning’; As artificial intelligence techniques advance, the investment industry pays more attention
by: Robin Wigglesworth – FT
In 1957 Frank Rosenblatt and the eggheads of the Cornell Aeronautical Laboratory invented the Perceptron, a machine that the New York Times wrote could be “the embryo of an electronic computer that [the Navy] expects will be able to walk, talk, see, write, reproduce itself and be conscious of its existence”. In short, artificial intelligence.
/goo.gl/rvuvtE

***DA: But once these AI tools are implemented, all past data becomes irrelevant, as such data represents trading in the absence of AI.

Commodities hedge funds – Investors Flock Amid Metals Boom
ValueWalk
The hedge fund industry just can’t seem to catch a break this year. Performance is abysmal and in today’s world of low-cost ETFs and tracker funds, the hedge fund industry’s antiquated 2/20 fee structure is attracting plenty of negative publicity.
The combination of high costs and low returns isn’t doing the sector’s reputation any good and investors are withdrawing their cash from funds in droves. Indeed, Tony James, president of private-equity giant Blackstone, told Bloomberg this week that he expects one-quarter of all current assets in hedge funds to be yanked out in the next year.
jlne.ws/22y4DQW

Managed Futures/Managed Funds

Hedge funds: Overpriced, underperforming; The industry has ballooned thanks to pension funds. Now institutional investors are taking a look at costs and returns
John Authers and Mary Childs – FT
It was the shot heard around the hedge fund world. After the New York City Employees’ Retirement System decided to cash all its investments in hedge funds, Letitia James, the city’s public advocate, delivered a message to the industry straight out of Occupy Wall Street: “Let them sell their summer homes and jets and return those fees to their investors.”
/goo.gl/48qm5U

***DA: Cue up the villagers with the torches and pitchforks…

Bridgewater Associates, Biggest Hedge Funds, Gets Welfare
ValueWalk
ridgewater Associates, the world’s largest and arguably most financially successful hedge fund in history, is currently in negotiation with one of the most indebted states in the nation, Connecticut, to receive a $22 million assistance package. Bridgewater using leverage to obtain public assistance comes as fund founder Ray Dalio was reported to have raked in $1.4 billion in 2015, a year in which the reputed “noncorrelated” hedge fund correlated to the downside relative to the stock market.
jlne.ws/22y359B

***DA: …and maybe a little tar and feathers while we’re at it.

Biggest Hedge Fund Set to Get $22 Million From Connecticut
By ALEXANDRA STEVENSON – NY Times
The world’s biggest hedge fund, Bridgewater Associates, is poised to receive $22 million in financial aid from Connecticut in an effort to keep it from moving its headquarters out of the state.
goo.gl/1ug0HB

Money managers tussle for bigger slice of ‘smart beta’ pie; Established groups swoop for niche players as interest hots up
by: Robin Wigglesworth in New York – FT
The jostling for territory in the swelling “smart beta” investment industry has heated up in recent weeks, with a flurry of acquisitions by asset managers that fear losing out in the next big battleground for investor money.
/goo.gl/gfiqbX

Commodity cycle ‘closer to the end than the start’
InvestorDaily
It’s too early to call the end of the current commodities cycle as a whole, according to Henderson Global Investors – but some sectors have bottomed out already.
jlne.ws/22xZY1k

Is This the Turning Point for Commodities?
Morningstar
The primary reason for investing in commodities should always be as an inflation hedge. And there is every reason to argue that higher inflation is coming
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***DA: No, this is not the turning point. February was the turning point.

Pensions & Institutions

Ex-Calpers CEO Gets 4 1/2 Years Prison for Bribery Scheme
Joel Rosenblatt – Bloomberg
Buenrostro took $200,000 cash from ex-board member Villalobos; U.S. judge calls crime ‘dagger in the heart of public trust’
A former chief executive officer of the country’s biggest pension fund was sentenced to 4 1/2 years in prison for steering $14 million in placement fees to an ex-board member in exchange for cash bribes and gifts.
goo.gl/WD3sPs

End of hedge funds as we know it
Business Insider
Let’s not forget, five hedge fund managers made over $1 billion in 2015. Based on recent outlooks, however, the reign of these “masters” may be coming to an end.
Everywhere you look, it appears that doom and gloom is surrounding the industry. From competitors to analysts and even to the managers of hedge funds themselves, everyone is acknowledging that these funds are going through a rough patch.
jlne.ws/22y5d13

BlackRock dominates as LGIM joins 10 largest managers
IPE
The 2016 survey finds that most of the top 10 managers retained their rank from the previous year, with PIMCO rising one place to seventh, deposing Capital Group following a EUR159bn increase in AUM in 2015, compared with Capital’s EUR105bn.
jlne.ws/22y5kJS

BlackRock receives additional $3 billion in China quota capacity
Pensions & Investments
BlackRock (BLK)’s Singapore affiliate garnered an additional quota capacity of 20 billion renminbi ($3.04 billion) on Monday for investment in China’s capital markets under that country’s renminbi qualified foreign institutional investor program.
jlne.ws/22y5xwM

In alternatives, consultants and money managers branching out into each other’s territory
Pensions & Investments
Alternative investment managers that started out in the funds-of-funds business and consulting firms are following suit. In January, Chicago-based private equity management firm Adams Street Partners LLC hired former Oaktree Capital Management (OAK) LP (OAK) private credit executives William Sacher and Shahab Rashid to form a new private credit group.
jlne.ws/22y5Ojj

Lead Stories

U.S. futures regulator adds hedging exemptions to position limit proposal
Reuters
The U.S. futures contract market regulator moved closer on Thursday to finishing its rule on limiting positions that traders can hold in commodity markets, which is intended to head off oil and gas hedging abuse, by responding to industry concerns about “bona fide hedges.”
goo.gl/PabRYm

***DA: Read the press release HERE and the commentary by Gary DeWaal, special counsel for Katten Muchin Rosenman HERE

CME’s Duffy slams transaction tax plan
Futures & Options World
CME Group executive chairman and president Terry Duffy has appeared before the Illinois House Revenue and Finance Committee to argue against a tax on financial transactions. The Financial Transaction Tax Act, called HB0106 and proposed by Democratic member of the Illinois House of Representatives Mary Flowers early last year, would impose a tax on engaging in a financial transaction on the Chicago Stock Exchange, the Chicago Mercantile Exchange (CME), the Chicago Board of Trade and the Chicago Board Options Exchange.
goo.gl/E9oFk0

***DA: Read Duffy’s remarks in the press release HERE. Spoiler alert: he does not much care for it.

SEC Proposes Higher Net Worth Threshold for Qualified Clients under the Advisers Act
by Anthony Drenzek, Stephen Mears, Christopher Wells via JD Supra
On Wednesday, May 18, 2016, the U.S. Securities and Exchange Commission (SEC) proposed to increase the net worth threshold for qualified clients from $2 million to $2.1 million. This proposed adjustment is being made pursuant to a five-year indexing adjustment required by §205(e) of the Investment Advisers Act of 1940 (the Advisers Act), as amended by §418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
goo.gl/IoRh2G

CFTC top cop ramps up use of anti-manipulation rule; Agency’s new authority under Dodd-Frank is “very promising”, Goelman says
Alexander Osipovich – Risk.net
Historically, the US Commodity Futures Trading Commission (CFTC) has had a spotty track record of winning market manipulation cases in court. But Aitan Goelman, director of the CFTC’s division of enforcement, is determined to change that. Goelman, who was appointed in 2014, is luckier than many of his predecessors in that the CFTC has a powerful new authority, granted by the US Dodd-Frank Act, to prosecute manipulation. Before the law was passed in 2010, the commission’s lawyers needed to prove…
goo.gl/6nTy4X

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