Observations / Statistics / Commentary

The A,B,C’s: Ian Morley’s Tips for Emerging Managers
Emerging managers have always faced challenges getting their firms off the ground. From establishing a track record to building the infrastructure needed to grow, firms are now faced with a new regulatory regime in the US and Europe that puts additional hurdles in their way.

Ian Morley, chairman of Wentworth Hall Consultancy in London spoke with Jim Kharouf, editor-in-chief of John Lothian News at the Emerging Manager Forum in Miami in December about the challenges that managed futures funds face today. He said that Dodd-Frank and European rules have made compliance and reporting more onerous on managed futures firms and hedge funds, but that is only one part of the problem.

JLN/MarketsWiki 2014 Annual Survey – Please Give us 30 Seconds of Your Time
John Lothian News
We say “annual” but, quite frankly, it has been three years since we’ve conducted one, so the last one is getting a little, shall we say, stale. Please click the link below and answer five simple questions. 30 seconds of your time once every three years? It isn’t too much to ask, right? Besides, you might win a valuable prize.
***DA: The grand prize has been decided. Actually we decided to let the winner decide – between an iPad Mini or a pair of Bose Quiet Comfort Noise-Canceling Headphones. Can’t win if you don’t play, so click on over and give us some feedback.

Deconstructing Futures Returns: The Role of Roll Yield
Press Release – White Paper
Campbell & Company has released its latest white paper, Deconstructing Futures Returns: The Role of Roll Yield, which aims to demystify roll yield and address misconceptions regarding its nature, measurement and relevance. In its illustrative paper, Campbell seeks to provide clarity on this oft-overlooked component of futures returns, which can have a significant impact on the gain or loss a futures investor experiences over the lifetime of a trade.
***DA: Campbell has made a lot of money over the years exploiting inefficiencies in the market. When they publish a paper that gives away some of the tricks of the trade, prudent investors should pay attention.

CTA/CPO Capital Requirements – More Harm than Good?
Turnkey Trading Partners
On January 23, 2014, the National Futures Association (NFA) issued a request for comment from its members on the possibility of adding capital requirements and other customer protection measures. Over the past month Turnkey Trading Partners has spent many hours talking to our clients and contemplating this proposal.  Based on our experience and research the following presents our perspective on the most important of these questions.

Preqin: Hedge fund assets climb to $2.6 trillion total in 2013
Pensions & Investments
Total hedge fund assets grew by more than $300 billion in 2013 to more than $2.6 trillion overall, according to a report from Preqin.
**Also see JLN column below.

Alternative Lifestyle: What’s up for alternative investments in ‘14?
Jim Kharouf – John Lothian News
A new report reflecting the views of institutional investors in private equity funds, hedge funds, real estate and infrastructure says that their impression of alternative investments is “particularly positive” over the next 12 months.

Lead Stories

Winton Capital CEO Tony Fenner-Leitao resigns
Ben Wright and Vivek Ahuja – Financial News
Tony Fenner-Leitão, chief executive of Winton Capital Group, Europe’s fourth-largest hedge fund by assets under management, has resigned and will be replaced in the role by the firm’s founder and executive chairman David Harding, the company said Friday.
***DA: So much for an easy retirement, eh, Dave?

Winton Capital Plans Expansion Drive With Up To 100 New Hires By Year-End
Wall Street Journal
Winton Capital, Europe’s fourth-largest hedge-fund company, plans to hire up to 100 employees this year, part of an expansion that includes starting five funds and opening offices in New York, Tokyo and Sydney, according to the firm’s founder, David Harding.
***DA: And it appears he has hit the ground running with an aggressive strategy.

Futures Trading for the Masses
On Wall Street
Adding managed futures to a portfolio doesn’t necessarily improve performance, but it may add resilience. Morningstar reports that the five-year average annual return of managed futures mutual funds was a negative 4.88% at the start of 2014. Ryan Issakainen, SVP and exchange-traded fund strategist at ETF sponsor First Trust Advisors, compared a 60/40 stock and bond portfolio with a hypothetical 45/40/15 stock, bond and managed futures mix for the period 1988 to 2012. His figures, using commonly quoted indexes, showed a slightly lower annual return with the managed futures added, but less volatility.

Yale Says ‘Alpha Is Not Dead’ as It Defends Investment Model
Michael McDonald – Bloomberg
Yale University, the world’s second-wealthiest school with a $20.8 billion endowment, said it can still beat market returns, known as generating alpha, as it seeks to stand out from other investors.
***DA: Sometimes I think the key to alpha is strategically defining the benchmarks to which you compare returns.  

Finra Fines Brokerage Over Sales of Nontraded REITS, Exotic ETFs
Wall Street Journal
The Financial Industry Regulatory Authority said Berthel Fisher & Company Financial Services Inc. had inadequate oversight over the sale of alternative investments such as nontraded REITs, managed futures, oil-and-gas programs, equipment-leasing programs and business-development companies between 2008 and 2012. As a result, its brokers made sales to investors for which they were unsuitable, Finra said.
***DA: KYC is a compliance rule, not a fast food chicken restaurant.

Proposed Amendments to NFA’s Articles of Incorporation for Changes to the Structure of NFA’s Board of Directors and Executive Committee
At its meeting on February 20, 2014, the Board accepted the Special Committee’s recommendations and unanimously ratified changes to NFA’s Articles of Incorporation. Ballots must be received by March 21, 2014

Managed Futures / Managed Funds

Fund investors find small is beautiful
David Oakley – FT.com
Size matters. And when it comes to active investment management, there is a strong case for small rather than big as the performance of some of the giant, or leviathan, funds trails in the slow lane.
**JK – Also see our interview with Mike Dubin of Silvercrest (http://jlne.ws/1pURe3k), talking about smaller funds.
***DA: So long as the benefits of nimbleness outweigh the costs of regulation.

The 25 Highest-Earning Hedge Fund Managers And Traders
The vast majority of hedge fund managers were yet again unable to keep up with the U.S. stock market as equities boomed from New York to Tokyo. But prominent hedge fund managers and traders did not have to match the 32% return of the Standard & Poor’s 500 index to make a lot of money in 2013—and many of them increasingly argued they should not even be measured against such a benchmark during a bull market.

Markowitz attacks hedge fund diversification claims
Kris Devasabai – Risk.net
Harry Markowitz, one of the pioneers of modern portfolio theory and 2009 Nobel prize winner, has claimed alternative investments such as hedge funds rarely offer the diversification benefits sought by their investors.

Hedge fund exit requests rise slightly in February
Hedge fund investors asked to pull out just slightly more money in February than they did the previous month, largely sticking with their managers to help them navigate financial markets, data showed on Friday.

Agricultural Futures Trying to Make Up for Lost Time
I noted back in January 2011 how the Barclay Hedge index of commodity trading advisors specializing in agricultural commodities beat the unmanaged Dow Jones-UBS agricultural index over a long period. It is kind of an unfair competition, really; the CTAs can take short and spread positions or be out of sideways markets while the DJ-UBS index has to keep rolling long positions forward.

Market conditions provide chance for hedge funds to justify their fees
Yorkshire Post A selloff in emerging markets has given hedge funds a chance to prove they can profit from even the most testing market conditions – and try to justify their lucrative fees. These are conditions in which hedge funds are meant to be able to outperform, using their much wider array of trading tactics to capitalise on default risks, currency routs and share price falls.

‘Alternative’ or ‘Hedged’ Mutual Funds: What Are They, How Do They Work, and Should You Invest?
Bear markets are devastating, bull markets a beautiful sight to behold, but nothing gets Wall Street more excited than the dawn of a new financial product that brings with it lucrative client flows. Thus despite the weather, the mood in luncheon conversations during my trip to New York last week was downright giddy.  The excitement is over a new frontier for the hedge fund industry: mutual funds.  Over the past few years, a combination of industry shifts and regulatory changes has led to a number of alternative investment firms entering the mutual fund market.

Pensions & Institutions

Japan’s public pension fund assets rise to record $1.26 trln
Japan’s public pension fund, the world’s largest, reported a 4.73 percent return on investments in the October-December quarter, thanks to gains in Japanese stocks and an increase in the value of its foreign assets due to the weakness of the yen.

Pension Funds Sue on a Deal Gone Cold
Sitting around a table in Baton Rouge, La., in February 2008, a handful of board members of the Firefighters’ Retirement System of Louisiana heard an investment pitch that would later come back to haunt them.

Japan’s GPIF to invest $2.7 billion in infrastructure alongside OMERS, DBJ
Pensions & Investments
Japan’s Government Pension Investment Fund will invest up to $2.7 billion in infrastructure assets over the next five years in a co-investment deal with Ontario Municipal Employees Retirement System and Development Bank of Japan, confirmed Tokihiko Shimizu, the director-general of the $1.3 trillion pension fund’s research department.

Europe’s Pension Consultants: Are fees wasted?
Investments & Pensions in Europe 
Last autumn, the Saïd Business School at the University of Oxford published a survey on fund manager selection that came to some controversial conclusions.

17 companies set pension contributions totaling $10 billion for 2014
Pensions & Investments
Seventeen companies have announced projected contributions to their defined benefit plans totaling more than $10 billion since Feb. 14, according to 10-K filings with the Securities and Exchange Commission. This total is on top of the nearly $5 billion, combined, announced earlier this year by a dozen other U.S. corporations. Companies across the board raised the discount rate used to determine obligations, boosting their pension plans’ funded status.


Don’t be late; NFA fines could add up
Futures Magazine
If you think endless snow storms and wind chills below zero have gotten you pretty far down, don’t even look at the new and proposed regulation discussed below.

Fed extends comment period for new commodity rules
The U.S. Federal Reserve gave market parties 30 more days to comment on its plan to submit Wall Street banks to greater restrictions in dealing physical commodities, the central bank said on February 27.

“As with any new industry, there are certain bad actors”
Joseph Cotterill | FT Alphaville
Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading.

Regulation: Triple whammy
For 25 years, Ucits were the only European Union-regulated product. Even the AIFMD regulates managers rather than the funds themselves. But we now have two new EU fund regimes, and a third proposed. Their common aim is to contribute to the EU’s economic growth agenda by allowing investors other than large institutions to put money in venture capital, ‘social business’ and infrastructure via regulated funds.

The cost of compliance rising for Canadian hedge fund industry
Hedge fund managers revealed they are making significant investments in their firms’ infrastructure to comply with new regulatory requirements, according to The Cost of Compliance, a report produced by KPMG International, the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA), in 2013.

Could You Be A Commodity Trading Advisor or Commodity Pool Operator and Not Know It?
National Law Review
As the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight recently reminded market participants in a Staff Advisory, entities that meet the definition of a commodity trading advisor (“CTA”) are subject to various regulatory requirements and may be required to register as a CTA with the National Futures Association (“NFA”).

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