Observations/Commentary

Get Shorty: The Year Ferruzzi Spun A Soybean Tale
Doug Ashburn – JLN
Short crops, as the old saying goes, have long tails. In the case of the 1988-89 drought-shortened soybean crop, the other kind of tale also was told with Italians, a squeeze, lawsuits and a stuffed envelope.

Twenty-five years ago, July 11, 1989, the Chicago Board of Trade issued an emergency liquidation order for its soon-to-expire July soybean contract. That order was tied to a large accumulation of July beans by Italian processor Ferruzzi Finanziaria, S.p.A. And that CBOT move led to a two-day freefall in prices at the front end of the soy complex.

And that was just the beginning.
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***DA: This commentary appeared in the John Lothian Newsletter last Friday, on the anniversary of the liquidation order. Enjoy.

What’s a hedge fund manager to do?
Joshua M Brown – The Reformed Broker
I know a small startup hedge fund that was flat last year versus the S&P 500’s 32% total return. He’s out of business, pack up the truck. Nothing he can explain or illustrate means anything to the handful of seeders who let him hold onto some money for a year.
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***DA: It’s easy, as an investor in alternatives, to say one desires non-correlation. When traditional investments are outperforming, it can be awfully hard to believe it.

Why trading water futures could be in our future
Patti Domm – CNBC
Water is the one natural resource required to sustain all life on the planet, making it already the most important commodity on Earth. Although it has been fought over, sold, diverted, dammed, claimed by governments and overseen by authorities, Wall Street has never really gotten its hands in it the way it has with, say, oil.
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***DA: Water is the ultimate public good, which lends itself to fair, orderly, centrally-controlled distribution. For the future, I am placing my faith in cheap, scalable desalination, which would solve the problem forever.

Lead Stories

Hedge funds attract $72.2 bln in first five months of year -data
By Sam Forgione, Reuters
Investors poured $72.2 billion into hedge funds worldwide in the first five months of 2014, marking their strongest five-month start to a year since 2007 partly on fears of a downturn in stock and bond prices, data from a survey showed.
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Hedge Funds End Q2 On Strong Note, Up 3.2% YTD
ValueWalk
CTA/managed futures hedge funds were up for the third consecutive month, reporting gains of 1.67% in June and 2.63% year-to-date.
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Global fund managers face multi-asset skills shortage
Reuters
With stock markets struggling to match the stellar gains of 2013, bond markets looking overpriced and emerging markets offering only patchy value, many investors are looking for flexibility in their investments. That means more money going into funds that can invest across the range of asset classes instead of just one, the study by State Street and research group FT Remark found.
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***DA: Moving the point of diversification from the broker to the fund manager.

Market Mini: Understanding Risk – Why Diversifying Investments Matters
Investing.com
Uncertainty seemed to have benefited investors in 2013. However this hasn’t always been the case, especially in 2008. As recently released Federal Reserve papers show, it was a little luck and a great amount of risk that helped prevent a further decline in the stock market and the economy.
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***DA: After last year’s equity rally, the CNBC talking heads say it does not matter.

Sun finally shines on commodities
Neil Hume, Commodities Editor – Financial Times
After years of losses and investor pessimism the sun finally shone on commodities in the first half of 2014. The Dow Jones-UBS index, which tracks the prices of 21 commodities, delivered total returns of 7.1 per cent, outpacing US equities, 10-year Treasuries and high yield corporate bonds.
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***DA: Yet my portfolio seems to be stuck in a place where the sun don’t shine.

Trend Following Strategies In Today’s Markets
The Independent
Trend following strategies have been under the limelight for its dismal performance in recent years. Whenever we think of trend following, we think about Commodity Trading Advisors (CTA) and as a result, CTA funds’ performance has been closely scrutinized as well. Media has also been quick to jump onto the story proclaiming the “death” of trend following and CTA funds.
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Managed Futures/Managed Funds

Fee pressure eases on European hedge funds as demand surges
Reuters Hedgeworld
Pressure on European hedge funds to cut fees is easing for the first time in three years, giving a fillip to managers as they grapple with mounting regulatory and compliance costs. After hedge fund fees dropped in 2013 to their lowest level since at least 2005, a strong investment performance last year – giving a 9 percent return on average – coupled with increased demand have given those behind new launches the confidence to demand more from investors.
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***DA: If only cap-weighted index fund managers could charge like that.

Demand growth for agricultural products to slow
FT.com
Demand for agricultural products is set to increase at a slower pace over the next decade, but demand for protein-rich foods will rise substantially as consumers in the developing world adopt a more western diet. The projections, from the widely followed annual agricultural outlook from the UN Food and Agricultural Organisation and the OECD, highlight how fast-growing Asian economies are reshaping global agricultural production.
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New Online Exchange Matches Hedge Funds with Investors
By John D’Antona Jr., Traders Magazine Online News
Algorithms and behavior finance studies are now being sourced by a new exchange designed to bring investors and hedge funds together. The online exchange, dubbed AltX from IMATCHATIVE, is a cloud-based, two-sided automated network that harnesses its own proprietary algorithms and embraces a behavioral finance methodology to bring investors and capital providers together.
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***DA: Single male fund manager seeks 2-and-20 in exchange for solid returns and the occasional random walk.

Why Cash Is King for This Small-Cap Investor
By Steven Russolillo, WSJ
With the Dow Jones Industrial Average above 17000 and the market setting new highs on an almost daily basis, one investor is sticking to cash.
Eric Cinnamond of Aston/River Road Independent Value is among a small group of mutual-fund managers who are comfortable letting cash pile up in their portfolios. Some 70% of his fund’s assets are in cash, earning almost nothing. Yet he is confident that the ultra-conservative position will prove beneficial in the long run.
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***DA: I think he’s right, but what a brave call. Losing money when everyone else is losing money seems to be given a pass. Missing a rally is cause for divestment.

Percentages vs. Dollars—a Battle for Investors’ Attention
Charlie Wells – WSJ
Two familiar figures are duking it out in a battle for fund investors’ attention and comprehension. On the one side: the percentage. On the other, the plain dollar amount.
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Five Popular—but Dangerous—Investments for Individuals
Wall Street Journal Mutual funds that try to emulate hedge funds. Exchange-traded funds that use borrowed money to jack up their bets. Real-estate investment trusts that are hard to unload. Structured notes that look like conventional debt but can be far more risky, and “go anywhere” bond funds that are prone to trade safety for yield.
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Rallies in energy, metals boost commodity funds in Q2-Lipper
Reuters
Commodity funds delivered robust returns in the second quarter, consolidating their recovery since the start of the year, with rallies in energy and metals boosting the top performers in the Lipper Global Commodity group.
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Pensions & Institutions

Green is good, says Law Commission
Mike Foster – Financial News
The Law Commission has decided pension scheme trustees should be allowed to take account of ethical issues when taking investment decisions, rather than being forced to focus purely on returns.
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***DA: The color of money.

UK National Pension Combines EM with Smart Beta
Chief Investment Officer
The UK’s national defined contribution (DC) pension plan has added to its emerging market offerings and hosted a smart beta fund on its investment platform in its first foray into alternative indexing.
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Does the Defined-Contribution Broom Still Sweep All Before It?
AllAboutAlpha
“The New York Times froze the pension benefits for non-union employees, and we were determined that they would not do likewise for Guild employees.” Those are the words of Bill O’Meara, President of The Newspaper Guild of New York. We were discussing the background of the labor negotiations between the Guild and The New York Times in 2012, and how the outcome of those talks, now ratified so to speak by the Internal Revenue Service, may be a straw in the wind for a revival of defined-benefits plans (though in a re-jiggered form).
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U.S. financial advisers try to win over wary millennials
By Michael Leibel, Reuters
Wealth management firms are trying to get millennials excited about investing and hope to win their trust – and the sizeable wealth they are expected to control in the future.
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***DA: Hard to get excited about investing when one is drowning in student loan debt.

Former Calpers CEO Admits To Pay For Play Scheme
Mark Melin – ValueWalk
Former CalPers CEO Fred Buenrostro, one time investment chief at the US’s largest state pension fund, is admitting to a pay-for-play scandal and is implicating his one-time collaborator.
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Global alternative assets jump to $5.7trn
Fundweb
The amount of money invested in alternative assets across the globe surged by 11.8 per cent last year, the latest research from Towers Watson shows. Investors have flocked to alternative assets over recent years as they continue to search for returns outside traditional asset classes. Over the past year, the value of global alternative assets jumped from $5.1trn $5.7trn.
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The $15 trillion question
The Economist
Many retired people don’t have proper pensions any more. The financial-services industry may end up cashing in.
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Lead Stories

PwC must face $1 billion lawsuit over MF Global collapse
By Jonathan Stempel, Reuters
A federal judge on Wednesday rejected PricewaterhouseCoopers’ request to dismiss a $1 billion lawsuit accusing the auditor of providing bad accounting advice that contributed to the October 2011 collapse of MF Global Holdings Ltd, a brokerage run by former New Jersey Governor Jon Corzine.
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Energy Trading Seen Slumping as Regulatory Oversight Rises
Bloomberg
Energy trading on futures exchanges is slumping as increased oversight from regulators hinders transactions, according to Platts, a company publishing prices for physical commodities including oil.
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Arden: AIFMD driving investors to alternative Ucits
Risk.net
The introduction of AIFMD in Europe is pushing investors away from offshore funds towards onshore registered vehicles such as Ucits funds, according to Arden Asset Management
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Regulators Ready Money-Fund Rules; SEC Vote Could Come as Early as This Month
By Andrew Ackerman, WSJ
WASHINGTON—U.S. regulators are poised to complete long-awaited rules intended to prevent a repeat of the investor stampede out of money-market mutual funds that threatened to freeze corporate lending during the 2008 financial crisis.
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***DA: A regulation is coming, and it is targeting institutional investors. Will a rule forcing stressed funds to break the buck alleviate panic, or encourage it?

NFA assessment fee reduction will become effective on October 1, 2014
Effective October 1, 2014, NFA’s assessment fee will be $.01 per side for futures and options contracts. The new rate is a 50 percent decrease from the current rate.
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***DA: Add NFA fees to the list of things that ain’t what they used to be.

Fund managers hold the potential for systemic risk
John Authers – Financial Times
Could fund managers pose a systemic risk? Regulators round the world started to ask the question, and answered “perhaps”.
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