Observations / Statistics / Commentary

I Still Believe in the Futures Industry Model
By John J. Lothian
I still believe in the futures industry segregated funds model.  In fact as strange as it may seem, my own experience, or that of my former firm with Refco and MF Global, has only strengthened my belief in the structure and wisdom of the model.  However, there is a flaw to the model which has weakened faith in the futures markets and the model.  That flaw is the lack of stewardship from our regulators and bankers and the lack of what I will call a customer fund dislocation scheme.

Recently we received the news that MF Global customers in the US would receive 100% of their funds back.  Several years ago, a fund The Price Group represented had over $200 million stolen from it by Refco right before Refco went bankrupt.  Through the diligence of Tom Price, all those funds and more were returned to customers.

All it took to get the money back was time, application of the laws and a waste of customer goodwill.  A customer fund dislocation scheme for the industry could have benefited both the Refco and MF Global bankruptcies.  Instead, the industry has squandered its hard earned reputation for customer fund safety and we are paying the price for that lack of stewardship.

The Peregrine Financial Group case continues to go on and I believe there will be a recovery of significant assets from the custodian bank, which I believe was derelict in its regulatory responsibilities.  A customer fund dislocation scheme would have helped here too.

(To read the rest of the essay, visit the John Lothian Newsletter blog at http://jlne.ws/KmeKWc )

Quote of the Day

The powers of the status quo want us all to forget about MF Global, Peregrine Financial Group and more recently the AlphaMetrix black eye. – John J. Lothian, in the recent commentary “The Rogue Incumbents of the NFA Board”

Ten Market Guarantees for 2014
Paul Vigna – MoneyBeat – WSJ
Here, then, are ten predictions we can absolutely, positively guarantee will come true in 2014. They definitely will improve our success rate when this year’s predictions get tallied up. They may even help you in the market.
http://jlne.ws/1dr0oOV
***DA: Anyone can be Nostradamus if the bar is set low enough. I predict the sun will rise in the east, and Chicago will be warmer in July than it is today. See?

The Rogue Incumbents of the NFA Board
The John Lothian Newsletter
Until two years ago the elections for the board of directors of the National Futures Association was a pretty much a sure thing for the incumbents. However, when Doug Bry and Ernest Jaffarian ran as write-in nominees, after not getting the nod from the NFA Nominating Committee, they won election in an upset.
http://jlne.ws/1l4nYVr

Lead Stories

Voices: Lee Partridge, on Investing in Alternatives
WSJ.com
From the perspective of a fund manager, there are two objectives we’re seeking with alternative investments. The first is to add return strains that are diversifying to a portfolio because they are less-than-perfectly correlated with market-based exposures. The second objective is pursuing alpha. Both are legitimate applications of alternative investments.
http://jlne.ws/1grbDYq
***DA: Nice little shout-out to managed futures.

Fund managers make monkeys out of molehills
Mark Cobley – Financial News
One of the biggest debates in fund management in 2013 concerned whether a new breed of “smart” index-tracking investment strategies are as good at picking stocks as upside-down monkeys.
http://jlne.ws/1dcMZtG
***DA: They always find new ways in which to package old ideas.

Millions of Tons of Metals Stashed in Shadow Warehouses
WSJ.com
The world’s metal is slipping into the shadows. Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe.
http://jlne.ws/1dcMZtX
***DA: Now you see it; now you don’t.

Commodity hedge fund Higgs Capital to wind down -founders
Reuters
Commodity hedge fund Higgs Capital Management, founded by two former bank commodity executives, will wind down and return money to investors as it faces headwinds raising money, joining other commodity funds that closed this year.
http://jlne.ws/1grcUi1
***DA: Redemptions continue in the commodities world, to the tune of about $100 billion says a recent report.

Record-Breaking Volume on OneChicago in 2013
PR Newswire
OneChicago, LLC, an equity finance exchange, announced December 2013 volume of 1,174,205 and a total volume of 9,515,194 for full-year 2013.
http://jlne.ws/1kbEBQT
***DA: A bright spot in the futures world, and savvy CTAs are taking note.

Managed Futures / Managed Funds

Hedge Funds Return 8%, Gain $225B In Assets In ’13
FINAlternatives
Hedge funds generated returns of 8.02% in 2013 (having returned 0.99% in December) and gained over US$225 billion in assets for the year. According to the latest Eurekahedge data, hedge fund managers were up 2.53% in H1 2013 and 5.36% in H2.
http://jlne.ws/1aqSvF1

Hiding Behind Liquidity – Assessing Managed Futures Advisors
Seeking Alpha
As a Managed Futures Fund Advisor, we are always assessing sub-advisors on behalf of our clients. Our investment team reviews multiple shops each week. But we reject many more than we potentially use.
http://jlne.ws/19N0H5E

SAC Capital Outperforms Peers in 2013
WSJ.com
Steven A. Cohen is exiting the hedge-fund stage with a 2013 performance that is ahead of the pack. As the beleaguered hedge fund manager’s SAC Capital Advisors prepares to return outside money and manage only its billionaire founder’s cash beginning next month, it is closing in on a banner year relative to its peers.
http://jlne.ws/1dr0rKB

Active ETFs on the Rise
On Wall Street
Ever since the SEC changed its rules to allow sponsors to offer actively managed exchange traded funds in 2007, this asset class has been putting down roots. It reached almost $15 billion in assets at the end of October, according to Morningstar. While this is only a small fraction of the total $1.64 trillion ETF market, these products now offer advisors some interesting opportunities not available through either mutual funds, stock purchases, alternative asset classes or traditional indexed ETFs.
http://jlne.ws/1kbAVyH

Five trends in global hedge fund flows
Harriet Agnew – Financial News
As 2013 draws to its close, research from data provider eVestment points to the key trends emerging in the global hedge fund industry.
http://jlne.ws/1dcMZtY

Pensions & Institutions

Bond funds post record $80 billion in redemptions in 2013
Pensions&Investments
Bond mutual funds in the U.S. posted record investor withdrawals of $80 billion in 2013 as investors fled fixed income in anticipation that interest rates will rise further. The previous annual record for redemptions from bond funds was in 1994, when investors pulled about $62 billion in the full year, or 10% of assets, as interest rates rose, according to ICI.
http://jlne.ws/1g3r2gF

US public finance: Day of reckoning
By Neil Munshi and Norma Cohen – Financial Times
Chicago is tackling the worst pension crisis in the US. But methods that got it into its bind are still used across America
http://jlne.ws/1cKRrjw

Illinois Retired Teachers Association sues over state pension reform
Pensions&Investments
The lawsuit, the first filed over the law, was filed Dec. 27 in Cook County Circuit Court on behalf of eight retirees. The lawsuit contends the pension reform law violates a state constitutional stipulation that pension benefits “shall not be diminished or impaired.”
http://jlne.ws/Jwy82t
***DA: This deal is nothing compared to the diminishment or impairment resulting from a default. They already doubled the state income tax (a “temporary” tax that will most certainly become permanent. Something’s got to give.

Carlyle aiming for pan-alternatives outsourcing
P&I Online
Carlyle Group is the first alternative investment manager to set up a group to invest across multiple asset classes using third-party funds in addition to its own. Other alternative firms such as The Blackstone Group LP, Apollo Global Management LLC and KKR & Co. LP are investing sizable discretionary separate accounts for institutional investors, also called strategic accounts and separately managed accounts. But Carlyle is the first to span multiple strategies and managers.
http://jlne.ws/1dWYm7q

Regulation

CFTC’s Gensler Says Regulators Reached ‘Right Balance’ on Rules
Cheyenne Hopkins – Bloomberg
U.S. regulators’ Dodd-Frank rules properly balance Wall Street’s pursuit of profits with the public’s need for a stable financial system, said outgoing Commodity Futures Trading Commission Chairman Gary Gensler.
http://jlne.ws/1d32OzR

Demoralised U.S. commodities watchdog waits for new leaders
Reuters
The incoming chairman and new members of the U.S. Commodity Futures Trading Commission (CFTC) will inherit an agency that has been severely demoralised by overwork, defeats in court, infighting among the commissioners and severe criticism from the futures industry.
http://jlne.ws/1l9hhi0
***DA: The good, the bad and the ugly of regulatory reform.

CFTC Opens Probe Into Fees Charged by Managed Futures Funds
Bloomberg
The Commodity Futures Trading Commission is investigating the high fees charged to investors in the $337 billion managed futures market. CFTC Commissioner Bart Chilton says the agency initiated the inquiry after Bloomberg Markets magazine reported in its November issue that 89 percent of the $11.51 billion profits of 63 managed futures funds was consumed by commissions, fees and expenses.
http://jlne.ws/19fSLMr
***DA: Wonder what they will find. It took them five years to determine there was inconclusive evidence of manipulation in the silver market.

CFTC’s Division of Swap Dealer and Intermediary Oversight Issues No-Action Relief Regarding Introducing Brokers’ Compliance with Certain Financial Reporting and Capital Computation Requirements
http://jlne.ws/1cTup6q

Finding Our Differences: FOA’s Anthony Belchambers Says Regulation Has Long Way to Go
JohnLothianNews.com
European regulatory changes continue to move forward, but there are significant differences between the US and EU, and also between the European states themselves. The Futures & Options Association’s Anthony Belchambers spoke with John Lothian News about where Europe stands in the rulemaking process and the challenges that still remain. Belchambers said that the issue of extraterritoriality continues to concern EU regulators and market participants.
http://jlne.ws/1eRwsik

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