Observations / Statistics / Commentary

(Mis) Managed Futures Sector
by Douglas Ashburn

Last month’s Bloomberg story about managed futures continues to ripple through the industry. As I scanned the headlines while assembling this week’s newsletter, I hit upon two items from law firms targeting the managed futures sector.

We do not need this. Targeting Morgan Stanley and other firms will be a further drag on the sector, affecting returns as well as asset flows. No matter what the outcome of these investigations, the industry must conduct its own investigations, root out any bad actors, and work together to promote the benefits of managed futures as an asset class.

The key is integrity. Integrity starts with fiduciary responsibility. Fiduciary responsibility starts with putting the customer’s interest ahead of one’s own interest. In fact, doing anything else is an ethical lapse worthy of dismissal from every professional society out there. The customers know this. Read the Cogent study below. Integrity outranks everything else, including performance statistics.

Was the Bloomberg story a crock? A bit. Did the author play fast and loose with some facts, engage in cherry-picking, and intentionally mislead in some areas? Of course. But, how many of you read the article and thought, “although it is nonsense, there is at least a kernel of truth in there.”

As if the fee story fallout weren’t bad enough, the AlphaMetrix implosion has led to another round of questions about what the heck is going on in the managed futures sector. I wish there were a better answer than, “I don’t quite know. Hopefully it is not that bad.”

It is that bad. 

Look around the industry. The word of the decade is “disintermediation.” Middlemen are being cut out at every stage of the trade life cycle. Meanwhile fees are rising at the exchange level, traditional revenue sources such as interest income have dried up, and regulatory changes have forced a plethora of new compliance burdens on firms. All of these things are impediments to total return at the end-user level.

Throw in the clusterbombs that were MF Global, Peregrine and AlphaMetrix, and we have the makings of an industry crisis.

Let’s fix this.

Quote of the Day:

“As AlphaMetrix has come under redemption pressure, their expenses are largely fixed, their revenue variable and therefore eventually something had to give. What gave was that they were taking unauthorized loans from the hedge funds they were overseeing.”

– Kenneth Phillips, chief executive of HedgeMark International, a BNY Mellon affiliate, who criticized non-bank administrators as detracting from the integrity of the system, in the Private Wealth article “AlphaMetrix Lawsuit Points To Larger Hedge Fund Risks.”

Keller Rohrback Investigates Managed-Futures Funds Regarding Excessive Fees
Attorney Advertising. Keller Rohrback L.L.P. is currently investigating various fund managers, brokers and advisors of managed-futures funds regarding allegedly excessive fees associated with those funds and potential conflicts of interest. Many managed-futures funds have fees that are so high they wipe out all gains for investors.
***DA: I had to include this item, as it speaks volumes about the state of our capital markets/political/litigation system. Several layers of fees? Billions in asset flows? Sounds like an invitation to shark attorneys to come get a piece of the action.

Zeldes Haeggquist & Eck, LLP Announces Investigation on Behalf of Investors in Managed-Futures Funds
Zeldes Haeggquist & Eck, LLP, a shareholder and consumer rights litigation firm, has commenced an investigation into claims on behalf of purchasers of certain managed-futures funds offered by Morgan Stanley Smith Barney and its subsidiary Ceres Managed Futures LLC. The investigation concerns whether Morgan Stanley and Ceres disclosed excessive commissions, expenses, and fees that would be charged to customers who invested in the following futures funds
***JK: Of course, the other side of the argument is that it will take a hit to the pocketbook to weed out the charlatans.

Integrity Of Alts Providers A Top Criterion Say Advisors
PR Newswire
Franklin Square Capital Partners, a leading manager of alternative investment funds designed for individual and small institutional investors, today announced the results of its recent survey conducted by Cogent Research, a division of Market Strategies International. The survey was intended to measure the attitudes of independent advisors and registered investment advisors toward alternative investments.
***DA: Fascinating. Integrity outranked performance, correlation, pricing and liquidity issues.

The billionaire play coming to your 401(k)
Public pension funds are able to boost their returns by using alternative investments, including private equity. But you need big money—billions—to get into that game, which means 401(k) investors have been shut out. That’s about to change.
***DA: Another reason why we need more truth-in-fees. The arrival of “mom-and-pops” into a sector is always accompanied by more regulators.

AlphaMetrix Lawsuit Points To Larger Hedge Fund Risks
Private Wealth
AlphaMetrix’s fall from grace points to larger issues the hedge fund industry faces when it comes to the use of non-bank administrators.

Lead Stories

Corzine, banks fail to win dismissal of MF Global lawsuit
A federal judge on Tuesday rejected a bid by former MF Global Holdings Ltd Chief Executive Jon Corzine to dismiss investor litigation seeking to hold him, former colleagues and several banks responsible for the futures brokerage’s rapid collapse.
***DA: Meh. It was worth a try, huh?

CME Group hikes transaction fees for 2014
CME Group Inc, the largest U.S. futures exchange operator, on Tuesday said it would increase transaction fees for nearly all its major products next year after making investments in resources and technology.

What do advisers look for in alternative investments? (Evidence of robust due diligence and a strong track record, that’s what)
As more retail alternative investments hit the market, financial advisers are doing more due diligence and seeking out firms that provide the most transparency and have solid performance.

A Conversation with the Founders of CTA Expo
The Dan Collins Report, via Options Insider
Frank Pusateri and Bucky Isaacson, the founders of CTA Expo have been involved in the futures and managed futures worlds for several decades. They played a part in creating the organization representing commodity trading advisors that would eventually turn into the Managed Funds Association. By 2008 many CTAs had grown frustrated with the MFA. It had gone from the Managed Futures Association to the Managed Funds Association several years earlier and its focus had shifted to representing the large hedge fund players that provided much of their funding.

60/40 is fine for many advisers
Advisers are overdiversifying, and it’s not doing their clients any good.That’s the mantra of advisers who continue to use a traditional stocks-and-bonds allocation strategy, despite the surge of money being turned to alternative investments.
***DA: It’s a 20/20 problem, actually. Stock and bond funds have been on a one way train since the financial crisis, so it is easy to lose sight of what is important in the long term. 

Pimco’s Bill Gross Bets Treasury Yields Won’t Rise Despite Fed Tapering
Min Zeng – MoneyBeat – WSJ
Bill Gross, who runs the world’s biggest bond fund, has boosted Treasury bond holdings for two straight months through October, betting that Treasury yields won’t rise even if the Federal Reserve pares back monetary stimulus.
***DA: The interest rate environment is arguably the biggest driver of change in the managed futures sector, from the trading of products to the management of the funds themselves.

Managed Futures / Managed Funds

Hedge Funds Attract US$100B In Oct
FINalternatives Investors had poured US$100 billion into hedge funds as of end-October 2013, bringing total industry assets under management to $US1.91 trillion.
***DA: From the article: CTA/managed futures funds were up 1.06% on the month (but down 1.84% YTD, the only strategy in the red on a YTD basis).

The Case for Managed Futures ETFs
After enduring one of the most tumultuous periods of modern US stock market history, investors have gained a renewed interest in strategies aimed at reducing the volatility of their investment portfolios. Traditionally, this has meant increased exposure to bonds along with decreased exposure to stocks. The problem with this strategy today, however, is twofold: first, in many cases bond yields are too low to meet investors’ return objectives.

Henderson Global Buys Hedge Fund Firm
Asset management firm Henderson Global Investors has acquired an Australian and UK-based hedge fund firm, adding $342 million to HGI’s assets under management. HGI said in a statement today that it has purchased H3 Global Advisors, which specializes in managed futures and commodities strategies. Details of the sale were not revealed.

Franklin Templeton to push alternatives sales in Europe
FTSE Global Markets
Franklin Templeton Investments has hired a new head of alternatives sales for Europe after experiencing growing interest in alternative products throughout the region. Industry veteran Peter Vincent joins from Fauchier Partners and is tasked with selling the group’s alternative products in Europe and supporting the growth of its existing alternative offerings.

Hedge funds raise $100bn in new money this year
Sam Jones, Hedge Fund Correspondent – FT.com
Hedge funds have raised more than $100bn in new capital from investors so far this year in spite of underperforming most equity markets, according to the latest industry figures.

For Better Performance, Hedge Funds Seek the Inner Trader
In the hedge fund industry, as in sports, performance is everything. So after several years of lackluster performance, the industry is increasingly turning to self-help programs, sometimes referred to as “mindware” products, to try to improve its game.
***DA: Returns, by any means necessary.

2014 likely to be positive year for hedge fund growth
Margie Lindsay – Risk.net
As 2014 looms, the hedge fund industry is poised to enter a very different world, shaped by regulation on both sides of the Atlantic, but whether the new normal is going to extend throughout 2014 is moot.

A hardscrabble year for commodity funds
The Globe and Mail
We screened for the 15 best-performing funds for the six months ended Sept. 30. The U.S. dollar, segregated and duplicate versions of funds were excluded, along with funds closed to new investors.
***DA: Only one managed a gain over the period. My reaction was, “there was one?”

Pensions & Institutions

Use Alternatives to Boost Retirement Portfolios 
Retirees and institutional investors share the same priorities. Both aim to reduce portfolio volatility and maintain steady streams of funds, said Faizan Dhanani, an executive vice president at Horizons ETFs at yesterday’s ETF University event in Toronto.

Vanguard hires as part of pensions push
Sophie Baker – Financial News
Vanguard Asset Management is aiming to take a bigger role in the UK defined-contributions pensions sector with the hire of a high-profile former consultant to develop its offering. Vanguard hires as part of pensions push. It is the latest sign of increasing interest in the sector, in part triggered by the additional 10 million people who could be automatically enrolled into workplace schemes under the government’s latest pensions reform.

Harvard Swap Toll Tops $1.25 Billion as Agreements Exited
John Lauerman & Michael McDonald – Bloomberg
Harvard University, the world’s richest college, lost $345.3 million terminating interest-rate swaps last year, bringing its cost of unwinding debt derivatives since 2008 to more than $1.25 billion.

Gleeson: Why I don’t hold commodities funds
FE trustnet
An unconstrained global fund offers the most effective way to access the commodities story, according to head of FE Research Rob Gleeson, who thinks everyday investors should avoid physical commodities funds and ETFs

A hacker approach to rewiring pension funds
The Guardian
There is a spectre haunting the global pension fund industry. It is the spectre of a complete failure of common sense. It is driven by an outdated and increasingly dangerous ideology of infinite growth, and is held in place by structures of power and cultural inertia.

Growing popularity of “low volatility” funds belies their effectiveness
The National
In an environment where returns on pension funds’ traditional fixed income investments remain entrenched at historical lows, the advice from consultants and other investment advisers is clear: allocate money into asset classes seeking higher returns and take measures to manage the extra risks that they carry.


SEC chair says agency prepared for increase in trials after policy change
The top U.S. securities regulator said on Thursday her agency welcomed the possibility of more cases going to trial following a policy change that could require some defendants seeking settlements to admit to wrongdoing. 

SAC Manager’s Trial Next Week May Offer View Inside Fund
SAC Capital Advisors LP money manager Michael Steinberg lost a bid to delay his insider-trading case, leaving him to face a jury next week in the first of two upcoming trials tied to the hedge fund run by Steven A. Cohen. SAC Capital sought to plead guilty last week in Manhattan federal court after being indicted for securities and wire fraud. A judge declined to immediately accept the plea, saying she wanted to review documents in the case. Steinberg, 41, had argued that publicity surrounding the U.S. probe of SAC, and the record $1.8 billion plea deal, would compromise his right to a fair trial in the same courthouse. 

EU antitrust regulators monitoring metals warehousing
European Union antitrust regulators are monitoring metals warehousing, a spokesman said, stopping short of following U.S. counterparts in conducting inquiries into access and cost problems caused by storage backlogs.
***DA: The new wave of antitrust snooping is set to affect all commodity asset classes. You have been warned.

Corporate and Financial Weekly
Katten Muchin Rosenman LLP
It was a busy week at the CFTC, with several rulemakings released, including a final rule on margin for uncleared swaps and re-proposed rules on position limits. The commission also issued a proposed rule that would require [[IB]]s, [[CPO]]s and [[CTA]]s to become members of a registered futures association. In [[SEC]] news, the commission issued a $150,000 whistleblower award.

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