Observations / Statistics / Commentary

Let’s not beat around the bush here – the managed futures sector is coming off its worst 3-year run in perhaps forever. If performance were not bad enough, heightened regulatory scrutiny is on the way. This in response to some (dubious?) research about fees, but also in response to another industry failure, this time at AlphaMetrix. While trend followers are seeing opportunities of late, and the one-way train in the equity market has backed off recently, new regulations could seriously alter the capital structure in the CTA space.

Quote of the Day:

“Too often, investment firms sell strategies that result in devastating losses to investors who were trying to avoid speculative investing.”

– Attorney Chris Vernon, whose firm filed a claim against J.P. Morgan for allegedly misrepresenting risk in discretionary accounts of high net worth customers.

Lead Stories

It’s Time To Let 401(k) Holders Invest Like the Pros
Wall Street Journal
Super Bowl coaches Pete Carroll of the Seattle Seahawks and John Fox of the Denver Broncos understand that a modern playbook with a broad array of read options and audibles gives their teams a greater chance at winning than a simple, smash-mouth-style offense from decades past.
***DA: I agree in theory, but the structure is critical. 40 Act funds and others that wrap alts’ performance in an ETF structure can be one way to achieve it, but excessive fees remain an impediment.

Macro and Managed Futures Strategies Lose Appeal
Funds Europe
Investor interest in both macro and managed futures strategies has dropped to a near all-time low following poor performance, causing assets under management to shrink. Research from data provider eVestment suggests that while assets under management for the entire hedge fund industry rose by 10% last year, those for macro and managed futures strategies fell.
***DA: When the retail sector starts bailing, it means the low is in.

National Futures Association floats new rules for futures firms
Lynne Marek – Crain’s Chicago Business
The National Futures Association, a trade group charged with policing its members’ businesses, said today it may boost regulations for firms that invest in futures contracts on behalf of clients. Specifically, the NFA said it may require the firms to hold minimum levels of capital to back their business operations and be subject to independent oversight of disbursement of funds, in addition to reporting on customer funds and performance results.
***DA: This will become known as the “AlphaMetrix Rule” even though the comany says it did npothing wrong and the regulators are to blame (See story in Regulation below).

Hedge Fund Winton Capital Plans U.S. Office — Sources
Winton Capital Management, the fourth largest European hedge fund by assets under management, is planning to open a U.S. office in the summer, according to people familiar with the matter. The move is part of a broader global expansion that could lead to the U.K.-based firm, which has nearly $25 billion in assets under management, opening offices in Japan and Australia.

U.K. Lawmakers Criticize Management of Queen Elizabeth’s Budget
Poor management of Queen Elizabeth II’s finances last year resulted in some royal properties falling into a dangerous or deteriorating condition, while overspending forced the Royal Household to run down its financial reserves to historically low levels, according to a report by U.K. lawmakers.
***DA: Perhaps it is time to up its allocation to alternatives.

Dumb Investment Of The Week: Commodity Funds
Ben Strubel, Seeking Alpha
Strubel Investment Management’s Dumb Investment of the Week for this week is commodity funds. Commodities are physical products such as corn, oil, or sugar. Commodity investments only used to be a way that Wall Street parted institutional investors from their money, but over the past decade banks have been increasingly targeting individual investors either directly or through financial advisors, brokers, and mutual fund companies.
***DA: Ouch!

Managed Futures / Managed Funds

Shareholder activism hedge funds stand out
Ucits-compliant hedge fund assets under management (AUM) reached a new all-time high in August 2013 and continued to rise from both performance gains and investor allocations through year end. Investors have added an estimated $4.6 billion into Ucits hedge funds in 2013 compared with $14 billion in 2012. The primary difference is due to large redemptions from macro and managed futures strategies throughout 2013. http://jlne.ws/1idmFRV
***DA: Good 2013 roundup from eVestments.

Sortino Ratio: Correcting Sharpe Ratio flaws
Dan Collins, Futures Magazine
Ever since I began following investment manager performance, I have been advised to look at Sharpe ratio as a measure of risk adjusted performance. It is a truism of investing that you can’t simply look at returns but on the amount of risk taken to achieve those returns. This is particularly important when examining trading strategies that involve leverage like managed futures and various arbitrage based hedge funds.
***DA: Article first appeared in the Dan Collins Report, in between Mr. Collins’ stints at Futures.

80 Capital opens Helium strategy to investors
Quantitative hedge fund manager 80 Capital has opened its Helium strategy to external investors following a 23-month trading run and the acquisition of substantial seed capital.
***DA: Deutsche Bank provided the seed funding for this managed futures strategy fund.

CTA Intelligence US Services Awards 2014 – 27 February, New York
CTA Intelligence
Click below for the nominee list.

Lyxor reduces fees on flagship managed futures fund
Lyxor has acted to reduce the costs on its managed futures fund amid a difficult run for such strategies.
***DA: “We will charge less to underperform benchmarks.” Gee, thanks.

Typhon Acquires Proteus Volatility Group
In November, Typhon completed the acquisition of Matthew and Michael Thompson to co-head a volatility group for the firm as principals operating the Proteus Volatility Strategy. The Thompsons have been running an excellent systematic strategy since Q3’2011 which exploits the term structure of VIX futures.

Brevan Howard, Europe’s Largest Hedge Fund, Apologizes for Poor Results
For at least one hedge fund, sorry does not seem to be the hardest word. Alan Howard, co-founder of Europe’s largest hedge fund, Brevan Howard Capital Management, apologized to investors in his year-end letter, calling its 2.6 percent return for 2013 “somewhat disappointing.”
***DA: Candor from fund managers is as refreshing as it is rare.

Future of multi-asset strategy firms brighter as QFS’ single-asset fund sinks
Simon Watkins – Euromoney magazine
In a trading world in which a broader policy mandate for central banks is firmly in operation, and where risk appetite is in decline, the failure of another single-strategy fund from QFS Asset Management highlights why multi-strategy funds appear to be the way forward.

The US Stock Market Is A Joke
David Batson, Inside Futures
The title of this piece comes from an associate of a mine who lives in Brazil. He’s right.
***DA: Little content here, but the title was too delicious to pass up.

Pensions & Institutions

What’s Behind Target-Date Funds’ Popularity?
A closer look at skyrocketing asset levels in target-date funds, plus the trend toward customized glide paths.

For employers, there’s a downside to healthy pensions
The Globe and Mail
For the longest time, it looked like this moment would never come. But it turns out 2013 was the lucky year of the pension fund turnaround. Surpluses are around the corner, as every actuarial firm is now clamouring. Companies and pensioners can thank a roaring American stock market and rising long-term interest rates, which determine how much money must be set aside to make sure a company’s retirement commitments are met. (The lower the rates, the higher the cash must be piled up.)
***DA: “You never count your money while you’re sittin’ at the table.”  -The Gambler

Preqin: 84% of institutional investors surveyed say hedge funds met or exceeded expectations in 2013
Pensions & Investments
Collectively, 84% of institutional investors surveyed expressed satisfaction with their hedge fund portfolio performance in 2013 — 21% said returns exceeded their expectations and 63% said returns met expectations, while 16% said returns fell short.
***DA: Managed futures performed poorly. No surprise there.

NCSE Data: Endowments Sticking with the Endowment Model
AllAbout Alpha
The 2013 NACUBO-Commonfund Study of Endowments indicates that the endowments of the 835 U.S. colleges and universities in its database returned an average of 11.7%. This is a notable improvement on the flat/slightly negative showing a year ago. The FY2012 return was -0.3%. The improvement is of course good news for U.S. education.  As the NCSE data also indicate, responding institutions draw an average of 8.8% of their operating budget from their endowment.

Orkney’s pension fund lands a big investment catch
Mark Cobley – Financial News
Councils in Orkney, the Isle of Wight, and the City of London have some of the best-performing pension funds in the country, while Bedfordshire Council and the London Borough of Barking and Dagenham are among the worst.
***DA: Their secret? Lack of diversification. Go figure.

FTSE 100 pension schemes continue to shift investments into bonds despite the equity bull market
The Economic Voice
Research from JLT Employee Benefits reveals that the pension schemes of the FTSE 100 companies are continuing the shift from equities into bonds despite the recent rally in the equity market. Also, total deficit in FTSE 100 schemes worsened by GBP 12 billion over the last 12 months to GBP 52 billion


AlphaMetrix denies wrong-doing in court filing
Crain’s Chicago Business
AlphaMetrix Group LLC in a court filing denies wrongdoing in a case brought against it by the Commodity Futures Trading Commission and blames the regulators for short-circuiting its plan to pay customers $2.8 million in rebates they’re owed.

Vernon Healy Files Claim on Behalf of Investor Against J.P. Morgan for Engaging in Speculating With U.S. Treasury STRIPS in $5 Million Discretionary Account
Similar to other multi-million dollar claims filed recently by investors rights law firm of Vernon Healy, this claim filed against J.P. Morgan today addresses what the law firm believes to be deceptive sales strategies designed to appeal to high net worth investors. “We see a recent trend in pitching ‘risk management’ as a sales tool,” explained attorney Chris Vernon. The investors drawn to these types of sales pitches by Wall Street firms and Family Offices want to focus on reasonable returns with downside protection, not speculate with their net worth. But, according to Vernon, “Too often, investment firms sell strategies that result in devastating losses to investors who were trying to avoid speculative investing.”

After Gensler, U.S. grain trade hopes for gentler CFTC
After years of battling tighter regulations in the wake of the 2008 financial crash, the U.S. grain industry is hoping a change in the regulators can bring some relief.
***DA: Good luck with that.

Position limits pose no threat to futures market
Philip McBride Johnson | Futures & Options World
When I first became involved with the futures business in the 1960s as outside legal counsel to the Chicago Board of Trade – then, the worlds’ largest futures market – there were prescribed limits on the size of futures positions that speculators could hold or control -but none for hedgers. The Government set most such limits but, as the futures markets expanded beyond farm products, which then almost 100% of volume, now less than 10%, the exchanges determined such limits or accountability levels for nonfarm futures.

We must do better: CFTC’s O’Malia
Dan Collins – Futures Magazine
Scott O’Malia, commissioner with the [[Commodity Futures Trading Commission]] (CFTC), told market participants the agency must do a better job in protecting end users from overly burdensome rules at the Commodity Markets Council’s State of the Industry 2014 Conference in Miami on Monday.

Few hedge funds applying for AIFMD authorisation
Luke Clancy – Risk.net
Research from BNY Mellon has found that, with less than six months to go until full implementation of the alternative investment fund managers directive (AIFMD) on July 22, fewer than a fifth of alternative investment fund managers (AIFMs) have submitted an application to their local regulator for authorisation to continue managing funds affected by the directive.
***DA: No incentive to showing up early for this game.

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