Two more scandals are plaguing the financial sector this week – one surrounding PFGBest and its founder Russell Wasendorf, Sr., and another involving the manipulation of LIBOR. And yet, the popularity of alternative investments, and specifically managed futures, continues to rise. But up first, we present the first of our videos from last month’s highly successful Emerging Manager Forum London.

Observations – Statistics – Commentary

No More Scandals, Please
Douglas Ashburn

This week, the futures industry was plagued with its second major FCM scandal in nine months – this one surrounding PFGBest and its founder and CEO Russell Wasendorf, Sr. Since most readers are likely familiar with the scandal, we will simply refer you to the John Lothian Newsletter blog for recent updates. Meanwhile, another scandal involving the manipulation of LIBOR continues to grow. Finally, some are alleging that traders at JP Morgan initially masked the extent of losses in its credit risk management trading debacle. Trust in the financial sector seems shaky at best.

But the news is not all bad. In fact, some of the news is quite good. Regulatory and customer-driven solutions to the FCM problem have begun in earnest, as the market comes to the realization that the loss of segregated funds at MF Global was not a “one-and-done” event. The popularity of alternative investments, and specifically managed futures, continues to rise. But up first, we present the first of our videos from last month’s highly successful Emerging Manager Forum London.


Kevin Cook of Autumn Capital Partners Discusses Common Pitfalls for Emerging Managers
Kevin Cook, partner at Autumn Capital Partners, a UK-based consulting firm for hedge funds and CTAs, discusses common pitfalls for emerging managers and the outlook for the managed futures space at the Emerging Manager Forum in London. Cook presented “The Top 10 Reasons Emerging Managers Fail” at the conference. Interview by John Lothian News editor-in-chief Jim Kharouf. **Special thanks to Bucky Isaacson and Frank Pusateri for their help and to the May Fair Hotel, for use of their facilities

CTA Expo Chicago, September 13, 2012
CTA Expo
After a successful Emerging Manager Forum in London, where we exceeded last year’s attendance and had over 130 registered as capital sources, we are now concentrating on CTA Expo Chicago, September 13, 2012. At last year’s Chicago event, 43 percent of the attendees registered were capital sources, and 24 percent registered as CTAs. We anticipate another sold-out event, so please register early if you plan to attend.

The PFG Implosion: Lessons (Re)learned – JLN Guest Commentary
By James Gellert and Edward Chambliss, Rapid Ratings International
For the second time in less than a year the futures industry has been rocked by the implosion of yet another well-known FCM, Peregrine Financial Group, Inc. This time the collapse took place against a backdrop of formal CFTC allegations, from the start, of the misappropriation of customer funds. While PFG was nowhere near MF Global in the size and scope of its business, the firm enjoyed added industry prominence as a “thought leader” and promoter of ”best practices” growing out of its special efforts to instruct large numbers of individual traders by means of the periodicals and books it published over many years.

Video: Topic Overview on Managed Futures
Director at Castle Hall Alternatives, Esther Zurba, MBA, CAIA, gives a general overview of Managed Futures and its coverage as part of the CAIA Program. She discusses some of the benefits and applications of Managed Futures programs and the intricacies of using them in a brief but informative presentation.
**DA: Not just a shameless plug for a fellow CAIA – it is actually a nicely done video.

Managed Futures Scorecard   7/12/2012
Newedge Indices MTD Return YTD Return
Newedge CTA Index 2.89% 2.03%
Newedge CTA Trend Sub-Index 4.69% 3.74%
Newedge Trend Indicator 4.18% -7.81%
Newedge Short-Term Traders Index 0.64% -0.19%
Barclay Indices MTD Return YTD Return
Barclay CTA Index   0.11%
Barclay UCITS Index   2.57%
BTOP FX Index 1.64% 1.98%
BTOP 50 Index 2.00% 2.06%
Morningstar Long/Short Com. Index 2.36% -4.70

Lead Stories

Debacle at PFGBest is worst nightmare for client
The calls started coming in at about 2 p.m. last Monday, said Lauren Nelson, communications director for Attain Capital Management LLC, a small introducing broker that specializes in managed futures. Friends and industry members wanted to know if she had heard about the problems surfacing at Peregrine Financial Group, the non-clearing futures commission merchant put on ice last week by the National Futures Association. Had Ms. Nelson heard reports that the brokerage firm’s boss, Russell Wasendorf Sr., had attempted to commit suicide?

The Price Futures Group and Citi Announce Agreement to Introduce Price Futures Clients to CitiFX Pro
The Price Futures Group, a full service futures and options brokerage firm today announced that it has entered into a joint agreement with Citi C +0.21% to offer its clients access to CitiFX Pro, Citi’s online forex trading platform for active individual and small-to-mid sized institutional traders.
**DA: For all retail forex traders who may be shopping for a new broker this week.

PIMCO’s Gross Sees Jump in Jobless Rate Next Year
What happened to his optimism? PIMCO Chairman Bill Gross, traditionally a Fed cheerleader, increasingly doesn’t like what he sees. Speaking with CNBC’s “Street Signs” on Wednesday, the bond king said Federal Reserve policies are progressively having less impact, and by this time next year we’ll see unemployment higher than today’s 8.2%.
**DA: The diminishing marginal returns regarding Fed actions.

World agricultural commodity prices likely to remain high
The Hindu Business
Although global agricultural commodity prices have come off recent peaks, food price inflation remains a concern in developing countries; and over the next ten years, agricultural prices are expected to remain on a higher plateau even as energy price levels and volatility are seen to condition the outlook, according to the latest OECD-FAO Agricultural Outlook 2012-2021.
**DA: By extrapolating current trends, one would certainly arrive at this conclusion. But the world is more dynamic than that. Would we really divert a greater percentage of grain into biofuels amid a worldwide food shortage?

JPMorgan Pointing to Traders Baffles Former Employees
JPMorgan Chase & Co. (JPM)’s assertion that traders at its London chief investment office may have intentionally mismarked trades, masking losses that total at least $5.8 billion, makes little sense, according to former executives with direct knowledge of the unit’s operation.
**DA: Hmmm. The article never uses the word “fraud” but is there any other term for what is being alleged here?

Understanding tail-risk hedges and funds – part one
Conversations surrounding tail-risk started gaining more frequency with both investors and funds starting with the collapse of Long Term Capital Management as a result of the 1998 Russian debt default crisis. Since then, rolling crises from the 2007 “quant” crisis, to the 2008 global financial meltdown and most recently Grexit have made tail-risk hedging a hot topic. New funds, books, papers, and summits are springing up throughout the financial universe discussing tail-risk, whether it can be effectively hedged and how investors can fund the experiment. In this series, Opalesque will examine some of the more common tail-risk hedges, the funds in this space and what investors can expect.

Commodity funds can reduce your portfolio’s riskiness
By John Waggoner, USA Today
Some people believe that you can treat diseases by giving sick people more of what made them sick in the first place. Using that logic, you’d use an electric chair to cure people struck by lightning. For people sick of volatility, there’s evidence that adding another volatile investment — managed commodities — can calm a portfolio. This isn’t a strategy for everyone, particularly those prone to nervous tics, but it may work for you.

Managed Futures/Managed Funds

Cotton and Tin: Spots and Futures
It is this backwardation, then, that is the normal situation on Keynes’ view, and the contrary situation (“contango” as it has come to be called), the one in which futures prices are higher than, and over the life of the contract decline toward, the spot price, is extraordinary. Nonetheless, contango happens. Indeed, it happens sufficiently often to have inspired a contrary theory, the theory of storage.
**DA: A fresh look at the theory of storage vs. convenience yield.

U.S. billionaire named as mystery buyer of “The Scream”
Reuters via Yahoo! News
U.S. billionaire Leon Black is the mystery buyer who paid a record $120 million for Edvard Munch’s masterpiece “The Scream” at Sotheby’s in May, the most expensive work of art ever sold at auction, the Wall Street Journal said on Wednesday.
**DA: I keep forgetting – are objects of art purchased by fund managers categorized as “investment” or “conspicuous consumption?”

Investors downgrade prime brokers new survey shows
By Bailey McCann, Opalesque
A new survey from operational due diligence firm, Corgentum Consulting shows that prime brokers are no longer leading the pack as the most important service provider for investors. Instead hedge fund administrators are gaining more prominence as are auditors. I spoke with Jason Scharfman, Managing Partner of Corgentum Consulting, about the findings. “After the Lehman Brothers disaster, many investors placed significant importance on the role of prime brokerages,” said Jason Scharfman, Managing Partner of Corgentum Consulting. “The survey data indicates a potentially dangerous shift in the opposite direction signifying that investors have reverted to their old ways and are devaluing the role of prime brokers.”

Top 300 Hedge Funds Get Bigger, Nearly Surpass $750 Billion AUM Mark
The Top 300 US Equity Hedge Funds have seen their assets increase by more than $110 billion, or 6.75%, since the beginning of 2012. Overall, the top U.S. equity hedge funds manage a combined $746 billion in equity assets. On an absolute basis, 33 managers saw their US equity assets increase in excess of $1 Billion over the first quarter of 2012.

J8 and Pairstech to launch diversified liquid futures fund in October
Two London-based companies, J8 Capital Management LLP and Pairstech Capital Management LLP, are launching the J8 Futures Fund, a CTA managed futures fund domiciled in Malta, in October 2012. The fund is open to Qualifying Investors with a minimum investment of $75,000 and will be marketed globally to institutional investors and high net worth individuals.

Bloodied but unbowed, hedge fund Merchant Commodity trudges on
Chicago Tribune
Unlike some of his peers, Michael Coleman is not throwing in the towel after a bruising 18 months during which his Merchant Commodity Fund lost two-thirds of its capital. But after recently hitting another bad patch of volatile oil, grain and soft commodity prices, the veteran trader and co-founder of Merchant doesn’t know how long investors will keep him in the ring.
**DA: The trend is your friend ‘til the end of the trend.

Citigroup opens curtain on commodity client funds
Chicago Tribune
Responding to customer concerns following the loss of funds in the collapse of commodities broker MF Global, Citigroup said it is giving its customers Internet access to details about how their collateral is invested. The system, which Citigroup said has been under development since March, began working over the weekend before news broke that U.S. futures broker PFGBest had collapsed after allegedly losing more than $200 million in customer money.

‘Look the manager straight in the eye,’ say selectors
Investment Europe
Despite staging a comeback in many portfolios, as low yields elsewhere fuel the need for returns, hedge funds still face demands for trust, transparency and track records. “I expect the hedge fund and absolute return industry to raise another $500bn over the next ten years.” Even as Marcus Storr, head of hedge funds at Feri, warns of some pitfalls of hedge fund investing, he is sure that investment managers will have to turn to them to find diversification and returns.”
**DA: Trust, transparency and track record. These have never been more important, for both money managers and those in charge of keeping segregated funds safe.

Pensions & Institutions

For pension funds, the Libor scandal is about trust, not money
Financial News
As the Barclays/Libor debacle fades from newspaper headlines, we can all start to assess the long-term impact of this immensely disappointing development. As advisers to pension funds, we think the financial effect on our clients will be negligible – but the reputational impact on the City is immense.

Pension shortfall: Solving for the missing 2%
Pensions & Investments
Pension plan sponsors face significant challenges. Retirement obligations continue to increase, and the two major equity market setbacks in 2000 and 2008 have produced widening funding gaps. So what does the future hold? Will their plans be able to reliably achieve their stated return objectives? Unfortunately for plans relying solely on traditional equities and fixed income, the prospects look grim. Our analysis suggests these plans will likely experience a 2% shortfall per annum over the next seven to 10 years.
**DA: According to the report, a 20 percent allocation to alternatives that can deliver annual returns of 17 percent would right the ship. Oh; is that all we need to do?

Your Pension Payout: Lump Sum or Annuity?
By Roger Wohlner, US News & World Report
This is an issue that I’ve helped a number of clients resolve over the years. This issue has been in the news a bit more of late with the decision by General Motors to offer some of its retired employees who are currently receiving monthly pension payments an opportunity to rethink their original decision.
**DA: It’s good for institutional managers to know what financial planners are telling retail clients. I notice he touched only briefly on the real risk, which is what happens in case of issuer default.

AIMA publishes paper on social and economic value of hedge fund industry
The paper stresses the financial stability benefits that hedge funds provide to financial markets and highlights the fact that hedge funds increasingly are performing an important social role by managing investments for pension funds, university endowments, charitable foundations and other socially-important institutional investors.


CFTC Approves New Financial Rules Submitted by the National Futures Association to Strengthen the Protection of Customer Funds Held by Futures Commission Merchants
The new NFA rules require FCMs to strengthen their controls over the treatment and monitoring of funds held for customers trading on U.S. contract markets (segregated accounts) and for funds held for foreign futures and foreign option customers trading on foreign contract markets (Part 30 secured accounts).
**DA: A step (albeit a small one) in the right direction.

French transactions tax could be extended to derivatives, warns source
COO Connect
The French financial transactions tax on listed equities will lead to a surge in equity swaps while an extension of the tax to derivatives products cannot be ruled out, an industry source in Paris has said. Hedge funds trading listed French equities are going to be hit by the 20bp charge, which will be collected by their broker-dealer. Some reports have suggested the charge could hit 30bp
**DA: Coming soon to a market near you: Higher costs of doing business!

Key Mutual Fund Regulations
Mutual funds didn’t cause 2008’s financial collapse, and they weren’t the targets of the massive Dodd-Frank legislation passed in its wake. Yet the funds, and their investors, will feel the effects of a spate of regulations in the works that are designed to head off the next crisis. The two biggest issues—both opposed by the industry—are the potential reform of money-market funds and new regulations that would require certain funds that hold commodity futures, swaps, and other derivatives to register with the U.S. Commodity Futures Trading Commission as well as the Securities and Exchange Commission.

OSC Releases Interpretation Of Commodity Futures Adviser Registration Requirement
Corporate/Commercial Law – Canada
The Ontario Securities Commission yesterday released a staff notice setting out how OSC staff interpret the application of the adviser registration requirement set out in Ontario’s Commodity Futures Act with respect to non-resident investment funds sold to Ontario investors. Ultimately, yesterday’s notice confirms that OSC staff take the same view regarding the elimination of “flow-through” theory under the Commodity Futures Act and the requirement to register as with NI 31-103.

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