Observations/Commentary

Happy Expo Week; Looking Ahead
The derivatives world descends on Chicago this week for the FIA’s 30th Annual Futures & Options Expo. If you will be attending, and would like to chat, please come by Booth 314 in the Green Hall, where we will be conducting our “conversations with the industry,” a collaboration with our friends at Cinnober.

Of particular interest to us is the topic of transparency. Where do we need to improve transparency in the markets today? What is the solution to achieve that? How will futures and options markets look in the future, in terms of transparency? These broad ranging questions are designed to get a broad range of answers from our interviewees which will then be plugged into three videos that correspond with the questions. After Expo, we will piece together the best answers and roll out the series in parts, to correspond with the questions.

Looking ahead, the final 2014 event on the CTA Expo slate is happening December 9 in Miami – the third annual Emerging Manager Forum, an opportunity for money raisers and asset allocators to meet and discover fund managers and promote alternative investing. Panels, presentations and networking. Follow the link to learn more.
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Clive Furness, managing director, Contango Markets – Commodities’ Oddities
JohnLothianNews.com

“Commodities are now so much part of the infrastructure of the marketplace and the asset classes that buy side investors get involved with…that they are going to continue to look for those opportunities.”

Clive Furness, managing director of Contango Markets, discusses commodities and how the commodities markets function. Starting with a brief history of commodities, Furness illustrates why commodities sit uneasily with other mainstream products and the pros and cons of the situation. He then discusses the evolution of commodities, covering the shift in technology and people’s attitudes then and now. Finally, Furness gives his predictions and thoughts on the future of commodities and discusses a project he is currently working on with an African exchange in order to build the products the exchange will trade.

Watch the video »

Lead Stories

Managed Futures Are Back In The Game
Value Walk
Early losers of the year have come up as winners in the later part. The star example of this phenomenon is the managed futures strategy. According to Preqin’s Q3 Roundup, CTAs have been gaining for six straight months now. The spell of positive activity marks the strategy’s best performance since Q4 2010. CTAs grabbed a +5.5% return in Q3 2014, outperforming hedge funds by a wide margin. CTAs have accounted for 6% of all fund launches this year.
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**JK – We did a raindance for volatility and voila!

Where Do Alternatives Fit in a Portfolio?
WSJ.com
So-called liquid alternative funds have begun their march from the fringe to the mainstream, some investment professionals say. But the increase in popularity of holdings such as “long short” funds and “unconstrained” bond funds raises questions about where they fit in an investment portfolio. Are such funds an asset class of their own or subsets of, say, an investor’s stock and bond allocations?
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**JK – I think we should take the classification of asset class out of the equation and just talk about true portfolio diversity.

Some MF Global creditors to get first payout, 3 years after bankruptcy
Jonathan Stempel – Reuters
A large group of creditors of MF Global Holdings Ltd’s bankrupt brokerage unit will soon receive their first payout, as $518.7 million of checks start to be mailed out on Friday, the third anniversary of the company’s Chapter 11 filing.
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**JK – Who among us would vote for bankruptcy reform?

Commodities: Buy When the World Is Selling
Barron’s
Commodities are an outlier at a time when most asset classes—stocks, bonds, real estate—are at or near record levels. Oil, the most important global commodity, is down 18% this year, to $80 a barrel, and many others, including natural gas, copper, and corn, are also in the red. Corn is down more than 50% from its 2012 high, to $3.75 a bushel. On Friday, gold hit a new 2014 low of $1,171 an ounce and is 38% below its peak of $1,900 in 2011.
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Commodities: A partial pump primer
Chris Giles – Financial Times
Few economic forces are more important than commodity prices. When they rise they transfer riches and power from consumers to producers; when they fall, it is as near as anything in economics to a free lunch for consumers. With so much at stake, turning points are important for the global economy. Such a moment appears to be at hand.
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Hermes to close commodities business, joins flight from sector
Reuters
Hermes Investment Management on Friday joined an exodus of financial institutions from commodities, saying it planned to close its business in the sector due to difficulties in making returns and a shift in investor attitudes. Many fund managers have struggled to make profits in commodities in recent years as prices have slid and volatility has been low, leading to fund closures including Hall Commodities earlier this month, Clive Capital, BlueGold and Higgs Capital Management.
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**JK – All employees get a free purse on the way out.

Managed Futures/Managed Funds

Quant Hedge Fund Archipel Shuts After Biggest Investor Pulls Out
Will Wainewright – Bloomberg
Archipel Asset Management AB, a Swedish hedge-fund firm that makes trades based on computer algorithms, is closing after its biggest investor pulled out.
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***DA: Most CTAs are familiar with this story line – managing one’s investors is as important as managing their money. As tempting as it is to on-board a whale, if the whale pulls out, it could be game-over.

Disruption arrives for investment managers
Pauline Skypala – Financial Times
Technological change has famously disrupted publishing, music, photography and other industries. Mostly the results have been to the advantage of consumers, widening choice if not always reducing costs. Similar disruption threatens the financial industry.
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***** That disruption is not a threat, it is an opportunity.

Be careful with that commissions axe on investment research
FT.com
After more than a decade of procrastination, the financial authorities are about to order the full “unbundling” of research costs from dealing commissions. Currently, the ultimate investors in, say, a pension fund, shoulder all the costs of producing bank and broker research as part of the trading commission paid when a fund manager makes a market transaction.
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Billionaire Ray Dalio’s Hedge Fund Sues Ex-Employees Over New Fund
Nathan Vardi – Forbes
Billionaire Ray Dalio’s Bridgewater Associates sued two former employees for falsely advertising their new hedge fund firm by exaggerating and misrepresenting their role at Bridgewater, the world’s largest hedge fund firm that manages some $160 billion.
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US institutions sour on hedge fund fees, survey shows
Boston Globe
Hedge funds and private equity funds took a hit among US institutions and pension managers in a survey by Fidelity Investments released Monday. The survey found that only 19 percent of American managers of pensions and other large funds believe the benefits of hedge funds and private equity funds are worth the fees they charge. That contrasted with Europe and Asia, where the vast majority — 72 percent and 91 percent, respectively — said the fees were fair.
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Pensions & Institutions

Japan pension fund commits to big switch to stocks
FT.com
A long-awaited overhaul of Japan’s national pension fund surpassed investors’ expectations on Friday, as the world’s largest institutional investor said it would put half of its assets in stocks while cutting its government bond holdings by a third. The reshuffle of the Government Pension Investment Fund, apparently timed to maximise the impact of another shot of monetary stimulus from the Bank of Japan, was the result of almost two years of pressure from the administration of Shinzo Abe, prime minister.
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Judge Approves Bankruptcy Exit for Stockton, Calif.
NY Times Dealbook
A judge on Thursday confirmed a plan by Stockton, Calif., to exit bankruptcy, rejecting arguments that it unfairly discriminated among creditors by chopping a mutual fund’s recovery to near zero while shielding city retirees from any impairment at all.
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Pension plans urged to take more risk
Risk.net
Risk managers should be helping pension plans add exposure safely, argues Jane Buchan, founder and chief executive of fund-of-hedge-funds firm Paamco Pension plans need to take more risk to hit their return targets, a large fund-of-hedge-funds manager has warned.
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Pension Funds: Eliminate the Negative
CFO
Pity the pension-fund manager. Cash pays close to zero in many developed economies and ten-year Treasury bonds offer a yield of 2.3%. But many managers need much higher returns if they are to pay the benefits they have promised. That forces them to pile into equities, despite the risks of big bear markets like 2001-02 or 2008-09, not to mention minor scares like mid-October’s wobble.
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Pension Funds Eye Reducing Hedge-Fund Investments
Dan Fitzpatrick – WSJ
Pension-fund managers across the U.S. are rethinking their investments in hedge funds in the wake of a retreat by the California Public Employees’ Retirement System.
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What’s In Your Pension Fund?
Morningstar
The introduction of a charge cap on pensions from next April will mean more workplace schemes will include a blend of low cost passive and active funds
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Even Art for Sale as Philippine Pension Hunts for Yield
Bloomberg
Government Service Insurance System may put around 100 works by Philippine artists including Juan Luna and Fernando Amorsolo up for sale over the coming 10 years as local consumers become more wealthy, GSIS President Vergara said in an Oct. 21 interview in Manila. The $20 billion fund targets returns of at least 8.5 percent to meet obligations to the 1.4 million workers whose savings it manages and has generated between 9 and 12 percent over the last three years, he said.
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Regulation

CFTC chairman offers hope to derivatives end-users
Mark Pengelly – Risk.net
Timothy Massad, the new chairman of the US Commodity Futures Trading Commission, seems to be steering the agency towards a more deliberate and pragmatic approach to Dodd-Frank regulation
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***DA: The pragmatic approach gets put to its first test today. Read on:

Residual Issues
Doug Ashburn – JLN
The CFTC meets next Monday to consider three “bits & pieces” of its own. These rules are, in the words of Chairman Massad, a “fine-tuning” of previous rules. That is a nice way of saying that these are rules on which the previous commission kicked down the road. Since these rules pertain to basic functions within the FCM, farmer, rancher and energy communities (in other words, the people who will be attending Expo next week), what better time to address these issues?

The first rule pertains to forward contracts with “volumetric optionality,” which is a fancy way of saying “a bit of wiggle room on the exact size of the contract.” These types of forwards are rather useful in certain energy forwards, but are they swaps? The commission tabled the decision in its final swap product definitions rules in July 2012.

The dreaded residual interest rule, which is drastically altering the long-standing margin practices at FCMs, will on November 14 require margin to be posted as of 6 pm on the settlement date. Monday’s rule, if approved, will prevent the 6 pm deadline from being moved any earlier unless being changed at the commission level, complete with rule proposal and public comment period. For a background on residual interest see the video we made last year

The final rule tweak concerns the recording of transactions (CFTC Rule 1.35). The final rule, which became effective in March 2013, was viewed as an overreach, and has since been subject to no-action relief by the CFTC staff. On Monday, the commission will decide whether to codify the no-action relief.

We will watch the meeting and report next week, then follow up with a complete summary on MarketsReformWiki

Look ahead to next reforms, say regulators
Luke Jeffs – Futures & Options World
Senior regulators have called on exchanges and the G20 to look ahead to the next challenges in the global reform agenda despite ongoing concerns about the lack of cross-border co-ordination on the current rules.
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Mifid II: Regulatory ‘typhoon’ on course for Europe
Steve Johnson – Financial Times
Wealth managers and private banks across Europe are about to be hit by a regulatory “typhoon” and are “burying their heads in the sand” about the consequences, according to a leading campaigner on costs and transparency.
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CFTC staff issues more no-action letters to commodity pool operators
Association of Corporate Counsel
Over the last month, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission (CFTC) issued four letters providing exemptive, no-action and interpretative relief to commodity pool operators (CPOs) on a variety of issues. This alert briefly summarizes the relief provided.
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