Observations/Commentary

Which Direxion for 40 Act Funds
Jim Kharouf, John Lothian News

The question for many in the managed futures industry at the CTA Expo in Chicago last month was where the next opportunity will come from.
Several years now into the next big thing – managed futures mutual funds or 40 Act Funds – there is great hope and great potential for the product, depending on who you speak with. It could be the product that zaps the managed futures industry out of its doldrums and finally brings this sector into the mainstream investing circle in a big way. Others see wrinkles in the product that need to be ironed out.
Ed Egilinksy, managing director, head of alternatives for Direxion, said that “the potential is rather significant.” Direxion’s partnership with Auspice Capital on its Direxion Indexed Managed Futures Strategy Fund is a managed futures mutual fund with about $75 million in investments. Direxion has about $9 billion in ETFs and managed futures. Not a home run, Egilinsky admits. “The asset class has been a little out of favor,” he said.
After all, the CTA space in general and this product has not performed all that that well in recent years. The BarclayHedge CTA Index posted negative returns in each of the past three years from 1.4 percent to 3 percent. And so far this year, the index is posting a modest 2.2 percent rise while the stock markets are posting record highs.
But Egilinksy says that the story about managed futures mutual funds, and managed futures, isn’t being told, especially when one thinks about volatility.
“If you look at other investments, the peak to valley has been far less severe than you’ve seen in REITs or even commodities,” Egilinsky said.
Indeed, the roller coaster ride that many investors have taken in equities is far less rough than the one most investors have ridden in the CTA space. Nonetheless, this is a “what have you done for me lately” investing public. Retail investors, who may be tempted to jump into the managed futures mutual fund space, want to see real returns and outperformance. Many don’t want to hear about how it can serve as a shock absorber, diversifier or even a portfolio saver when the markets turn.
Egilinsky said there is still education to be taught about the managed futures space. If this stock market is indeed overheated, it may be another lesson for the investing public that managed futures can smooth out returns over time if you are patient.
“Investors are always looking at the liquid alternative space,” Egilinsky said.

Lead Stories

Managed futures enjoy rare strong performance
David Pett, Financial Post
Managed futures haven’t been a very good investment so far this decade.
But all of that may be changing now that central bank policies are beginning to diverge. Managed futures in August booked their best monthly performance in more than three years.
“After a few years of underwhelming performance, a return to form in 2014 for CTAs will be welcomed by both managers of the strategy and its investors alike,” said Amy Bensted, head of hedge fund products at Preqin, a London-based research firm.
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**JK – Are we coming back to more natural fundamentals? CTAs sure hope so.

Barclay CTA Index Gains 1.63% in August
BarclayHedge
Managed futures gained 1.63% in August according to the Barclay CTA Index compiled by BarclayHedge. Year to date, the Index is up 2.18%.
“The trend was a friend in August,” says Sol Waksman, founder and president of BarclayHedge. “The S&P 500 rallied to new all-time highs, US Treasury yields declined to new lows on the year, and the US dollar continued to strengthen.”
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Why managed futures aren’t getting the job done
By Jeff Malec – Investment News
Most advisers got involved in managed futures after stocks performed poorly in 2008. But they walked right into another poor market environment, this time for managed futures themselves. http://jlne.ws/X7lDAM
**JK – This is one of the best pieces I’ve read about the state of the managed futures industry in some time. Well worth the read. Nice job Jeff.

The Top Ten Managed Futures Performers of August: Brandywine Up 14%
Attain Capital
The Top Ten Managed Futures Performers of August by Attain Capital
While one month’s performance is no way to judge an investment that has 3 to 5 year cycles, a glance at who’s doing well in the different environments month to month can be a useful data point at times. Here’s the top managed futures performers (by return only) for the month gone by:
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**JK – Brandywine, KeyQuant and Robinson-Langley Capital take the top three spots.

What hath CalPERS Wrought? And Why?
All About Alpha
CalPERS’ recent announcement that it will close down its hedge fund operation raises a range of obvious and not-so-obvious questions.
This policy change mandates an exit from each of 24 hedge funds and six funds of funds, and in the process a re-allocation of approximately $4 billion.
The first thought that came to my mind when I learned of it was: Are they unhappy about fees? http://jlne.ws/1pG5KIz
**JK – Interesting analysis of 2 and 20 fees.

Calpers sticks with commodities after dropping hedge funds
Reuters
Top U.S. pension fund Calpers is sticking with commodities, an asset class known for volatile markets and returns, despite finding hedge funds too costly to work with, a spokesman said on Tuesday.
The $300 billion Calpers, as the California Public Employees’ Retirement System is known, has maintained a portfolio of commodity futures tied to the S&P GSCI since 2008. http://jlne.ws/YU1C1s
**JK – And then there is this –

Two major pension funds join hedge fund pullback
Mike Foster and Andrew Pearce – Financial News
The £20 billion Railways Pension Scheme currently has £1 billion invested in hedge funds but investment director Paul Bishop said it was looking to reduce this “significantly”.
Bishop said: “We believe that hedge funds in aggregate offer a poor trade-off between expected returns and cost.”
jlne.ws/1qW7Xjt

‘Trend-following’ algo funds back in fashion
Miles Johnson – FT
They are the fashion victims of the hedge funds world: funds that make money by copying exactly what everyone else has been doing. But more recently “trend following” trading strategies were regarded by investors as distinctly passé.
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**JK – Drop what you’ve been working on for the past 4 years. Trend following works again.

The Rise (and Likely Fall) of the Talent Economy
Harvard Business Review
When Roberto Goizueta died of cancer in 1997, at the age of 65, he was a billionaire. Not bad for a Cuban émigré who had come to the United States as a teenager. He was by no means the first immigrant to America to become a billionaire, but the others had made their fortunes by founding and building companies or taking them public. Goizueta made his as the CEO of Coca-Cola.
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Fusion Equities, a New Managed Futures Stock Index Program from County Cork, Receives BarclayHedge Award
Press Release
County Cork LLC, a Commodity Trading Advisor offering multiple managed futures programs announces Fusion Equities, a new, short-term, automated, systematic program for trading E-mini S&P stock index futures on the CME Group’s Globex platform. The Fusion Equities program adds a short term, systematic, absolute return strategy to County Cork’s roster of both fundamental discretionary and systematic commodity programs.
jlne.ws/1pqJvY0

Larry Swedroe Interview with Michael Covel on Trend Following Radio
Michael Covel
Michael Covel speaks with Larry Swedroe on today’s podcast. Swedroe is a Buckingham Asset Management principal. He is also a principal and co-founder of BAM Advisor Services, LLC, and serves as the director of research for both entities. Swedroe has authored or co-authored fourteen books and comes at investing from an evidence-based approach. Covel and Swedroe have different vantage points, but there are some commonalities in their thinking. http://jlne.ws/1yzo4NQ
**JK – Swedroe blasts economic forecasters.

Managed Futures/Managed Funds

CTAs bounce back to post positive performance in August
Automated Trader
Following a tough month for returns in July, all managed futures indices calculated by Newedge reported positive performance in August. The strong month means that all Newedge managed futures indices are also now in positive territory for 2014 year-to-date.
jlne.ws/Zs9HeV

Barclay Hedge Fund Index Gains 1.28% in August
BarclayHedge
Hedge funds gained 1.28% in August, according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index is now up 4.44% in 2014.
“The S&P 500 gained four percent in August, propelling the index into new high ground,” says Sol Waksman, founder and president of BarclayHedge. “Global equity markets followed suit and rallied as well.”
jlne.ws/1rGzcT4

Commodity Outliers Attract Investors
Leslie Josephs – Wall Street Journal
Hedge funds and other money managers are flocking to small markets ranging from cocoa to coffee to cattle that have defied a broader plunge in raw-materials prices.
These investors are betting on goods that are seeing demand soar as emerging-market countries become wealthier and their middle classes expand, increasing demand for products such as chocolate and hamburgers.
Investors and economists view demand for these products as less vulnerable to a slowdown in China’s growth. Demand in China for higher-end foodstuffs is still strong, and the ascent of other emerging markets will help alleviate any pullback, they say.
jlne.ws/ZsdgBY

AQR Capital, Lone Pine & Viking Global lead Largest Connecticut Hedge Funds past $174 billion mark
HedgeTracker
The rankings for the Top Connecticut Hedge Funds have been released, revealing that the top 50 hedge funds oversee a combined $174 billion in equity assets. Overall, the hedge funds on the list have seen their assets grow by more than $3 billion, or nearly 1.8% year-to-date. http://jlne.ws/1pG57yC

The rise of Corvex Management – Corvex remains #1 on top 75 Emerging Hedge Fund Manager list
HedgeTracker
The Top 75 U.S. Equity Emerging Hedge Fund Managers now manage almost $90 billion in U.S. equity assets, according to the latest hedge fund industry report.
Corvex continues its impressive run up The Top 75 Emerging Manager List by retaining the top spot for another quarter with greater than $7B in US equity assets. Corvex entered HedgeTracker’s inaugural Emerging Hedge Fund Manager list in Q4 ’12 at the sixth spot and steadily rose the ranks each quarter finding the top spot in Q1 ’14.
jlne.ws/1vxLdwt

Luc Van Hof – Capital Hedge Interview
Top Traders Unplugged
“I don’t want to trade much more money – I want to show that a mostly automated system can make money over the years in a pretty regularly recurring fashion.” – Luc Van Hof
In the second part of our interview with hedge fund founder Luc Van Hof, we dive into the philosophy and creation behind his trading models. We also discuss why he is a risk averse person, what hobbies help him stay focused at work, and what investors and fund managers can do to grow their business and trade smarter.
Welcome to Part 2 of our conversation with Luc Van Hof.
jlne.ws/1muHFcC

Chris Cruden, Insch Capital Management
TopTradersUnplugged-Chris-Cruden
“I don’t know if we’re a hedge fund, I don’t know if we’re a CTA – but as a currency trader we’ve always been the red-headed step child of both industries.” – Chris Cruden
Our next guest was a British Army Officer and moved to South Africa before finding a career in the financial markets. He is now the CEO of his Managed Futures firm and has worked with some of the industry’s most influential companies and people, including Dean Witter and AHL. http://jlne.ws/1rqn6Qa

Managed Funds Association Announces 2014-2015 Board of Directors, Renews Focus on Global Outreach and Advocacy
Press release
Managed Funds Association (MFA) today announced its 2014-2015 Board of Directors. With a financial landscape increasingly shaped by interconnected markets and coordination among prudential regulators, this globally diverse new board uniquely positions MFA to continue to be the leading voice of the global hedge fund and managed futures industry.
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**JK – Will MFA finally reach out to the media to get their story heard?

Long the US Dollar… And Loving It
Attain Capital
While hardly scientific, we tend to have a knack for highlighting a certain market move or environment on the blog, and that market or environment quickly reversing course upon our piece hitting the airwaves. It’s the futures market equivalent of the old contrarian magazine indicator.
jlne.ws/YNK3Aw

Pensions & Institutions

Commodities Funds Soar As Retirement Asset Niche
Ted Knutson – Financial Advisor
The value of commodities funds soared by 45 percent from 2010 to 2012 in 401(k) and defined contribution plans, asset research firm BrightScope disclosed Tuesday using the latest Labor Department data.
Despite the surge, these funds continue to be a niche holding for retirement savings, accounting for just over 1 percent ($3.8 billion) of retirement assets.
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Harvard Picks Insider to Run $36.4 Billion Endowment
Michael McDonald and John Lauerman – Bloomberg
Harvard University named Stephen Blyth as head of the unit overseeing its $36.4 billion endowment, picking an insider as it looks to boost investment returns that have lagged Ivy League peers.
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**JK – Would Harvard EVER pick someone who wasn’t an insider?

Regulation

US CFTC revokes SAC Capital’s registration as commodity hedge fund
Sarah N. Lynch – Reuters
U.S. derivatives regulators formally revoked the registration of Steven A. Cohen’s SAC Capital commodity fund units on Tuesday, as part of a settlement that comes in the wake of the firm’s guilty plea to insider-trading charges last year.
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