Managed Futures: The Next Five Years
Campbell & Co.
The past five years have proven phenomenal for investors in equity indices. Will the next five years offer the same opportunities?

Even with the turmoil of the last few weeks, many believe that equity returns will continue to climb. If you believe that the S&P, with an annualized return exceeding 18% (through May 2014), is likely to continue to deliver this level of performance, there is little need for portfolio diversification.

A look in the rearview mirror, however, suggests that the results of the past few years may not be sustainable. A new commentary by Campbell & Company, entitled Managed Futures: The Next Five Years, examines the cyclical nature of investment returns and the value of portfolio diversification. Campbell considers the impact of the environment on the Managed Futures industry, noting that while there have been significant headwinds during the most recent 5-year period, there is evidence that the environment for the strategy has started to improve.

Trade Commodities instead of ‘Invest’ in them?
Attain Capital Management Blog 
Ben Carlson has been nailing it lately over in Tumblr-ville on the new Yahoo Finance Contributor network. There was him pointing out the issues with using risk adjust returns, then some stats showing even Warren Buffet has had some very big Drawdowns… (consider that all of you who pull the plug at the first sign of trouble in the alternative investment world), and the one that most caught our attention – “Are Commodities for Trading or Investing?”

The commodities piece was right up our alley, being in the business, so to speak. The piece echoes some of what we said in our newsletter last year: “3 Big Reasons Commodity ETFs aren’t Getting the Job Done,” which is basically that commodity ‘investing’ doesn’t look so great when it is a “long-only” approach (only makes money when commodities go up) because:
1. Commodities don’t always go up,
2. Even when they do, they are very volatile,
3. Even when they do, the access points are complex and won’t necessarily provide a return equal to what the commodity did.

The Future of Best Execution
Steve Grob – Fidessa Fragmentation Index
I was chatting with a few work colleagues last Friday about best execution and derivatives. They confidently asserted that without real fungibility (i.e. the ability to trade the same instrument on different venues), price comparison is not possible and so any notion of best-ex was pretty meaningless.

By coincidence, I was later looking at the wording in the best-ex policy of my own broker (and yes, it was a slow afternoon). Interestingly though, it reminded me that best-ex is a much broader concept than just price comparison – it needs to take into account the liquidity, tradability and reputation of any venue, together with an assessment of my own sophistication/naivety.

It’s Now or Never: Register for CTA Expo Chicago
Registration is filling up fast for this year’s CTA Expo Chicago, September 23, 2014, at the UBS Tower Conference Center. This event sells out every year, and 2014 will be no exception. Not only will you mix and mingle with asset allocators, CTAs, vendors, and service providers, you will also hear great speakers like CME Group Chairman Emeritus Leo Melamed and our own Jim Kharouf.

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Lead Stories

Industry waits for managed futures to recover from slip-up
Beverly Chandler – Financial News
Its exposure to a variety of uncorrelated markets, such as commodities, energy, agriculture and currency originally made the commodity trading adviser, or managed futures strategy, one of the most compelling reasons for investing in hedge funds. It is one of the earliest hedge fund strategies, dating back 30 years.

***DA: I guess the industry will wait a bit longer.

Barclay Hedge Fund Index Down 0.44% in July
European and US Equities Burden Fund Managers
FAIRFIELD, Iowa, August 20, 2014 — Hedge funds lost 0.44% in July, according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index remains up 3.26% in 2014.
“European equity prices dropped due to weakening economic data, and US equity prices dropped based on a strengthening recovery,” says Sol Waksman, founder and president of BarclayHedge. “It was a difficult month for equity funds hoping to turn a profit.”

Cotton, sugar u-turns slow hedge funds’ ag selling Agrimoney
Hedge funds’ selldown in the agricultural commodity complex slowed to a crawl as they turned less negative on cotton and sugar, offsetting in part continued bearish positioning in livestock and soybeans. Managed money, a proxy for speculators, reduced its net long position in futures and options in the top 13 US-traded agricultural commodities, from cotton to corn, by 3,844 lots in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator.

***DA: Let us not forget that continued liquidation from long-only funds.

Exclusive: Funds could face market curbs after lobbying backfires
Huw Jones – Reuters
Fund managers may face tougher scrutiny by global regulators than planned after their intense lobbying against a first proposal backfired, industry sources and G20 officials said. A global G20 task force is rethinking its initial approach which involved targeting the biggest funds, and could opt for a more intrusive method that would affect more funds by limiting their market activities during periods of turbulence, the sources told Reuters.

***DA: You think redemption gates are bad when applied to money markets? Just wait until it starts being applied to other funds.

Can Managed Futures Be an Income Investor’s Best Friend?
This is the fourth in a series of blogs exploring the use of liquid alternatives by advisors, based on reporting conducted among advisors for the August 2014 Investment Advisor cover story, Alts Are the Answer.

***DA: I am worried about liquid alts becoming an enemy of regulators.

Systemic risks of e-trading demand new pre-trade risk controls
Charlie Woodward – The Trade
The increasing complexity of electronic trading systems pose fundamental risks to the stable functioning of financial markets and their participants, claims a new report, which proposes a set of pre-trade risk control best practices for tier I and II sell-side institutions.

Looking Ahead: What’s in store for managed futures?
Futures Magazine
For the past five years, the annualized performance of the S&P 500 Index has been +18.4% (through May 2014). If you believe that this level of performance from equities is likely to persist, there is little need for portfolio diversification.

Managed Futures/Managed Funds

Blackstone Hires for ‘Big Bet’ Hedge Fund
Rob Copeland – WSJ
Blackstone Group LP, weeks away from the start of a new “big bet” hedge fund, is close to landing its first traders who will scour the world for concentrated investments, people familiar with the matter said.

***DA: I can’t help but wonder if these proposed “curbs” would prevent a John Paulson or George Soros from profiteering in a crisis?

Star trader Rokos slugs it out with hedge fund he co-founded
Nishant Kumar – Reuters
Former Brevan Howard star trader Chris Rokos has stepped up his legal challenge to a partnership agreement imposing a five-year ban on him setting up in competition against the hedge fund firm he co-founded.

***DA: The future of no-compete clauses may be unfolding.

Aston Martin ‘Myth’ Tested as Hedge-Fund Pay Slumps
Lindsay Fortado – Bloomberg
Bonuses for hedge-fund employees in London have dropped by 94 percent since 2012 as returns in the industry declined, according to a salary-data provider. The average bonus for directors, or mid-level employees, plummeted to 8,000 pounds ($13,300) this year from 135,000 pounds in 2012, Emolument.com said in a statement.

***DA: The Aston Martin myth has been downgraded to a Chevy.

Commodities Attractive As Stocks Smash Highs
Most financial advisors suggest that their clients diversify across asset classes, with only the percentages of stocks, bonds, gold and other assets as a matter for debate. I won’t wade into the latter discussion, but the charts suggest that commodities as an asset class may be ready to play a greater role.

Commodities Volatility Shakes Up Hedge Funds
Jumpy commodities markets are taking hedge funds for a wild ride. A spate of unpredictable U.S. weather, a surprise record harvest and even a pig virus are giving commodities traders exactly what they craved: volatility. But a few big names are on the wrong side of this summer’s topsy-turvy moves.

Pensions & Institutions

Fewer Funds Reporting To Databases, But AUM Up
Fewer hedge funds reported to commercial databases in 2013 but industry assets were up, according to a new eVestment report. The hedge fund data provider combed through 10 commercial databases and discovered that in 2013 a total of 9,247 unique hedge funds and CTAs reported, down from 10,149 a year earlier.

***DA: Fewer, but larger, funds seem to be the trend.

Essay: Dwelling in Possibility – are Alternatives Necessary in a Portfolio?
Fox Business
The period of “The Great Moderation” (1983-2008) was one resulting in massive assumption and prerogative. Long gone were the silly fears of the “Great Depression” – bankers and brokers were immortal – above reproach and certainly beyond correction. Technology created both speed and choice – this dynamic encouraged a whole new breed of investing mind thought and subsequently pushed equities into a quick-and-easy mainstream investment http://jlne.ws/1ltF5Dj

Pressure grows over fund fee transparency
Emma Dunkley – Financial Times
Two major industry bodies are clamping down on the way fees are levied across pensions and investments amid continuing concern that many savers are confused by charges and cannot effectively compare products.

***DA: The industry bodies ought to know about confusion – they write regulations the same way.

Illinois puts $1.1 billion to work right away
Teachers’ Retirement System of the State of Illinois, Springfield, kicked off its 2015 fiscal year with investments and commitments totaling $1.1 billion and set the stage to tactically deploy at least another $1 billion with real estate and hedge fund managers.

What’s inside Intel’s retirement plans? Hedge funds. Lots of ’em.
The Oregonian
I recently looked inside Intel’s workplace retirement fund. My logic board just about locked up. Intel Corp. is Oregon’s largest private employer and, as a result, carries a big burden. Nearly 18,000 employees in the state rely heavily on the company’s three retirement plans to ensure they will be able to enjoy their twilight years.

***DA: Be careful with the use of the word “ensure.” No sure thing here.

‘Pension funds do not yield enough, and we want to offer an alternative’
Investment Week
Natixis Global Asset Management head of UK retail Chris Jackson tells Julia Rampen how the group plans to make a splash in the pensions market as it looks to become a ‘major player’ in the UK.

***DA: Risk on. Way on.

Detroit’s bankruptcy battle begins: Trial to decide city’s fate
Detroit Free Press
Detroit’s historic Chapter 9 bankruptcy will culminate in a high-stakes court battle starting Tuesday that will determine the fate of the city’s sweeping plan that would pay pensioners more than financial creditors, preserve the Detroit Institute of Arts and slash more than $7 billion in debt while reinvesting in services.

***DA: Another Detroit entity, GM, settled with pensioners by giving them a major stake in the company. How about giving each pensioner his or her own block of Detroit?

CalPERS To Recover Millions In Bank Of America Settlement
The California Public Employees’ Retirement System (CalPERS) is poised to get back up to $250 million in damages from Bank of America in a federal investigation settlement announced today by California Attorney General Kamala Harris.

Hedge Funds and the problem of structure
Dan McCrum – Financial Times
Not the hedge fund structure, a fee schedule masquerading as an asset class, that is old hat. What we mean is the problem that arises once your pension fund has hired staff to invest in alternative assets.

Lead Stories

How The SEC’s Examination Of Alternative Funds Affects BlackRock
The financial regulator aims to examine alternative fund offerings of 30 firms by next April – including BlackRock, AQR Capital Management, Goldman Sachs, BNY Mellon, Blackstone and PIMCO – to ensure that retail investors are given a clear understanding of the risks involved in these investments by the asset managers as well as by financial advisers.

Attention mutual funds–potential relief for CPO and CTA regulation in the 2014 CFTC Reauthorization Act
Thomas H. Watterson and Crystal T. Travanti, Reed Smith LLP
As the second part of our ongoing series on the 2014 CFTC Reauthorization Act, we wanted to highlight what could become important relief for mutual funds and their investment advisers with respect to registration as commodity pool operators (“CPOs”) or commodity trading advisers (“CTAs”).

Fed Economists Criticize SEC Money-Fund Restrictions
Andrew Ackerman – MoneyBeat – WSJ
Federal policy makers are warning a central plank in the Securities and Exchange Commission’s plan to rein in risks posed by the $2.6 trillion money-market mutual-fund industry will inadvertently encourage investor stampedes rather than quell them.

No arbitrage: New rules make markets ‘less efficient’
Kris Devasabai – Risk.net
Arbitrageurs are being squeezed by post-crisis regulation, meaning market dislocations could be bigger and more persistent in future. In particular, indexes may track the value of their constituents less reliably – a problem for hedgers and investors.

***DA: We have been hearing for several years that liquidity will suffer in the new regulatory regime. We shall see.

CFTC Staff Issues Rule Interpretation Concerning Deposit of Customer Funds with United Kingdom Depositories
The U.S. Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight today issued an interpretation of Commission Regulation 30.7(c) under the Commodity Exchange Act. The interpretation permits futures commission merchants to deposit customer funds margining foreign futures positions with UK-licensed investment firms that hold such funds in accordance with either UK Financial Conduct Authority’s client money rules or as bank deposits subject to UK Prudential Regulation Authority regulations.

Why CFTC reauthorization matters
Michael Dunn, Richard Shilts and Matthew Kulkin – TheHill
Congress has reauthorized the Commodity Futures Trading Commission seven times since its creation in 1974. While reauthorization has been the focus of past political debate, particularly the Commodity Futures Modernization Act of 2000, extending the CFTC’s governing laws has never been more important than right now.

MF Global judge questions then approves added defense funds for Corzine
U.S. Bankruptcy Judge Martin Glenn is “surprised and disappointed” by the mounting legal costs incurred by Jon Corzine and other former MF Global Holdings executives. But he signed off on another $7.5 million for them, anyway.

***DA: Ugh! This man is like a fly buzzing around the industry, in need of swatting, but remains just out of reach.

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