Observations/Commentary

CTA Expo Update
Doug Ashburn – John Lothian News

CTA Expo returns to Chicago on September 17, 2015, at the UBS Center at 1 N. Wacker Dr. The event features a number of panels specifically addressing the most pressing issues in the CTA space. Gerry Corcoran, CEO of R.J. O’Brien, kicks off the event with a look at the futures industry – “Where are we and where are we going.” Other panels cover institutional investors, family offices, the art of communication, due diligence and more.

CTA Expo typically sells out, but I hear there are a few slots still open, so sign up today.

Historically, registered capital sources make up a little less than half of CTA Expo participants. Roughly a quarter are CTAs and another 25 percent are service providers. CTA registrations still start at just $500, Service Providers at $700 and Capital sources, including asset allocators, pool operators and professional clients, attend CTA Expo conferences for free. For what you get, the event is a bargain regardless of which category you are in. And I am not just saying this because I qualify as media.

On the afternoon of the 16th, there is a half-day program for registered traders,”The Rules of the Game – Business Guidelines for Emerging Managers.” I will be co-hosting the 3 pm session along with BarclayHedge president Sol Waksman on the effective use of media and databases in an emerging manager’s marketing plan.

For more on this year’s program, click HERE

See you there.

All Smalls and Mediums: Richard Sandor Looks To Transform The Small and Mid-Tier Bank Sector (Part 2)
JohnLothianNews.com

Over the past 40 years, Richard Sandor has created some of the most successful products in financial markets, from interest rate futures to greenhouse gas derivatives. Now he’s shifted his attention to small and mid-sized banks with a new exchange platform that could transform the way in which those Main Street institutions lend, borrow and set interest rates for themselves. Sandor spoke with John Lothian News about his new venture, the American Financial Exchange, and the future for his latest marketplace.
View the full report in Sway »
***JK: This features a second part of our exclusive interview with Richard Sandor, as well as an expanded story on his new platform, the American Financial Exchange, all in a new layout format with additional stories attached.

Why investors need normalisation of risk/return trade off; QE and inflation have skewed curve
Daniel Flynn
Former Barings CIO Michael Hughes has said the time has come for global asset allocation to be geared towards a normalisation of the risk/return trade off.
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***DA: Perhaps the quote of the decade from Mr. Hughes: “If we are not careful, this flat risk curve will set expectations for the future, leading people to think that they do not have to take more risk to get higher returns – which is perfectly understandable given the current state of global markets.”

Lead Stories

Hedge funds down 2.19 per cent in August
Hedgeweek
Managed futures funds experienced another negative month in August, their fourth in the last five months. Losses were more concentrated within smaller managers, as has been the case during most of this recent difficult stretch. Small managed futures products declined -1.80 per cent in August and are -2.10 per cent YTD, while large MF products were -0.37 per cent in August, but +3.03 per cent YTD.
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The relentless heartbreak of trend-following funds
FT.com
The hedge fund strategy that has attracted the most money this year is on course to cause some of the biggest losses for investors, in the latest example of the dangers of going with the crowd. Institutions and individuals have piled an estimated $20bn into managed futures funds, which use computer programs to follow market trends, but returns have turned negative amid the whipsaw markets of the past few months.
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Winton: The Growth Of The CTA Industry
ValueWalk
We provide updates to two research briefs written at the start of 2014, ‘The Growth of the CTA Industry’ and ‘Capacity of Managed Futures’, showing how managed futures’ assets under management and market volumes have developed since then. We find that neither the assets managed by CTAs nor the total dollar volumes in futures markets have changed significantly, leaving the conclusions from earlier research unchanged.
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Some ‘Alternative’ Funds Come Up Short
WSJ
Hedge-fund-like “alternative” mutual funds often are pitched as providing decent returns that aren’t tied to the fate of stocks or bonds. But some of these funds have failed to deliver on one of those counts—or both—in the past five years. For instance, the monthly ups and downs of managed-futures funds—which bet on futures contracts in a variety of markets, including currencies, fixed income, stocks and commodities—often showed no connection to the S&P 500’s monthly direction. But over the five years through Thursday, the average managed-futures fund returned only 1% a year, according to investment researcher Morningstar Inc. That compares with 14% for the S&P 500 and 3.4% for the average intermediate-term bond fund.
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***DA: Some do, and some do not. The problem with these aggregate metrics is that, because of the wide range of strategies, returns vary greatly from fund to fund. With an index fund, such variability simply does not exist.

Coquest Advisors launched to tap best in class trading managers
Coquest
Dallas-based Coquest Inc., one of the largest independent brokers in the U.S. derivatives markets, announced the launch of Coquest Advisors, an independent research and advisory firm that will provide due diligence on commodity trading advisors and hedge funds and target the most talented investment managers for its clients. The group will be headed up by Coquest Managing Director Maxwell Eagye, and Ryan Hart, Coquest Director of Research and Co-Portfolio Manager, who worked with Mr. Eagye at Altegris, will lead the team that performs the investment due diligence and portfolio management.
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How hedge fund legend Jim Simons went from cracking codes to cracking financial markets –
Business Insider
Jim Simons, the investor who founded the hedge fund Renaissance Technologies, gave a rare interview to TED’s Chris Anderson to chat about his stint at the National Security Agency, his hedge fund, and the role scientists can play in finance.
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Forget the Banks, it’s Stress Test Time for Alternatives
RCM’s Attain Alternatives Blog
With 1,000 point swings in the Dow and problems in China – the pressure is on for the hard working folks in the alternative space. For the past five to six years, alternative assets have been exploding; growing in part because many of them promise non correlated performance to stocks and bonds – meaning, they look to provide diversification in your portfolio when the market finally takes a turn lower.
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Arthur Bell expands into Ireland
Arthur Bell CPAs
Arthur Bell CPAs, a leading professional services firm dedicated to servicing the alternative investment industry, announced today that it has formed Arthur Bell Limited based in Ireland to better serve its international clients. This expansion follows the opening of an Arthur Bell office in Midtown Manhattan, the nexus of New York’s alternative investment industry, just four months ago in May 2015. The formation of Arthur Bell Limited represents a commitment to its clients to deliver more comprehensive service offerings on a global scale.
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China takes aim at automated trading in commodities futures
Reuters
China is extending its control of onshore markets to commodities exchanges, spooked by signs that speculators have shifted from China’s volatile stock markets to commodities futures. The country’s top commodities exchanges – the Dalian Commodity Exchange (DCE), Shanghai Futures Exchange (SHFE) and Zhengzhou Commodity Exchange (ZCE) – were asked recently by China’s exchange regulator to draft rules designed to “regulate the behaviour of program trading” in futures markets, according to people familiar with the matter.
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Fool-Proofing Your Portfolio For Risk
ETF.com
While some say that broad diversification in strategic asset allocation is key to mitigating risk in a portfolio, others say that achieving that diversification is increasingly difficult as correlation among assets rise. Diversification alone may no longer suffice in the quest to mitigate risk, some say. So, we asked three ETF strategists: Is broad diversification no longer an effective way of mitigating risk in strategic asset allocation? Have markets changed so much that investors have to be tactical to manage risk?
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Managed Futures/Managed Funds

Volatility Targeting: CTAs Deliver Amid Outburst
Mark Melin, ValueWalk
Just days after JPMorgan Chase & Co. (NYSE:JPM)’s closely followed Global Head of Derivatives and Quantiative Strategies, Marko Kolanovic, released a revised strategy note last week that says the quantitative selling of stocks is only half over, a new note from another analyst at the bank says that many CTA trend following strategies sold ahead of the August stock market rout. As concerns regarding robotic market disruptions spread from China to the U.S., the question of CTA trend followers engaging in some rather “unorthodox” strategy deviations vex those with insight into algorithmic trading techniques.
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AQR Managed Futures Fund Attracts $360M As Liquid Alts Remain Popular
FINalternatives
Market volatility has apparently not dampened investor appetite for liquid alternatives, at least according to one data point.
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Are Hedge Funds Still for Suckers?
Bloomberg By Sheelah Kolhatkar
Every time the market plunges, I smell cigar smoke. It filled the halls where I once worked as an analyst for a hedge fund. The fund next door was primarily a short fund, betting heavily that certain stocks would go down. The farther the market fell, the thicker the smoke.
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***DA: I smell something else.

361 Capital Soft Closes the 361 Managed Futures Strategy Fund
MarketWatch
361 Capital, a leading boutique asset manager offering institutional-quality alternative mutual funds, today announced the soft close of the 361 Capital Managed Futures Strategy Fund, a fund which employs a distinct counter-trend approach in the pursuit of attractive risk-adjusted returns that exhibit low correlations to traditional stock and bond investments. The fund will be closed to new investors beginning September 30, 2015.
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Preqin: Most consistent performing hedge funds over the past five years
Automated Trader
Drawing on data compiled for the 2015 Preqin Alternative Assets Performance Monitor, Preqin has created league tables of hedge funds that have most consistently delivered strong, stable performance. The league tables do not seek in any way to endorse these funds, but rather to illustrate those that have performed the most consistently over the period June 2010 – June 2015. Seven top-level strategies are represented – Equity, Macro, Event Driven, Credit, Relative Value, Multi-Strategy, and CTA – with all of the top 10 equity strategies funds scoring over 90 out of 100 across all metrics.
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Giant Hedge Fund’s Radical Idea: Performance Guaranteed or Your Money Back; By hedge-fund standards, their system is nearly unheard of
By ROB COPELAND, WSJ
Hedge-fund managers have long clung to a doctrine of high fees in good years and bad, minting billionaires and riling investors along the way.
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***DA: A 3-year/36,000 mile bumper-to-bumper warranty on any fund in the fleet.

J.P. Morgan’s Client ‘Steering’ Questioned; CFTC is the latest to look into whether J.P. Morgan made proper disclosures when pitching its own hedge funds to its private-banking clients
By EMILY GLAZER and JEAN EAGLESHAM, WSJ
Greg Burk, a Las Vegas car dealer, says his bankers at J.P. Morgan Chase & Co. flew out to see him last year and offered to put him in what they called “the mother of all hedge funds.”
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***DA: As opposed to Alfred Winslow Jones, who was the father of all hedge funds.

These Hedge Funds Bucked Their Own Trend in August Selloff
By CHIARA ALBANESE, WSJ
Computer driven hedge funds have had a tough time over the past few months, but when the chips were down for global markets in late August, they came into their own.
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Hedge funds for the masses are tested
Dallas Morning News
Hedge funds aren’t just for the 1 percent. The mutual-fund industry wants average investors to get into its own version of hedge funds, saying they can offer protection when the stock market is tumbling, as it has been doing the last few weeks
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Pensions & Institutions

Public Pensions Double Down on Hedge Funds
Chief Investment Officer
US-based public pension funds have become the biggest source of capital for hedge funds, beating out endowments or foundations, according to Preqin. These funds are increasingly investing in the asset class, the report said, accounting for approximately 16% of the total institutional capital allocated to hedge funds. This is despite recent distancing from hedge funds by high-profile pension funds like the California Employee’s Retirement System, which last year announced a $4 billion divestment from hedge funds.
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***DA: Heads, we win; tails, the taxpayers lose.

Hedge funds on track to crack $100bn
Andrew White, The Australian
When the cream of Australia’s hedge fund industry gathered in Sydney a year ago its annual conference was overshadowed by the news that one of the world’s biggest pension funds had decided to axe its exposure to the sector.
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Retirement prospects only bright for diligent savers
Gail MarksJarvis, Chicago Tribune
If you think you are going to retire at 65, think again.
It’s likely that you aren’t going to have enough money stashed away to make retirement work out for you. Only two in five people working for large U.S. companies will be ready financially to retire at age 65, according to a study by human resources firm Aon Hewitt.
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***DA: Like it or not, 80 is the new 65.

As other funds bail on commodities, CalSTRS pursues test drive
Reuters
CalSTRS, the $191 billion California teachers pension fund, is pressing ahead with plans to test the waters of global commodity markets, an asset class that has fallen out of favor for many investors because of slumping prices. Almost a year after its chosen commodity investment manager shut down, CalSTRS, one of the country’s largest public pension funds, is now looking at another firm to manage some of a $150 million allocation it earmarked in 2013, a spokesman said.
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***DA: Does the warranty come with this model?

Impact investing group chairman calls on managers to adopt new skill set
Pensions & Investments
Money managers need to recognize that an emerging trend of institutional investors keen to allocate to impact investments will require a new skill set, said Sir Ronald Cohen, chairman of the Global Social Impact Investment Steering Group.
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Public Pensions Lower Return Assumptions, But Taking More Risk
Forbes
The Wall Street Journal reports that public employee pension plans are getting more realistic about the returns they assume for their investments. But, as I show in a new report released by the American Enterprise Institute, they’re not being nearly realistic enough. In fact, state and local pensions are taking even more risk in an effort to gamble their way out of their financial problems.
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***DA: There is no punting in this game, even on 4th-down-and-20.

Regulation

ESMA Defends Efforts to Regulate Derivatives Trades by Non-Banks
Bloomberg Business
The European Union’s new derivatives regulations need to apply to non-financial companies as well as banks and other investment firms, according to the European Securities and Markets Authority. The Paris-based regulator also defended its efforts to improve oversight of bond-market trading and central counterparties, in a Sept. 2 letter to nations and the European Commission. http://jlne.ws/1VRMwlP

Regulatory Reporting, Risk Mitigation, Central Clearing and Collateral management: Are you ready?
COOConnect
Regulation including MiFID II, MiFIR and EMIR, with its introduction of mandatory central counterparty clearing and derivative reporting, all present challenges for financial institutions. As such, financial institutions will have to deal with significant changes and indeed uncertainties going forward as the regulation begins to bite and impact their businesses.
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White House Prepares to Nominate Ex-House Aide for CFTC Seat
Andrew Ackerman – WSJ
The White House is preparing to nominate Brian Quintenz, a former House aide, to fill a Republican vacancy on the Commodity Futures Trading Commission, according to people familiar with the matter. Mr. Quintenz, the managing principal at Saeculum Capital Management in Washington, previously worked as a senior policy aide to former Rep. Deborah Pryce (R., Ohio) from 2001-07.
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Why Jeb Bush’s attack on ‘carried interest’ matters
By Robert Schroeder, MarketWatch
Get ready to hear a lot more about so-called “carried interest” this campaign season, and beyond.
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***DA: Heads up – with both parties courting the middle class, any tax scheme that sees sees most of the beneficiaries at the top of the food chain, will be under attack.

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