Observations – Statistics – Commentary

In the current issue of JLN Managed Futures, Horizon Cash Management launches a custodial solution for the under-$10 million crowd, the death of trend following is highly exaggerated, and despite the pullback in commodity fund performance, new funds are still being launched.  Up first, though, is our interview with Jack Schwager, author of the “Market Wizards” book series and portfolio manager with ADM Investor Services.

Jack Schwager

Jack Schwager on Market Wizards and How the CTA Space is Changing

Jack Schwager is a well-known name in the financial market community today, as author of trading classics such as: Market Wizards in 1989, The New Market Wizards in 1992 and Stock Market Wizards in 2001. He’s added to the series in May 2012, with Hedge Fund Market Wizards, and more recently released book Market Sense and Nonsense, where he explores investment models and the theories of how markets work.

He spoke with JLN editor-in-chief Jim Kharouf about hedge fund managers and how the CTA space has changed, what’s happened to managed futures since its breakout year in 2008 and his opinion of just how much growth is left for CTA sector.

Schwager, who is currently a co-portfolio manager at ADM Investor Services, helps manage ADM’s Diversified Strategies Fund, a portfolio of futures and FX managed accounts. The fund combines both system and discretionary managers that use technical and fundamental strategies.

Watch Part 1 »

Watch Part 2 »

Quote of the Day:

“Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin.”

-Detroit Emergency Manager Kevyn Orr, as he announced the city would miss a $34 million payment due Friday on $1.43 billion of pension certificates

CTA Expo News
On June 27, Frank and Bucky bring the CTA Expo to London for the second annual Emerging Manager Forum. This conference series continues to grow in popularity, and this year’s London show looks to be no exception. So if you are a CTA or emerging hedge fund looking to network with European family offices, capital raisers and allocators, plan to spend the day at the Mayfair Hotel.
**JK: If you plan to be in London during that week, either for this event or for IDX, John Lothian and I will be there. Look for us.

Also, registration just opened for CTA Expo Chicago 2013, September 19, at the UBS Tower. This event has been selling out earlier and earlier, so register ASAP.

Altegris CTA Challenge Update
We are reaching the halfway point of the inaugural Altegris CTA Challenge, and the leaderboard is heating up, with the top spot changing hands again, and a couple of newcomers cracking the top ten for the first time.

Risk On/Risk Off Market Snapshot: May 2013
Attain Capital Management
2013 continues to sport far fewer risk on/off days than the last few years, with only 2 days added to the tally in May: 1 risk off and 1 risk on. The big risk off drop on the first day of the month gave way to a risk on rebound the next day, with normal trading the rest of the month. Not even the broad selloff in stocks and metals at the end of the month was enough to qualify as a risk off day, as it was offset by gains in grains. http://jlne.ws/1a504Ud
**DA: Whenever I read about risk on/off, I can’t help but sing “The Clapper” jingle: Risk on! (clap, clap), Risk off! (clap, clap) Risk on. Risk off. The market.

JOBS Act 2.0
Clarke Camper – Inside the Beltway
Building on the bipartisan success of last year’s JOBS Act, some House members plan to introduce “JOBS Act 2.0” legislation that aims to increase investor interest in startup businesses and “make it easier for small companies and entrepreneurs to raise capital,” reports POLITICO.

Horizon Cash Management launches Emerging Manager Fund Cash Account
Horizon Cash Management, an investment adviser specializing in active cash management solutions for the alternative investment industry, has launched the Emerging Manager Fund Cash Account, to provide small and emerging fund managers with a safe alternative for cash balances that are in excess of margin requirements.
**DA: Many smaller investors and funds got caught up in the MF and PFG bankruptcies, as there were few cost-effective cash management solutions for the under-$10 million crowd. Look for an interview with Horizon about this new account structure in a subsequent issue of JLN Managed Futures. In the meantime, please check out Horizon president Mike Markowitz’ contribution to our “Restoring Customer Confidence” series.

Lead Stories

Turnkey Trading Partners Named Best North American Regulatory Advisory Firm
Turnkey Trading Partners is proud to announce that it’s been voted “Best North American Regulatory Advisory Firm,” by Hedgeweek magazine. Hedgeweek’s fourth-annual Global and USA Awards recognize excellence among hedge fund managers and service providers around the world.
**DA: For more on Turnkey, check out last year’s MarketsWiki.tv interview with founder James Bibbings.

Cantab, BlueTrend, AHL lead losses as CTAs suffer in May
Hedge Fund Intelligence
Cantab Capital, Blue Trend and Man AHL were among the hardest hit among the big managed futures funds in a wretched end to May for most CTAs, as the sell-off in major government bonds and the sharp correction in the Japanese equity market late in the month brought the recent performance pick-up in the managed futures space to a dramatic halt.
**JK – Per comments from our interview with Jack Schwager (above), the bigger you are the harder it is to diversify.

Mixed May Performance for the Newedge Indices
Press Release
The Newedge Trend Index fell 3.65% in May, relinquishing some of the gains from March and April.  The Newedge Short-Term Trading Index finished slightly positive, extending a run of performance not seen since 2008.
The Newedge Trend Index, which is equally weighted, calculates the daily rate of return for a pool of the largest 10 trend following based CTAs that are willing to provide daily returns and are open to new investment.

Hedge funds receive meagre USD430m in April
Hedge funds took in a net USD430m (0.02 per cent of assets) in April, building on an inflow of USD817m in March, according to BarclayHedge and TrimTabs.

Now’s Best Time to Buy Art, Hedge Fund Founder Rachofsky Says
Bloomberg Businessweek
Now is a good time to buy contemporary art, even though prices have never been higher, the Dallas-based collector Howard Rachofsky says as he digests his bratwurst.
**DA: Art as an alternative asset class is the classic sucker’s bet. The contemporary stuff is moderately priced because no vehicle exists that can accurately weed out the future masterpieces from the future garbage. Besides, art in general provides no diversification benefit since it is almost perfectly correlated to equity markets.

Hedge Funds Cut Gold Bets as Paulson’s Loss Widens: Commodities
Hedge funds cut wagers on a gold rally for the first time in three weeks on mounting speculation central banks will curb record stimulus and as this year’s slump in bullion spurred losses for billionaire John Paulson.
**DA: We generally stay away from price-oriented stories here at JLN, but when big guns such as Paulson get hammered by the market, well, we can’t resist.

Stockbrokers eye joint outsourcing
Vanessa Kortekaas – FT.com
Several rival stockbrokers are planning to meet to discuss jointly outsourcing parts of their back offices and ways to compete better with the bulge-bracket banks in an unprecedented sign of co-operation. The discussions among a handful of City brokers are also a reflection of the difficult climate they are operating in, amid rising regulatory costs and fewer corporate transactions to advise on.
**JK – How would you feel if your futures broker combined with another on back office operations?

Managed Futures/Managed Funds

Observations on the death of trend following
Futures Magazine
The weak performance of commodity trading advisors (CTA) the last five years begs the question “are trend following strategies still profitable?” In 2012, the aggressive and persistent actions by central banks and other authorities worldwide served to maintain an unfavorable market environment that began in 2009 for most trend following systematic programs. Many short, medium and long-term trend following CTAs, as well as other trend following hedge fund strategies performed poorly. Nevertheless, equity and futures markets experienced sizable moves.
**DA: When traditional assets are rising, we get angry when our non-correlated diversified assets do not correlate. Hmm.

CTAs Behind The Recent Japan Market Volatility? Some Evidence Suggests Yes
The Japan market volatility continues, with TOPIX falling 4.8% on June 13 and now officially entering bear territory. Some market observers are linking the market’s decline to the yen’s renewed appreciation and disappointment with Japan’s growth strategy (many other theories have been suggested as well), but Chisato Haganuma, Chief Equity Strategist, Mitsubishi UFJ Morgan Stanley thinks factors outside of fundamentals may also be having a major impact. Sam Jones of The Financial Times reported on June 12 that the main Commodity Trading Advisors (CTAs) posted losses in excess of 8% in May.

Rival hedge funds hope to feast on SAC Capital redemptions
Reuters via Yahoo! News
By Svea Herbst-Bayliss and Katya Wachtel BOSTON/NEW YORK – A long list of rival hedge funds is eager to tap the billions in outside money that Steven A. Cohen’s SAC Capital Advisors is expected to return to investors by year-end.

Credit Suisse Rolls Out 2 Commodity ETNs
On Wednesday, June 12, Credit Suisse launched a pair of exchange-traded notes devoted to offering investors long-only exposure to commodities.
**DA: Which have we seen more of over the past few months – new commodity fund launches, or stories declaring the sector to be dead? Read on:

Commodity funds mostly in red in gloomy first half year
Commodity funds with combined assets of about $10 billion are heading for the half-year mark with losses, with some hoping that improving market fundamentals will overpower worries over global growth and stimulus measures in the second half.

Commodity Hedge Funds Said by FAO Finding Profits Harder to Make
Customers who besides paying annual fees are now finding themselves “saddled with 100 percent of the losses,” the United Nations agency said today in a report called “Commodity hedge funds in retreat?” The Food & Agriculture Organization cited commodity index fund investment data showing a 20 percent drop since April 2011, mirroring a withdrawal from hedge funds.
**DA: Yes. When you are long a market and it goes down, profits are harder to make. Thank you, FAO.

Hedge Fund Manager Browder: If I Get Assassinated…
Bill Browder, chief executive and founder of Hermitage Capital Markets, told CNBC the Russian government is “apoplectic” over sanctions imposed on Russian officials that he has campaigned for, and if he gets assassinated, “everyone would know who did it.”
**JK – It’s not everyday you get to say “if I get assassinated” so you better do it on TV in front of millions.

Man Group Trips Up (Again) on AHL
Harriet Agnew – Wall Street Journal
Man Group, the world’s largest publicly-traded hedge fund manager, saw its shares tumble almost 15% in London today, following the worst monthly performance from its flagship quantitative strategy AHL in over a decade and fears about the company’s continued dependence on the computer-driven division.

Makena’s Eric Upin On Global Endowment-Style Investing
Institutional Investor
**JK – Good Q&A on diversification of portfolios.

Pensions & Institutions

Temasek Prepares for European Opportunities
Sovereign Wealth Fund Institute
**JK – Word also has it, Bob Diamond will be involved with Temasek’s London operations. Diamond Turns To Singapore For $2bn Fund.

Detroit defaults on some debt to avoid bankruptcy filing
Detroit defaulted on some debt on Friday and proposed most creditors receive just pennies on the dollar owed by the “insolvent” city in order to avoid the largest municipal bankruptcy filing in U.S. history.
**DA: We should all watch very closely as this issue unfolds. There are countless municipal pensions out there with similar risk profiles.

Behind the times on infrastructure
Professional Pensions
Around the world, institutional investors are increasing allocations to alternative asset classes, especially direct infrastructure, private equity and listed real estate. However, pension funds are restricted from fully joining the trend by governance standards, AMP Capital says.

Investing in Alts: Advice From Morningstar Panel
Financial Planning
There are now more than 400 mutual funds using alternative strategies, and about the same number of ETFs, Nadia Papagiannis, Morningstar’s director of alternative fund research, told advisors at the Morningstar Investment Conference.  That’s up from only 10 such alternative funds in 2008, she added; only 4% of advisors responded to a 2012 survey saying they did not use alternatives in constructing client portfolios.

Institutions taking divergent paths in revamping hedge fund portfolios
Hedge fund portfolio revamps are front and center on CIOs’ desks as institutions, especially public pension plans, refine their investment approaches.
**DA: Some institutions are taking the drastic step of considering how their alt portfolios correlate with their traditional portfolios? Scandalous!

Calpers Commodity Holdings Declined 5.5% in April to $1.214B
The California Public Employees’ Retirement System, the largest U.S. pension fund, reported the value of its commodity holdings fell 5.5 percent in April from the previous month.


Government’s ‘once in a generation securities law rewrite’ to set out a detailed definition of derivatives for the first time
The Financial Markets Conduct Bill, touted by the Government as a once in a generation securities law rewrite, could end decades long uncertainty about just what derivatives are by recognising them as a category of financial product in their own right.
**DA: A bill out of New Zealand aims to set the record straight regarding what is and is not a derivative.

CFTC urges closing ‘tropical island’ loophole
The top derivatives regulator urged closing a legal loophole for offshore hedge funds, warning it threatened to undo a deep overhaul of Wall Street after the credit meltdown.
**DA: Extraterritoriality is apparently a four-letter word.

CFTC Hits Commodity Hedge Fund Manager Over Allegedly False Statement
Thomas Hampton raised about $5.2 million in 2010 and 2011 for a commodities hedge fund, trumpeting its profits to investors. The only problems were, Hampton Capital Markets was regularly losing money and Hampton himself had failed to register as a commodity pool operated.
**DA: After the commodity boom retracement, the Madoff-style schemes are revealed.

The bad-weather scale of regulation
Financial Times
Tsunamis, tidal waves and avalanches – regulation is dampening the spirits of fund management professionals so much that they have started referring to impending rule changes, which they believe to be excessive and onerous, in units of bad weather.
**DA: The overuse of such language has cast a dark cloud over the industry.


Jim Kharouf
John Lothian News
Email – jimkharouf@johnlothian.com
LinkedIn – http://jlne.ws/JSHVyV
MarketsWiki – http://jlne.ws/Jrq0uu

Doug Ashburn
John Lothian News
Email – dougashburn@johnlothian.com
MarketsWiki – http://jlne.ws/MOqrPQ

Disclaimer: The John Lothian, Environmental Markets, JLN Metals, JLN Managed Futures, JLN Interest Rates, JLN Options and JLN FX newsletters and blogs and MarketsWiki are products of John J. Lothian & Company, Inc. The opinions expressed in these publications are strictly those of their respective editors. They are intended solely for informative purposes and are not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Security futures are not suitable for all customers.

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