After a disappointing 2012, the CTA space is looking to the future of managed futures. Articles featured in this issue include two on the difficulty of trend following in markets that have not been trending, and another two articles on the squeezing of fees and performance incentives. Another category getting squeezed: middlemen – capital introducers, or “finders.” All of this is inevitable after a year in which the typical equity index fund blew away alternative investments. There are bright spots, however, in some 2013 metrics on returns and asset allocation. 

By the way, readers may notice that today’s newsletter should have been delivered last Friday. We have no excuse except to say that the JLN Managed Futures team was traveling home from a fun but exhausting week at the FIA Boca 2013 conference. While in Boca, we interviewed over a dozen market participants, mostly bigwigs, for two upcoming special reports. Detail to follow.

Quote of the Day: “Once firms have invested in technology and research, they may be able to offer parts of their portfolio at significantly lower fees.”

-Cantab Capital Partners founder Ewan Kirk on the global squeeze on fee structures

Observations – Statistics – Commentary

Second Annual Managed Futures Pinnacle Awards, June 19, 2013
Join CME Group and BarclayHedge for the only awards event to recognize excellence exclusively in the managed futures space, Wednesday, June 19, 2013, preceding MFA’s Forum 2013, Chicago. For more information, including a list of the categories, and to see last year’s winners, visit the MFP Awards site below.

What is the future of trend following CTAs and futures funds?
I want to examine what has driven this asset class to deviate in 2011 and 2012 so far from such an incredible history of superior returns. It seems two atypically poor years is enough to shake the confidence of some in the industry. That’s a big mistake. Not only is the vitality of trend following far from over, I expect 2013 to be a great year for trend following CTAs. To begin with we need to examine in particular what drives such superior returns for trend following CTAs in the first place.

Executive Profile: Impassioned advocate for commodities customers
Chicago Tribune
James Koutoulas, a Chicago hedge fund manager, had about 85 percent of his clients’ money tied up in MF Global, about $55 million. Because of the shortfall in what were supposed to be safe balances, customers were frozen out of their accounts. His panicked clients were not the biggest MF Global customers, but Koutoulas became the loudest voice advocating for the speedy return of their money.
**DA: Nice piece on the newest member of the NFA board.

Barclay CTA Index Down 0.53% in February; Currency Traders Gain from Stronger US Dollar
Managed futures lost 0.53% in February according to the Barclay CTA Index compiled by BarclayHedge. The Index remains up 0.77% year to date. “A combination of trend reversals and downdrafts across the major futures markets made the task of extracting profits more difficult in February,” says Sol Waksman, founder and president of BarclayHedge.

Lead Stories

Investors Ponder the Future for Managed Futures
Institutional Investor’s Alpha
Commodity trading advisers and their close cousins, managed futures funds, continue to miss out on the global market rally. CTAs lost 3 percent in February, their worst month since May 2012, while managed futures lost 1.41 percent, putting both strategies in the red for the first two months of the year, according to industry tracker eVestment. Managed futures lost 1.67 percent and 1.44 percent in 2011 and 2012, respectively.

Managed futures under pressure on fees
Financial News
Cantab Capital Partners’ new CCP Core Macro fund set the cat among the pigeons in January with a 0.5% management fee and a 10% performance fee, against the hedge fund standard 2% and 20%. Cantab founder Ewan Kirk said: “Once firms have invested in technology and research, they may be able to offer parts of their portfolio at significantly lower fees.” Kirk thinks that firms need the scale – typically at least $2bn – to cover these overheads before rolling out lower-cost products
**DA: Fee squeeze: Coming soon to a fund near you? Read on:

Hedge fund fees under pressure
Financial Standard
Hedge fund fees tend to be the most expensive of all active managed options available to investors because they typically promise higher returns, use more sophisticated techniques and often invest in more expensive, niche areas. However, disappointing returns through 2010 and 2011, coupled with on-going industry pressure on fees has seen institutional investors across the globe review their hedge fund exposures.
**DA: Yeah, that, plus the fact that equity markets have been outperforming alternatives since the crisis.

Educator and Introducing Broker FuturesANIMAL Officially Launches
Combining a futures education element with a proprietary brokerage platform, FuturesANIMAL, a licensed member of the National Futures Association (NFA), aims to provide the retail trader with the tools they need to successfully navigate and access the futures and options market
**DA: CEO Travis McGhee used to be with OptionMonster. At least he has a clever naming algorithm.

Managed Futures/Managed Funds

‘Finding’ Hedge Fund Investors Just Got A Bit More Difficult
The hedge fund world has always walked a fine line when it comes to attracting new investors.  And nowhere has this line been thinner than the one between “finders” and “solicitors” — the parties who act as the middlemen in the investor location process.
**DA: Keep your head above water, consistently beat your benchmarks,manage risk well and limit drawdowns, and the investors will find you.

What You Can Do to Steer Clear of a ‘Custody’ Battle
Wall Street Journal
First, it was money-market funds that lost their aura of invulnerability, then auction-rate securities. Could the ultimate assurance of investment safety also be shaken? When you buy a mutual fund or hire a financial adviser, your assets generally must be held in “custody,” or safekeeping—segregated from anyone else’s assets, scrupulously recorded and even protected if the institution that holds them becomes insolvent. Investors have long taken it for granted that an asset might lose value in a market crash, but the asset can’t disappear if it is properly held in custody.

Elite Advisers’ Wine Fund Favors Burgundy Over Bordeaux
Elite Advisers SA’s wine fund, one of Europe’s largest, is boosting its holdings of Burgundy over Bordeaux and sees value in the region even after price gains. The investment vehicle, branded Nobles Crus, has a five- year track record and had 102 million euros ($135 million) under management at the end of December. Wines held include a Romanee- Conti 1915 Domaine de la Romanee-Conti, harvested during World War I, and Chateau d’Yquem Sauternes dating back to 1811, when Napoleonic troops were fighting in Spain.
**DA: This article gives an excellent snapshot into the managed wine asset market. Two words: caveat emptor.

The Ups and Downs of Trendspotting
Institutional Investor’s Alpha
For managed futures funds, the past two years were some of the toughest ever. Managed futures funds make their money from following trends in the market, and it’s tough when there are no steady trends to capture.
**DA: I knew that long-only investors have a hard time in bear markets, and investing in CDs is hard when interest rates are at zero. And now I learn that trend followers lag when markets do not trend. Got it.

Pensions & Institutions

Sorry, Folks: One Way or the Other, You’ll Never Be Able to Completely Count on Retirement
The Daily Beast
For over 100 years, the Studebaker Corporation made vehicles, from wagons for the Gold Rush to tracked vehic
les for World War II.  And of course, the cars that we mostly know them for: streamlined, a little stodgy, and very much of their era. That’s because their era ended, in 1963, when the company closed its South Bend plant.  That wasn’t a surprise; sales had been suffering for years, due to high costs and concerns over reliability.  What was a surprise was the state of its pension fund, which was disastrously underfunded.
**DA: The ultimate adverse selection problem: Underfunding is necessary during recessions, but overfunding during boom times makes one susceptible to the LBO sharks. Besides, it is awfully tempting to extrapolate good times into the future, a la 1999.

Tiburon: Investable assets to hit $80T by 2017
Investable assets market firms will be chasing an $80 trillion market by 2017, according to a new report. Tiburon Strategic Advisors, Tiburon, Calif., published this in a summary of results from its survey, “State of the Financial Products and Services Businesses: Deleveraging, Increasing Investable Asset Options, and Growing Insurance Demand.” The March 2013 report is part of Tiburon’s Financial Institutions Research Series.

Top LA pension OKs $800 mln for commodities; eyes ‘active’ play
The largest public pension in Los Angeles is investing $800 million in commodities over the next two years, a quarter in actively managed derivatives, as it tries to profit from markets that have frustrated many institutional investors. The Los Angeles Fire and Police Pension System, with nearly $16 billion in assets, said it is allocating 5 percent of its money to commodities with investments that aim to maximize returns and minimize downside risks. That includes commodity futures, stocks and private equity.

Sovereign wealth funds to hit record $5.6 trln by year end-study
Sovereign wealth funds (SWFs) are set to see their assets grow to $5.6 trillion by the end of 2013, a study found, a sum more than double British GDP and underscoring their status as the world’s wealthiest investors.

Pension funds struggle with asset allocation
Financial News
It is a difficult time to be a pension fund manager. Few asset classes are generating strong performance, complicating asset allocation decisions to the point of paralysing investors.


SEC Issues Guidance Update on Social Media Filings by Investment Companies
Press Release
On March 15, 2013 the Securities and Exchange Commission published a guidance update from its staff to clarify the obligations of mutual funds and other investment companies to seek review of materials posted on their social media sites.
**DA: If only I could fit a D-Doc into 140 characters or less.

Paulson says he’s staying put, not moving to Puerto Rico
Hedge fund titan John Paulson, who oversees $18 billion in assets from his offices in New York, said on Friday he has no plans to leave the island of Manhattan for the island of Puerto Rico. In an unusual move, Paulson, a life-long New Yorker who guards his personal life zealously, had his firm, Paulson & Co, put out a news release to rebut speculation that he might pick up his family and move to the Caribbean.
**DA: Not yet, anyway. In the race for returns, do not underestimate the value of the tax arb.

NFA Regulatory Requirements For FCMs, IBs, CPOs, and CTAs
National Futures Association
March 2013 Revisions: Updated to reflect the amendments to NFA Financial Requirements Section 4 to make use of technology to monitor FCM segregation compliance.

Proposed amendments to NFA Rule 2-45 and its related interpretive notice for member CPOs
Under CFTC final rules adopted in February 2012, CPOs are required to register with the CFTC and become a Member CPO unless an exemption is available under the CEA or the CFTC Regulations. The NFA acknowledges that Member CPOs that would be exempt from registration but for the Final Rules may have, as part of their normal course of business, previously caused their pools to make certain types of loan or advance arrangements that would violate Rule 2-45. The Proposed Amendment requires such CPOs to notify the NFA of these existing arrangements within 30 days of either (i) the effective date of any amendments to Compliance Rule 2-45 or its Interpretive Notice or (ii) becoming a Member CPO, whichever occurs latest.

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