Strategists at a recent conference in Chicago declare an end to “the great correlation.” Pension funds are apparently wasting billions of dollars a year on “worthless advice” according to a story in the Financial Times. And the bad news keeps coming for the managed futures sector in terms of returns. Leading off the newsletter, though, is a fresh look at trend following from Thomas Rollinger of Red Rock Capital.

Observations – Statistics – Commentary

Thomas Rollinger of Red Rock Capital Explains the Trouble with Trend Following and Why He Likes Sortino Ratios

Thomas Rollinger has a unique perspective on the markets.

As the managing partner and chief investment officer of Red Rock Capital, Rollinger joined the managed futures firm in March after being a long-time customer of the firm. But Rollinger also has an interesting background, as a student and colleague of Edward O. Thorp, who is also known as the “godfather of quants.” Rollinger co-developed and co-managed the systematic futures strategy which Thorp called “System X,” which was featured in Scott Patterson’s “The Quants” and well as in Jack Schwager’s book “Hedge Fund Market Wizards.”

Rollinger now works alongside Red Rock’s founder Scott Hoffman and helps run the 10-year-old Chicago-based firm’s programs which include: the Systematic Global Macro and the Commodity Long/Short program, which was launched just a few months ago.

JLN Managed Futures newsletter editor Jim Kharouf spoke with Rollinger about his experience and lessons learned from Thorp, as well as what’s been hampering trend followers as well as why the Sharpe Ratio doesn’t isn’t better than the Sortino Ratio.

Quote of the Day:

“If you bought managed futures for negative correlation, you’re getting it. If you just want things that move like the equity market, you should buy all stocks.

– Afroz Qadeer, chief investment officer at Equinox Institutional Asset Management, in the article, “Is the Great Correlation Over?”

Emerging Manager Forum Miami, December 3, 2013
CTA Expo
We have almost 100 registered for Emerging Manager Forum, Miami Beach on Dec. 3, 2013. We have reserved a small block of rooms at the Fontainebleau Miami Beach at a discounted rate. If you plan on coming we suggest you register and reserve your room early. Click the link below to register.
**DA: The CTA Expo Chicago was a rousing success. Miami is just around the corner.

Managed Futures vs ETFs: Why Managed Futures Should be Part of Your Clients’ Portfolios
RCM Asset Management
RCM is holding a cocktail reception and panel discussion Wednesday, Oct. 2 from 4-7pm at CME Group, 20 S. Wacker in Chicago. The event features two panels covering the reasons for managed futures allocation and proper manager selection.
***** Have a cocktail on RCM and pick up a tip or 2 on managed futures.

Altegris CTA Challenge 2013 Update
If you have not been following the action this year, it is not too late to tune in. Visit the Altegris CTA Challenge site, leave an email address, and begin receiving the monthly update, which features commentary, regulatory updates, special features and more. It’s also not too early to begin thinking about next year’s challenge. If you are a CTA, know of a CTA, or invest with a CTA who would be interested, head on over to the Altegris site.

Lead Stories

Is the great correlation over?
The unprecedented correlation between asset classes that stemmed from the financial crisis appears to be over, strategists said Tuesday at the InvestmentNews Alternative Investments Conference in Chicago.
***DA: Like the parrot in the Monty Python sketch, it’s not dead; it’s resting.

Billions of dollars wasted on investment advice
Steve Johnson – FT
Pension funds and other large investors are throwing away billions of dollars a year on worthless advice from investment consultants, according to academic research.
The funds recommended by consultants do no better than any other, and by some measures they underperform the wider market significantly, the research* found.

Don’t feel bad, the pros can’t pick managers either
The Reformed Broker
Today’s must-read article belongs to Steve Johnson at the Financial Times, who concludes that institutions have wasted billions of dollars on the advice of manager-picking consultants. Picking investment managers is neither art nor science, it is something else entirely and, in the aggregate, it cannot really be done over long stretches of time.
**DA: Not touching this one with a ten-foot pole.

Commodity Trading Advisors, puzzled by Fed, head for third year of losses
Long-term trend-following hedge funds are heading for a third straight year of losses unless the commodity and financial markets they trade in settle into a more predictable pattern, which does not seem likely given the Federal Reserve’s mixed signals on the U.S. economic stimulus.
***DA: If the best we can do is underperform the S&P during equity rallies and underperform the VIX during equity meltdowns, the sector is going to have trouble.

Advisers search for pastures new
Financial Times
Increasing numbers of financial advisers are incorporating exposure to retail alternative products into portfolios. Others are proving harder to convince. This spring, Ignites Distribution Research surveyed the Financial Times Top 400 Advisers (FT 400), who work at national, regional and independent broker-dealers. The average adviser in the FT 400 manages more than $1.3bn and has more than 25 years of experience. The results indicate that these elite advisers are very interested in retail alternative products, and many plan to increase their use or start using them.
***DA: New sources of revenue, but for whom, the retail customer or the adviser?

In This Battle Arena, Warriors Are Armed With Algorithms
Michael Chang, 30 years old, is the sort of guy that BattleFin, a recruitment firm searching for hedge fund talent, wants to attract. Six years ago, at a Foxconn plant in Guangdong, China, Mr. Chang used data analysis to figure out that the unusually cold weather outside had led to a high failure rate of the computer chips on the factory floor. The finding saved the company from significant revenue losses.
**DA: Is this the future of the CTA community? Or is it the present?

Managed Futures/Managed Funds

Mainstream managers face cultural hurdle
Financial Times
Several US managers have acquired alternative investment strategists in the past year in order to boost their credibility before offering such products to retail clients. But how they address cultural and organisational barriers will determine whether such transactions are successful, merger and acquisition advisers say.

HEDGE FUNDS – Place your advertisement HERE
Tracy Alloway | FT Alphaville
And enjoy sub-par returns for the next 12 months. No, this is not FT Alphaville’s marketing department shooting itself in the foot. This is the conclusion of a recent paper examining the effect of advertising on hedge funds’ inflows and returns.
***DA: Here’s what our own Jon Matte had to say: “I expect that hedge fund advertising will be just as predictive as that in other sectors, such as used cars.”

A Hedge Fund Manager Who Doesn’t Mind a Losing Bet
Meet Mark Spitznagel, the hedge fund manager who doesn’t mind a losing bet. Mr. Spitznagel, the founder of Universa Investments, which has around $6 billion in assets under management, says the stock market is going to fall by at least 40 percent in one great market “purge.” Until then, he is paying for the option to short the market at just that point, losing money each time he does.
**DA: I know a Mark Spitz and a Marc Nagel, but I don’t know Mark Spitznagel. I like his attitude, though.

Commodity hedge fund Clive Capital to close down
Commodity hedge fund Clive Capital is to close down, blaming a lack of investment opportunities for its poor performance and investor outflows, making it the latest commodity fund to call it a day.

Finding Order in (Commodity) Chaos
Wealth Management
Navigating through chaos is the daily charge of investment managers. Since futures contracts represent one of the most unpredictable asset classes, advisors who trade commodities must, ipso facto, be experts in managing chaos.

Pensions & Institutions

Foundations return 12% for fiscal year 2012, report shows
Foundations returned an average 12% net of fees for the year ended Dec. 31, according to a report from the Commonfund Institute and Council on Foundations. 2012 was a significant improvement from the average -0.7% return in 2011.

Alternative investments – post GFC opportunities emerge
Money Management
Although many investors were burned during the global financial crisis by the liquidity shortfalls of alternative investments, retail investors now have better opportunities to build up portfolios that offer reliable liquid alternative strategies and assets both locally and globally, writes Dominic McCormick.

U.S. public pension investments jump, costs surge too
Asset values at U.S. public pension funds rose 8.4 percent in the latest fiscal year to the highest level in more than 40 years, but their costs also rose, the U.S. Census reported on Monday.

How Kwame Kilpatrick’s Wall Street Deal Helped Bankrupt Detroit And Fuel Corruption
Deadline Detroit
In The Detroit News, Robert Snell ties together strands from several Detroit narratives for a tale that underscores how the rampant corruption of the Kilpatrick years is intertwined Detroit’s bankruptcy. Relying on federal court records and pension officials, Snell writes how the Wall Street deal backed by former Mayor Kwame Kilpatrick that helped push the city into bankruptcy bankrolled a three-year spree of alleged corruption.

Report: SEC investigating Atlanta’s employee pension fund
CL Atlanta
The U.S. Securities and Exchange Commission is reportedly looking into whether $65 million of Atlanta’s pension fund was improperly invested. According to WABE, federal investigators are seeking information from City Hall employees and pension board members about Larry Gray, an adviser for the city’s $2.5 billion fund. The investigation stems from a January complaint alleging that Gray recommended the cash be invested into a pension fund he owned without disclosing his conflict of interest.
**DA: Is Atlanta the new Detroit? Let’s hope not.

Looting the Pension Funds
by Matt Taibbi, Rolling Stone
All across America, Wall Street is grabbing money meant for public workers
**DA: If you have not seen Taibbi’s latest piece, please check it out.

PA. lawmaker offers new approach to pension reform
Sacramento Bee
A key Republican lawmaker proposed borrowing $9 billion Monday as part of a new approach to rein in the soaring costs of pensions for nearly 380,000 Pennsylvania teachers and state employees.
**DA: Well that’s one idea. Any others?

Let Pensions Die. Build Something Better
The American way of retirement is crumbling. Private pensions are disappearing. Public pensions are crumbling. Instead of clawing and fighting to save them as they slip away, populists and progressives should just let them die. No one needs pensions. Everyone needs a pension. In the golden days of old, a pension was taken for granted, as part of the guarantee offered to middle class Americans. The American dream of getting a stable, long-term job, owning a home, and retiring with a pension was all of a piece. It was a lifelong promise from American capitalism as a system: Participate, and you will be taken care of.

That’s dead now.
**DA: Something to think about, but please show me the math.


CFTC scrambling to protect whistle-blower’s identity
Gregory Meyer in New York –
The US commodities regulator has accidentally shared details about a crucial informant in its only market manipulation case to address the massive oil price spike of 2008, court documents reveal.
**DA: Manipulation? What manipulation? Move on, folks – nothing to see here.

Five-year silver probe is closed –
Gregory Meyer in New York
The US commodities regulator has said it failed to uncover evidence of illegal trading after a five-year investigation into the silver market. The rare announcement by the Commodity Futures Trading Commission came after its enforcement staff spent more than 7,000 hours reviewing transaction data and interviewing witnesses, the agency said.
**DA: Ditto the above comment.

BOE Sets Sights on Hedge Funds as Potential Stability Risk
The Bank of England on Wednesday trained its sights on hedge funds as a potential source of instability in the financial system, underscoring regulators’ increasing concern about risks that might develop outside banks and other big institutions.
**DA: In the modern regulatory environment, big is bad.

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