Observations – Statistics – Commentary

The bond-bigwigs at Pimco are apparently coming to the managed futures world, according to the Wall Street Journal. This despite the fact that 2013 has been another disappointing year thus far. Moore Capital paid $48 million to settle accusations of market manipulation – but was Mr. Bacon’s firm simply a victim of circumstance, in that it has been just too big a fish for the small platinum and palladium ponds? A study just released by two Vanderbilt professors has created quite a buzz in the futures industry. Leading off the newsletter, due diligence expert Leigh Faber offers a primer on family offices and special considerations when seeking an allocation.

CTA Expo Chicago, September 19, UBS Tower Conference Center
CTA Expo
We invite you to register for the CTA EXPO in Chicago on September 19th, 2013 at the UBS Tower Conference Center located at One North Wacker Drive. Commodity Trading Advisors, Service Providers, Press and Capital Sources should register now because all previous events have been sold out and we anticipate a repeat here in Chicago.
***DA: If you have any interest in attending, do yourself a favor and register today. It sells out every year and, last I heard, there are only a few seats left.

Pimco’s Gross Jumping Into Managed Futures
Daniel P. Collins, The Dan Collins Report, via Huffington Post
Warren Buffett is known for his quote, “Be fearful when others are greedy and greedy when others are fearful.” It has been cited so many times by so many people that you would think its underlying logic would be ingrained into the U.S. investors’ psyche but markets are irrational because people are irrational so no matter how many times someone has heard this piece of wisdom, there is a tendency to jump on investment bandwagons when the trend is long in the tooth and bail or stay out of underperforming investments right when they are ready to take off.
**DA: So many of us are fearful about other people’s level of greed in this market, that we are getting mixed signals. Is my fear making others greedy? **More on Pimco’s foray into managed futures in the section below.

Altegris CTA Challenge Update
If you have not been following the action this year, it is not too late to tune in. Visit the CTA Challenge site, leave an email address, and begin receiving the monthly update, which features commentary, regulatory updates, special features and more. This month’s commentary, “Staying The Course Is Not Always The Best Decision – But Neither Is Abandoning Ship” offers a reminder as to why we believe in managed futures as an asset class.

Lead Stories

Bond-King Pimco Plans to Push ‘Alternative Funds’
Wall Street Journal
Pacific Investment Management Co., the world’s largest bond-fund manager by assets, wants to hang more with the hedge-fund crowd. The firm, based in Newport Beach, Calif., is planning an expansion of its alternative-investments business in the coming months aimed at both individual and institutional clients, including potentially launching new funds invested in assets such as distressed debt in Europe.

Hedge funds lag as sub strategy plunges
Investor Daily
Hedge funds returned 0.88 per cent in July and 4.59 per cent for the year to date as one sub strategy plunged deep into the red, the latest Credit Suisse Hedge Fund Index has found. In total, the industry saw estimated outflows of approximately $0.5 billion in July, bringing overall assets under management for the industry to approximately $1.9 trillion, according to Credit Suisse.
***DA: Managed futures is the only other sub strategy in negative territory year to date (-4.61 per cent), down 1.06 per cent in July, according to CS.

Moore Capital settles platinum, palladium lawsuit for $48.4 mln
Louis Bacon’s Moore Capital Management has agreed to pay $48.4 million to settle a class-action lawsuit asserting that the hedge fund manipulated platinum and palladium prices, the plaintiff’s lead attorney said on Wednesday.
**DA: Bacon wrote the check with no pork-bellyachin.’ For a deeper look at the platinum market, check out the Attain blog: http://jlne.ws/175OFhM

High-frequency trading does not raise futures volatility -study
Volatility in futures contracts has remained largely stable in the face of increased participation from high-speed and algorithmic traders often blamed for roiling markets, according to a study issued on Tuesday.
**JL: Fighting the innuendo with facts.

Managed Futures/Managed Funds

Hedge Funds Emerge From The Bunker
Abheek Bhattacharya – MoneyBeat – WSJ
While many investors have been running away from emerging markets, one set of money managers is seeing opportunity: hedge funds.

Pimco, the Bond-Fund Heavyweight, Plans to Push ‘Alternative Funds’
Pacific Investment Management Co., the world’s largest bond-fund manager by assets, wants to hang more with the hedge-fund crowd. The firm, based in Newport Beach, Calif., is planning an expansion of its alternative-investments business in the coming months aimed at both individual and institutional clients, including potentially launching new funds invested in assets such as distressed debt in Europe.

Hedge Fund Association Forms New Academic Advisory Board
The Hedge Fund Association today announced that it has formed a new academic advisory board to empower and educate students and others about the hedge fund industry. The board will hold HFA symposiums on campuses nationwide featuring well-known hedge fund managers and investors as guest speakers, along with hosting online webinars to teach the next generation of professionals not only about the industry, but also finance and ethics.

Newedge research shows CTA capacity concerns overblown
Kris Devasabai – Risk.net
Commodity trading advisers (CTAs) are mired in a 24-month long drawdown – a performance slump that follows a two-year period in which the industry’s total assets surged more than 50% to around $330 billion.
It is no surprise then that investors are asking whether the recent performance woes are tied to the sudden jump in assets. A paper from Newedge’s prime brokerage division, ‘Capacity of the managed futures industry’, wrestles with this very question. The research suggests growth in assets will have muted impact on CTA performance.

Merkel Says G20 Needs to Push Harder to Control Hedge Fund Risks
German Chancellor Angela Merkel told voters at an election rally that she’ll push for greater regulation of hedge funds at next month’s Group of Twenty meeting.
Addressing a crowd of about 2,000 in the Rhine city of Bonn, Merkel said she hoped European members of the G20 would “speak with one voice” at a meeting in St. Petersburg, amid slow progress on tightening controls on hedge funds. “It’s not enough to regulate just banks but not hedge funds and shadow banks and I’ll fight for that,” she said.

The Alternative Answer
Bob Rice in WealthManagement.com
Liquid alternatives are a revolutionary advance for average investors. The term refers to alternative assets and strategies that are packaged up inside mutual funds, ETFs, publicly traded partnerships and a few other vehicles that can be bought by anyone and either sold or redeemed at any time. But the most exciting, and rapidly developing, branch of liquid alternatives is the “smart beta” category, which provides easy, low-cost access to traditional hedge fund strategies.
***DA: As a market maker, I was always on the lookout for the dumb beta.

Pensions & Institutions

The ABC and Ds of investing risk
Financial Post
In Act 2 of Shakespeare’s Romeo and Juliet, Juliet utters the famous words, “What’s in a name? That which we call a rose / By any other name would smell as sweet.” The meaning to her star-crossed lover Romeo is that a name is an artificial and meaningless convention, and that she loves the person who is called Montague, but not the Montague name nor family. If only this were true in investing.
***DA: I read the article, and it looks as though the best portfolio mix works out to about a B- or C+. I can totally relate.

Preqin: Expensive hedge fund managers perform better
Hedge fund managers who charge performance fees greater than 20% produce better net returns over longer periods than those who charge 20% or less, according to new data from research house Preqin.
***DA: Is that correlation or causation? When I start losing money I should just jack up my fee, right?

Derivatives tax proposal could have dire consequences
A draft proposal in Congress to change the taxation of financial products could affect pension funds and other tax-exempt institutional investors.

Top1000 Pension Funds: Tax reforms and Solvency II on the agenda
Investments & Pensions in Europe
Some pension funds defy a 2% cap on dividend payments agreed in the government-industry pact while the regulator continues to update and tighten the rules.

TABB Says European Equity Dark Trading Volume Now Exceeds 10% as MiFID II Trialogue Meeting Looms
Sys-Con Media
European politicians may want greater transparency but by pushing all equity market order flow onto traditional primary “lit” exchanges, they may well risk harming the pension funds and retail investors they want to protect due to poor trade execution. This is what asset managers tell TABB Group in new research published on the eve of continued MiFID II trialogue meetings as dark trading volume exceeds 10%

Rothschild WM: CTAs Offer Attractive And Cheap Portfolio Insurance
Value Walk
Hedge funds have also suffered from recent market events with Bernanke’s comments in late May bringing gains made so far this year to a halt. Managed futures funds (CTAs) suffered from falling asset prices in late May with long positions in longterm government bonds hurting the most. Yet recent events do not change our view that CTAs offer attractive and cheap portfolio insurance.

Mixed picture emerges on hedge fund fee structures
Hedge Funds Review
Average hedge fund management fees have increased due to increased regulatory compliance and pressure from institutional investors to maintain more robust operational risk management. Management fees have increased to an average 1.58% after 2007. In 2002 the average management fee was around 1.38%, according to a study by eVestment.

Trading problems sparking calls for closer oversight of exchanges
A spate of recent glitches in trading markets is putting pressure on federal regulators to step in, and on institutional money managers to pay more attention to market infrastructure.


U.S. futures industry regulator NFA comes under fire from within
A U.S. futures industry regulator is falling short in its attempt to keep tabs on brokers and asset managers, more than a year after the collapse of one brokerage under its oversight that cost clients hundreds of millions of dollars, according to one of the regulator’s directors.
***JL: That is a fairly common view throughout the industry and thus not surprising. The NFA needs to do a better job of communication, but what organization has no room for improvement?

***DA: The story references a study on NFA practices in the wake of the PFG debacle. View that document along with a summary and links on MarketsReformWiki: http://jlne.ws/Yxv9IY

Rumblings from the Regulators
DTN / The Progressive Farmer
CFTC appears poised to move on its controversial customer protections rule as well as take the first baby steps towards reining in high frequency traders.

Interpretive Notice: NFA Compliance Rule 2-9: FCM and IB Anti-Money Laundering Program
An explanation of the amendments to the Interpretive Notice can be found in the August 27, 2012 rule submission letter

Peregrine accountant barred from working for firms overseen by CFTC
Douwe Miedema | Reuters
The U.S. futures regulator on Monday barred Jeannie Veraja-Snelling from working as an accountant for firms it oversees after she failed to detect the massive fraud at failed brokerage Peregrine Financial Group.
***JL: OK, so you hire a lone accountant working from home to handle your FCM’s audit. Then she does the bad job you hired her for, but your crime is figured out and you go to jail. Your accountant gets banned from doing business in the futures industry, perhaps the only FCM she audited anyway. And the real penalty for this is what? Being stupid is not a crime, but staying stupid is. We were all at least a little stupid in the PFG case. Have we learned our lesson?

FMC tightens settlement rules for commodity futures bourses
The Economic Times (India)
Some lessons seem to have been learnt from the NSEL crisis. Commodity futures regulator Forward Markets Commission (FMC), which was in the process of framing uniform guidelines for a settlement guarantee fund for national commodity bourses like MCX and NCDEX, has spelt out details regarding the fund sooner than expected.

Private Equity, Hedge Funds Are Ready For Their Close-Up
What makes private funds, such as a hedge fund or a private equity fund, “private”? The answer is a series of affirmative decisions taken by the proposed fund’s sponsors, and explicitly agreed to by prospective investors, to operate within designated exemptions to securities laws and financial regulations.

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