In this pre-holiday issue, Dodd Frank may be shifting some swaps users into the futures market, and the approaching “fiscal cliff” may be steeper than we think. But first, Editor-in-Chief Jim Kharouf offers details of his recent trip to London, where he attended CTA Expo’s Emerging Manager Forum.

Quote of the Day

“We have been facing a sick patient that keeps on getting higher and higher dosages of morphine without going through the serious operation. At some point, central banks were forced to go to extreme measures that weren’t on their menu of policy tools before, like [quantitative easing] (QE).”

-Menachem Sternberg, from the article “Analyzing the ’New Normal’”

Observations – Statistics – Commentary

A week in London
Jim Kharouf

Fresh off a week in London, and a visit to the well-attended Emerging Managers Forum hosted by the CTA Expo founders Bucky Isaacson and Frank Pusateri, it’s clear that a vibrant community of CTAs is, well, emerging there.

No doubt, they face sizable challenges with the raft of regulatory changes, banks reorganizing their operations, skittish investors searching for returns in the midst of the European Union’s economic problems, among many others. But it is an opportunity for CTAs to show their skills and illustrate how they thrive when other managers are falling.

In the coming issues of JLN Managed Futures, we will explore many of these issues and opportunities for emerging CTAs in video interviews with a variety of speakers at the event including Bob Swarup, who is writing a book on financial crisis over the past 2,500 years. Eirv Knox, non-executive director of Banque Havilland who has spent the past 10 years in the Middle East’s banking arena, Kevin Cook, of Autumn Capital Partners who advises CTAs and hedge fund managers on how to build their businesses and Alan Snyder, managing partner of Shinnecock Group.

On a personal note, our thanks to Bucky and Frank for their hospitality and invitation to cover their event in London.

Analyzing the”New Normal:” A Q&A with Eagle’s Menachem Sternberg
Futures Magazine
Menachem Sternberg is an economist and trader whose analysis of the global market environment has allowed his firm, Eagle Trading Systems, to navigate one of the more treacherous periods for global financial markets. He has been a discretionary trader and a quantitative system developer, and he employs those skills with his current strategies. Futures Magazine’s Dan Collins talked to Sternberg about markets, economic policy and the “new normal” market environment that has existed since the 2008 global economic meltdown.
http://jlne.ws/MoaS6k

Fiscal Cliff Is Higher Than You Think: BofA-Merrill
AdvisorOne
As the presidential elections draw near, the nation’s debt woes are coming into clearer focus—and Bank of America-Merrill Lynch Global Research warns that the “fiscal cliff” is bigger than most market observers imagine. The fiscal cliff, off which U.S. taxpayers may have to leap on Jan. 1, 2013, if the Bush tax cuts expire, is seen as being the inevitable consequence of Washington lawmakers’ infighting unless President Obama and Congress honestly confront this deadline in an election year.
http://jlne.ws/MNZjUK

Barclay CTA Index Gains 2.64% in May; Diversified Traders Add 3.47%
BarclayHedge
Managed futures gained 2.64% in May according to the Barclay CTA Index compiled by BarclayHedge. The Index is up 1.92% year-to-date. “The risk-off trade which started to gain momentum in April moved into high gear in May, allowing CTAs that were properly positioned to have a profitable month,” says Sol Waksman, founder and president of BarclayHedge.
http://jlne.ws/LK4bdv
**DA: For current data, see the scorecard below.

Managed Futures Scorecard   6/30/2012
     
Newedge Indices MTD Return YTD Return
Newedge CTA Index -1.68% 0.79%
Newedge CTA Trend Sub-Index -1.74% 2.22%
Newedge Trend Indicator -3.87% -6.32%
Newedge Short-Term Traders Index -0.36% 0.50%
     
Barclay Indices MTD Return YTD Return
Barclay CTA Index   1.88%
Barclay UCITS Index   1.57%
BTOP FX Index -0.77% 0.68%
BTOP 50 Index -0.47% 1.22%
Morningstar Long/Short Com. Index -1.75% -1.07%

Lead Stories

Fund manager to pay $400M in Madoff settlement
CNN Money
A hedge fund manager who lost more than $1 billion of his investors’ money to Ponzi schemer Bernard Madoff has agreed to pay his clients more than $400 million in compensation, the New York attorney general said Monday.
http://jlne.ws/KVeZ9c
**DA: I opened this article thinking it was the story of a big-hearted altruistic fund manager doing right by his clients. Not so much.

Derivatives Rules Have Swaps Users Eyeing Shift to Futures
Fox Business
Regulators’ push to make derivatives markets safer is having an unexpected side effect: it is encouraging some financial institutions to rethink how they manage risk and consider experimenting with alternatives to privately traded derivatives called “swaps.” Any migration from the existing $600 trillion-plus market for swaps into more cost-effective and transparent futures contracts threatens to put pressure on banks’ profits at a time when their trading revenue is already falling, thanks to weaker trading in credit derivatives.
http://jlne.ws/MTHHUZ

Financial ‘Armageddon’ Will Happen Despite EU Deal: Jim Rogers
CNBC
Even as markets cheered the agreement by European leaders to allow the direct use of the bloc’s bailout funds to recapitalize struggling banks, well-known investor Jim Rogers told CNBC the move does nothing to help solve the region’s biggest problem, which is its high debt levels. “Just because now you have a way to get them (the banks) to borrow even more money, this is not solving the problem, this is making the problem worse,” Rogers said on Friday.”
http://jlne.ws/OZifmu
**DA: Leave it to Rogers to rain on our holiday parade.

MF Global creditors may get up to $3.2bn
By Philip Stafford – Financial Times
MF Global UK’s administrator on Friday said it could return up to $3.2bn to creditors but warned it faces claims on the estate potentially totalling $3.9bn.
http://jlne.ws/M0Kv35
**DA: Is this good news or bad news? I can’t tell.

Seeking elusive ‘alpha,’ investors scour the globe
Fox News
You can leap off a mountainside in extreme skiing, kick and claw to near death in extreme fighting and twist yourself into a pretzel in extreme yoga. Why not turn investing into an adventure sport? Professional money managers are scouring the world for oddball assets, desperate to find anything that moves to its own beat rather than rising and falling with everything else in the financial markets. They are putting money into racehorses, stakes in lawsuits, old coins, even the copyrights to old pop songs.
http://jlne.ws/KWcZNG
**DA: Call it what you want, but that is not “alpha.” If it were, Goldman Sachs would be tuning in to Antiques Roadshow to find its fund managers.

Managed Futures/Managed Funds

How to Diversify with Alternative ETFs
by Tom Lydon, ETF Trends
While becoming a little more tempered, growth in alternative investments and exchange traded funds still continue to expand, even as confidence in overall equities wanes in light of global macroeconomic pressures. http://jlne.ws/N5UVQz

Tudor Said to Open First Macro Hedge Fund in Decade
Bloomberg
Tudor Investment Corp. opened a $500 million hedge fund, its first new fund to bet on macroeconomic trends in a decade, according to four investors briefed on the matter. Tudor’s new offering will allow the managers, some of whom have been at the Greenwich, Connecticut-based firm for more than 20 years, to increase the amount of money they oversee as funds that wager on macroeconomic events have attracted investors this year. The firm’s flagship Tudor BVI Global has limited client deposits since 2010 so that its performance isn’t hindered, the investors said
http://jlne.ws/M0KtZg

Funds Win With Bull Bets Before Biggest Rally Since ’09
Bloomberg
Hedge funds lifted their bullish commodity bets for a third week, just before a European agreement to contain the region’s debt crisis spurred the biggest rally in raw-material prices in three years. Money managers increased their combined net-long positions across 18 U.S. futures and options by 15 percent to 724,783 contracts in the week ended June 26, Commodity Futures Trading Commission data show. That’s the biggest gain since January. Corn holdings rose to the most in five weeks, and sugar wagers climbed to the highest since mid-April.”
http://jlne.ws/Ls4RRX
**DA: Drought-like conditions in the Midwest make for a wild ride in the grains; crude takes a big bounce off the lows; eurozone leaders actually agreed on something (maybe). I thought summer was supposed to be boring.

USAG In Focus As Agricultural Commodity ETFs Soar
By Eric Dutram, Zacks Investment Research
One of the most well-received results of the ETF boom has been the incredible number of options now available to investors in the commodity world. Now, everyday investors can gain exposure to commodity futures in any number of sectors in a way that was once reserved for hedge funds and institutional clients.
http://jlne.ws/KWbNdq

The Role Of Managed Futures And Commodities Funds
by Ron Mulvey, Index Universe
“How can an investor protect his wealth against possible future adverse events? We propose three basic approaches and variants therein. First, the investor can choose ultraconservative funds, including cash management accounts and Treasury bills, as his primary investment vehicle. While protecting nominal wealth, short-term fixed-income securities will inevitably lead to low returns, especially under the current close-to-zero interest rate environment throughout much of the world.”
http://jlne.ws/MPkCE8
**DA: Spoiler alert: The other two are timing the market and investing in non-correlated assets like managed futures.

CTAs ponder regulatory future
Investment Europe
Regulation of over the counter markets poses one type of challenge to the CTA community, but there are others to consider too.
http://jlne.ws/LfmsRG

Pensions & Institutions

Preqin to Hedge Funds: Wooing Institutions May Require Patience
AllAboutAlpha
Institutions aren’t to be rushed into committing to a hedge fund. The process can take more than a year. Preqin asked institutions: once a fund has caught their attention, specifically once they have first seen a fund proposal, how much time typically passes before they actually make an investment, if they do?
http://jlne.ws/OZxKuO

Can You Manage Your Future?
by Rob Russell, U.S. News & World Report
I don’t envy you, today’s retirees and soon to be retirees. I don’t think there’s been a more difficult and contentious time to retire within the last 100 or so years. With pensions disappearing, benefits being slashed, taxes set to skyrocket, real inflation soaring, incredibly correlated volatility in the global markets, and an obvious governmental intrusion into our daily lives, I think many have become envious of the previous generations of retirees.
http://jlne.ws/LK585A
**DA: It was easier to make the numbers work when the retirement age was set higher than average life expectancy. By the way, in paragraph six, Russell offers up managed futures as a way to boost returns.

Advisors Increase Alternative Investments in Client Portfolios
Financial Advisor
Retail financial advisors are redoubling efforts to diversify their clients’ portfolios by increasing allocations of alternative investments, says a new study by Cogent Research. The data, gathered from a survey of 1,750 retail investment advisors, reveals a trend of advisors turning to alternatives to manage risk in a volatile market. Retail financial advisors are moving to alternatives for their clients’ portfolios, something that was done in the past mostly by institutional investors, and the trend is projected to increase in the future, Cogent principal John Meunier said.
http://jlne.ws/KN1Ji3
**DA: Usually when the retail investor jumps in, the high is just about in. I wonder.

PwC: Open Books Will Rebuild Trust for Hedge Funds
AllAboutAlpha
The return of assets to the realm of hedge funds comes with enhanced scrutiny. As Todd Groome, chairman of AIMA, says: “Following 2008, a much greater investor focus on liquidity, portfolio transparency, control and fund governance was clearly evident.” In common with legislative/regulatory changes, this requires transformation.
http://jlne.ws/MNN4ok
**DA: Tough sell, in my opinion. The mystique is quite embedded in the value proposition.

Canadian Pension Funds Sniffing Around
ninemsn
With cyclical stocks on the nose for longer term investors in Australia and worldwide, given post-GFC risk frustration, defensive stocks have returned to popularity, not just because of their defensive nature on a capital preservation basis but also because of the yield they offer on distributions. The search for yield has become a fundamental driver of portfolio allocation in recent years, particularly as the burgeoning SMSF cohort adjusts its risk-reward bias. With the RBA now in rate-cutting mode, bank deposits are no longer a panacea.
http://jlne.ws/LKLulz

Pension schemes’ interest in LDI strategies grows
Pension Funds Insider
A new study reports that the number of UK pension schemes that move away from investments in equities and more towards alternative and liability matching assets, is likely to increase “significantly” over the next three years.
http://jlne.ws/Nenk51

Japanese pension funds to raise alternatives allocations
Edward J. Rogers – Opalesque
Japanese pension funds are expected to increase its current asset allocations from weighting between zero and 3% to between 5% and 7% into alternative investments, a move that would benefit hedge funds, said Ed Rogers head of research and investment firms Rogers Investment Advisors, Wolver Hill Asset Management, and Wolver Hill Advisors.
http://jlne.ws/N4e5WO

What every fund manager should know about managing ERISA plan assets
Hedgeweek
Due to the lacklustre performance in the equity and debt markets in recent years, investments in hedge funds and other alternative investment vehicles are becoming increasingly attractive to retirement plan trustees and investment committees.
http://jlne.ws/M1bmMH

Illinois Pension Seeks P.E. Manager, Cans Two Funds Of Funds
FINalternatives
The Illinois Municipal Retirement Fund is looking for a private equity fund to run about 0.1% of its $25.5 billion portfolio. The public pension fund, based in Oak Brook, Ill., will issue a request for proposals next month, seeking a middle-market buyout fund manager owned by minorities, women or persons with a disability. A hire for the $25 million mandate is expected in the fall.
http://jlne.ws/LfoGAF
**DA: IMRF parted ways with Mesirow and Gosvenor and need a replacement. Any takers? Illinois has the dubious distinction of having the most underfunded pension system in the US. Here is your chance to be the ultimate savior.

Regulation

EU watchdog plans curbs on hedge fund pay
Reuters
European regulators published draft rules on Thursday to crack down on excessive bonuses for managers of hedge funds, a sector politicians have blamed for worsening euro zone debt problems.
http://jlne.ws/N3nCty
**DA: Define “excessive.” Bankers bonuses became a sore subject after banks failed, yet the execs still got paid. Most hedge funds I know have clawbacks, high water marks, and performance-based compensation. Sounds like a shakedown to me.

Dutch regulator casts doubt on added value of alternative assets
Investment&Pension Europe
Dutch pension funds lack sufficiently detailed guidelines governing their alternative asset portfolios and should examine the cost/return ratio of investments, regulator De Nederlandsche Bank (DNB) has said.
http://jlne.ws/LL3wsf

Fund Managers Face Longer Wait For Bonuses Under EU Rules
Bloomberg
Senior hedge-fund and private-equity managers face longer waits for bonuses under proposals from the European Union’s top markets regulator. Bonuses for risk-taking employees should be withheld for a certain length of time to align managers’ interests with the long-term performance of the fund, the European Securities and Markets Authority said today. Staff with the “most material impact on the risk profile” of the fund should be subject to longer retention periods, ESMA said without specifying how long.
http://jlne.ws/LIHS3u

Call for tougher rules on US hedge funds
By Steve Johnson, Financial Times
Manny Roman, a leading light of the UK hedge fund industry, has called for tighter regulation of the sector in the US to help prevent future scandals. “It is still possible to start a hedge fund in New Orleans with $20m under management, an administrator that no one has heard of, and with no need to register with the SEC ” said Mr Roman, chief executive of GLG Partners and chief operating officer of Man Group, which has $59bn under management, at last week’s Fund Forum conference in Monaco.
http://jlne.ws/Lf8CPh

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