Observations - Statistics - Commentary
Five Minutes with Newedge’s Brian Walls and Ryan Duncan
Newedge’s Prime Brokerage Group has been following the CTAs for years, providing its well-known Newedge CTA Index as well as its AlternativeEdge Short-Term Traders Index and AlternativeEdge Teamwork Index. JLN Managed Futures Newsletter’s Jim Kharouf spoke with Brian Walls, executive vice president and global head of investor research and Ryan Duncan, head of research, Americas about the indexes and trends their research team has been seeing in the CTA space.
Q: Tell us about the Newedge Alternative Investment Group and the research that you do.
Brian Walls: When we were Calyon Financial, we were called the Alternative Investment Group. And Newedge, which is the combination of Calyon and FIMAT, combines our research group and FIMAT’s, which was called the Prime Brokerage Group. So we’re now called the Newedge Prime Brokerage Group and we have several tracks. One is statistical reporting which is where we collect data from managers, 1,300-plus [CTA] managers on a monthly basis and 35 to 40 on a daily basis. We turn that into all types of analysis for our clients.
Another track is what we call the alternative edge series of notes, which has created a body of work of about 17 different white papers on a specific issue related to the CTA or hedge fund industry. An example would be a paper on what is the right way to perform an analysis, or a certain look at portfolio construction methodologies.
In addition to that, we use that body of work to produce our indexes, and we have a pretty big family of them. We’re well known for our daily CTA index and short-term traders index, but we also have the volatility traders index and macro- trader’s index. And that provides insight without digging into managed data.
Q: The Newedge CTA Index shows the daily rate of return on a pool of CTAs from the largest managers taking new investment. What has the index shown over the past three years during the credit crisis?
Brian Walls: We’re very proud of the industry in a way. We’ve come through a liquidity crisis that we’ve never seen before in 2008, with global markets collapsing. CTA performance was really strong. We observed a lot of risk management, cutting of positions during this period, so performance was very strong even though they were cutting positions down and managing their risk.
It was relatively flat in 2009 and up a little in 2010. What we see is, one of the most easy to value and easy to exit strategies, and its uncorrelated with positive returns. But from our perspective, CTA performances seem to be measured by a different yardstick than other hedge fund strategies. For some reason, people expect more than just liquidity, accurate valuation and expectations and uncorrelated returns!
To give you an example, we looked at our trend indicator, which is a very simple diversified trend following model that tries to generally represent what trend-following CTAs do. In our latest research note, what we found there is, the way we sized positions, the way we used volatility to weight positions which is kind of standard, we [set] much bigger positions in our model than the actual managers did going into the fall of 2008. Those managers really responded to the market environment and cut back positions. And so they didn’t make money by maintaining risk or taking excessive risk. They made money by actually cutting risk. The volatility returns of our simple indicator were double what the actual managers were. So it was really a risk management effort first and a return second.
Q: Year-to-date, the CTA Index is up 4.02%, Short-Term Traders Index is up 1.69% and Alternative Teamwork Index, which tracks the monthly performance of 20 CTAs, is up 1.78%. What’s contributed most to these low returns? Is it just that CTAs don’t perform as well in a sideways or directionless market?
Ryan Duncan: That’d be our guess. We’ve tried but have not been able to find a simple way to define market states. We’re still looking for ways to define markets in which we can learn more about CTA performance. Having said that, it would appear to us that when you have these volatile, sideways moving markets, those would be the worst environments for CTA strategies.
And what we’ve seen is that in a market that keeps going one way, such as bonds, which keep going down, that is the best performing sector for the trend indicator. Our trend indicator is losing money in stocks, commodities and foreign exchange and made money in interest rates.
Our indicator is tracking this fairly well. It’s down 2% in equities, down almost 4% in currencies and down 1.5% in commodities and up almost 10% in interest rates and bonds.
Q: Does one type of CTA perform better over time?
Ryan Duncan: I don’t think so. Both the short-term and the longer term space performed well in 2008. And both have kind of flat-lined a bit in 2009 and 2010. But both are really un-correlated to one another. By and large, their average correlation is about a .2 and over long periods of time, they are non-correlated to moderately correlated to the longer term CTA space.
You can throw in different styles, discretionary or systematic, high commodity weighting or no commodity weighting. So there isn’t one strategy that seems to work. They each have their time to shine, so to speak.
Q: As you’ve watched the CTA space, what patterns do you see repeated most?
Ryan Duncan: From a style point of view, we’ve seen more managers adding a non-correlated trading strategy. So those managers who are industry-recognized trend followers, they’ve been adding non-correlated trading strategies, anything to reduce volatility and smooth out returns.
Q: What is the next for your research group?
Brian Walls: We’re still in the process of aligning our statistical reports. We have two research notes coming out soon, one we just put out which is off the trend indicator and provides a lot of good research on trend following.
And on the horizon we have a book coming out toward the end of the year, which is comprised of 16 or 17 research notes and three or four practical chapters. This will be our first book.
Next year, we hope to take a lot of what we’ve learned about CTA strategies and apply it to all hedge fund strategies.
Editor’s Note: To take a look at the Newedge indices, please go to http://www.newedgegroup.com/web/guest/brokerage_services/research/alternativeedge_indices
Lead Stories
Setbacks on the Hedge Front
Barrons.com
THE HEDGE HEROES OF HORRIFIC 2008 have turned into this year's hedge bums.
Funds that track global price trends through the equity, bond, commodity and currency-futures markets are having another lousy year. So are those that track the same asset classes but don't necessarily follow trends, spicing their portfolios with strategies like relative value and quantitative analysis.
http://jlne.ws/9AYCIO
**JK - Also from this story:
According to Bank of America Merrill Lynch research, among the best-performing credit strategies year to date through July were distressed debt, up 4.93%, and convertible-bond arbitrage, which gained 2.42%. The worst performers in general were short-bias strategies, which dropped 2.75%, and managed futures, which fell 2.24%. The S&P 500 was down 1.21% for the same period.
Barclay CTA Index up 0.09 per cent in July
Hedgeweek
Managed futures gained 0.09 per cent in July, according to the Barclay CTA Index compiled by BarclayHedge.
Year-to-date, the Barclay CTA Index has lost 0.91 per cent.
http://jlne.ws/dpHJXP
Managed futures post mixed returns for July
Hedgeweek
The Lipper Managed Futures/CTAs index registered a positive return of 1.02 per cent for July, bringing the year-to-date performance to minus 2.94 per cent and the 12-month rolling return to minus 1.94 per cent.
Managers with assets in excess of USD45m returned a worse average monthly performance at minus 1.21 per cent—103 basis points below the average reading for the strategy.
http://jlne.ws/aWLkUd
In your flight to safety, don't crash
MarketWatch
Fears of deflation are becoming widespread. And investors are building portfolio safety nets -- stashing cash in money markets, gold, government bonds and the like. http://jlne.ws/daq4fM
**JK - Also a section about adding managed funds to one's portfolio.
Natixis Global Associates Launches Natixis ASG Managed Futures Strategy Fund
Press release
Reinforcing its position as a leader in niche investment solutions, Natixis Global Associates (NGA) announced today the launch of a managed futures mutual fund to be managed by AlphaSimplex Group (ASG): Natixis ASG Managed Futures Strategy Fund (AMFAX).
http://jlne.ws/aC8dNt
Qbasis plans UK launch for managed futures ETF
Chris Flood - FT
Qbasis, a Liechtenstein-based hedge fund, has gained approval from UK regulators to start marketing the Qbasis Futures Fund, the first managed futures ETF.
The fund will replicate the investment strategy of the Qbasis managed futures hedge fund.
http://jlne.ws/b7KBhD
Europe’s top 10 hedge fund managers take off
Financial News
Europe’s 10 largest firms saw their assets under management rise by 22% over the 12 months to June 30, to $146bn (€114bn). The previous year’s top 10 had seen their assets fall by 33% compared with June 2008.
The biggest growth in the top 20 came from BlueCrest Capital Management, which saw assets balloon by over 65% since last year due to strong performance and investor inflows. BlueCrest’s growth pushed it to third place, just behind Man Group’s AHL and ahead of Lansdowne Partners.
http://jlne.ws/bU8Z3k
FSA pressure on proprietary trading could cost the buy-side
The Trade News
Capital adequacy proposals in a new Financial Services Authority (FSA) discussion paper on banks’ proprietary trading risks could increase execution costs for their institutional investor clients.
The paper follows recommendations put forward in the Turner Review, a response to the financial crisis published 18 March 2009 by FSA chairman Lord Adair Turner, which called for tighter capital and liquidity requirements to “constrain commercial banks’ role in risky proprietary trading activities”.
http://jlne.ws/c5tgQ1
MF Global Returns to Profit
JACOB BUNGE - Dow Jones
Futures and options brokerage MF Global Holdings Ltd. reported its first profit in six quarters as Chief Executive Jon Corzine cut staff costs and buoyant exchange trading volume boosted revenue.
Mr. Corzine steered the firm to deliver fiscal first-quarter earnings of $783,000 or 1 cent a share, following a prior-year loss of $32.8 million, or 27 cents a share.
http://jlne.ws/cRALK2
Corzine at the helm, MF Global back in the black
Reuters
MF Global Holdings Ltd (MF.N) reported better-than-expected quarterly earnings on Thursday, returning to profitability in the brokerage's first full quarter under new CEO Jon Corzine.
http://jlne.ws/dDh5k8
The misperception of high risk in quant and CTA strategies
Opalesque
"It is surprising that we are confronted with that [high risk] perception on a regular basis," says Karsten Schroeder, Founder and CEO of Zug-based Amplitude Capital during a recent Opalesque TV interview with Matthias Knab. Amplitude, which was founded in 2004 has grown to offer 3 fully systematic CTA programs and manages approximately $1bn in assets. "If you look at the actual numbers CTAs, as a strategy within the hedge fund asset class, are one of the most efficient strategies."
http://jlne.ws/aRNX48
The Interview – Aref Karim, Quality Capital Management
HedgeWeek
We see managed futures playing a bigger part in a portfolio as uncertainties prevail in traditional markets
http://jlne.ws/b9PoBc
Using Managed Futures in Rough Markets: Part 1
Jane Wollman Rusoff - Investment Advisor
A little-known portfolio tool can help advisors reduce risk for their clients in severe market
“Managed futures zig when everything else zags. They behave differently from hedge funds, REITS — what have you,” said Robert J. Lindner, CEO, Lindner Capital Advisors and author of the upcoming book, Managed Futures, in an interview: The Missing Piece of the Portfolio Puzzle."
http://jlne.ws/aIkd0d
**JK - A basic primer on managed futures.
Using Managed Futures in Rough Markets: Part 2
Jane Wollman Rusoff - Investment Advisor
In today’s volatile market, diversifying with managed futures, which typically correlate negatively with stocks and bonds, may go far to smooth out portfolio performance and avoid a steep decline.
http://jlne.ws/cKZFfk
**JK - And part two. And this quote from Lindner:
“Because managed futures are so new to advisors, a lot of them are afraid to allocate more than 3 percent to 5 percent. If you’re going to use that, don’t even bother. It doesn’t have the effect you’re looking for in terms of diversification and lowering volatility,” says Marietta, Ga.-based Lindner.
Choppy market conditions challenging for hedge funds
Hedge Funds Review
Macro, discretionary managed futures, fixed income and emerging markets managers are expected to top hedge fund performance tables in the short run, according to Lipper Tass.
Macro data will continue to be disappointing in coming months, presenting challenging macro arbitrage opportunities for managers, according to global hedge fund research head Aureliano Gentilini, writing in the latest Lipper Hedge Funds Insight Report. http://jlne.ws/cMZyri
Elliott Management Drops Hedge Fund Mag Suit
Paula Schaap - HedgeFund.net
Elliott Management backed off big-time on its aggressive pursuit of Absolute Return + Alpha when it dropped its lawsuit against the hedge fund industry magazine Tuesday. http://jlne.ws/cZkyrg
**JK - Don't fight with people who buy ink or bytes by the barrel.
**And in the saddest news of the economic crisis:
U.S. Beer Consumption Declines
Press release
Last year marked the third consecutive year of diminishing growth rates in the beer industry, dropping 2.1% to 2.877 billion cases. According to the Beverage Information Group's recently released 2010 Beer Handbook, the beer industry's downturn can be directly attributed to the decline in the light beer segment. Light beer, which accounts for a 52.8% share of the U.S. beer market, posted its first negative year since its beginning 30 years ago.
http://jlne.ws/blCasf
Managed Futures
Citigroup Hires Christian Lusted as Hedge-Fund Sales Director in London
Bloomberg
Citigroup Inc. hired Christian Lusted from BNP Paribas SA to join its London-based commodities team as a director for hedge fund sales.
http://jlne.ws/aUFYPu
The Interview – Michael Azlen, Frontier Capital Management
HedgeWeek
More multi-asset funds entering the market will help highlight our proven track record and low-cost philosophy” | Hedgeweek "Michael Azlen, Frontier Capital Management: “More multi-asset funds entering the market will help highlight our proven track record and low-cost philosophy”
http://jlne.ws/bOxpMI
David Oros Hedge Fund Reaches $6.7M
Citybizlist Baltimore
According to an amended SEC filing, a hedge fund managed by David Oros, former chair of Aether Systems, Inc., has attained $6.7 million.
http://jlne.ws/d9gDtc
Technology
French quant firm EXQIM uses OneMarketData to develop HFT strategies
The Trade News
EXQIM, which was launched by its four executives last year, will use OneMarketData’s OneTick CEP and database, which the firm claims will allow it to develop more advanced strategies on its proprietary front-to-back-office automated trading platform.
http://jlne.ws/aBTKVL
Regulatory News
Andrew J. Donohue To Leave SEC After Four Years Leading Division Of Investment Management Press release
The Securities and Exchange Commission announced today that Andrew J. "Buddy" Donohue plans to leave the SEC in November after serving more than four years as its Director of the Division of Investment Management.
http://jlne.ws/cLsXpA
Wednesday, September 1, 2010
Monday, August 2, 2010
JLN Managed Futures: August 2, 2010
Life moves on
Markets are always in transition from one thing to another. And so to is for JLN Managed Futures Newsletter. As editor-in-chief of John J. Lothian & Co., I'll be taking the reins here for the next few months, as we fold in a new editor for this publication.
We've switched to a monthly distribution for the time being, and may revert back to the bi-monthly schedule at some point.
As we work through this transition, please feel free to connect with me at jimkharouf@johnlothian.com with any questions, suggestions or new ideas for the newsletter. Today's commentary comes from Jon Matte, our COO, who assists on the John Lothian Newsletter and has experience in the managed futures space.
Observations - Statistics - Commentary
Same as the Old Boss
Jonathan Matte, COO, John J. Lothian & Co., Inc.
It's been a wild and woolly 2010, eh? Well, that and 2009 - that year was pretty crazy, too. Remember 2008 when things REALLY were bad? But 2010, that's really the worst, because high frequency trading is ruining the markets!
...well, except that HFT is already in active use - has been for years - and the markets are not ruined.
I'm somewhere between puzzled and vaguely amused at the doom-clouded way folks are viewing the May 6 flash crash. That market sneeze did correctly and painfully identify areas of risk to address. But the thing about HFT killing the markets is just a new verse in a very old song.
Remember when "program trading" was vilified as a market killer back in the dinosaur days? Program trading was the bad guy when the market broomsticked a bunch of people back in 1987. The thing is, program trading wasn't outlawed in 1987, which means that between then and now, we've apparently been living with a ticking time bomb in the markets.
So let's review. Since 1987 - that's 23 years - how much time has our domestic marketplace spent in a state of ruin at the hands of program trading? None. The overall function and pattern of the markets is intact. They go up, down and sideways. People get in and out of positions when they need to, unless they're trading in illiquid markets. People win and lose and sometimes they lose badly, but that's the same as it ever was.
The addition of high frequency trading has introduced risks but all new things introduce new risk. Innovation is not a safe process. Our best bet is to find the risks we can and correct them as best we can. The trick is to be clear-headed enough to keep digging and asking questions until we get answers that ring true, not answers that please a population looking for easy, knee-jerk responses.
The markets aren't ruined. HFT is not bringing the financial world to an apocalyptic end. So. What ARE the risks for high frequency trading, then, based on evidence and analysis rather than Congressional hysteria and what needs to be fixed? That's a subject that will hold my interest.
Lead Stories
NFA looks to regulate funds operating managed futures
FT.com
The National Futures Association, an industry-funded watchdog for futures investors, wants to re-assert oversight of mutual funds that primarily trade futures contracts, leveraged derivatives whose value is linked to the future value of markets from commodities to interest rates. The association had these powers until 2003.
http://jlne.ws/bu2lmv
Commodities funds brace for regulatory ‘confusion’
Investment News
Mutual fund companies may be largely unaffected by the financial services reform legislation, but they are girding for other types of regulation. Specifically, commodities funds that invest in futures may soon be more stringently monitored by not only the Securities and Exchange Commission but the U.S. Commodity Futures Trading Commission.
http://jlne.ws/bH0TK0
Managed futures up 0.12 per cent in June
Hedgeweek
The Lipper Managed Futures/CTAs Index registered a positive return of 0.12 per cent for June, bringing the year-to-date performance to minus 3.90 per cent.
http://jlne.ws/aDPEN1
Barclay CTA Index gains 0.24 in June (-1.04 YTD); currency and agricultural traders lead the pack
Opalesque
Managed futures gained 0.24% in June according to the Barclay CTA Index compiled by BarclayHedge. The Index is down 1.04% for the first six months of 2010.
http://jlne.ws/azisbZ
Hedge Fund Survey Report Indicates Increased Optimism
HedgeTracker
The “2010 Hedge Fund Outlook: Back to the Future?” found that more than 67% of hedge funds surveyed plan to raise additional investment capital this year. Firms included in the survey reportedly show 77% assets under management under $500 million and roughly 23% reporting assets under management in excess of $500 million.
http://jlne.ws/aWkSSK
Research: Secondary Hedge Fund Market Rebounds
HedgeCo.Net
The average price for assets on the secondary hedge fund market rose to 78% after shaking off some of the fallout from May’s European debt crisis, according to Hedgebay’s June Index.
http://jlne.ws/bcNqFO
Armajaro's Anthony Ward corners the Cocoa Market
HedgeTracker
That Hershey bar you’ve been sneaking out to buy on breaks is about to cost you a lot more. London based Anthony Ward’s hedge fund, Armajaro Asset Management, built up a billion dollar long position in the cocoa futures market, which traders expected him to unwind going into expiration. To the absolute shock of investors and industry insiders alike, he took physical delivery instead of 240,000 metric tonnes of the delectable soft commodity, about 7% of the world supply.
http://jlne.ws/bLqwrH
Trading Speed: Time to Put the Brakes On?
Trader's
The drive towards faster trading speeds may be hitting a wall.
In the wake of the May 6 "Flash Crash," the Securities and Exchange Commission, academics, and industry professionals are swapping ideas about capping trading speeds at some level. If any of the ideas are translated into regulatory initiatives, the repercussions would likely be significant.
"Trading happening at one millisecond or faster isn't the purpose of the stock market," Michael Goldstein, a professor at Babson College who took part in a SEC roundtable last month, told Traders Magazine. "It's to allocate capital, and I believe it hasn't been doing that any better than in 2007, when markets were slower."
http://jlne.ws/9ivxYJ
**Nice look at speed of trading
Black-box funds perform as bubbles burst
Reuters
Paul Mulvaney, who owns more than 95 percent of Mulvaney Capital, said managed futures funds or CTAs (commodity trading advisors) performed strongly when the Internet bubble imploded and when the credit crisis struck.
As a case in point, Mulvaney Capital generated returns of 11.6 and 45.5 percent in September and October 2008, when the collapse of Lehman Brothers raised the spectre of global recession and decimated most asset classes.
http://jlne.ws/aoGoD7
**JK - Quote from Mulvaney: "Interest in alternative investments such as our fund has been on the rise over the last few years. CTAs are not correlated to traditional asset classes, and so help investors reduce risk and enhance returns."
For Hedge Fund Investors, Does Size Matter?
From Reuters Breakingviews:
More than ever, the biggest investors are entrusting their money disproportionately to the largest hedge funds. They may discover that bigger isn't always better.
http://jlne.ws/cRu3cl
Man Group remodels top hedge fund
Man Group is trying to improve the way its flagship fund AHL, one of the world’s biggest hedge funds, copes in choppy markets with measures it says would have cut last year’s damaging losses by half.
Tim Wong, chief executive of AHL, told Reuters that the US$21.1-billion computer-driven fund has brought in new programs to limit losses and is cutting its reliance on its traditional strategy of following market momentum. http://jlne.ws/abzePo
Eight people leave Man Group’s AHL
Financial News
Eight people have left AHL, Man Group’s flagship computer-driven hedge fund responsible for three quarters of its profits, across its research, trading and technology departments. The departures come as analysts express concern about AHL’s weak performance and the firm tries to diversify its dependence on the fund for profits. http://jlne.ws/cpeOjl
Man, GLG Merger
Second in a series of five Capital eBooks looks inside the events that led to the Man Group, GLG Partners mergers. Access the latest Capital eBook to read additional capital feature stories from Institutional Investor Magazine.
http://jlne.ws/9ZX1xR
A small but lively industry
FT.com
Austrians are known for their conservativism in saving and investing – fewer than a 10th of the population own shares. Yet the country is home to a small but lively alternative investment industry that has done well even in the financial crisis.
http://jlne.ws/d3AHTS
**JK - Interesting look at Austria's alt investment business.
Strategy
Direct Edge employs Correlix to measure latency
The Trade News
US trading venue Direct Edge has selected latency intelligence firm Correlix to provide its customers with information on the latency levels for its order execution and market data flow.
http://jlne.ws/clXErX
Redefining Alpha: “the Inertia Concept”
HedgeTracker
These days everyone talks about alpha. If one attends any of the well-known investment/hedge fund management conferences they will find that a large part of the discussions are devoted to the difficulties that these fund management companies have in locating managers than can generate alpha. While these discussions are of great interest, few have taken the time to find out whether alpha can in fact be accurately calculated.
http://jlne.ws/cnFHOF
Managed Futures/CTAs/Managed Funds Firm News
Rockefeller Financial Appoints Jeffery as CEO
Reuben Jeffery III, a former State Department official, will become chief executive of Rockefeller Financial and join its board of directors on September 7, the firm announced Wednesday, July 27. He will be responsible for general oversight of the firm and its four business groups: Rockefeller Wealth Advisors, Rockefeller Asset Management, Rockefeller Capital Partners, and Rockit Solutions.
http://jlne.ws/c1Celn
Billionaire European family to launch asset management business Campden FB
The Bertarellis, one of the world's wealthiest families, are to build a global asset management franchise and have hired a senior BNY Mellon banker to run it.
Asked what type of client the new venture would target, a spokesman for the family told campdenFB.com: "We will not target a single niche although a retail focus is unlikely a lot of it is dependent on acquisitions." http://jlne.ws/94TFJ7
Ramius Capital launches mutual fund, Makes Shareholder Activist waves
HedgeTracker
Ramius Capital Group has announced the launch of the Ramius Dynamic Replication Fund, its first mutual fund, which will focus on hedge fund replication. According to Hedgeweek, the fund is scheduled to open at the end of this month with over $100 million. The new venture’s mutual fund structure will allow investors access to typical hedge fund exposures while retaining its daily liquidity as a mutual fund.
http://jlne.ws/cQP5kR
John Paulson to launch fund for the masses with UCITS offering
HedgeTracker
New York-based John Paulson’s hedge fund firm, Paulson & Co., will launch a new fund open to retail investors later this year. According to the Financial Times, the new offering will utilize the more regulated UCITS fund structure, which has gained popularity among European hedge fund managers. Paulson & Co.’s UCITS fund will track Paulson’s existing investment strategies.
http://jlne.ws/a94CRG
FRM Seeding New Hedge Fund With $50M Injection
HedgeFund.net:
Seeding firm FRM Capital Advisors announced it has agreed to invest in a new hedge fund run by a former manager from Citadel. FRM will invest $50 million in the first fund being launched by Varna Capital, which is headed up by Svetlana Lee.
http://jlne.ws/d7K0V9
Divorce, Hedge Fund-Style
HedgeFund.net
Martin Coward and Elena Ambrosiadou founded Ikos in 1992. Coward, who holds a Ph.D. in mathematics, gave the fund a quantitative strategy focus and, by 2009, it had about $3 billion in assets under management. " http://jlne.ws/9kQwpS
Where are the traps in managed account agreements?
Futures Magazine
Commodity trading advisors (CTAs) are asked to sign a variety of contracts on a regular basis: technology agreements, office leases, licensing contracts and third party marketing agreements, just to name a few. However, arguably the most important contracts for CTAs are the managed account agreements, sometimes called “advisory agreements,” with their clients.
http://jlne.ws/crbr4o
Markets
Global macro hedge fund managers lock-in high returns HedgeTracker
After a dramatic increase in market volatility in May and June, very few hedge funds have seen positive returns in recent months - but those that did witnessed their largest increases since Lehman Brothers went under. According to the Financial Times, bearish hedge fund managers and their global macro funds, which bet on the shifting conditions of the global economy, have reported gains from short positions against the Eurozone’s sovereign credit, the Yen, the Euro, and “commodity currencies” like the Australian and Canadian dollars. http://jlne.ws/bbPyZy
Regulation
SEC Seeks Comments on Hedge Fund Regulation Under the Dodd-Frank Act
HedgeCo.Net
The SEC has opened a page for investors and hedge fund managers to make their opinions and views known on Dodd-Frank Wall Street Reform and Consumer Protection Act before official comment periods are opened. http://jlne.ws/bSuPJ4
CFTC's Chilton sees broader position limit rule
A new speculative position limit regime will also apply to metals and soft agricultural commodities, a top official at the Commodity Futures Trading Commission told Reuters Insider on Thursday. The U.S. futures regulator proposed new position limits for energy markets in January -- a rule that sparked angst among oil and gas traders -- but will use new authority granted in the recent financial reform act to apply curbs to "all commodities of finite supply," said CFTC Commissioner Bart Chilton.
http://jlne.ws/aDFNUF
Hedge Fund Manager Wyly Charged With Fraud
HedgeFund.net
The SEC filed a complaint in federal court in Manhattan against Samuel Wyly, 75, and his brother Charles, 76, alleging that they made more than $550 million off their insider trades.
http://jlne.ws/aOGKQF
CFTC Charges Three Chicago Defendants With Destroying Records And Failing To Diligently Supervise Employees
Press release
The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging New World Holdings, LLC (NWH), based in Chicago, Ill., with destroying business records and failing to diligently supervise employees. NWH is a registered Introducing Broker and Commodity Trading Advisor. NWH’s principal Steven David Erdman, also of Chicago, and its branch manager Grace Elizabeth Reisinger, of Grand Island, Neb., are charged with aiding and abetting NWH’s failure to keep proper business records. Erdman also is charged with failing to diligently supervise employees. Erdman and Reisinger are registered as Associated Persons of NWH.
http://jlne.ws/97FWZV
Rule to Aid Bankrupt Commodities Brokers' Clients
WSJ.com
WASHINGTON—Trustees handling commodities-brokerage bankruptcies will now be allowed in some cases to continue operating the business so that customers' trading isn't disrupted, federal futures regulators announced Thursday.
http://jlne.ws/c9SEqa
Paul Greenwood, WG Trading Hedge Fund Manager, Pleads Guilty to Fraud
Bloomberg
Greenwood and Walsh, his fellow manager of WG Trading and WG Investors, were indicted last July on charges that they conspired to defraud investors of $554 million. The U.S. said the scheme stretched from 1996 until their arrest in February 2009. A prosecutor said today that Greenwood will testify against Walsh at trial.
http://jlne.ws/bDXw9Z
Markets are always in transition from one thing to another. And so to is for JLN Managed Futures Newsletter. As editor-in-chief of John J. Lothian & Co., I'll be taking the reins here for the next few months, as we fold in a new editor for this publication.
We've switched to a monthly distribution for the time being, and may revert back to the bi-monthly schedule at some point.
As we work through this transition, please feel free to connect with me at jimkharouf@johnlothian.com with any questions, suggestions or new ideas for the newsletter. Today's commentary comes from Jon Matte, our COO, who assists on the John Lothian Newsletter and has experience in the managed futures space.
Observations - Statistics - Commentary
Same as the Old Boss
Jonathan Matte, COO, John J. Lothian & Co., Inc.
It's been a wild and woolly 2010, eh? Well, that and 2009 - that year was pretty crazy, too. Remember 2008 when things REALLY were bad? But 2010, that's really the worst, because high frequency trading is ruining the markets!
...well, except that HFT is already in active use - has been for years - and the markets are not ruined.
I'm somewhere between puzzled and vaguely amused at the doom-clouded way folks are viewing the May 6 flash crash. That market sneeze did correctly and painfully identify areas of risk to address. But the thing about HFT killing the markets is just a new verse in a very old song.
Remember when "program trading" was vilified as a market killer back in the dinosaur days? Program trading was the bad guy when the market broomsticked a bunch of people back in 1987. The thing is, program trading wasn't outlawed in 1987, which means that between then and now, we've apparently been living with a ticking time bomb in the markets.
So let's review. Since 1987 - that's 23 years - how much time has our domestic marketplace spent in a state of ruin at the hands of program trading? None. The overall function and pattern of the markets is intact. They go up, down and sideways. People get in and out of positions when they need to, unless they're trading in illiquid markets. People win and lose and sometimes they lose badly, but that's the same as it ever was.
The addition of high frequency trading has introduced risks but all new things introduce new risk. Innovation is not a safe process. Our best bet is to find the risks we can and correct them as best we can. The trick is to be clear-headed enough to keep digging and asking questions until we get answers that ring true, not answers that please a population looking for easy, knee-jerk responses.
The markets aren't ruined. HFT is not bringing the financial world to an apocalyptic end. So. What ARE the risks for high frequency trading, then, based on evidence and analysis rather than Congressional hysteria and what needs to be fixed? That's a subject that will hold my interest.
Lead Stories
NFA looks to regulate funds operating managed futures
FT.com
The National Futures Association, an industry-funded watchdog for futures investors, wants to re-assert oversight of mutual funds that primarily trade futures contracts, leveraged derivatives whose value is linked to the future value of markets from commodities to interest rates. The association had these powers until 2003.
http://jlne.ws/bu2lmv
Commodities funds brace for regulatory ‘confusion’
Investment News
Mutual fund companies may be largely unaffected by the financial services reform legislation, but they are girding for other types of regulation. Specifically, commodities funds that invest in futures may soon be more stringently monitored by not only the Securities and Exchange Commission but the U.S. Commodity Futures Trading Commission.
http://jlne.ws/bH0TK0
Managed futures up 0.12 per cent in June
Hedgeweek
The Lipper Managed Futures/CTAs Index registered a positive return of 0.12 per cent for June, bringing the year-to-date performance to minus 3.90 per cent.
http://jlne.ws/aDPEN1
Barclay CTA Index gains 0.24 in June (-1.04 YTD); currency and agricultural traders lead the pack
Opalesque
Managed futures gained 0.24% in June according to the Barclay CTA Index compiled by BarclayHedge. The Index is down 1.04% for the first six months of 2010.
http://jlne.ws/azisbZ
Hedge Fund Survey Report Indicates Increased Optimism
HedgeTracker
The “2010 Hedge Fund Outlook: Back to the Future?” found that more than 67% of hedge funds surveyed plan to raise additional investment capital this year. Firms included in the survey reportedly show 77% assets under management under $500 million and roughly 23% reporting assets under management in excess of $500 million.
http://jlne.ws/aWkSSK
Research: Secondary Hedge Fund Market Rebounds
HedgeCo.Net
The average price for assets on the secondary hedge fund market rose to 78% after shaking off some of the fallout from May’s European debt crisis, according to Hedgebay’s June Index.
http://jlne.ws/bcNqFO
Armajaro's Anthony Ward corners the Cocoa Market
HedgeTracker
That Hershey bar you’ve been sneaking out to buy on breaks is about to cost you a lot more. London based Anthony Ward’s hedge fund, Armajaro Asset Management, built up a billion dollar long position in the cocoa futures market, which traders expected him to unwind going into expiration. To the absolute shock of investors and industry insiders alike, he took physical delivery instead of 240,000 metric tonnes of the delectable soft commodity, about 7% of the world supply.
http://jlne.ws/bLqwrH
Trading Speed: Time to Put the Brakes On?
Trader's
The drive towards faster trading speeds may be hitting a wall.
In the wake of the May 6 "Flash Crash," the Securities and Exchange Commission, academics, and industry professionals are swapping ideas about capping trading speeds at some level. If any of the ideas are translated into regulatory initiatives, the repercussions would likely be significant.
"Trading happening at one millisecond or faster isn't the purpose of the stock market," Michael Goldstein, a professor at Babson College who took part in a SEC roundtable last month, told Traders Magazine. "It's to allocate capital, and I believe it hasn't been doing that any better than in 2007, when markets were slower."
http://jlne.ws/9ivxYJ
**Nice look at speed of trading
Black-box funds perform as bubbles burst
Reuters
Paul Mulvaney, who owns more than 95 percent of Mulvaney Capital, said managed futures funds or CTAs (commodity trading advisors) performed strongly when the Internet bubble imploded and when the credit crisis struck.
As a case in point, Mulvaney Capital generated returns of 11.6 and 45.5 percent in September and October 2008, when the collapse of Lehman Brothers raised the spectre of global recession and decimated most asset classes.
http://jlne.ws/aoGoD7
**JK - Quote from Mulvaney: "Interest in alternative investments such as our fund has been on the rise over the last few years. CTAs are not correlated to traditional asset classes, and so help investors reduce risk and enhance returns."
For Hedge Fund Investors, Does Size Matter?
From Reuters Breakingviews:
More than ever, the biggest investors are entrusting their money disproportionately to the largest hedge funds. They may discover that bigger isn't always better.
http://jlne.ws/cRu3cl
Man Group remodels top hedge fund
Man Group is trying to improve the way its flagship fund AHL, one of the world’s biggest hedge funds, copes in choppy markets with measures it says would have cut last year’s damaging losses by half.
Tim Wong, chief executive of AHL, told Reuters that the US$21.1-billion computer-driven fund has brought in new programs to limit losses and is cutting its reliance on its traditional strategy of following market momentum. http://jlne.ws/abzePo
Eight people leave Man Group’s AHL
Financial News
Eight people have left AHL, Man Group’s flagship computer-driven hedge fund responsible for three quarters of its profits, across its research, trading and technology departments. The departures come as analysts express concern about AHL’s weak performance and the firm tries to diversify its dependence on the fund for profits. http://jlne.ws/cpeOjl
Man, GLG Merger
Second in a series of five Capital eBooks looks inside the events that led to the Man Group, GLG Partners mergers. Access the latest Capital eBook to read additional capital feature stories from Institutional Investor Magazine.
http://jlne.ws/9ZX1xR
A small but lively industry
FT.com
Austrians are known for their conservativism in saving and investing – fewer than a 10th of the population own shares. Yet the country is home to a small but lively alternative investment industry that has done well even in the financial crisis.
http://jlne.ws/d3AHTS
**JK - Interesting look at Austria's alt investment business.
Strategy
Direct Edge employs Correlix to measure latency
The Trade News
US trading venue Direct Edge has selected latency intelligence firm Correlix to provide its customers with information on the latency levels for its order execution and market data flow.
http://jlne.ws/clXErX
Redefining Alpha: “the Inertia Concept”
HedgeTracker
These days everyone talks about alpha. If one attends any of the well-known investment/hedge fund management conferences they will find that a large part of the discussions are devoted to the difficulties that these fund management companies have in locating managers than can generate alpha. While these discussions are of great interest, few have taken the time to find out whether alpha can in fact be accurately calculated.
http://jlne.ws/cnFHOF
Managed Futures/CTAs/Managed Funds Firm News
Rockefeller Financial Appoints Jeffery as CEO
Reuben Jeffery III, a former State Department official, will become chief executive of Rockefeller Financial and join its board of directors on September 7, the firm announced Wednesday, July 27. He will be responsible for general oversight of the firm and its four business groups: Rockefeller Wealth Advisors, Rockefeller Asset Management, Rockefeller Capital Partners, and Rockit Solutions.
http://jlne.ws/c1Celn
Billionaire European family to launch asset management business Campden FB
The Bertarellis, one of the world's wealthiest families, are to build a global asset management franchise and have hired a senior BNY Mellon banker to run it.
Asked what type of client the new venture would target, a spokesman for the family told campdenFB.com: "We will not target a single niche although a retail focus is unlikely a lot of it is dependent on acquisitions." http://jlne.ws/94TFJ7
Ramius Capital launches mutual fund, Makes Shareholder Activist waves
HedgeTracker
Ramius Capital Group has announced the launch of the Ramius Dynamic Replication Fund, its first mutual fund, which will focus on hedge fund replication. According to Hedgeweek, the fund is scheduled to open at the end of this month with over $100 million. The new venture’s mutual fund structure will allow investors access to typical hedge fund exposures while retaining its daily liquidity as a mutual fund.
http://jlne.ws/cQP5kR
John Paulson to launch fund for the masses with UCITS offering
HedgeTracker
New York-based John Paulson’s hedge fund firm, Paulson & Co., will launch a new fund open to retail investors later this year. According to the Financial Times, the new offering will utilize the more regulated UCITS fund structure, which has gained popularity among European hedge fund managers. Paulson & Co.’s UCITS fund will track Paulson’s existing investment strategies.
http://jlne.ws/a94CRG
FRM Seeding New Hedge Fund With $50M Injection
HedgeFund.net:
Seeding firm FRM Capital Advisors announced it has agreed to invest in a new hedge fund run by a former manager from Citadel. FRM will invest $50 million in the first fund being launched by Varna Capital, which is headed up by Svetlana Lee.
http://jlne.ws/d7K0V9
Divorce, Hedge Fund-Style
HedgeFund.net
Martin Coward and Elena Ambrosiadou founded Ikos in 1992. Coward, who holds a Ph.D. in mathematics, gave the fund a quantitative strategy focus and, by 2009, it had about $3 billion in assets under management. " http://jlne.ws/9kQwpS
Where are the traps in managed account agreements?
Futures Magazine
Commodity trading advisors (CTAs) are asked to sign a variety of contracts on a regular basis: technology agreements, office leases, licensing contracts and third party marketing agreements, just to name a few. However, arguably the most important contracts for CTAs are the managed account agreements, sometimes called “advisory agreements,” with their clients.
http://jlne.ws/crbr4o
Markets
Global macro hedge fund managers lock-in high returns HedgeTracker
After a dramatic increase in market volatility in May and June, very few hedge funds have seen positive returns in recent months - but those that did witnessed their largest increases since Lehman Brothers went under. According to the Financial Times, bearish hedge fund managers and their global macro funds, which bet on the shifting conditions of the global economy, have reported gains from short positions against the Eurozone’s sovereign credit, the Yen, the Euro, and “commodity currencies” like the Australian and Canadian dollars. http://jlne.ws/bbPyZy
Regulation
SEC Seeks Comments on Hedge Fund Regulation Under the Dodd-Frank Act
HedgeCo.Net
The SEC has opened a page for investors and hedge fund managers to make their opinions and views known on Dodd-Frank Wall Street Reform and Consumer Protection Act before official comment periods are opened. http://jlne.ws/bSuPJ4
CFTC's Chilton sees broader position limit rule
A new speculative position limit regime will also apply to metals and soft agricultural commodities, a top official at the Commodity Futures Trading Commission told Reuters Insider on Thursday. The U.S. futures regulator proposed new position limits for energy markets in January -- a rule that sparked angst among oil and gas traders -- but will use new authority granted in the recent financial reform act to apply curbs to "all commodities of finite supply," said CFTC Commissioner Bart Chilton.
http://jlne.ws/aDFNUF
Hedge Fund Manager Wyly Charged With Fraud
HedgeFund.net
The SEC filed a complaint in federal court in Manhattan against Samuel Wyly, 75, and his brother Charles, 76, alleging that they made more than $550 million off their insider trades.
http://jlne.ws/aOGKQF
CFTC Charges Three Chicago Defendants With Destroying Records And Failing To Diligently Supervise Employees
Press release
The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging New World Holdings, LLC (NWH), based in Chicago, Ill., with destroying business records and failing to diligently supervise employees. NWH is a registered Introducing Broker and Commodity Trading Advisor. NWH’s principal Steven David Erdman, also of Chicago, and its branch manager Grace Elizabeth Reisinger, of Grand Island, Neb., are charged with aiding and abetting NWH’s failure to keep proper business records. Erdman also is charged with failing to diligently supervise employees. Erdman and Reisinger are registered as Associated Persons of NWH.
http://jlne.ws/97FWZV
Rule to Aid Bankrupt Commodities Brokers' Clients
WSJ.com
WASHINGTON—Trustees handling commodities-brokerage bankruptcies will now be allowed in some cases to continue operating the business so that customers' trading isn't disrupted, federal futures regulators announced Thursday.
http://jlne.ws/c9SEqa
Paul Greenwood, WG Trading Hedge Fund Manager, Pleads Guilty to Fraud
Bloomberg
Greenwood and Walsh, his fellow manager of WG Trading and WG Investors, were indicted last July on charges that they conspired to defraud investors of $554 million. The U.S. said the scheme stretched from 1996 until their arrest in February 2009. A prosecutor said today that Greenwood will testify against Walsh at trial.
http://jlne.ws/bDXw9Z
Thursday, July 1, 2010
JLN Managed Futures: July 1, 2010
Commentary
Professionalism. It’s a buzz word across the entire business world. But what does it mean, really? Webster defines professionalism as: “the conduct, aims, or qualities that characterize or mark a profession or professional person.” That’s a bit vague for my tastes, Businessdictionaryonline.com says this: “Meticulous adherence to undeviating courtesy, honesty, and responsibility in one's dealings with customers and associates, plus a level of excellence that goes over and above the commercial considerations and legal requirements” That’s a better definition of professionalism, and one that resonates in the managed futures world.
CTA’s as money mangers have various levels of professional and ethical standards to adhere to. There are the legal requirements that hedge funds don't have. The CFTC has laws that enforce limits on conduct hopefully reducing the chance for deceptive or outright fraudulent practices to harm the public. So too with the rules that the NFA promotes and enforces. But ethically, CTA’s should have a deeper obligation to their investors/clients. CTA’s should take on the burden of acting in the client’s best interests. That could mean passing up on taking on a new account from someone who for more reasons than just a “means test” shouldn't engage in trading futures. It might mean getting to know your clients and suggesting they close their account if their situation or needs have changed. There are dozens of possible scenarios where a CTA who puts their clients needs ahead of their own might, by acting in the clients best interest, diminish their own prospects. But that’s the way it should be.
I’ll admit that’s a touchy subject. People will be tempted point to their disclosure documents and remind everyone that we do spell out in a very specific manner that there are no guarantees and that commodity trading is inherently risky. But if you’re the kind of manager people should be looking for, the one who treats every penny under management, not as his own to use, but as if it were his own to grow and tend to, then you’re probably watching out for your clients best interests already. And if you’re not that kind of CTA, you should ask yourself, "why not?" This weeks “Five Minutes with” interview is with Tom Pearson of Cortland Fund Services. Tom points out that one way to present your CTA professionally is to bring in outside experts. Keeping clients clearly informed about what’s happening with their money is a great step in assuring that you are indeed being “professional”.
Five minutes with Tom Pearson, President of Cortland Fund Services, LLC
Pearson has over 30 years experience in the financial services and accounting industries. Prior to Cortland, Pearson was a founder and managing member of IFA USA LLC, a fund administration company with offices in BVI, the UK and the USA. During his career he has served as Chief Financial Officer and senior executive for Peregrine Financial Group, Inc., a regional futures brokerage firm and Gerald, Inc. an international futures brokerage firm. He has extensive experience with fund formation, regulatory compliance and fund reporting. Tom started his accounting career in public accounting at Arthur Andersen & Company, holds a BSBA from Drake University, and is registered with the National Futures Association as a Series 3. JLN Managed Futures spoke with Tom about his industry experience and how a fund administrator can enhance the image and raise the professionalism of a CTA/CPO.
Q: How has the industry changed over the last 20 years?
A: The professionalism of the trader has changed. It’s no longer a successful floor trader who thinks, “I can generate 300% per year”, you don’t see that now. The mangers who bring in outiside money are organized, and present a thoughtful, professional image.
Q: Fund administration ties in to that trend doesn’t it?
A: Yes. We started the fund admin business about five years ago when I left PFG Best. Because of our futures background we see a lot of CPO’s where the need for accurate professional reporting is critical.
Q: What made Cortland think about becoming involved in the CTA/Managed Futures space?
A: As an administrator Cortland is familiar with numerous asset classes and investment strategies and maintains connectivity with all major FCMs and prime brokers. Cortland’s staff has an average of more than 10 years in the administration of a multitude of investment assets including futures and options on futures and a platform that can efficiently process performance data and produce accurate reports.
Q: It's pretty clear that to find real success as a CTA, reporting and back office procedures are important, how can a services provider/fund administrator aide a CTA ?
A: A fund administrator's procedures should be SAS 70 Type II certified, therefore the client receives the immediate operational benefit of a professional back office staff familiar with futures trading activity and a system that aggregates trade data from numerous sources allowing efficient consolidation and professionalized reporting. Often CTAs are focused entirely on markets & trading - that is what they are good at and where they add value. Full service fund administrators are focused on accounting and back office administration. For many CTA’s, they can gain access to advanced systems and the best practices of a focused fund administrator for less than the cost of one professional level employee. >
Q: Are there common mistakes that Cortland sees CTA's making?
A: Underestimating the effort involved in marketing and attracting investors. Spending a large amount of time and resources calculating and benchmarking performance at the investor level. Too detailed and too lengthy explanation of the strategy – the investor should be able to understand the overall concept in less ten minutes or less.
Q: From your vantage point, when should a CTA start looking for for a fund administrator?
A: Upon registration, we believe that an administrator can provide valuable counsel from the time the CTA starts business.
Q: Is there a size threshold for a CTA when looking at administrators? (AUM? Number of accounts?)
A: The size threshold is different for each CTA. For example, a CTA with numerous small managed accounts may find the services of an administrator reduce the CTA’s operating cost by eliminating the CTAs need for staff and further allowing the CTA to devote more time to trading activities and marketing. A CTA with few accounts but larger minimum account sized may find that his/her investment base gains comfort in knowing a third party is providing appropriate performance reports and oversight regarding cash transfers.
Q: What are the things investors and managers should look for when seeking out an administrator?
A: The 10 minimum service levels investors and managers should seek when deciding upon a third party administrator are :
Q: Are there questions or performance numbers that clients are looking for that CTA's are often missing?
A: Performance numbers that are required by investors relate to the sophistication level of the investor or their financial advisor. Over the last 18 months, we (Cortland) are fielding a material increase in requests for assistance in applying GIPS (Global Investment Performance Standards) performance reporting. At a minimum, the CTA should be prepared to discuss risk management guidelines and policies that are in effect to adjust trading programs in the event market conditions change dramatically.
Q: Have you seen a flow of cash into CTA's? Why do you think that is?
A: We have seen an increased interest level in futures related investments. Investors are seeking better returns with higher transparency and liquidity. We are seeing people who have never been interested in managed futures start looking around. I think there’s a lot of cash on the sidelines looking for a reasonable return. You’re also seeing CTA’s and CPO’s who are getting better at marketing and who are creating they’re own investor interest. Engaging a fund administrator can free the CTA up to give the appropriate amount of time to marketing their management services. We can provide a full professional staff for less than the cost of one “in-house” senior staff member.
Q: Do you think the back office functions are as important as the trading functions?
A: Yes, in light of all the Ponzi schemes that have been exposed lately , there’s a sincere interest on the part of investor community regarding knowing where the money is and how it’s being handled. They want more transparency, they want to know exactly where their money is, and they really like that there’s a third party who’s watching over the money and that there are controls that keep the trader from moving cash around without reasonable oversight. We’ve seen investors come and visit us as a form of due diligence. There used to be “one man” CTA’s where yesterday’s statements might have just been lost in the disorganization. Engaging a fund administrator can eliminate that possible pitfall.
Q: Any tips for CTA’s?
A: What we’ve been told by many investors is that if a manager can’t explain their strategy clearly in five or ten minutes, if it’s too complex to be readily understood, then they’ll tend to walk away.
Industry News
Hedge Funds Are Down For the Year
by John Curran
You think you've got it rough. Consider the poor hedge fund manager, who has an awful lot riding on the percentage gains he or she is able to post for clients. The reason is that hedge fund skippers pocket about 20% of the fund's gains in addition to their annual fee. Of course, it's a bit more complicated than that because to pocket a juicy cut of profits hedge funds must be above the high water mark in performance (i.e. the fund can't be clawing its way back to its old high,) and there could still be many funds that are under that mark due to the devastating losses of recent years. But for the rest, 2010 could be a year of big payoffs. Only problem is, it isn't.
A new Merrill Lynch report from technical analyst Mary Ann Bartels notes that year to date the average hedge fund is in the minus column, having lost 50 basis points, or one-half percentage point. That may not sound like terrible performance in these troubled times, but it is if you are counting on your 20% cut. Certainly not all hedge funds are in the red as some sub specialties such as convertible arbitrage funds are posting decent gains so far in 2010. But overall it's been rough.
6/29/2010
http://curiouscapitalist.blogs.time.com
http://jlne.ws/dC05RA
What Hedge Fund Managers Think of Financial Reform
by Paula Schaap
Whether the financial reform bill makes it through the thickets of a highly partisan legislature before the U.S. Independence Day holiday is still an open question, especially after the death this week of Sen. Robert Byrd (D.-W. Va.) at 92. But whatever finally comes out of the debate over how to bring the financial system into the 21st century technological world from the 20th century Industrial Revolution economy is was designed for, the effects will be felt on both the financial sector and the financial industry.
6/30/2010
Hedgefund.net
http://jlne.ws/bDUFUc
Strategy
Foundations post big returns in 2009: Commonfund Institute
By Timothy Inkebarger
Foundations and charities reported returns of more than 20% in 2009, an increase of almost 50 percentage points from a year earlier, according to a survey by the Commonfund Institute. The returns also were the highest in the eight-year history of the Wilton, Conn.-based Commonfund Institute's Benchmark Study of Foundations and in the six-year history of its separate Benchmark Study of Operating Charities. Foundations returned an average 20.9% and operating charities returned 21.5% for the year ended Dec. 31, 2009. Both suffered losses of 26% in 2008. Three-year returns for foundations and charities were an annualized -1.1% and -0.7%, respectively, and five-year returns were 3.6% and 4%, respectively.
7/1/2010
pionline.com
http://jlne.ws/cN2pgJ
Beyond Stocks And Bonds: A True Alternative Investment
By Bruce Greig
We have all heard the adage “don’t put all your eggs in one basket,” and most of us have been told this in the context of investing. Surely, you wouldn’t put all of your money in one stock, one mutual fund, or even one asset class. This lesson was painfully learned in 2008 when everything seemed to lose value. Stock and bond indexes were down, as were real estate, commodities and even most hedge funds. Perhaps the traditional definition of “diversification” has been too narrow. But was there a “safety net”? There was: managed futures. Professional money managers, known as commodity trading advisers (CTAs), invest in managed futures. There are more than 1,500 registered CTAs, each with a unique managing style. Similar to mutual funds, risk varies among CTAs. Some invest very conservatively, and others more aggressively. Managed futures have been used by investment professionals for more than 30 years and now represent over $200 billion in assets. High-profile endowments, such as those at Yale and Harvard, have utilized managed futures, in part, to generate their impressive returns over the past decade.
6/28/2010
fa-mag.com
http://jlne.ws/9DB0J7
Markets
Commodities Lose Their Way
Commodities used to be different. Often used as a hedgeagainst inflation, investing in commodities has traditionally had a low or even negative correlation with equities. In hard times, investors have traditionally shifted their investments from stocks into the safety of hard assets like commodities. At least that's the way it used to be. Tuesday's tumble in the financial markets underscores a recent trend of commodity markets moving in tandem with global equity markets. While the S&P 500 dropped 3.1%, the Reuters/Jefferies CRB Index of 19 raw materials also fell 2.8%.
6/30/2010
Forbes.com
http://jlne.ws/cNNPIx
Commodity Slump Means Worst Quarter in Year on Growth Outlook
By Maria Kolesnikova and Anna Stablum
Commodities are heading for their worst quarter in more than a year on investors’ concern that slower growth from China to the U.S. will sap demand. The S&P GSCI Total Return Index of 24 raw materials plunged 11 percent since the end of March, led by declines in industrial metals, gasoline and crude oil. That’s the steepest decline since the fourth quarter of 2008 and the first time prices dropped in the first-half since 2001. The gauge climbed 0.1 percent to 4,016.1 at 5:32 p.m. in London.
6/30/2010
Businessweek.com
http://jlne.ws/dqugoX
Regulation
Finance Bill's Fate Uncertain in Senate
By Victoria McGrane and Corey Boles
The most sweeping overhaul of financial regulations since the 1930s is on a knife's edge as Democrats scramble to secure the Senate votes needed to pass the legislation.
The death of Sen. Robert Byrd (D., W.Va.) robs Democrats of a vote to push the bill toward final passage. Another Democratic senator, who voted against an earlier version of the legislation, said Monday he wouldn't support the final product either. And the late addition of a fee on banks and hedge funds to cover the cost of the legislation is roiling the few Republicans thought likely to vote for the package. Democrats need to retain the remaining 57 Democratic and Independent senators and also win over at least three Republicans to meet the key 60-vote threshold needed to pass the bill. As of Monday, no Republican had committed to voting for the legislation. Sen. Christopher Dodd of Connecticut, who's charged with guiding the legislation through the Senate, said he "always" worries about having enough votes, but declined to answer further questions. "Let me do my work," he said, before heading off to meet with Sen. Olympia Snowe, one of the Maine Republicans open to voting with Democrats.
6/29/2010
wsj.com
http://jlne.ws/9Pjxtb
CFTC Issues Report on NFA Registration Process
by Bart Mallon
The CFTC registration process is handled almost exclusively by the NFA and last year the CFTC audited the NFA to see how successful the organization was at conducting the registration process. The audit report, issued this week, indicates that the NFA needs to improve on many different areas. One of the most important items which was mentioned a number of times in the report is that the NFA has not standardized the registration process in some areas. While the CFTC report focuses only on the registration process, there are a number of other issues with the NFA which should have been highlighted. The first and most important for many managed futures professionals, is the lack of standardization with respect to the disclosure document review process. CTAs and CPOs both need to have their disclosure documents reviewed by the NFA and during this review process, depending on which examiner is assigned to the review, the process can be relatively straight-forward or quite difficult. This obviously increases the time before the disclosure document is approved and most likely increases the legal costs involved. Because our firm completes a number of CTA and CPO registrations each month we see this first hand.
6/26/2010
favstocks.com
http://jlne.ws/bRUrgN
Bad Behavior
NFA Enforcement Actions
Windsor Wealth Management LLC
Link to National Futures Association case narrative and disposition of a complaint filed on April 21, 2010.
NFA.futures.org
6/21/2010
http://jlne.ws/bDUFUc
CFTC Enforcement Actions
Charged with Defrauding CustomersThe U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging Highlands Capital Management, LP, based in San Francisco, Calif., and its principal Glenn Kane Jackson of Tiburon, Calif., with operating a fraudulent off-exchange foreign currency (forex) scheme. Specifically, the CFTC complaint charges the defendants, in connection with the fraudulent scheme, with misappropriating customer funds, issuing false account statements to customers, misrepresenting Jackson’s success and background as a forex trader and misrepresenting the reasons why defendants could not honor customer withdrawal requests. Court order freezes defendants’ assets, protects records. On June 17, 2010, the same day the complaint was filed under seal, the Honorable Samuel Conti of the U.S. District Court for the Northern District of California entered an order, also under seal, freezing assets held or controlled by the defendants and prohibiting the destruction of books and records. Both documents were unsealed by the court on June 23, 2010.
CFTC.gov
6/24/2010
http://jlne.ws/dBljdM
Richard D. Theye and Micind Capital Management, Inc., charged with Fraud in Connection with a Multi-Million Dollar Ponzi Scheme
The CFTC’s complaint charges that, since at least December 2005, Theye fraudulently solicited members of the general public to invest millions of dollars in two commodity pools, RYCO Group, LLC and First RYCO, LLC (the RYCO pools), and encouraged prospective investors to roll over their 401(k)s, IRAs and pension funds into the RYCO pools. Theye also allegedly solicited investors through false representations during face-to-face meetings at his church in Austin and in advertising the RYCO pools’ purported historical profits trading commodity futures.
CFTC.gov
6/21/2010
http://jlne.ws/cNSCyN
Professionalism. It’s a buzz word across the entire business world. But what does it mean, really? Webster defines professionalism as: “the conduct, aims, or qualities that characterize or mark a profession or professional person.” That’s a bit vague for my tastes, Businessdictionaryonline.com says this: “Meticulous adherence to undeviating courtesy, honesty, and responsibility in one's dealings with customers and associates, plus a level of excellence that goes over and above the commercial considerations and legal requirements” That’s a better definition of professionalism, and one that resonates in the managed futures world. CTA’s as money mangers have various levels of professional and ethical standards to adhere to. There are the legal requirements that hedge funds don't have. The CFTC has laws that enforce limits on conduct hopefully reducing the chance for deceptive or outright fraudulent practices to harm the public. So too with the rules that the NFA promotes and enforces. But ethically, CTA’s should have a deeper obligation to their investors/clients. CTA’s should take on the burden of acting in the client’s best interests. That could mean passing up on taking on a new account from someone who for more reasons than just a “means test” shouldn't engage in trading futures. It might mean getting to know your clients and suggesting they close their account if their situation or needs have changed. There are dozens of possible scenarios where a CTA who puts their clients needs ahead of their own might, by acting in the clients best interest, diminish their own prospects. But that’s the way it should be.
I’ll admit that’s a touchy subject. People will be tempted point to their disclosure documents and remind everyone that we do spell out in a very specific manner that there are no guarantees and that commodity trading is inherently risky. But if you’re the kind of manager people should be looking for, the one who treats every penny under management, not as his own to use, but as if it were his own to grow and tend to, then you’re probably watching out for your clients best interests already. And if you’re not that kind of CTA, you should ask yourself, "why not?" This weeks “Five Minutes with” interview is with Tom Pearson of Cortland Fund Services. Tom points out that one way to present your CTA professionally is to bring in outside experts. Keeping clients clearly informed about what’s happening with their money is a great step in assuring that you are indeed being “professional”.
Five minutes with Tom Pearson, President of Cortland Fund Services, LLC
Pearson has over 30 years experience in the financial services and accounting industries. Prior to Cortland, Pearson was a founder and managing member of IFA USA LLC, a fund administration company with offices in BVI, the UK and the USA. During his career he has served as Chief Financial Officer and senior executive for Peregrine Financial Group, Inc., a regional futures brokerage firm and Gerald, Inc. an international futures brokerage firm. He has extensive experience with fund formation, regulatory compliance and fund reporting. Tom started his accounting career in public accounting at Arthur Andersen & Company, holds a BSBA from Drake University, and is registered with the National Futures Association as a Series 3. JLN Managed Futures spoke with Tom about his industry experience and how a fund administrator can enhance the image and raise the professionalism of a CTA/CPO.
Q: How has the industry changed over the last 20 years?
A: The professionalism of the trader has changed. It’s no longer a successful floor trader who thinks, “I can generate 300% per year”, you don’t see that now. The mangers who bring in outiside money are organized, and present a thoughtful, professional image.
Q: Fund administration ties in to that trend doesn’t it?
A: Yes. We started the fund admin business about five years ago when I left PFG Best. Because of our futures background we see a lot of CPO’s where the need for accurate professional reporting is critical.
Q: What made Cortland think about becoming involved in the CTA/Managed Futures space?
A: As an administrator Cortland is familiar with numerous asset classes and investment strategies and maintains connectivity with all major FCMs and prime brokers. Cortland’s staff has an average of more than 10 years in the administration of a multitude of investment assets including futures and options on futures and a platform that can efficiently process performance data and produce accurate reports.
Q: It's pretty clear that to find real success as a CTA, reporting and back office procedures are important, how can a services provider/fund administrator aide a CTA ?
A: A fund administrator's procedures should be SAS 70 Type II certified, therefore the client receives the immediate operational benefit of a professional back office staff familiar with futures trading activity and a system that aggregates trade data from numerous sources allowing efficient consolidation and professionalized reporting. Often CTAs are focused entirely on markets & trading - that is what they are good at and where they add value. Full service fund administrators are focused on accounting and back office administration. For many CTA’s, they can gain access to advanced systems and the best practices of a focused fund administrator for less than the cost of one professional level employee. >
Q: Are there common mistakes that Cortland sees CTA's making?
A: Underestimating the effort involved in marketing and attracting investors. Spending a large amount of time and resources calculating and benchmarking performance at the investor level. Too detailed and too lengthy explanation of the strategy – the investor should be able to understand the overall concept in less ten minutes or less.
Q: From your vantage point, when should a CTA start looking for for a fund administrator?
A: Upon registration, we believe that an administrator can provide valuable counsel from the time the CTA starts business.
Q: Is there a size threshold for a CTA when looking at administrators? (AUM? Number of accounts?)
A: The size threshold is different for each CTA. For example, a CTA with numerous small managed accounts may find the services of an administrator reduce the CTA’s operating cost by eliminating the CTAs need for staff and further allowing the CTA to devote more time to trading activities and marketing. A CTA with few accounts but larger minimum account sized may find that his/her investment base gains comfort in knowing a third party is providing appropriate performance reports and oversight regarding cash transfers.
Q: What are the things investors and managers should look for when seeking out an administrator?
A: The 10 minimum service levels investors and managers should seek when deciding upon a third party administrator are :
- The delivery of valuations at the frequency requested by the fund manager whether it be daily, weekly or monthly.
- The delivery of investor information within five to seven business days for all their clients that are not fund of funds or private equity funds, with investors able to choose whether they receive their information by e-mail, fax or mail.
- Independently pricing of every position in every portfolio for each valuation, if possible. This is good risk management and is beneficial to fund investors.
- “One point of contact” for each fund. This makes administrators more responsive rather than the separate accounting and shareholder teams that some administrators use.
- The management of the audit process for funds so that it is completed in the timeframe determined by the manager.
- Knowledge, experience and best practice (SAS 70) should be utilized to provide advice on the structure, jurisdiction and reporting of the fund, appropriate to the fund's investment strategy and target investor base. A value-added service which will ultimately benefit the marketability of the fund.
- Responsiveness that ensures e-mails and phone calls are returned within finite time periods.
- Staff experience and location
- Corporate secretarial support for fund managers and their funds. An efficient corporate secretarial team with the administrator can save time when compared to using a separate service provider and it is also easier to have one point of contact with the administrator.
- Acting as signatories and managing bank accounts in an effective way. This adds an additional control for fund managers and additional reassurance for investors.
Q: Are there questions or performance numbers that clients are looking for that CTA's are often missing?
A: Performance numbers that are required by investors relate to the sophistication level of the investor or their financial advisor. Over the last 18 months, we (Cortland) are fielding a material increase in requests for assistance in applying GIPS (Global Investment Performance Standards) performance reporting. At a minimum, the CTA should be prepared to discuss risk management guidelines and policies that are in effect to adjust trading programs in the event market conditions change dramatically.
Q: Have you seen a flow of cash into CTA's? Why do you think that is?
A: We have seen an increased interest level in futures related investments. Investors are seeking better returns with higher transparency and liquidity. We are seeing people who have never been interested in managed futures start looking around. I think there’s a lot of cash on the sidelines looking for a reasonable return. You’re also seeing CTA’s and CPO’s who are getting better at marketing and who are creating they’re own investor interest. Engaging a fund administrator can free the CTA up to give the appropriate amount of time to marketing their management services. We can provide a full professional staff for less than the cost of one “in-house” senior staff member.
Q: Do you think the back office functions are as important as the trading functions?
A: Yes, in light of all the Ponzi schemes that have been exposed lately , there’s a sincere interest on the part of investor community regarding knowing where the money is and how it’s being handled. They want more transparency, they want to know exactly where their money is, and they really like that there’s a third party who’s watching over the money and that there are controls that keep the trader from moving cash around without reasonable oversight. We’ve seen investors come and visit us as a form of due diligence. There used to be “one man” CTA’s where yesterday’s statements might have just been lost in the disorganization. Engaging a fund administrator can eliminate that possible pitfall.
Q: Any tips for CTA’s?
A: What we’ve been told by many investors is that if a manager can’t explain their strategy clearly in five or ten minutes, if it’s too complex to be readily understood, then they’ll tend to walk away.
Industry News
Hedge Funds Are Down For the Year
by John Curran
You think you've got it rough. Consider the poor hedge fund manager, who has an awful lot riding on the percentage gains he or she is able to post for clients. The reason is that hedge fund skippers pocket about 20% of the fund's gains in addition to their annual fee. Of course, it's a bit more complicated than that because to pocket a juicy cut of profits hedge funds must be above the high water mark in performance (i.e. the fund can't be clawing its way back to its old high,) and there could still be many funds that are under that mark due to the devastating losses of recent years. But for the rest, 2010 could be a year of big payoffs. Only problem is, it isn't.
A new Merrill Lynch report from technical analyst Mary Ann Bartels notes that year to date the average hedge fund is in the minus column, having lost 50 basis points, or one-half percentage point. That may not sound like terrible performance in these troubled times, but it is if you are counting on your 20% cut. Certainly not all hedge funds are in the red as some sub specialties such as convertible arbitrage funds are posting decent gains so far in 2010. But overall it's been rough.
6/29/2010
http://curiouscapitalist.blogs.time.com
http://jlne.ws/dC05RA
What Hedge Fund Managers Think of Financial Reform
by Paula Schaap
Whether the financial reform bill makes it through the thickets of a highly partisan legislature before the U.S. Independence Day holiday is still an open question, especially after the death this week of Sen. Robert Byrd (D.-W. Va.) at 92. But whatever finally comes out of the debate over how to bring the financial system into the 21st century technological world from the 20th century Industrial Revolution economy is was designed for, the effects will be felt on both the financial sector and the financial industry.
6/30/2010
Hedgefund.net
http://jlne.ws/bDUFUc
Strategy
Foundations post big returns in 2009: Commonfund Institute
By Timothy Inkebarger
Foundations and charities reported returns of more than 20% in 2009, an increase of almost 50 percentage points from a year earlier, according to a survey by the Commonfund Institute. The returns also were the highest in the eight-year history of the Wilton, Conn.-based Commonfund Institute's Benchmark Study of Foundations and in the six-year history of its separate Benchmark Study of Operating Charities. Foundations returned an average 20.9% and operating charities returned 21.5% for the year ended Dec. 31, 2009. Both suffered losses of 26% in 2008. Three-year returns for foundations and charities were an annualized -1.1% and -0.7%, respectively, and five-year returns were 3.6% and 4%, respectively.
7/1/2010
pionline.com
http://jlne.ws/cN2pgJ
Beyond Stocks And Bonds: A True Alternative Investment
By Bruce Greig
We have all heard the adage “don’t put all your eggs in one basket,” and most of us have been told this in the context of investing. Surely, you wouldn’t put all of your money in one stock, one mutual fund, or even one asset class. This lesson was painfully learned in 2008 when everything seemed to lose value. Stock and bond indexes were down, as were real estate, commodities and even most hedge funds. Perhaps the traditional definition of “diversification” has been too narrow. But was there a “safety net”? There was: managed futures. Professional money managers, known as commodity trading advisers (CTAs), invest in managed futures. There are more than 1,500 registered CTAs, each with a unique managing style. Similar to mutual funds, risk varies among CTAs. Some invest very conservatively, and others more aggressively. Managed futures have been used by investment professionals for more than 30 years and now represent over $200 billion in assets. High-profile endowments, such as those at Yale and Harvard, have utilized managed futures, in part, to generate their impressive returns over the past decade.
6/28/2010
fa-mag.com
http://jlne.ws/9DB0J7
Markets
Commodities Lose Their Way
Commodities used to be different. Often used as a hedgeagainst inflation, investing in commodities has traditionally had a low or even negative correlation with equities. In hard times, investors have traditionally shifted their investments from stocks into the safety of hard assets like commodities. At least that's the way it used to be. Tuesday's tumble in the financial markets underscores a recent trend of commodity markets moving in tandem with global equity markets. While the S&P 500 dropped 3.1%, the Reuters/Jefferies CRB Index of 19 raw materials also fell 2.8%.
6/30/2010
Forbes.com
http://jlne.ws/cNNPIx
Commodity Slump Means Worst Quarter in Year on Growth Outlook
By Maria Kolesnikova and Anna Stablum
Commodities are heading for their worst quarter in more than a year on investors’ concern that slower growth from China to the U.S. will sap demand. The S&P GSCI Total Return Index of 24 raw materials plunged 11 percent since the end of March, led by declines in industrial metals, gasoline and crude oil. That’s the steepest decline since the fourth quarter of 2008 and the first time prices dropped in the first-half since 2001. The gauge climbed 0.1 percent to 4,016.1 at 5:32 p.m. in London.
6/30/2010
Businessweek.com
http://jlne.ws/dqugoX
Regulation
Finance Bill's Fate Uncertain in Senate
By Victoria McGrane and Corey Boles
The most sweeping overhaul of financial regulations since the 1930s is on a knife's edge as Democrats scramble to secure the Senate votes needed to pass the legislation.
The death of Sen. Robert Byrd (D., W.Va.) robs Democrats of a vote to push the bill toward final passage. Another Democratic senator, who voted against an earlier version of the legislation, said Monday he wouldn't support the final product either. And the late addition of a fee on banks and hedge funds to cover the cost of the legislation is roiling the few Republicans thought likely to vote for the package. Democrats need to retain the remaining 57 Democratic and Independent senators and also win over at least three Republicans to meet the key 60-vote threshold needed to pass the bill. As of Monday, no Republican had committed to voting for the legislation. Sen. Christopher Dodd of Connecticut, who's charged with guiding the legislation through the Senate, said he "always" worries about having enough votes, but declined to answer further questions. "Let me do my work," he said, before heading off to meet with Sen. Olympia Snowe, one of the Maine Republicans open to voting with Democrats.
6/29/2010
wsj.com
http://jlne.ws/9Pjxtb
CFTC Issues Report on NFA Registration Process
by Bart Mallon
The CFTC registration process is handled almost exclusively by the NFA and last year the CFTC audited the NFA to see how successful the organization was at conducting the registration process. The audit report, issued this week, indicates that the NFA needs to improve on many different areas. One of the most important items which was mentioned a number of times in the report is that the NFA has not standardized the registration process in some areas. While the CFTC report focuses only on the registration process, there are a number of other issues with the NFA which should have been highlighted. The first and most important for many managed futures professionals, is the lack of standardization with respect to the disclosure document review process. CTAs and CPOs both need to have their disclosure documents reviewed by the NFA and during this review process, depending on which examiner is assigned to the review, the process can be relatively straight-forward or quite difficult. This obviously increases the time before the disclosure document is approved and most likely increases the legal costs involved. Because our firm completes a number of CTA and CPO registrations each month we see this first hand.
6/26/2010
favstocks.com
http://jlne.ws/bRUrgN
Bad Behavior
NFA Enforcement Actions
Windsor Wealth Management LLC
Link to National Futures Association case narrative and disposition of a complaint filed on April 21, 2010.
NFA.futures.org
6/21/2010
http://jlne.ws/bDUFUc
CFTC Enforcement Actions
Charged with Defrauding CustomersThe U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging Highlands Capital Management, LP, based in San Francisco, Calif., and its principal Glenn Kane Jackson of Tiburon, Calif., with operating a fraudulent off-exchange foreign currency (forex) scheme. Specifically, the CFTC complaint charges the defendants, in connection with the fraudulent scheme, with misappropriating customer funds, issuing false account statements to customers, misrepresenting Jackson’s success and background as a forex trader and misrepresenting the reasons why defendants could not honor customer withdrawal requests. Court order freezes defendants’ assets, protects records. On June 17, 2010, the same day the complaint was filed under seal, the Honorable Samuel Conti of the U.S. District Court for the Northern District of California entered an order, also under seal, freezing assets held or controlled by the defendants and prohibiting the destruction of books and records. Both documents were unsealed by the court on June 23, 2010.
CFTC.gov
6/24/2010
http://jlne.ws/dBljdM
Richard D. Theye and Micind Capital Management, Inc., charged with Fraud in Connection with a Multi-Million Dollar Ponzi Scheme
The CFTC’s complaint charges that, since at least December 2005, Theye fraudulently solicited members of the general public to invest millions of dollars in two commodity pools, RYCO Group, LLC and First RYCO, LLC (the RYCO pools), and encouraged prospective investors to roll over their 401(k)s, IRAs and pension funds into the RYCO pools. Theye also allegedly solicited investors through false representations during face-to-face meetings at his church in Austin and in advertising the RYCO pools’ purported historical profits trading commodity futures.
CFTC.gov
6/21/2010
http://jlne.ws/cNSCyN
Tuesday, June 15, 2010
JLN Managed Futures: June 15, 2010
Five Minutes with Tom Griffo, of FlexTrade Systems
Tom Griffo is the vice president of Global Futures Sales at FlexTrade Systems, a broker-neutral execution management system (EMS) for trading equities, cash, foreign exchange and global futures. Griffo sat down with Ron Sebonia to discuss how the EMS space is evolving in the managed futures arena, how FlexTrade helps level the playing field in an increasingly automated execution environment and what CTAs can do to gain a competitive edge.
Q: Of all the stuff that’s out there, I don’t think there’s a lot that actually covers how to run your CTA, how to be involved in the industry other than performance. I think that that’s a big kind of gap that needs to be filled.
A: What struck me about your last commentary was that FlexTrade is also focusing on that “second tier” of CTAs, the guys who are running between $200 million and $500 million dollars, but they’re kind of flat lining in terms of growing their assets. They haven’t been able to bust out.
The largest CTAs have been adopting more sophisticated execution tools, although probably not to the extent that I would have thought a couple of years ago. But execution really hasn’t been something that the smaller CTA has focused on, and there are various reasons for that. That idea that you just talked about, how CTAs manage their business, should also include a conversation about execution.
Q: Let’s take a look at the execution front. If you could take a step back and talk about how you would explain FlexTrade to a CTA who is looking around for some sort of execution package.
A: Well, FlexTrade is, at its heart, a highly customizable execution management system that is focused on more smartly “slicing and dicing” large orders so as to reduce market impact and slippage. The company was founded in 1996, and it grew out of the equity world, which was of course on the forefront of electronic and algorithmic trading. Fast forward into the early 2000s and where we are today. Obviously, futures trading is now fully electronic, or just about fully electronic, and the power of platforms like FlexTrade can now be accessed and utilized by institutional futures traders such as CTAs.
Historically CTAs have been rather content, and this also includes some of the larger ones, to hand off the execution piece to their brokers, and I think the main reason for that is the execution risk. Either they didn’t have resources, or they just said, “You know what, I just don’t have the time or expertise to manage the actual trading of my positions, so I’m going to give it to a broker who is going to provide value, I hope, and execute my orders for me. As important, they’re going to write me a check if there is an error and I’m covered.” That’s not an insignificant value for a broker to provide. Before I joined FlexTrade, I was broker for almost 25 years. I’m not sure if we actually quantified what portion of our a execution commission was for risk management, but clearly CTAs and other clients were paying us something for managing the risk of execution.
That’s all well and good because it’s really a balance between the risk management side and the performance side. Now that markets are electronic, they are in many ways much easier to manage from an execution perspective. You don’t have to talk to 15 different pits or 20 different brokers to execute your portfolio. Your whole portfolio can be managed from a single front end. So it becomes a lot “easier” to manage the execution of your global CTA portfolio.
Yes, there are natural and justifiable concerns a CTA should have when taking on the execution risk. In my mind what FlexTrade, and products like FlexTrade can do, is help improve execution performance and reduce market impact. If you’re a mid-sized CTA trading a couple of hundred thousand contracts a year or more and you look at the average tick size being $10, give or take, the math is pretty easy: Saving a tick per contract will have a direct and significant impact on your bottom line. Most CTAs are very systematic in the way they approach their business and approach their markets, but sometimes, in some cases, that systematic approach sort of ends at the execution. So we’re saying why not extend that same approach to execution, and use a tool like FlexTrade to accomplish that.
Q: That seems like a pretty reasonable approach. Something that’s always been a problem in the industry, although actually, I think now people tend to look at slippage as being sort of been wrung out of the system, which isn’t necessarily true.
A: I really don’t think it’s true at all. Yes, bid/ask spreads have narrowed in many cases. We could have a long discussion about liquidity and what it means and whether is it better or worse in the electronic world. But even if I make the assumption that liquidity is “better” in an electronic environment than it was in an open-outcry environment, the other side of that coin is that we know – even just with the naked eye looking at a screen – that in many cases you’re seeing a lot of big orders being chopped into ones and twos. So if you have a big order to execute, you can just throw the whole thing onto a machine and “get it done”, and it might look like you got a great fill vis-a-vis maybe what it would have been a few years ago over the phone. But there are definitely more efficient ways of managing bigger orders in markets that cumulatively trade a lot of volume but where orders are being executed in smaller and smaller increments. I think that’s what sometimes gets lost in the discussion.
Another thing that systems like FlexTrade can provide are tools that can quantify, versus benchmarks, just how “good” or “bad” your executions are. This is a lot better than in the old days when you put an order on the floor and you got it back a few minutes later and it was kind of guess whether it was a good fill or not. It was more touchy- feely than quantifiable. But now you know exactly when your order was generated, when it was sent to the broker or exchange and when those executions came back in real-time, and everything can be measured to the millisecond and even the microsecond. So now that you can really measure and quantify your true slippage, you might have even more reason to consider using better execution tools to reduce market impact and improve your execution. I think slippage remains a very big problem – or an opportunity if you want to look at it that way – because I think there remains a lot of slippage that can be wrung out of the market by using execution tools that are a bit more sophisticated.
Q: So this might be a way for a CTA to gain a relative edge against their competition?
A: I’m not going to say that an investor is going to pick CTA A over CTA B because CTA A is using a better execution system. But if CTA A and B are fairly similar in their profiles, say they’re both trend followers, they both have similar Sharpe ratios, they both have the same relative correlations to other asset classes, then maybe the one with the better execution tools gets the allocation. So, yes, to answer your question, CTAs can use execution as a differentiator and gain a competitive edge.
Q: Does your platform do anything for improving transparency for the investor? Does it generate better reports?
A: The short answer is yes. If you make a system like FlexTrade the hub of your trading activity, then anything that happens in the system becomes quantifiable, from cancel/replaces to slippage to P&Ls. All can be calculated in real-time and also can be communicated in many ways to investors. You can clearly demonstrate how you’re executing your orders. If the model says I want to buy at “X” and you get filled at “Y”, you may explain to your investors that I’m doing a lot better on my execution because I’m using superior execution tools.
Q: Where do you see the trip wire for your type of product? Is it a certain number of accounts? Is it a dollar value of accounts? Is it a number of executions? If I am an emerging CTA and I have five accounts, slippage should probably be on my radar so I am not wasting an opportunity, but that's probably not a critical thing at that point at least, five accounts you should all get the same tick and probably not far off your price, whatever it is. On the other hand, if I have five hundred accounts and I am trading a market like sugar than slippage could be a real problem. I would like to get a feel for when you think your type of technology is applicable?
A: That is an excellent question and the answer is going to vary. Certainly the size of your order is important, the markets that you are trading in and what your time horizon is for your typical trade. If you are a CTA that's trading a shorter-term system -- which, by the way, we are seeing as a growing trend since the markets became electronic -- it is a given in my mind that you should be using a tool like FlexTrade because traditional “point-and-click” systems cannot react fast enough to ever-changing market conditions. But, as discussed earlier, the more traditional trend following CTA can still benefit significantly from reduced slippage. So it's not really a “one size fits all” answer, you have to look at all the variables. I would say the key variable is simply your overall volume. For the CTA you mentioned who only has a few small accounts, even a traditional front-end “point-and-click” system may be too much fire power. That CTA might be fine, as he builds his business, continuing to use the broker for execution. However, in general terms, the CTA who is trading a quarter million contracts or more a year, from our perspective and our experience, can really benefit significantly by using a system like FlexTrade.
Taking a step back and looking at the smaller CTAs, I still think there is a case to be made for handling your own execution business using a “point-and-click” platform as opposed to just giving it out to the broker. Now even in this instance, the CTA still has to make the decision to assume the risk of execution and make sure he understands how to mitigate fat finger risk and similar types of execution mistakes. But I still believe a CTA is, more times than not, going to do better executing for himself as opposed to sending an email to a broker saying “get this done.”
Q: As someone who does execution, I totally agree with that, in part because my experience goes back to being on the floor at the Board of Trade. I can remember watching things coming into the order stream and thinking wow that is just taking forever. If you were to look at CTA's and say you guys have all this bit down, what would you say is the most critical thing for execution? Is it speed? What do you see as the issue? If you are approaching a CTA, how do you say you need this?
A: The issue of speed is on everyone’s mind these days. For most CTA's, and again, I’m talking about the more traditional CTA and not the guy who is running a high velocity, high frequency model, I think speed is somewhat overrated. I mean if you think about it, only one guy can be first in line and everyone is behind him.
The new locals are the quants and the black box guys who have co-located their software and hardware. You are not going to beat those guys in terms of speed whether you have FlexTrade or anything else. They build their own stuff, they have the best technology, the best telecom. They get a “look” at every order that comes into the order match engine before anyone else does by virtue of that edge. That's just the way it is. But technology like FlexTrade’s can help level the playing field, so while you are not going to be the fastest whether you use FlexTrade, TT, Pats, CQG or whatever, you still are going to have the ability to execute more efficiently and effectively. You also have the ability to act more quickly by building some level of automation into your execution on the front end and therefore being proactive instead of reactive in your execution. The result is better execution, less slippage, less market impact and overall better performance. So it's just learning to deal with the new execution paradigm and what it is. There are certain players that have better technology than others, but that doesn't mean you can't be successful or compete effectively for liquidity.
I am an old floor guy myself, and it's akin to someone who in the days of pit trading had a direct line to the ring as opposed to someone who sent their orders across the Teletype machine. The guy who had the direct line wasn't in a better position than the local on the bottom step, but he was much better off than the guy coming across on the Teletype. And the same is true today – the guy who is sending emails or faxes to brokers, which still happens, is obviously worse off than the guy using more sophisticated trading technology.
Q: Is there a question or an area you want to shine some light on that I didn't get to?
A: Sure. Another point to make is to bring the broker back into the loop. I don't want to give you the impression that brokers are no longer adding value on the execution front. There are many excellent “value-added” broker execution desks out there. But if you are still giving your orders to brokers, then make sure they themselves are using good technology to get your orders done.
Related to that, many brokers are now offering execution algorithms to their clients. These broker “algos,” which have evolved from the equity world, are essentially execution strategies or tactics, such as VWAP or TWAP, that can improve execution performance. Brokers have put a lot of time and effort into developing these tools, so CTAs should check them out. Frankly, I don't think brokers are overly enamored in many cases by having staff taking orders over the phone or picking up orders off the fax and would much rather provide value via algos.
With a system like FlexTrade, you can access multiple brokers’ algorithms - like anything else, the more choices the better. This is the latest advancement in futures execution, and clearly we are seeing a lot of activity in this realm as brokers are developing more and more algorithms that are constructed and created specifically for the futures markets. Again, if you are going to use a broker, make sure you are going to be using the latest broker technology.
Q: Let's say I am a CTA in the market for a quality execution platform, what are three critical questions to ask?
A: Are you trading only futures? As you know, many CTAs also trade cash foreign exchange, so it is nice to have a platform that can handle both asset classes. Also, what about the risk management piece? We talked about the legitimate concerns CTAs have about taking on execution risk. So a big question to ask is what can a technology provider offer in terms of risk management tools to help mitigate that risk? No vendor that I know would say you can 100 percent eliminate all risk, but an execution system should be able to provide robust and effective “fat finger” and other risk management tools. Thirdly, a quality execution platform should be able to handle your requirements not only today, but also in the future. The futures markets continue to evolve at a dizzying pace. What works today may not work tomorrow. You may not want to invest in a piece of technology that isn’t able to grow with your business.
Lead Stories
Trading firm Headlands Technologies founded by three Citadel veterans
HedgeTracker
Matthew Andresen, Jason Lehman and Neil Fitzpatrick, three former traders at Chicago hedge fund Citadel Investment Group, have joined forces once more to run Headlands Technologies, their own computer-driven trading firm. According to the Wall Street Journal, Headlands Technologies will use a quantitative-trading operation, and while its focus has not been finalized, the trading firm may eventually trade in stocks, options and futures markets
http://bit.ly/aC9ns8
Penson GHCO Announces Global Futures Execution Desk
Press release
Penson GHCO has established a 24-hour, global execution desk for assisting managed futures executions, including bulk order placement and allocations. Penson GHCO also announced a new relationship with introducing broker Colagrossi Futures, which plans to make immediate use of the desk.
http://bit.ly/9FyvWX
Superfund Shuts Six Offices
FINalternatives
Retail hedge fund firm Superfund is cutting back after a difficult 2009.
The managed futures shop, which manages about US$1.24 billion, has shut six offices around the world and laid off staff to cut costs. Superfund blamed a tough business environment for the move.
http://bit.ly/ccTwrB
Superfund shuts 6 offices including S'pore
Reuters
Austrian hedge fund manager Superfund said on Friday it has shut six international offices and laid off staff as part of cost-saving measures amid a tough business environment.
http://bit.ly/aEvd8Y
GCI, Orix Open Computer-Driven Hedge Fund to Profit From Crisis
Bloomberg
GCI Asset Management Inc. and Orix Investment Corp. will start today a hedge fund using computer models to spot trends in futures prices and profit from market turmoil.
http://bit.ly/9Xhk3d
Alternative advisors launches ucits fund of hedge funds
Hedge Funds Review
The fund is likely to include a large proportion of equity long/short managers as well as global macro, commodity trading advisors (CTAs) and some event-driven managers.
http://bit.ly/cVJwWO
Industry News
EU moves closer to derivatives, short selling legislation
The Trade News
The European Union (EU) has pushed ahead with its reforms of the region’s financial markets by publishing consultation papers that outline its proposed frameworks for regulating derivatives trading and short selling. http://bit.ly/doRi8N
CFTC seeks equal access for co-location services
The Trade News
The new rules from the CFTC, which were published in the Federal Register at the end of last week, would require derivatives exchanges to make provisions relating to equal access, fees, latency transparency and third-party solutions for co-location and proximity hosting services.
This includes the requirement to make such services available to any qualified market participant willing to pay for them and ensuring that costs are not used as a way to price certain types of participant out of the market.
http://bit.ly/cclZTJ
May losses cloud hedge fund summit in sunny Monaco
Reuters
Executives such as Man Group (EMG.L) CEO Peter Clarke, whose firm last month unveiled a $1.6 billion (1.1 billion pound) takeover of GLG Partners (GLG.N), and Leda Braga, head of Bluecrest's 'black box' funds, will debate how the industry continues to win back clients in the face of choppy markets and looming regulation.
The 2010 GAIM International conference on June 14 to 17 comes after almost a year of steady net client inflows -- helped by returns of 20 percent in 2009.
http://bit.ly/bQjhFS
Hedge Funds Dodge European Proposal With ‘Newcits’
Bloomberg
Guy Hurley said he’s not sweating European plans for new hedge-fund rules after leaving Bank of America Corp.’s Merrill Lynch & Co. a year ago to start an onshore fund that uses strategies such as merger arbitrage.
http://bit.ly/blgAtm
Bull and Bear Capital & Critical Value Advisors announce launch of Hedge Fund Xchange an Investor Matching Service
HedgeTracker
Hedge Fund Xchange is a powerful new service available to firms wishing to refine and streamline their capital raising efforts via a highly-targeted and customized investor matching process.
http://bit.ly/bX6wNs
The Alternative Beta strategy fared really well during the 2008 crisis
Sagar Chakraverty, Opalesque Asia
Once thought impossible, hedge fund replication has become one of the buzzwords in the finance community, driven by the growing realization that most hedge fund returns come from risk premiums rather than manager alpha,” said Dr. Lars Jaeger, the CEO of Alternative Beta Strategies at Zurich-based Partners Group. http://bit.ly/cQXtNS
Markets
George Soros Discusses the Financial Crisis and Regulatory Reform
HedgeTracker
George Soros believes the financial crisis is nowhere near over and that we have now entered into ‘Act II’, “when financial markets started losing confidence in the credibility of sovereign debt”.
http://bit.ly/bQn4Vf
Newedge CTA Index down 1.51 per cent in May
Hedgeweek
The Newedge CTA Index fell by 1.51 per cent in May, bringing its year-to-date performance to +2.06 per cent.
The Newedge CTA Index top performances for May included Boronia Diversified Fund, up by an estimated 4.32 per cent, IKOS Financial USD, up 3.07 per cent, and Kaiser Trading Group, up 2.90 per cent." http://bit.ly/aQZdTd
Bad Behavior
CFTC Watchdog Launches Review of Market Surveillance Operations
SARAH N. LYNCH - WSJ.com
WASHINGTON—The Commodity Futures Trading Commission's internal watchdog has launched a review of the agency's market surveillance operations to determine how well the CFTC enforces speculative limits for large traders.
The independent review was disclosed by the CFTC's inspector general in the semiannual report to Congress. http://bit.ly/aK1czL
Noteworthy
Cavenagh Capital Launching New Macro Fund
HedgeTracker
Cavenagh Capital, a macro-focused hedge fund manager, is launching a new macro hedge fund in July after receiving a capital commitment from Netherlands’ largest pension fund manager. Cavenagh received an initial investment of $40 million as part of a three year seeding commitment from APG, the asset manager for Stichting Pensioenfonds ABP.
http://bit.ly/bs0Qdx
Rough Spring for Ravi Kaza, Seasons Capital Management to close all three hedge funds
HedgeTracker
Due to the increased difficulties of today’s investing environment, Ravi Kaza’s Seasons Capital Management has decided to call it quits and is starting to return capital to its investors. According to a 2008 SEC filing, Mr. Kaza’s hedge fund firm once had more than $4 billion in assets under management. Seasons Capital’s most recent SEC filing revealed that the firm’s assets had fallen to just under $1.5 billion.
http://bit.ly/aP2Hb8
Julian Barnett’s Ridley Park Capital launches flagship hedge fund with $200 million
HedgeTracker
Julian Barnett, former portfolio manager at fund manager Polar Capital, launched the flagship hedge fund of his startup venture, Ridley Park Capital, last month. According to the Financial Times, Mr. Barnett raised almost $200 million for the new fund manager, although some sources claim Mr. Barnett had originally aimed for figures as high as $500 million.
http://bit.ly/aXKwd8
A former head of risk management at Goldman Sachs is reportedly starting up his own hedge fund firm.HedgeFund.net
Gregg Weinstein, who was the global head of risk management at Goldman is hoping to launch event-driven RocWood Capital by the third quarter, according to a Bloomberg report.
http://bit.ly/af9Axu
Tom Griffo is the vice president of Global Futures Sales at FlexTrade Systems, a broker-neutral execution management system (EMS) for trading equities, cash, foreign exchange and global futures. Griffo sat down with Ron Sebonia to discuss how the EMS space is evolving in the managed futures arena, how FlexTrade helps level the playing field in an increasingly automated execution environment and what CTAs can do to gain a competitive edge.
Q: Of all the stuff that’s out there, I don’t think there’s a lot that actually covers how to run your CTA, how to be involved in the industry other than performance. I think that that’s a big kind of gap that needs to be filled.
A: What struck me about your last commentary was that FlexTrade is also focusing on that “second tier” of CTAs, the guys who are running between $200 million and $500 million dollars, but they’re kind of flat lining in terms of growing their assets. They haven’t been able to bust out.
The largest CTAs have been adopting more sophisticated execution tools, although probably not to the extent that I would have thought a couple of years ago. But execution really hasn’t been something that the smaller CTA has focused on, and there are various reasons for that. That idea that you just talked about, how CTAs manage their business, should also include a conversation about execution.
Q: Let’s take a look at the execution front. If you could take a step back and talk about how you would explain FlexTrade to a CTA who is looking around for some sort of execution package.
A: Well, FlexTrade is, at its heart, a highly customizable execution management system that is focused on more smartly “slicing and dicing” large orders so as to reduce market impact and slippage. The company was founded in 1996, and it grew out of the equity world, which was of course on the forefront of electronic and algorithmic trading. Fast forward into the early 2000s and where we are today. Obviously, futures trading is now fully electronic, or just about fully electronic, and the power of platforms like FlexTrade can now be accessed and utilized by institutional futures traders such as CTAs.
Historically CTAs have been rather content, and this also includes some of the larger ones, to hand off the execution piece to their brokers, and I think the main reason for that is the execution risk. Either they didn’t have resources, or they just said, “You know what, I just don’t have the time or expertise to manage the actual trading of my positions, so I’m going to give it to a broker who is going to provide value, I hope, and execute my orders for me. As important, they’re going to write me a check if there is an error and I’m covered.” That’s not an insignificant value for a broker to provide. Before I joined FlexTrade, I was broker for almost 25 years. I’m not sure if we actually quantified what portion of our a execution commission was for risk management, but clearly CTAs and other clients were paying us something for managing the risk of execution.
That’s all well and good because it’s really a balance between the risk management side and the performance side. Now that markets are electronic, they are in many ways much easier to manage from an execution perspective. You don’t have to talk to 15 different pits or 20 different brokers to execute your portfolio. Your whole portfolio can be managed from a single front end. So it becomes a lot “easier” to manage the execution of your global CTA portfolio.
Yes, there are natural and justifiable concerns a CTA should have when taking on the execution risk. In my mind what FlexTrade, and products like FlexTrade can do, is help improve execution performance and reduce market impact. If you’re a mid-sized CTA trading a couple of hundred thousand contracts a year or more and you look at the average tick size being $10, give or take, the math is pretty easy: Saving a tick per contract will have a direct and significant impact on your bottom line. Most CTAs are very systematic in the way they approach their business and approach their markets, but sometimes, in some cases, that systematic approach sort of ends at the execution. So we’re saying why not extend that same approach to execution, and use a tool like FlexTrade to accomplish that.
Q: That seems like a pretty reasonable approach. Something that’s always been a problem in the industry, although actually, I think now people tend to look at slippage as being sort of been wrung out of the system, which isn’t necessarily true.
A: I really don’t think it’s true at all. Yes, bid/ask spreads have narrowed in many cases. We could have a long discussion about liquidity and what it means and whether is it better or worse in the electronic world. But even if I make the assumption that liquidity is “better” in an electronic environment than it was in an open-outcry environment, the other side of that coin is that we know – even just with the naked eye looking at a screen – that in many cases you’re seeing a lot of big orders being chopped into ones and twos. So if you have a big order to execute, you can just throw the whole thing onto a machine and “get it done”, and it might look like you got a great fill vis-a-vis maybe what it would have been a few years ago over the phone. But there are definitely more efficient ways of managing bigger orders in markets that cumulatively trade a lot of volume but where orders are being executed in smaller and smaller increments. I think that’s what sometimes gets lost in the discussion.
Another thing that systems like FlexTrade can provide are tools that can quantify, versus benchmarks, just how “good” or “bad” your executions are. This is a lot better than in the old days when you put an order on the floor and you got it back a few minutes later and it was kind of guess whether it was a good fill or not. It was more touchy- feely than quantifiable. But now you know exactly when your order was generated, when it was sent to the broker or exchange and when those executions came back in real-time, and everything can be measured to the millisecond and even the microsecond. So now that you can really measure and quantify your true slippage, you might have even more reason to consider using better execution tools to reduce market impact and improve your execution. I think slippage remains a very big problem – or an opportunity if you want to look at it that way – because I think there remains a lot of slippage that can be wrung out of the market by using execution tools that are a bit more sophisticated.
Q: So this might be a way for a CTA to gain a relative edge against their competition?
A: I’m not going to say that an investor is going to pick CTA A over CTA B because CTA A is using a better execution system. But if CTA A and B are fairly similar in their profiles, say they’re both trend followers, they both have similar Sharpe ratios, they both have the same relative correlations to other asset classes, then maybe the one with the better execution tools gets the allocation. So, yes, to answer your question, CTAs can use execution as a differentiator and gain a competitive edge.
Q: Does your platform do anything for improving transparency for the investor? Does it generate better reports?
A: The short answer is yes. If you make a system like FlexTrade the hub of your trading activity, then anything that happens in the system becomes quantifiable, from cancel/replaces to slippage to P&Ls. All can be calculated in real-time and also can be communicated in many ways to investors. You can clearly demonstrate how you’re executing your orders. If the model says I want to buy at “X” and you get filled at “Y”, you may explain to your investors that I’m doing a lot better on my execution because I’m using superior execution tools.
Q: Where do you see the trip wire for your type of product? Is it a certain number of accounts? Is it a dollar value of accounts? Is it a number of executions? If I am an emerging CTA and I have five accounts, slippage should probably be on my radar so I am not wasting an opportunity, but that's probably not a critical thing at that point at least, five accounts you should all get the same tick and probably not far off your price, whatever it is. On the other hand, if I have five hundred accounts and I am trading a market like sugar than slippage could be a real problem. I would like to get a feel for when you think your type of technology is applicable?
A: That is an excellent question and the answer is going to vary. Certainly the size of your order is important, the markets that you are trading in and what your time horizon is for your typical trade. If you are a CTA that's trading a shorter-term system -- which, by the way, we are seeing as a growing trend since the markets became electronic -- it is a given in my mind that you should be using a tool like FlexTrade because traditional “point-and-click” systems cannot react fast enough to ever-changing market conditions. But, as discussed earlier, the more traditional trend following CTA can still benefit significantly from reduced slippage. So it's not really a “one size fits all” answer, you have to look at all the variables. I would say the key variable is simply your overall volume. For the CTA you mentioned who only has a few small accounts, even a traditional front-end “point-and-click” system may be too much fire power. That CTA might be fine, as he builds his business, continuing to use the broker for execution. However, in general terms, the CTA who is trading a quarter million contracts or more a year, from our perspective and our experience, can really benefit significantly by using a system like FlexTrade.
Taking a step back and looking at the smaller CTAs, I still think there is a case to be made for handling your own execution business using a “point-and-click” platform as opposed to just giving it out to the broker. Now even in this instance, the CTA still has to make the decision to assume the risk of execution and make sure he understands how to mitigate fat finger risk and similar types of execution mistakes. But I still believe a CTA is, more times than not, going to do better executing for himself as opposed to sending an email to a broker saying “get this done.”
Q: As someone who does execution, I totally agree with that, in part because my experience goes back to being on the floor at the Board of Trade. I can remember watching things coming into the order stream and thinking wow that is just taking forever. If you were to look at CTA's and say you guys have all this bit down, what would you say is the most critical thing for execution? Is it speed? What do you see as the issue? If you are approaching a CTA, how do you say you need this?
A: The issue of speed is on everyone’s mind these days. For most CTA's, and again, I’m talking about the more traditional CTA and not the guy who is running a high velocity, high frequency model, I think speed is somewhat overrated. I mean if you think about it, only one guy can be first in line and everyone is behind him.
The new locals are the quants and the black box guys who have co-located their software and hardware. You are not going to beat those guys in terms of speed whether you have FlexTrade or anything else. They build their own stuff, they have the best technology, the best telecom. They get a “look” at every order that comes into the order match engine before anyone else does by virtue of that edge. That's just the way it is. But technology like FlexTrade’s can help level the playing field, so while you are not going to be the fastest whether you use FlexTrade, TT, Pats, CQG or whatever, you still are going to have the ability to execute more efficiently and effectively. You also have the ability to act more quickly by building some level of automation into your execution on the front end and therefore being proactive instead of reactive in your execution. The result is better execution, less slippage, less market impact and overall better performance. So it's just learning to deal with the new execution paradigm and what it is. There are certain players that have better technology than others, but that doesn't mean you can't be successful or compete effectively for liquidity.
I am an old floor guy myself, and it's akin to someone who in the days of pit trading had a direct line to the ring as opposed to someone who sent their orders across the Teletype machine. The guy who had the direct line wasn't in a better position than the local on the bottom step, but he was much better off than the guy coming across on the Teletype. And the same is true today – the guy who is sending emails or faxes to brokers, which still happens, is obviously worse off than the guy using more sophisticated trading technology.
Q: Is there a question or an area you want to shine some light on that I didn't get to?
A: Sure. Another point to make is to bring the broker back into the loop. I don't want to give you the impression that brokers are no longer adding value on the execution front. There are many excellent “value-added” broker execution desks out there. But if you are still giving your orders to brokers, then make sure they themselves are using good technology to get your orders done.
Related to that, many brokers are now offering execution algorithms to their clients. These broker “algos,” which have evolved from the equity world, are essentially execution strategies or tactics, such as VWAP or TWAP, that can improve execution performance. Brokers have put a lot of time and effort into developing these tools, so CTAs should check them out. Frankly, I don't think brokers are overly enamored in many cases by having staff taking orders over the phone or picking up orders off the fax and would much rather provide value via algos.
With a system like FlexTrade, you can access multiple brokers’ algorithms - like anything else, the more choices the better. This is the latest advancement in futures execution, and clearly we are seeing a lot of activity in this realm as brokers are developing more and more algorithms that are constructed and created specifically for the futures markets. Again, if you are going to use a broker, make sure you are going to be using the latest broker technology.
Q: Let's say I am a CTA in the market for a quality execution platform, what are three critical questions to ask?
A: Are you trading only futures? As you know, many CTAs also trade cash foreign exchange, so it is nice to have a platform that can handle both asset classes. Also, what about the risk management piece? We talked about the legitimate concerns CTAs have about taking on execution risk. So a big question to ask is what can a technology provider offer in terms of risk management tools to help mitigate that risk? No vendor that I know would say you can 100 percent eliminate all risk, but an execution system should be able to provide robust and effective “fat finger” and other risk management tools. Thirdly, a quality execution platform should be able to handle your requirements not only today, but also in the future. The futures markets continue to evolve at a dizzying pace. What works today may not work tomorrow. You may not want to invest in a piece of technology that isn’t able to grow with your business.
Lead Stories
Trading firm Headlands Technologies founded by three Citadel veterans
HedgeTracker
Matthew Andresen, Jason Lehman and Neil Fitzpatrick, three former traders at Chicago hedge fund Citadel Investment Group, have joined forces once more to run Headlands Technologies, their own computer-driven trading firm. According to the Wall Street Journal, Headlands Technologies will use a quantitative-trading operation, and while its focus has not been finalized, the trading firm may eventually trade in stocks, options and futures markets
http://bit.ly/aC9ns8
Penson GHCO Announces Global Futures Execution Desk
Press release
Penson GHCO has established a 24-hour, global execution desk for assisting managed futures executions, including bulk order placement and allocations. Penson GHCO also announced a new relationship with introducing broker Colagrossi Futures, which plans to make immediate use of the desk.
http://bit.ly/9FyvWX
Superfund Shuts Six Offices
FINalternatives
Retail hedge fund firm Superfund is cutting back after a difficult 2009.
The managed futures shop, which manages about US$1.24 billion, has shut six offices around the world and laid off staff to cut costs. Superfund blamed a tough business environment for the move.
http://bit.ly/ccTwrB
Superfund shuts 6 offices including S'pore
Reuters
Austrian hedge fund manager Superfund said on Friday it has shut six international offices and laid off staff as part of cost-saving measures amid a tough business environment.
http://bit.ly/aEvd8Y
GCI, Orix Open Computer-Driven Hedge Fund to Profit From Crisis
Bloomberg
GCI Asset Management Inc. and Orix Investment Corp. will start today a hedge fund using computer models to spot trends in futures prices and profit from market turmoil.
http://bit.ly/9Xhk3d
Alternative advisors launches ucits fund of hedge funds
Hedge Funds Review
The fund is likely to include a large proportion of equity long/short managers as well as global macro, commodity trading advisors (CTAs) and some event-driven managers.
http://bit.ly/cVJwWO
Industry News
EU moves closer to derivatives, short selling legislation
The Trade News
The European Union (EU) has pushed ahead with its reforms of the region’s financial markets by publishing consultation papers that outline its proposed frameworks for regulating derivatives trading and short selling. http://bit.ly/doRi8N
CFTC seeks equal access for co-location services
The Trade News
The new rules from the CFTC, which were published in the Federal Register at the end of last week, would require derivatives exchanges to make provisions relating to equal access, fees, latency transparency and third-party solutions for co-location and proximity hosting services.
This includes the requirement to make such services available to any qualified market participant willing to pay for them and ensuring that costs are not used as a way to price certain types of participant out of the market.
http://bit.ly/cclZTJ
May losses cloud hedge fund summit in sunny Monaco
Reuters
Executives such as Man Group (EMG.L) CEO Peter Clarke, whose firm last month unveiled a $1.6 billion (1.1 billion pound) takeover of GLG Partners (GLG.N), and Leda Braga, head of Bluecrest's 'black box' funds, will debate how the industry continues to win back clients in the face of choppy markets and looming regulation.
The 2010 GAIM International conference on June 14 to 17 comes after almost a year of steady net client inflows -- helped by returns of 20 percent in 2009.
http://bit.ly/bQjhFS
Hedge Funds Dodge European Proposal With ‘Newcits’
Bloomberg
Guy Hurley said he’s not sweating European plans for new hedge-fund rules after leaving Bank of America Corp.’s Merrill Lynch & Co. a year ago to start an onshore fund that uses strategies such as merger arbitrage.
http://bit.ly/blgAtm
Bull and Bear Capital & Critical Value Advisors announce launch of Hedge Fund Xchange an Investor Matching Service
HedgeTracker
Hedge Fund Xchange is a powerful new service available to firms wishing to refine and streamline their capital raising efforts via a highly-targeted and customized investor matching process.
http://bit.ly/bX6wNs
The Alternative Beta strategy fared really well during the 2008 crisis
Sagar Chakraverty, Opalesque Asia
Once thought impossible, hedge fund replication has become one of the buzzwords in the finance community, driven by the growing realization that most hedge fund returns come from risk premiums rather than manager alpha,” said Dr. Lars Jaeger, the CEO of Alternative Beta Strategies at Zurich-based Partners Group. http://bit.ly/cQXtNS
Markets
George Soros Discusses the Financial Crisis and Regulatory Reform
HedgeTracker
George Soros believes the financial crisis is nowhere near over and that we have now entered into ‘Act II’, “when financial markets started losing confidence in the credibility of sovereign debt”.
http://bit.ly/bQn4Vf
Newedge CTA Index down 1.51 per cent in May
Hedgeweek
The Newedge CTA Index fell by 1.51 per cent in May, bringing its year-to-date performance to +2.06 per cent.
The Newedge CTA Index top performances for May included Boronia Diversified Fund, up by an estimated 4.32 per cent, IKOS Financial USD, up 3.07 per cent, and Kaiser Trading Group, up 2.90 per cent." http://bit.ly/aQZdTd
Bad Behavior
CFTC Watchdog Launches Review of Market Surveillance Operations
SARAH N. LYNCH - WSJ.com
WASHINGTON—The Commodity Futures Trading Commission's internal watchdog has launched a review of the agency's market surveillance operations to determine how well the CFTC enforces speculative limits for large traders.
The independent review was disclosed by the CFTC's inspector general in the semiannual report to Congress. http://bit.ly/aK1czL
Noteworthy
Cavenagh Capital Launching New Macro Fund
HedgeTracker
Cavenagh Capital, a macro-focused hedge fund manager, is launching a new macro hedge fund in July after receiving a capital commitment from Netherlands’ largest pension fund manager. Cavenagh received an initial investment of $40 million as part of a three year seeding commitment from APG, the asset manager for Stichting Pensioenfonds ABP.
http://bit.ly/bs0Qdx
Rough Spring for Ravi Kaza, Seasons Capital Management to close all three hedge funds
HedgeTracker
Due to the increased difficulties of today’s investing environment, Ravi Kaza’s Seasons Capital Management has decided to call it quits and is starting to return capital to its investors. According to a 2008 SEC filing, Mr. Kaza’s hedge fund firm once had more than $4 billion in assets under management. Seasons Capital’s most recent SEC filing revealed that the firm’s assets had fallen to just under $1.5 billion.
http://bit.ly/aP2Hb8
Julian Barnett’s Ridley Park Capital launches flagship hedge fund with $200 million
HedgeTracker
Julian Barnett, former portfolio manager at fund manager Polar Capital, launched the flagship hedge fund of his startup venture, Ridley Park Capital, last month. According to the Financial Times, Mr. Barnett raised almost $200 million for the new fund manager, although some sources claim Mr. Barnett had originally aimed for figures as high as $500 million.
http://bit.ly/aXKwd8
A former head of risk management at Goldman Sachs is reportedly starting up his own hedge fund firm.HedgeFund.net
Gregg Weinstein, who was the global head of risk management at Goldman is hoping to launch event-driven RocWood Capital by the third quarter, according to a Bloomberg report.
http://bit.ly/af9Axu
Thursday, June 10, 2010
Bernanke warns U.S. of 'unsustainable' debt level
By Jia Lynn Yang
Washington Post
Thursday, June 10, 2010
Thursday, June 10, 2010
The U.S. economy continues a slow, painful recovery, but Congress must prepare to address an "unsustainable" level of debt in the federal budget, Federal Reserve Chairman Ben S. Bernanke cautioned Wednesday. "Our nation's fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession," Bernanke told the House Budget Committee.The budget deficit was necessary to help get the nation out of recession, Bernanke said, but will have to be addressed in the long term, particularly in light of the European debt crisis.
As the U.S. economy improves and stimulus measures are phased out, Bernanke said, the budget deficit gap should narrow. But the country's aging population will make it hard to balance the budget, as the ratio of taxpayers to elderly people benefiting from social programs decreases.
Tuesday, June 1, 2010
JLN Managed Futures: June 1, 2010
Commentary
Ok everyone, May's over! And, since I'm writing from Chicago I have to mention the Blackhawks--its a law. At least I think it's a law. So, Go Hawks!
When we started this publication at the beginning of the year, I wrote about what I called a "trinity" of managed futures; liquidity, transparency, and reduced third party risk. These are the fundamental advantages of managed futures. Exchange traded futures provide superior liquidity to off-exchange transactions, this is fact. With exchange trading comes a level of transparency that is simply unachievable when you compare it to trading off an exchange. The publicly traded nature of futures contracts allows for visibility and price discovery that can't be achieved when the transactions involved are not open to wide public scrutiny. Moreover, because CTA's are not allowed to hold the funds of clients themselves, there's an added level of accountability that's absent from secretive hedge fund accounts--you don't have to trust your CTA to give you your correct position valued accurately, you're FCM should be showing you exactly what your manager has done for you, without any interference from your CTA --that's accountability and transparency amplified. Finally, during this whole financial mess and the continuing volatility there have been exactly zero defaults on exchange traded futures, which makes a pretty strong case for that reduced third party risk leg... So CTA's have a superior alternative investment vehicle to offer investors.
Yet, despite these critical advantages, the anticipated capital flow to CTA's is largely absent. Sure, the large established CTA's have seen some capital come their way in a "flight to quantity", but there's been no large scale movement to managed futures. So what gives? I think there's another trinity that many CTA's have not completed; trading, accounting, and marketing. Trading is the one leg that every CTA "gets". Obviously, that's the business we're in. But, for too many CTA's, its the less sexy, business bits that often fall short of target.
Accounting would seem to be obvious, but in depth analysis lies just out of the reach of many start-up CTA's. Do you have the capability to answer questions not addressed in your disclosure document? Maybe a potential investor wants to know your average winning trade, or what your intraday volatility might be, do you have a convenient way to derive an accurate picture for them? Could an investor walk in your office on any given day and get clear, easy to understand answers about how their investment is performing? Do you know what your Sharpe Ratio is?
Then there's the marketing. Yes, we know you have your Disclosure Document--as Brad Cole points out in this month's "Five Minutes With" interview, your disclosure document is a legal requirement, not a marketing tool. Have you taken the time to consider what makes you unique? Do you invest with yourself ? Who in the CTA world is your direct competitor--and don't you dare say everyone.... Be honest, if you're a trend following manager, your competition is not quantitative management programs, it's other trend followers. Do you know the markets you consistently correlate with, and those you don't? What kind of homework have you done when it comes to knowledge of the market for your particular style of management? Have you taken more than a few minutes to work up an "ideal investor" profile--someone for whom your program, whatever it is, is the right fit? If you've done all that , do you have a channel for feedback from your marketers and investors--communication is often overlooked even in comprehensive business plans, have you failed to consider it in your business plan? This month's "Five Minutes with" interview is with an experienced third party marketer--Brad Cole of Cole Partners. Brad's direct style offers a refreshing insight into what you need to have in your business plan to succeed as a complete CTA--one that not only trades well, but has enough investors to keep you in the game and making money for both yourself and your investors.
Five Minutes with Brad Cole, of Cole Partners
JLN Managed Futures interviewed Brad Cole, of Cole Partners in Chicago. Cole Partners specializes in marketing alternative investment managers to professional investors--Cole Partners fulfills the role often referred to as a "third party marketer". Brad Cole took a few minutes to share his views on what's needed in the marketing equation for a CTA--above and beyond performance.
Q: Can I get a thumbnail of your background?
A: When I got out of school I went to work as a runner at the CME in Chicago. I got involved there in the currency markets, and got to understand the different aspects and types trading, everything from floor trading to off the floor trading. I traded for myself for a while; there is an intellectual pull to try to figure out the market and beat it. I left the floor in the mid-'90's , and joined a CTA, here in Chicago. I worked at Sjo trading for seven years on the business development side. That's where I built out my marketing purview for CTA's on a global basis. I was with Sjo until '98. When I was with Sjo we hired a third party marketer who I was disappointed with. I didn't like their opportunistic approach and I thought I could do better. So I left Sjo and started my own third party marketing firm in '98. The idea was that I sell while being accountable and respectable to all sides of the equation--manager, investor, and myself. The plan was to work with just a few managers that we know very well, and with a very bright and professional investor base.
Q: From your perspective, where do you end up coming in contact with CTA's?
A: We represent all types of strategies in the "alternative investment world", the "CTA and quant world" we know well. We take inquiries from managers, we look for managers, we get referrals from investors and cap intro people. We've developed a network for manager referrals, and we reach out to mangers too. Unfortunately we can't work with alot of managers because our approach is labor intensive. Managers who are good at what they do are welcome to call us.
Last week I gave a speech at Morningstar about raising capital, and the question came up, "can you look at a manager with only a couple of million dollars under management?" and the answer is, yes we can, but in the current market environment it's very difficult to raise money for small managers. There is currently what I'd call a "flight to quantity" going on, where assets are chasing the highest quality mangers that were closed to new capital prior to the '08 crash and now they are open to new investment. I tell small managers that they should look for seed investors that can allocate 25 or 50 million. From time to time I can help find investors like that, but its better if the manger can find them, because it costs them less.
Q: What would you tell a CTA to have "done" before they even approach a third party marketer?
A: Have your business plan done for one thing. Be in the business, be in the game. If your in a trading shop now, or trading for yourself now, and you think "I should manage other peoples money", make a commitment, don't wait for a marketer to come "discover" you and release you from purgatory--it just doesn't work that way. A good marketer will help you flesh out the marketing aspect of your business plan. You have to remember that you're going in to business, not just trading. If trading is what you do best, you need other people to support you. You need to have an idea of what your future holds and what you're team looks like. You have to be able to describe you core competency , be able to describe how and why you make money--that's really really important. If a manger comes to me and says "I've got some proprietary algorithms", that doesn't cut it. My investor base is smart, they want to know what you do; why and how you make money. You've got to be able to show what it is that you do. Just saying "I've got some secret" that doesn't work. If you do have a special algorithm, you've still got to be able to account for how it works and under what market conditions it works or fails. The investor has a right to understand how it works so they know what to expect.
Q: What metrics do CTA's have to have "nailed" to attract potential investors?
A: Above the metrics, I want to know about a manager's point of differentiation -- What do you do? How are you different? What is it that you're providing an investor that they're not getting somewhere else? Nine out of ten times the person who's going to allocate to you has a series of other allocations going on. So they want to know how your return stream and behavior is going to be the same or different than their other holdings. In marketing we call it your "USP", your unique selling proposition. What is it that makes you different? For instance, in a land of "trend followers", maybe you're the "mean-reversion" guy. The differentiation will get you to the right door to knock on. And there will be a reason for them to answer that door. For example, if you approach a fund of funds to talk to their CTA guy, if you're a medium term trend follower, you're likely to go to the end of the line. On the other hand if you're arbitraging something off-beat, like mustard seeds to feathers, that might be cool. That might generate some interest. Then you can talk about the metrics.
Then you get to the returns and correlations. Correlation numbers themselves most investors are skeptical of, in part because they're not very stable. You've got to be able to demonstrate something beyond a three year rolling correlation, that's not enough information. They'll want to see an episodic discussion, "what happened in September of '08?" You want your return to be larger than your highest draw down and you want your return to be higher than your annualized volatility. If you're beating a '1' Sharpe ratio consistently, then you're doing something special. The hurdle is not too high, but not a lot of people do it consistently.
Q: What's a typical downfall for a manager's marketing materials?
A: Using phrases like "proprietary system"--that's got to stop. You've got to be able to describe what you've got. You've go to be able to say what you do and why you're different in five minutes. A manger has to be a good communicator. Your abilty to communicate will improve your investor's experience. If the client doesn't understand what he's getting in to, he may pull his investment at the wrong moment. What I'm saying is that manager communication skills are often overlooked. As a marketing agent we go through the manger's client communications and make sure things are being communicated clearly and succinctly. We make sure there's lots of "back-up' and examples, with plenty of quantitative verification of what they do. Another huge thing--the paper trail has to be crystal clear; Here's my broker, here's my administrator, here's who can write checks, here's how you can access me. That all has to be on the table and crystal clear. We advise manager's to have all top notch service providers, with current technology. A disclosure document is legal requirement, not a marketing tool. If you can't communicate what you're doing, and how you're doing it, people won't invest with you. It's not about a marketer doing it for you, the marketer opens the door, makes sure the sales process goes well and helps the investor arrive at the decision to invest or not. But it's still the manager that sells it. It's the marketer's job to make the best match between manager and investor. A marketer should get the meetings and the conference calls, but at the end of the day its the manager who has to be a good honest, straight-forward communicator. Successful mangers have to have an air of confidence, investors need to know that the manager is to going to protect your money and find profitable opportunities for you. Investors need to feel that manager's are working for them to the extreme. That’s why investors like to see the manager invest a substantial portion of their own net worth in their trading program: eat their own cooking if you will.
As a third party marketer it's my job to find the right investor for the right manger. You have to have a level of trust that you're marketer is working for you in the same way an investor needs to know a manager is working for them. To raise money, a manger has to be committed to the game and able to communicate that he has the ability to succeed. Keep in mind that asset raising isn't an overnight thing, it takes time and persistence.
Industry News
London’s domination of European hedge funds industry in question
by Margie Lindsay
Hedge Funds Review
May 31, 2010
Audio Programming
http://jlne.ws/av1pTy
US pension fund eyes commodity investments
By Gregory Meyer and Javier Blas
FT.Com
May 31, 2010
The US’s second-biggest public pension fund is poised to make its first investment in commodities as a hedge against the risk of rising inflation, in the latest sign of growing investor appetite for raw materials. The proposal by the California State Teachers’ Retirement System comes as US federal commodities regulators explore whether to impose limits on institutional investors’ exposure to raw material markets. Critics, including several senior lawmakers in Washington, worry that large investors helped inflate commodity prices in 2008 when oil, wheat, cotton and other markets surged. Gary Gensler, chairman of the US Commodity Futures Trading Commission, said last year that commodity markets experienced a “bubble” in 2008 fuelled by speculators.http://jlne.ws/aXmVp9
Managed Futures finish April on "High Note"May 27, 2010
Hedgeweek
Long exposures to equities and large speculative short trades in euro futures sustained manager performance.
The Lipper Managed Futures/CTAs index registered a positive return of 0.63 per cent for April (+1.30 per cent year on year). The degree of dispersion among individual fund returns declined from the previous month’s reading. A 31.66-percentage-point monthly performance difference for April divided the top and bottom performers of the actively reporting managers tracked by Lipper. Although of a lower magnitude, April confirmed March’s readings. Managers with assets in excess of USD45m returned a better average performance at 0.93 per cent month on month—19 basis points above the average reading for the strategy. Large managed futures managers returned a positive 4.66 per cent on average for the 12-month rolling period at the end of April 2010.
http://jlne.ws/aIGB4j
Hedge Funds Post Biggest Monthly Losses Since Lehman Crisis
By John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to theHRFX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow Index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.
http://jlne.ws/dzUTit
Robeco group aims to double Japanese pension assetsTaiwan News
June 1, 2010
Robeco Group, the Dutch money manager owned by Rabobank Groep NV, aims to double assets from Japanese pension funds within two years, said Tetsuya Tanaka, senior executive advisor of the firm's Japan unit.Robeco Institutional Asset Management B.V. Japan, which opened in Tokyo in 2005, has grown assets from Japanese pensions to 60 billion yen (US$657 million) and invested them in a managed futures strategy run by Robeco's Transtrend Inc. unit, Tanaka said. The strategy, which invests in financial assets ranging from equities to livestock, has returned 7.1 percent this year through April. Robeco, with about US$194 billion in total assets, aims to capture a slice of Japan's more than 60 trillion yen corporate pension market as funds seek to diversify investments away from traditional asset classes such as bonds and equities. About 37 percent of Japanese pensions surveyed by JPMorgan Chase & Co. said they expect to boost allocations to alternative investments.
http://jlne.ws/cc9R8j
Markets
Can the EU survive Europe's crisis?
By Jane Wardell
AP
May 31, 2010
Forged out of the ashes of World War II and the end of the Cold War, the European Union was meant to create peace and prosperity across the region. But Europe's debt crisis has laid bare deep financial and cultural divisions within the 27-nation bloc that may never be bridged. The fateful decision to make the EU effectively a halfway house — tying its member countries into a joint currency and interest rate decisions, while allowing them to retain control over national budgets and taxes — has left the fractured grouping at a crossroads.Further political and economic integration leading to a common treasury — a central government, in effect — could rescue the ailing 11-year old euro currency, and some say now is the time to sieze the moment.
But what the head orders is not always what the heart desires: Greeks, Germans and even eurozone outsiders like the British are fiercely protective of their independence, their languages and ways, including the right to decide how they spend their own tax dollars.
http://jlne.ws/dczxgK
Much ado about currencies
By Edward Russelll
Corporate treasurers like predictability. Stable markets mean cashflow projections for the short- to medium-term hold true and life is less stressful. Unfortunately, this is not a predictable world. Today, the gyrating euro-US dollar exchange rate is high on most treasurers' minds. Year-to-date the euro has depreciated against the dollar 14.3% to $1.23 this past Friday -- its lowest point in years -- while a chart of the exchange rate since May 2007 looks just like a cut away of the Rocky Mountains -- all peaks and valleys with very little stability. The value of the euro against the dollar peaked at $1.60 in April 2008. Exchange rate volatilty is a real headache for us," said Ben Ho, Asia-Pacific vice-president of finance and controlling at German consumer goods company Henkel. "We are having phone calls on a daily basis to try to minimise the exposure."
http://jlne.ws/diIcWE
Hedge Funds Sell Crude Fastest in Eight MonthsBy Asjylyn Loder
Business Week
May 24, 2010
Hedge funds sold oil at the fastest pace in almost eight months, cutting their bullish bets by 32 percent as crude prices plunged on concern Europe’s debt crisis will hurt energy demand. The speculative net-long position in crude oil futures and options combined on the New York Mercantile Exchange fell to 89,335 in the week ended May 18, the biggest percentage decline since Sept. 29, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders Report on May 21.
http://jlne.ws/9Q9s0B
Events
MANAGED FUNDS ASSOCIATION Forum 2010
June 8-9, 2010
The Drake Hotel, Chicago
Forum 2010 is MFA's managed futures and global macro investment strategies conference and exposition for professionals in managed futures, hedge funds, funds of funds and their service providers and investors. Produced by MFA, Forum 2010 will feature an extensive educational program, special networking opportunities, and an informative exhibition of products and services of interest to industry professionals.
http://jlne.ws/9E2MgL
Bad Behavior
Federal Court Imposes $1.4 Million Civil Penalty against David A. OwenCFTC.gov
May 27, 2010
The US Commodity Futures Trading Commission (CFTC) today announced that it obtained a $1.4 million civil monetary penalty against David A. Owen of Destin, Fla., in a consent federal court order entered by U.S. District Court Judge M. Casey Rodgers of the Northern District of Florida in a commodity fraud action. The consent order recognizes that Owen paid approximately $1.7 million in restitution in a related criminal action and permanently bans him from engaging in certain commodity-related activities, including trading on registered entities. The order, which arises out of the CFTC complaint filed on October 30, 2009 (see CFTC Press Release 5748-09, November 10, 2009), finds that Owen fraudulently solicited at least $2.5 million from individuals to participate in commodity pools he operated under the name, Oasis Futures. Owen lost more than $1.6 million trading commodity futures, and he concealed those losses through the issuance of false statements to pool participants, the order finds. Specifically, the order finds that Owen held himself out as a certified public accountant, tax attorney and financial advisor while fraudulently soliciting prospective and existing pool participants. According to the order, he falsely claimed to have expertise and a successful track record in trading commodity futures. He also misrepresented the risk of loss in trading commodity futures and issued false account statements showing profits on commodity futures trading that were not realized. The order further finds that Owen pressured individuals to participate in his pools by claiming that, based upon his expert analysis, if they failed to invest, they would miss a huge opportunity in the market. Owen also failed to disclose his prior criminal convictions for fraud.
http://jlne.ws/dn5bLy
NFA takes emergency enforcement action against Oregon firm System Capital, LLC and its principal
http://www.nfa.futures.org
May 28, 2010
The National Futures Association (NFA) announced today that it has taken an emergency enforcement action against System Capital, LLC (System Capital) and Joshua Wallace. System Capital is a Commodity Trading Advisor (CTA) located in Lake Oswego, Oregon and Wallace is the firm's sole principal and associated person. NFA issued the Member Responsibility Action (MRA) and Associate Responsibility Action (ARA) to protect the customers of System Capital because System Capital and Wallace solicited customers with false and misleading information and misled and lied to NFA in its investigation of the firm. The investigation was prompted by documents received by NFA from another NFA Member which contradicted the information NFA had on file for System Capital. During the investigation, Wallace admitted to preparing and distributing a fabricated report that purported to show that System Capital was audited by a nationally recognized public accounting firm and to providing information to potential investors that showed significant profitable performance which had been falsely represented as actual. System Capital and Wallace are prohibited from soliciting or accepting any funds from customers or investors, soliciting investments for any commodity pools or other investment vehicles, or placing any trades on behalf of customers, commodity pools, or investors except liquidation or risk reducing trades. Additionally, System Capital and Wallace are prohibited from disbursing or transferring any funds of customers, investors, or commodity pools over which they exercise control, or participants in any such commodity pools, without prior approval from NFA.
http://jlne.ws/csUlqF
CFTC Charges Two California Men, Ruben Gonzalez and Jose Naranjo, and Their Company, New Golden Investment Group, LLC, with Running a Multi-Million Dollar Ponzi Scheme
CFTC.gov
May 24, 2010
The U.S. Commodity Futures Trading Commission (CFTC) today announced that it charged Ruben Gonzalez of West Covina, Calif., Jose C. Naranjo of La Mirada, Calif., and their company, New Golden Investment Group, LLC (NGI), also of West Covina, with fraud and misappropriation in connection with a multi-million dollar Ponzi scheme. The CFTC also announced that it obtained an emergency order from Judge Percy Anderson of the U.S. District Court for the Central District of California, on May 20, 2010, the same day the complaint was filed. The order freezes the defendants’ assets and prohibits defendants from destroying documents or denying CFTC access to their books and records. The CFTC’s complaint alleges that since at least August 2008, Gonzalez, Naranjo and NGI fraudulently solicited and accepted approximately $3.65 million from at least 165 members of the Los Angeles-area Spanish speaking community for various investments, including commodity futures trading. The defendants falsely claimed to customers that they would double their money within a year in oil, gold, silver and other commodities.
http://jlne.ws/d6aXKu
Noteworthy
The Downside Of Absolute Return
Benzinga.com
May 24, 1010
http://jlne.ws/9tcroA
Why managed futures funds should be handled with care
Fund Strategy
May 24, 2010
http://jlne.ws/ayxdA8
Buffett Tried To Block Derivatives Back In 1982
By Robert Lenzner
Forbes.com
May 25, 2010
http://jlne.ws/9tgZqY
Ok everyone, May's over! And, since I'm writing from Chicago I have to mention the Blackhawks--its a law. At least I think it's a law. So, Go Hawks! When we started this publication at the beginning of the year, I wrote about what I called a "trinity" of managed futures; liquidity, transparency, and reduced third party risk. These are the fundamental advantages of managed futures. Exchange traded futures provide superior liquidity to off-exchange transactions, this is fact. With exchange trading comes a level of transparency that is simply unachievable when you compare it to trading off an exchange. The publicly traded nature of futures contracts allows for visibility and price discovery that can't be achieved when the transactions involved are not open to wide public scrutiny. Moreover, because CTA's are not allowed to hold the funds of clients themselves, there's an added level of accountability that's absent from secretive hedge fund accounts--you don't have to trust your CTA to give you your correct position valued accurately, you're FCM should be showing you exactly what your manager has done for you, without any interference from your CTA --that's accountability and transparency amplified. Finally, during this whole financial mess and the continuing volatility there have been exactly zero defaults on exchange traded futures, which makes a pretty strong case for that reduced third party risk leg... So CTA's have a superior alternative investment vehicle to offer investors.
Yet, despite these critical advantages, the anticipated capital flow to CTA's is largely absent. Sure, the large established CTA's have seen some capital come their way in a "flight to quantity", but there's been no large scale movement to managed futures. So what gives? I think there's another trinity that many CTA's have not completed; trading, accounting, and marketing. Trading is the one leg that every CTA "gets". Obviously, that's the business we're in. But, for too many CTA's, its the less sexy, business bits that often fall short of target.
Accounting would seem to be obvious, but in depth analysis lies just out of the reach of many start-up CTA's. Do you have the capability to answer questions not addressed in your disclosure document? Maybe a potential investor wants to know your average winning trade, or what your intraday volatility might be, do you have a convenient way to derive an accurate picture for them? Could an investor walk in your office on any given day and get clear, easy to understand answers about how their investment is performing? Do you know what your Sharpe Ratio is?
Then there's the marketing. Yes, we know you have your Disclosure Document--as Brad Cole points out in this month's "Five Minutes With" interview, your disclosure document is a legal requirement, not a marketing tool. Have you taken the time to consider what makes you unique? Do you invest with yourself ? Who in the CTA world is your direct competitor--and don't you dare say everyone.... Be honest, if you're a trend following manager, your competition is not quantitative management programs, it's other trend followers. Do you know the markets you consistently correlate with, and those you don't? What kind of homework have you done when it comes to knowledge of the market for your particular style of management? Have you taken more than a few minutes to work up an "ideal investor" profile--someone for whom your program, whatever it is, is the right fit? If you've done all that , do you have a channel for feedback from your marketers and investors--communication is often overlooked even in comprehensive business plans, have you failed to consider it in your business plan? This month's "Five Minutes with" interview is with an experienced third party marketer--Brad Cole of Cole Partners. Brad's direct style offers a refreshing insight into what you need to have in your business plan to succeed as a complete CTA--one that not only trades well, but has enough investors to keep you in the game and making money for both yourself and your investors.
Five Minutes with Brad Cole, of Cole Partners
JLN Managed Futures interviewed Brad Cole, of Cole Partners in Chicago. Cole Partners specializes in marketing alternative investment managers to professional investors--Cole Partners fulfills the role often referred to as a "third party marketer". Brad Cole took a few minutes to share his views on what's needed in the marketing equation for a CTA--above and beyond performance. Q: Can I get a thumbnail of your background?
A: When I got out of school I went to work as a runner at the CME in Chicago. I got involved there in the currency markets, and got to understand the different aspects and types trading, everything from floor trading to off the floor trading. I traded for myself for a while; there is an intellectual pull to try to figure out the market and beat it. I left the floor in the mid-'90's , and joined a CTA, here in Chicago. I worked at Sjo trading for seven years on the business development side. That's where I built out my marketing purview for CTA's on a global basis. I was with Sjo until '98. When I was with Sjo we hired a third party marketer who I was disappointed with. I didn't like their opportunistic approach and I thought I could do better. So I left Sjo and started my own third party marketing firm in '98. The idea was that I sell while being accountable and respectable to all sides of the equation--manager, investor, and myself. The plan was to work with just a few managers that we know very well, and with a very bright and professional investor base.
Q: From your perspective, where do you end up coming in contact with CTA's?
A: We represent all types of strategies in the "alternative investment world", the "CTA and quant world" we know well. We take inquiries from managers, we look for managers, we get referrals from investors and cap intro people. We've developed a network for manager referrals, and we reach out to mangers too. Unfortunately we can't work with alot of managers because our approach is labor intensive. Managers who are good at what they do are welcome to call us.
Last week I gave a speech at Morningstar about raising capital, and the question came up, "can you look at a manager with only a couple of million dollars under management?" and the answer is, yes we can, but in the current market environment it's very difficult to raise money for small managers. There is currently what I'd call a "flight to quantity" going on, where assets are chasing the highest quality mangers that were closed to new capital prior to the '08 crash and now they are open to new investment. I tell small managers that they should look for seed investors that can allocate 25 or 50 million. From time to time I can help find investors like that, but its better if the manger can find them, because it costs them less.
Q: What would you tell a CTA to have "done" before they even approach a third party marketer?
A: Have your business plan done for one thing. Be in the business, be in the game. If your in a trading shop now, or trading for yourself now, and you think "I should manage other peoples money", make a commitment, don't wait for a marketer to come "discover" you and release you from purgatory--it just doesn't work that way. A good marketer will help you flesh out the marketing aspect of your business plan. You have to remember that you're going in to business, not just trading. If trading is what you do best, you need other people to support you. You need to have an idea of what your future holds and what you're team looks like. You have to be able to describe you core competency , be able to describe how and why you make money--that's really really important. If a manger comes to me and says "I've got some proprietary algorithms", that doesn't cut it. My investor base is smart, they want to know what you do; why and how you make money. You've got to be able to show what it is that you do. Just saying "I've got some secret" that doesn't work. If you do have a special algorithm, you've still got to be able to account for how it works and under what market conditions it works or fails. The investor has a right to understand how it works so they know what to expect.
Q: What metrics do CTA's have to have "nailed" to attract potential investors?
A: Above the metrics, I want to know about a manager's point of differentiation -- What do you do? How are you different? What is it that you're providing an investor that they're not getting somewhere else? Nine out of ten times the person who's going to allocate to you has a series of other allocations going on. So they want to know how your return stream and behavior is going to be the same or different than their other holdings. In marketing we call it your "USP", your unique selling proposition. What is it that makes you different? For instance, in a land of "trend followers", maybe you're the "mean-reversion" guy. The differentiation will get you to the right door to knock on. And there will be a reason for them to answer that door. For example, if you approach a fund of funds to talk to their CTA guy, if you're a medium term trend follower, you're likely to go to the end of the line. On the other hand if you're arbitraging something off-beat, like mustard seeds to feathers, that might be cool. That might generate some interest. Then you can talk about the metrics.
Then you get to the returns and correlations. Correlation numbers themselves most investors are skeptical of, in part because they're not very stable. You've got to be able to demonstrate something beyond a three year rolling correlation, that's not enough information. They'll want to see an episodic discussion, "what happened in September of '08?" You want your return to be larger than your highest draw down and you want your return to be higher than your annualized volatility. If you're beating a '1' Sharpe ratio consistently, then you're doing something special. The hurdle is not too high, but not a lot of people do it consistently.
Q: What's a typical downfall for a manager's marketing materials?
A: Using phrases like "proprietary system"--that's got to stop. You've got to be able to describe what you've got. You've go to be able to say what you do and why you're different in five minutes. A manger has to be a good communicator. Your abilty to communicate will improve your investor's experience. If the client doesn't understand what he's getting in to, he may pull his investment at the wrong moment. What I'm saying is that manager communication skills are often overlooked. As a marketing agent we go through the manger's client communications and make sure things are being communicated clearly and succinctly. We make sure there's lots of "back-up' and examples, with plenty of quantitative verification of what they do. Another huge thing--the paper trail has to be crystal clear; Here's my broker, here's my administrator, here's who can write checks, here's how you can access me. That all has to be on the table and crystal clear. We advise manager's to have all top notch service providers, with current technology. A disclosure document is legal requirement, not a marketing tool. If you can't communicate what you're doing, and how you're doing it, people won't invest with you. It's not about a marketer doing it for you, the marketer opens the door, makes sure the sales process goes well and helps the investor arrive at the decision to invest or not. But it's still the manager that sells it. It's the marketer's job to make the best match between manager and investor. A marketer should get the meetings and the conference calls, but at the end of the day its the manager who has to be a good honest, straight-forward communicator. Successful mangers have to have an air of confidence, investors need to know that the manager is to going to protect your money and find profitable opportunities for you. Investors need to feel that manager's are working for them to the extreme. That’s why investors like to see the manager invest a substantial portion of their own net worth in their trading program: eat their own cooking if you will.
As a third party marketer it's my job to find the right investor for the right manger. You have to have a level of trust that you're marketer is working for you in the same way an investor needs to know a manager is working for them. To raise money, a manger has to be committed to the game and able to communicate that he has the ability to succeed. Keep in mind that asset raising isn't an overnight thing, it takes time and persistence.
Industry News
London’s domination of European hedge funds industry in question
by Margie Lindsay
Hedge Funds Review
May 31, 2010
Regulatory and other threats to London's pre-eminence in the European hedge fund industry was one of the topics discussed on the latest broadcast of the N@ked Short Club radio programme.
The European Union alternative investment fund managers (AIFM) directive, increasing taxation and other issues could threaten London’s hedge funds industry. The eurozone crisis and the possibility a double dip recession was debated by guests on the show. Other topics of interest included currencies, short selling bans and prime brokerage fees were also discussed. Ucits hedge funds, exchange traded funds (ETFs), swaps and the disintermediation of funds of funds were also topics debated on the programme.Audio Programming
http://jlne.ws/av1pTy
US pension fund eyes commodity investments
By Gregory Meyer and Javier Blas
FT.Com
May 31, 2010
The US’s second-biggest public pension fund is poised to make its first investment in commodities as a hedge against the risk of rising inflation, in the latest sign of growing investor appetite for raw materials. The proposal by the California State Teachers’ Retirement System comes as US federal commodities regulators explore whether to impose limits on institutional investors’ exposure to raw material markets. Critics, including several senior lawmakers in Washington, worry that large investors helped inflate commodity prices in 2008 when oil, wheat, cotton and other markets surged. Gary Gensler, chairman of the US Commodity Futures Trading Commission, said last year that commodity markets experienced a “bubble” in 2008 fuelled by speculators.http://jlne.ws/aXmVp9
Managed Futures finish April on "High Note"May 27, 2010
Hedgeweek
Long exposures to equities and large speculative short trades in euro futures sustained manager performance.
The Lipper Managed Futures/CTAs index registered a positive return of 0.63 per cent for April (+1.30 per cent year on year). The degree of dispersion among individual fund returns declined from the previous month’s reading. A 31.66-percentage-point monthly performance difference for April divided the top and bottom performers of the actively reporting managers tracked by Lipper. Although of a lower magnitude, April confirmed March’s readings. Managers with assets in excess of USD45m returned a better average performance at 0.93 per cent month on month—19 basis points above the average reading for the strategy. Large managed futures managers returned a positive 4.66 per cent on average for the 12-month rolling period at the end of April 2010.
http://jlne.ws/aIGB4j
Hedge Funds Post Biggest Monthly Losses Since Lehman Crisis
By John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to theHRFX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow Index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.
http://jlne.ws/dzUTit
Robeco group aims to double Japanese pension assetsTaiwan News
June 1, 2010
Robeco Group, the Dutch money manager owned by Rabobank Groep NV, aims to double assets from Japanese pension funds within two years, said Tetsuya Tanaka, senior executive advisor of the firm's Japan unit.Robeco Institutional Asset Management B.V. Japan, which opened in Tokyo in 2005, has grown assets from Japanese pensions to 60 billion yen (US$657 million) and invested them in a managed futures strategy run by Robeco's Transtrend Inc. unit, Tanaka said. The strategy, which invests in financial assets ranging from equities to livestock, has returned 7.1 percent this year through April. Robeco, with about US$194 billion in total assets, aims to capture a slice of Japan's more than 60 trillion yen corporate pension market as funds seek to diversify investments away from traditional asset classes such as bonds and equities. About 37 percent of Japanese pensions surveyed by JPMorgan Chase & Co. said they expect to boost allocations to alternative investments.
http://jlne.ws/cc9R8j
Markets
Can the EU survive Europe's crisis?
By Jane Wardell
AP
May 31, 2010
Forged out of the ashes of World War II and the end of the Cold War, the European Union was meant to create peace and prosperity across the region. But Europe's debt crisis has laid bare deep financial and cultural divisions within the 27-nation bloc that may never be bridged. The fateful decision to make the EU effectively a halfway house — tying its member countries into a joint currency and interest rate decisions, while allowing them to retain control over national budgets and taxes — has left the fractured grouping at a crossroads.Further political and economic integration leading to a common treasury — a central government, in effect — could rescue the ailing 11-year old euro currency, and some say now is the time to sieze the moment.
But what the head orders is not always what the heart desires: Greeks, Germans and even eurozone outsiders like the British are fiercely protective of their independence, their languages and ways, including the right to decide how they spend their own tax dollars.
http://jlne.ws/dczxgK
Much ado about currencies
By Edward Russelll
Corporate treasurers like predictability. Stable markets mean cashflow projections for the short- to medium-term hold true and life is less stressful. Unfortunately, this is not a predictable world. Today, the gyrating euro-US dollar exchange rate is high on most treasurers' minds. Year-to-date the euro has depreciated against the dollar 14.3% to $1.23 this past Friday -- its lowest point in years -- while a chart of the exchange rate since May 2007 looks just like a cut away of the Rocky Mountains -- all peaks and valleys with very little stability. The value of the euro against the dollar peaked at $1.60 in April 2008. Exchange rate volatilty is a real headache for us," said Ben Ho, Asia-Pacific vice-president of finance and controlling at German consumer goods company Henkel. "We are having phone calls on a daily basis to try to minimise the exposure."
http://jlne.ws/diIcWE
Hedge Funds Sell Crude Fastest in Eight MonthsBy Asjylyn Loder
Business Week
May 24, 2010
Hedge funds sold oil at the fastest pace in almost eight months, cutting their bullish bets by 32 percent as crude prices plunged on concern Europe’s debt crisis will hurt energy demand. The speculative net-long position in crude oil futures and options combined on the New York Mercantile Exchange fell to 89,335 in the week ended May 18, the biggest percentage decline since Sept. 29, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders Report on May 21.
http://jlne.ws/9Q9s0B
Events
MANAGED FUNDS ASSOCIATION Forum 2010
June 8-9, 2010
The Drake Hotel, Chicago
Forum 2010 is MFA's managed futures and global macro investment strategies conference and exposition for professionals in managed futures, hedge funds, funds of funds and their service providers and investors. Produced by MFA, Forum 2010 will feature an extensive educational program, special networking opportunities, and an informative exhibition of products and services of interest to industry professionals.
http://jlne.ws/9E2MgL
Bad Behavior
Federal Court Imposes $1.4 Million Civil Penalty against David A. OwenCFTC.gov
May 27, 2010
The US Commodity Futures Trading Commission (CFTC) today announced that it obtained a $1.4 million civil monetary penalty against David A. Owen of Destin, Fla., in a consent federal court order entered by U.S. District Court Judge M. Casey Rodgers of the Northern District of Florida in a commodity fraud action. The consent order recognizes that Owen paid approximately $1.7 million in restitution in a related criminal action and permanently bans him from engaging in certain commodity-related activities, including trading on registered entities. The order, which arises out of the CFTC complaint filed on October 30, 2009 (see CFTC Press Release 5748-09, November 10, 2009), finds that Owen fraudulently solicited at least $2.5 million from individuals to participate in commodity pools he operated under the name, Oasis Futures. Owen lost more than $1.6 million trading commodity futures, and he concealed those losses through the issuance of false statements to pool participants, the order finds. Specifically, the order finds that Owen held himself out as a certified public accountant, tax attorney and financial advisor while fraudulently soliciting prospective and existing pool participants. According to the order, he falsely claimed to have expertise and a successful track record in trading commodity futures. He also misrepresented the risk of loss in trading commodity futures and issued false account statements showing profits on commodity futures trading that were not realized. The order further finds that Owen pressured individuals to participate in his pools by claiming that, based upon his expert analysis, if they failed to invest, they would miss a huge opportunity in the market. Owen also failed to disclose his prior criminal convictions for fraud.
http://jlne.ws/dn5bLy
NFA takes emergency enforcement action against Oregon firm System Capital, LLC and its principal
http://www.nfa.futures.org
May 28, 2010
The National Futures Association (NFA) announced today that it has taken an emergency enforcement action against System Capital, LLC (System Capital) and Joshua Wallace. System Capital is a Commodity Trading Advisor (CTA) located in Lake Oswego, Oregon and Wallace is the firm's sole principal and associated person. NFA issued the Member Responsibility Action (MRA) and Associate Responsibility Action (ARA) to protect the customers of System Capital because System Capital and Wallace solicited customers with false and misleading information and misled and lied to NFA in its investigation of the firm. The investigation was prompted by documents received by NFA from another NFA Member which contradicted the information NFA had on file for System Capital. During the investigation, Wallace admitted to preparing and distributing a fabricated report that purported to show that System Capital was audited by a nationally recognized public accounting firm and to providing information to potential investors that showed significant profitable performance which had been falsely represented as actual. System Capital and Wallace are prohibited from soliciting or accepting any funds from customers or investors, soliciting investments for any commodity pools or other investment vehicles, or placing any trades on behalf of customers, commodity pools, or investors except liquidation or risk reducing trades. Additionally, System Capital and Wallace are prohibited from disbursing or transferring any funds of customers, investors, or commodity pools over which they exercise control, or participants in any such commodity pools, without prior approval from NFA.
http://jlne.ws/csUlqF
CFTC Charges Two California Men, Ruben Gonzalez and Jose Naranjo, and Their Company, New Golden Investment Group, LLC, with Running a Multi-Million Dollar Ponzi Scheme
CFTC.gov
May 24, 2010
The U.S. Commodity Futures Trading Commission (CFTC) today announced that it charged Ruben Gonzalez of West Covina, Calif., Jose C. Naranjo of La Mirada, Calif., and their company, New Golden Investment Group, LLC (NGI), also of West Covina, with fraud and misappropriation in connection with a multi-million dollar Ponzi scheme. The CFTC also announced that it obtained an emergency order from Judge Percy Anderson of the U.S. District Court for the Central District of California, on May 20, 2010, the same day the complaint was filed. The order freezes the defendants’ assets and prohibits defendants from destroying documents or denying CFTC access to their books and records. The CFTC’s complaint alleges that since at least August 2008, Gonzalez, Naranjo and NGI fraudulently solicited and accepted approximately $3.65 million from at least 165 members of the Los Angeles-area Spanish speaking community for various investments, including commodity futures trading. The defendants falsely claimed to customers that they would double their money within a year in oil, gold, silver and other commodities.
http://jlne.ws/d6aXKu
Noteworthy
The Downside Of Absolute Return
Benzinga.com
May 24, 1010
http://jlne.ws/9tcroA
Why managed futures funds should be handled with care
Fund Strategy
May 24, 2010
http://jlne.ws/ayxdA8
Buffett Tried To Block Derivatives Back In 1982
By Robert Lenzner
Forbes.com
May 25, 2010
http://jlne.ws/9tgZqY
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