Professional Documents
Culture Documents
In This Issue
Founding Father Q&A
Ken Tropin, founder and chairman of Graham Capital Management, tells us how he approaches market trends...........................................2
Futures Lab
Insight on how to make the tails of the distribution work for you in hedge fund investing ....................4
Insider Talk
Why Dont CTA Assets Grow? Two veterans offer a contrarian view.....6
News Briefs
Dunns futures fund is the top performer in a life insurance database .....................................8
Practitioner Viewpoint
Managers offer their perspective on how to turn market volatility into opportunity. ................................9
Manager Profiles
Top Ten
OPALESQUE FUTURES
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OPALESQUE FUTURES
In this business you need to have ample payoffs from your winning trades but make sure your losing trades do not generate big losses.
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OPALESQUE FUTURES
FUTURES LAB
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FUTURES LAB
Given the skew statistics, it is likely that monthly returns are not normally distributed. Thus it is not surprising that both systematic traders and dedicated short bias are in the bottom half of strategies when the Sharpe ratio is the metric used to measure performance.
A statistical test showed that only systematic trader returns are likely to be normally distributed. For all other strategy types, we can reject the null hypothesis of a normal distribution at the 99% confidence level. We can conclude that the Sharpe ratio is not a good measure of reward per unit risk. It is highly probable that when a Sharpe ratio calculated from monthly returns is used to assess risk, the estimated risk is too high for systematic traders and dedicated short bias, while it is too low for the remaining strategy types.
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OPALESQUE FUTURES
INSIDER TALK
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OPALESQUE FUTURES
INSIDER TALK
BI: To have access to big money you have to show you have operational stability. So you have to spend money to hire people and build a corporate structure. Many CTAs dont know how to build a business. They focus on trading and dont pay attention to the business side. They are not set up to deal with clients, dont have a business plan. Even their web sites are not good. OFI: What should CTAs do? FP: They have to realize how important fund marketing is. Take presentations if your presentation looks like everybody elses, the investor has no way to distinguish you from the crowd. You have to spend time to build relationships. Meeting a fund of funds representative once or twice a year is not enough. You have to contact several hundred people to raise money. It is now more complicated and expensive than it used to be. BI: CTAs need to decide how much time and money they can spend on marketing the fund, then make a plan. There are different types of marketing, depending on the resources available. For instance, marketing overseas is very expensive. If the budget is small, the plan may be to build relations with local people. OFI: Are there other common CTA mistakes? FP: Many CTAs stay with their original program and keep trading in the same way. I believe that at some point the program stops working or its reward-to-risk characteristics are no longer competitive. Long-term success requires that the trading style evolve as the competition gets more sophisticated and/or markets change. OFI: Would you identify some encouraging developments? FP: Fund seeders did not need to look for CTAs in the past, but maybe now they will. The lack of CTA incubators has been a major problemtheres little money to develop new talent. Another good thing is that sophisticated allocators now put CTAs and global macro funds into the same bucket. Pensions allocate much more money to hedge funds than to CTAs, so the latter have a better chance if theyre together with global macro. Splitting them is generally an arbitrary distinction.
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OPALESQUE FUTURES
NEWS BRIEFS
Dunns Is Top Insurance Fund
A managed futures pool, Dunns Insurance Dedicated Futures Fund LLC, was the best performer for 2008 in a specialized database of funds for variable-return life insurance wrap investing. Dunns earned 73% for the year and has a compound annual return of 21% since inception in November 2005. The database, covering insurance-dedicated vehicles in a wide variety of hedge fund and long-only strategies, belongs to Compensation Strategies Inc. The 2008 returns for 63 funds in the database ranged from (-)48% to 73%, according to Bill Dreher of Compensation Strategies. He said that with a couple of exceptions the funds did better than major market indexes. Dunns Insurance Dedicated Futures Fund is a multi-advisor pool which allocates its assets to six systematic trading programs, varying from short-term to long-term and from trend-following to pattern-recognition. All of them trade exchange-listed futures contracts. Martin Money Management Inc. is the Manager. Dunn Capital Management Inc. licenses the funds systems and provides trading and back-office services. To be treated as a life insurance policy for tax purposes in the US, funds have to be dedicated to this kind of investing. The clients typically invest through insurance companies.
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OPALESQUE FUTURES
PRACTITIONER VIEWPOINT
* As of 2/27/09 (1/31/09 for Hedge Funds) Managed Futures = Credit Suisse/Tremont Managed Futures Index, Cash = 3 mo T-Bill rate, Bonds = Vanguard Total Bond Market ETF, Hedge Funds = Credit Suisse/Tremont Hedge Index, Commodities = Reuters/CRB Commodity Index,, US Stocks = S&P 500 Index, Real Estate = Dow Jones Wilshire Real Estate Securities Index
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OPALESQUE FUTURES
PRACTITIONER VIEWPOINT
Ty Andros of TraderView:
Volatility will be with us in spades during 2009. As currencies gyrate, investors will run all over the place trying to escape the maelstrom, driving values of stocks, commodities, bonds, energy and other markets up and down. In 2008, the currency markets offered some of the greatest opportunities. Every currency had substantial moves and many times both up and down, as de-leveraging and stampedes of panic swept through the markets at different times. 2009 will be no different. Governments are implementing stimulus plans that dont stimulate, they just consume precious capital. The Obamination $920 billion stimulus bill is an 88% permanent expansion of government (new and permanent baseline budget increases and expanded entitlements without the revenues to pay for them) and only a 12% token real investment that will pay itself back from productivity gains. Of course, the $900 billion understates all the costs. Have you ever heard of a government spending item that comes in for less than projected? When looking at currencies, it is important to note that most currencies are actually IOUs from morally and fiscally bankrupt governments. Central bankers want to inflate away debts aggressively. Look for the Swiss franc, US dollar and Japanese yen to be strong as borrowers scramble to pay off their debts and convert the home currency into the currency in which they originally borrowed (yen, dollar, Swiss franc). Once this is done, look for the dollar to reverse probably mid-year and head radically lower. The Swiss will stay stronger, as will the yen; they do not face the money printing requirements in which the US will indulge.
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MANAGER PROFILES
Managers with diverse approaches describe their strategy and what they see happening in the markets. Their comments have been edited.
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MANAGER PROFILES
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Return since Inception (April 2008) for 5-Year Treasury Program: 9.5%
Comments: This is an enhanced benchmark return (portable alpha) managed account program that invests in US Treasury bonds.
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Partnership
Hedge Funds and CTAs
In todays volatile markets, you want to maximize your opportunities and minimize your exposure. We work with you to understand your strategies, anticipate your needs and optimize your resources through our ongoing investments in expertise and infrastructure. We offer prime brokerage services spanning all major asset classes, with cross-margining tools, cutting-edge risk calculation, start-up services and in-depth market intelligence all geared to taking you where you want to go. Newedge committed to helping you reach your goals.
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OPALESQUE FUTURES
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Position Limits
Another proposed legislation impinges on futures markets. Last month the House Agriculture Committee approved the Commodity Markets Transparency and Accountability Act 2009 and sent it to the House Financial Services Committee. Levin has introduced a similar bill in the Senate. Both bills instruct the Commodity Futures Trading Commission to set binding position limits for all commodity contracts while reducing the Commissions ability to grant exemptions. Some version is almost certain to pass, given popular resentment against what is seen as manipulative speculation in commodities, an impression created by high energy prices in the first half of 2008. Gary Gensler, President Barack Obamas nominee to head the CFTC, wrote in a letter to senators that if confirmed by the Senate, he looks forward to working with Congress, my fellow commissioners and other regulators to consider appropriate capital requirements, business-conduct standards, and other rules for derivatives dealers.
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He promised to institute position limits on futures trading as well other measures such as moving overthe-counter derivatives to exchanges and looking more closely into hedge funds, electronic markets and foreign exchanges operating in the US. Mr. Gensler is against the merger of the CFTC with the SEC, an idea that has been advocated on grounds that a unified agency would be a more effective supervisor. If the CFTC were combined with the SEC, CTAs and CPOs would lose their long-time regulator and perhaps become subject to the same rules as all registered investment advisors. Even without a merger, the two regulators signed a cooperation agreement about a year ago to establish a closer working relationship. Under this agreement, they share information and work together in regulating new products that may have elements of both securities and commodity futures or options.
Other Proposals
Regulatory proposals continue to come from other quarters. The CFTC recently welcomed recommendations by the International Organization of Securities Commissions, which argued for improved supervision of commodity futures markets and better global cooperation toward this end. The IOSCO identified factors that potentially inhibit access to information needed to understand price formation in a particular futures contract and hence hinder the ability of futures regulators to monitor and detect manipulation. In particular, regulators may need data about deals in physical commodities and over-the-counter transactions. The organization called for periodic meetings among futures market regulators to air concerns on market trends and developments and share surveillance and enforcement techniques. Meanwhile, the CFTC is accepting comments on two rules it proposed in February. One is about the periodic account statements CPOs are required to provide to their clients and file with the National Futures Association. The new rule specifies the detailed information that must be included in the account statements for commodity pools with more than one series or class of ownership interest and clarifies other issues such as the disclosure of net asset value and the proper accounting treatment of certain income and expense items. The second proposed rule open to public commentary specifies requirements for the acknowledgment letters that futures commission merchants must obtain from any depository that holds segregated customer funds or funds of foreign futures or options customers. Comments can be sent to secretary@ cftc.gov. CFTC acting chair Michael Dunn has been talking about the urgent need for increased funding for the Commission so that it can fulfill its regulatory duties. In the budget passed last month, Congress allocated $146 million to the agency. Mr. Dunn applauded the significant increase over past budgets. I strongly believe that with todays action, the Congress has demonstrated an appreciation for the Commissions need for additional funding, he said in a statement. With these additional funds the CFTC will be able to better protect the futures markets and the customers who use them from fraud and abuse.
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TOP TEN
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Managed Account Research Inc. January 2009 Top Ten Advisors with More than $10 Million Assets
Program Company Last Monthly Return
Option Selling Strategy Spread Trading Managed Accounts-Bespoke Global 20 Multi-Strategy Forex LJM XL Diversified Grains
Financial Commodity Inv. Emil Van Essen Varengold Alder Capital Ltd. HB Capital Mgt. Inc. Dominion Capital Mgt. Ltd. LJM Partners Ltd. ER Capital Mgt. Ltd. Quick Silver Trading Lt. Stategic AG Trading
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PUBLISHER Matthias Knab - knab@opalesque.com EDITOR Chidem Kurdas - kurdas@opalesque.com ADVERTISING DIRECTOR Denice Galicia - dgalicia@opalesque.com EDITORIAL ADVISOR Tim Merryman - tmerryman@opalesque.com CONTRIBUTORS Bucky Isaacson, Frank Pusateri, Pavel Topol, Ty Andros, Walt Gallwas.
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