The Devil Is in The Details: Section Name

SECTION NAME
ISSUE 11 July 14, 2009
In This Issue
Founding Father Q&A
Jon Sundt of Altegris has picked some of the most successful commodity trading advisors early in their careers and allocated around $4 billion over the years. Here he explains how he makes investment decisions ................................................ 2
The Devil Is in the Details

Reviewing performance data for our Top Ten picks, Im always amazed at the wide variations among commodity trading advisors and global macro funds. So I was especially happy to get a chance to discuss this topic with Jon Sundt. Having invested with CTAs for decades, Jon has an impressive understanding of the industry and its fault lines. He talks about the key issues in picking managers in Founding Father. To see how big the differences among CTAs can be, take a look at Futures Lab. Investors remain very much interested in commoditiesa survey by IPE-Invesco found that around 55% of European institutions plan to increase their allocation to commodities this year. In the meantime, the ongoing public debate about commodities has added to the uncertainty. Were very glad that Danny Masters of Global Advisors made time to discuss the current market outlook for commodities in Insider Talk. And were delighted that Walker Todd set out his distinctive perspective on agricultural products in Practitioner Viewpoint. Their insights are particularly timely now as people talk about energy price volatility and the possibility of restrictions on futures trading. In Regulators & Courts we have the latest on this controversial subject. The viewpoints are as widely divergent as managers returns. The one thing Im pretty sure of is that futures traders will find ways to work around any development. Chidem Kurdas Editor kurdas@opalesque.com
Futures Lab
There are huge differences among commodity trading advisors. What does this mean for investors? ..................................5
Insider Talk
Daniel Masters, co-founder of Global Advisors and former head of energy trading at JP Morgan, discusses recent developments in commodity markets ....... 7
Practitioner Viewpoint
Walker Todd, an attorney and economist who worked for many years in the Federal Reserve System, sees danger in agricultural commodities ......................................... 10
News Briefs
Asset Flows, New Exchange, Changes at Brokerage and more ..............................12
Regulators & Courts
Hearing on position limits: Implications for commodity markets ..............................14
Top Ten
Highest-Return Programs for10 years ....15
Copyright 2009 Opalesque Ltd. All Rights Reserved.
OPALESQUE FUTURES
FOUNDING FATHER Q&A
Picking the Right Horses

What makes for success in selecting managers? We asked Jon Sundt, founder of Altegris Investments Inc. Mr. Sundt has an impressive track record as an investor. He picked some of the most successful commodity trading advisors early on, when they first started up their shops, and has allocated around $4 billion over the years. Here he explains how he makes investment decisions. Like many other managed futures pioneers, Mr. Sundt is an alumnus of Man Group. Currently he is chief executive and president of Altegris as well as of an affiliate that acts as a general partner to several hedge funds and commodity pools. Among his hobbies are horseback riding and surfing see the picture on the following page!
Opalesque Futures Intelligence: Why did you focus on CTAs initially? Jon Sundt: Back in 1987, I was trading options on the S&P 500. I used to get a popular weekly newsletter. After the market crashed in 1987, I saw a videotape about Paul Tudor Jones. I was struck by how different his mindset was from the newsletter writers. This film followed him for several months while he accumulated a position shorting the S&P 500. As I remember, he made over 110% in 87. I thought, this is the kind of manager I want to find and put my money with, a professional who has a properly audited track record and his own skin in the game. Thats when I decided to go after the commodity trading advisor market, including the many global macro managers registered as CTAs. OFI: How alike are global macro and managed futures? JS: Global macro and managed futures have a lot of common ground, but macro managers tend to be more discretionary while CTAs are more systematic. They may trade the same instruments but the approaches are distinct. A classic trend follower looks purely at price and does not care where interest rates are going. Trend followers tend to be agnostic about the market and dont have a view. Their philosophy is that price tells you all the information you need to know. By contrast, a macro guy wants to know why the spreads are widening or why the dollar is gaining. Ask George Soros where interest rates are going and he might not tell you but he has an opinion. His macro strategy is not based purely on price. OFI: How did you get into managed futures? JS: I quit options trading and learnt about managed futures. I came to know futures commission merchants, collected data on CTAs, produced reports for institutional and highnet-worth investors and developed software to monitor CTAs. In time, the software became more popular than the reports. I majored in computer science in college and we have designed some leading edge apps. We still use our own software to track detailed information for well over 1000 hedge funds and managed futures programs. OFI: When did you start own firm? JS: In the 1990s I worked as an independent broker, then joined a larger FCM in Chicago, which was sold to Man Group. For six years I was at Man Financial, as director of managed accounts for managed futures. We operated as a unit within the brokerage in the US and did business with some 100 CTAs, placing and clearing their trades. Institutional customers
Jon Sundt
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OPALESQUE FUTURES
FOUNDING FATHER Q&A

would come to us and ask for help in finding CTAs. In 2002 I left Man and rolled out my team as Altegris. We now have 62 people, over $2 billion in assets and do business with about 90 CTAs. OFI: Please describe your experience investing in managed futures. JS: We were early investors with major CTA players like David Harding of Winton, Michael Clark and CFM. We were Wintons first US account and Clarkes first account. When we first invested in Winton, they had just $25 million! Over the years weve probably allocated more than $4 billion to CTAs, including trend followers, high-frequency traders and discretionary traders that are typically commodities focused. We allocate to other hedge fund strategies as well. OFI: Whats the downside to managed futures? JS: One downside to CTA investing is that there are many players in this space who are not professionals. They may seem like professionals but when you look carefully under the hood, you realize that theyre not. This field has a very low barrier to entry. Someone can register, open a $100K trading account with his grandmas money, post three good years, hire a marketer and make a lot of people think he has the goods. Theres a qualitative issue here, over and above quantitative measures. OFI: What about the drawdowns? JS: The word drawdown does not appear in mutual fund nomenclature. If it did, people would not be talking about trend followers drawdowns, which in many cases is less than the drawdowns in the S&P 500 index. Managed futures can be a bumpy ride but you can say that about almost any investment. Theres no free lunch. Youd better be prepared. OFI: What do you look for in a manager, besides performance? JS: Performance is an attention getter but tells you very little about a manager. Say youre looking at a classic trend follower. You want a very smart group with mathematical-statistical grounding and respect for the markets. We like to see a combination of those skills, both theoretical grounding and practical application. Applying statistical models to real markets is different from working with theoretical models. You want the generals whove been in wars, not just designed wars in boardrooms. OFI: Whats special about managed futures due diligence? JS: Managed futures is not an investment strategy where either all the managers make money or they dont. It is not like conventional mutual funds. There is a huge dispersion between the best and worst CTAs. Different managers do different things. Active investors in managed futures have to pick the right horses. Thats a continual processyou cant invest and walk away. This is not a stock index where people leave their money for decades. I dont think you will find a successful index replicator in managed futures that will beat the best managers over time. OFI: How does investing with CTAs compare to investing with hedge funds? JS: Ongoing due diligence for a CTA is straightforward compared to other strategies. You get a managed account at a FCM and receive statements. The contracts are standardized, so you can easily understand what they are. OFI: Why are there so few large CTAs? JS: Building a successful CTA business over a long period is a very difficult endeavor. The transition to running a multi-billion business is really tough. Theres a major hurdle to crossing over from being a good system designer and trader to being an asset manager and building the infrastructure. Not everybody crosses over successfully. Its like the difference between designing the operating system, Windows, versus building the company, Microsoft. You no longer just tinker with systems, you have
The industry is littered with managers who had a pretty good value proposition seven or 10 years ago but do not now.
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OPALESQUE FUTURES
FOUNDING FATHER Q&A

to manage people and deal with asset growth. Ive seen some smart CTAs take their eye off the ball as their business grew. All decisions become more complex as the group grows and goes from one programmer to seven programmers, from an investment committee of one to a committee of five, has to decide how to allocate risk. OFI: What do you do about that? JS: We examine the business. How do they integrate new employees into the business, integrate new ideas with existing approaches, deal with angry investors when theres a drawdownwe do a lot of qualitative due diligence. OFI: Can a good manager lose the ability to make money? JS: The industry is littered with managers who had a pretty good value proposition seven or 10 years ago but do not now. We have seen some pretty good trend followers lose their edge. There are many reasons for thisthey have not done research to update the models, key people have left, the owners are no longer keeping their eye on the ball or they havent managed asset growth well. Investors need to do ongoing due diligence and ask themselves whether they want to keep their money with a particular CTA. OFI: Is there a capacity constraint? JS: Ive heard about capacity for a long time. There are some CTAs people thought might be too big at $10 billion that are now doing well at $20 billion! Certain trades and styles, especially high frequency trading, can get crowded. But I dont see how a CTA could get too big for trends in the dollar or interest rates. While some short-term models might no longer capture the opportunities they used to, long-term trends give CTAs a lot of breathing room. Right now, with assets down in the industry because of massive redemptions, capacity is not a problem for some strategies. OFI: What role do managed futures and macro play in a portfolio? JS: The natural extension of any portfolio beyond long stocks and bonds is to take advantage of the macro picture. The beauty of managed futures is that you have all four major asset classes stocks, bonds, currencies and commodities both long and short. That is a very powerful investment. The traditional 60/40 stock and bond portfolio got crushed in last 24 months and most savvy investors are looking for diversification and noncorrelation. Futures and global macro have the potential to provide that. Also, the illiquidity problems in other strategies show the advantage of managed futures and macro, which use instruments that are exchange-traded, marked to market daily and very liquid.
Active investors in managed futures have to pick the right horses.
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OPALESQUE FUTURES
FUTURES LAB
The Best vs. the Rest

In the previous pages Jon Sundt described a key feature of managed futures, namely the huge differences between managers returns in any given period. We asked for evidence and Mr. Sundts team kindly provided it. Here youll find a discussion of this issue and what it means for investing with commodity trading advisors.
CTA Returns Dispersion (July 2002 December 2008) Picking a better mutual fund manager may make a difference, but not a huge one. Mutual funds, say in actively managed large-cap US equity, correlate highly with each other as well as with market indices. They not only go up and down together but stay within a relatively tight band. By contrast, picking the right CTA or hedge fund can make the difference between a steep loss versus a substantial gain. The chart illustrates this using data from Altegris managedfutures.com database. International Traders Research, Inc., an affiliate of Altegris, supplies the performance information for alternative investment managers that is available on managedfutures.com. Each bar in the chart indicates the returns for 108 managers. The measure used is a two-year annualized rolling return for every 6 months. The darker part of each bar represents the larger number of managers that are clustered around a specific return. The groups mean for the period is indicated on the bar. The full period under consideration includes both great and lackluster years for managed futures as a whole. That is, during the years from 2004 through 2008 returns varied widely over time for the entire group of managers. There were years where the mean rolling return was around 3%, whereas in 2008 the
Note: Study shows rolling two-year annualized returns distribution for 108 CTAs. Mean of the sample on per period basis indicated by return percentage in center of bar chart. Source: Altegris managedfutures.com data base. International Traders Research, Inc., an affiliate of Altegris supplies the performance information for alternative investment managers that is available on managedfutures.com.
group averaged more than 19%. Regardless of the variation in the group mean across the years, at any given time there were some managers who lost money and others who made high returns. At the very extremes of this spectrum, one
finds 50 percentage point swingssome managers lost 20% while others gained more than 30%. Those are the tails of the distribution, but even if you disregard the extreme tails, picking the right manager still gives you a huge advantage. Or, from a glass-half-empty perspective, a
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OPALESQUE FUTURES
FUTURES LAB
bad choice could mean a loss even when the strategy does well. 2008 was a very good year for CTAs as a group, nevertheless there were CTAs that made a loss. Below the surface of returns is a complicated story. Mr. Sundt pointed out several reasons for the wide dispersion. One is that entry is relatively easy. As he put it, Someone can register, open a $100 K trading account with his grandmas money, post three good years, hire a marketer and make a lot of people think he has the goods. Many players in this space are not professionals, though they may seem like professionals, he says. Many entrants have a good idea that works for a while, but they lack the ability to develop a program that performs reasonably consistently over time. After a glowing track record that attracts some money, the luck runs out. But there is another major reason for the dispersion: CTAs pursue different approaches. They focus on different markets, have different time frames, look for different sorts of movements. Good managers can make a lower return than the average simply because their particular style does not work in certain market conditions. An investor has to consider whether the divergence in returns is due to differences in strategy, investment ability, business structure or some other factor. To make it even more complicated, competent managers can lose their edge over time. For instance, a system may cease making money because the type of trade it captures becomes too crowded as other traders recognize the same opportunity. A good manager can become preoccupied with personal issues or his golf game and less interested in the business. What all this means is that due diligence matters a lot and quantitative analysis of returns is at best a starting point. Qualitative questions are key to understanding why a CTA may be in a particular place in the wide distribution and what that may mean for the future. The questions have to be asked continually for successful active investing in managed futures. An investment that made sense three years ago may not any more. The decision of whether to stay with a manager, with the ongoing due diligence it requires, is as important as the initial investment decision.
Taking the two extremes of the spectrum, the difference between the top and bottom can be more than 50 percentage points in one year.
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OPALESQUE FUTURES
INSIDER TALK
Commodities Outlook
Remarkable as the past 18 months have been, commodity markets continue to gyrate in ways that catch the attention of politicians and regulators. At the same time, many investors look to these markets to diversify their portfolio. There are so many things going on that it is hard to get a coherent picture. The outlook for commodities remains very interesting, says Global Advisors in a commentary. We asked Daniel Masters, co-founder of Global Advisors and former head of energy trading at JP Morgan, to review recent developments and what these may mean for futures investors. Capital inflows from commodity indexes and exchange traded funds have become a major factor in the markets. Mr. Masters discusses the implications of this for investing. He started his career at Royal Dutch/Shell, where he managed a portfolio of North Sea crude. He moved to Phibro in 1987 and led the firms entrance into the electricity market. In 1994 he joined JP Morgan, where he established a proprietary trading program prior to being named head of the global energy trading business. Russell Newton and Mr. Masters started Global Advisors in 1999.
Opalesque Futures Intelligence: How do commodity ETFs relate to futures markets? Daniel Masters: The general investing public was sensitized to commodity prices through the events of 2007-2008 and learned to access those markets via ETFs. This allows people to get exposure to commodities in their 401(k) plan or other self-directed pension without having to buy futures. Now, some ETFs particularly in gold and silver are backed by the physical commodity, but the vast majority of ETFs are structured in a different way. They buy either futures contracts or some other derivative, usually swaps. So, commodity ETFs create a tremendous funnel for capital to come to futures markets. OFI: What effect does that have? DM: What it means is that the barriers between futures trading and stock trading are breaking down. The important point here is that the equity universe is many orders of magnitude bigger than the commodity or futures trading universe. Here is an indication of how big the equity market is relative to commodity markets. The entire holdings of commodity index investors is less than the market cap of Exxon, which is just one of hundreds of oil and refining companies. OFI: How is the commodities market changing? DM: The capital flows are too rapid and too
Daniel Masters
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OPALESQUE FUTURES
INSIDER TALK
large to be balanced by any form of real activity. Its like a lot of people crowding into a small boat. Equity investors are just too much for the boat. The number of ETFs is increasing. I suspect the next big rally in commodities will be driven by the ETF buyer rather than the traditional futures buyer. The ETF buyer is not subject to any of the rules that the CFTC applies to futures traders. OFI: Does that mean your models have to adapt to new conditions? DM: Our models are specifically designed to be responsive to enhanced levels of money flow. If there is a large flow of money to a commodity market, our models will pick that up and react to it. Thats a fundamental factor weve included in the system, so we dont need to make changes in the system because of ETF flows. If anything, as volumes pick up, our profitability tends to go up. OFI: How will the political-regulatory reaction to commodity prices affect markets? DM: I believe that in the next two to three years commodity prices are going to get so high, governments will almost certainly shut down the ETF link to commodity markets. There is too much capital that can be unleashed on the market via that route. Last year we were at the point of government getting involved. Were moving in that direction again. OFI: If the ETF flows stopped, what would happen to commodity markets? DM: Without the ETF money, markets would go back to where they were two or three years ago. We did pretty well then so were not worried about that, but it will be a dramatic shift. OFI: Early this year you removed the gating provisions contained in the terms of Global Commodity Systematic Fund, while hedge funds generally put down gates and froze redemptions. Why did you go in the opposite direction to other managers? DM: We decided to pass on our liquidity to investors in our fund in response to investor needs during the crunch. We trade 35 commodity instruments with about 27 underlying individual commodities. These are all listed on exchanges and highly liquid. OFI: Why is this year difficult for trend followers? DM: Our P&L has been flat. There were two reasons for that during the first half of the year. Because our program is designed with downside protection, it is very sensitive to high volatility. When commodity markets moved wildly in late 2008 and early 2009, our position sizes came down dramatically. Thats how we kept the drawdowns very limited last year during immense price reversals, even though were a momentum trend follower. That means that when the markets stabilize, were a bit under-invested because the models reacted to higher levels of volatility in the recent past. The other reason is that our positions became self hedgingnet exposure was quite small and spread across related commodities, because the models were
8
OFI: Whats the market outlook? DM: In the intermediate term, there are two broad scenarios. The combination of last summers collapse in prices and the general difficulty getting credit may serve to depress supply, causing prices to rise as demand recovers along with the global economy. Alternatively, commodity prices have already got ahead of themselves and economic growth will disappoint, causing them to fall again. Over the longer term, signs are pretty clear that well get commodity rallies. There is still a fundamental problem with the valuation of many commoditiesit is still below the cost of replacement. The price of natural gas in the US, for instance, has to be higher to sustain production. Also, central banks around the world are pumping a lot of currency into markets, which can boost asset prices. People say inflation wont happen because there is so much unemployment, but commodities will go up even with unemployment. Its a matter of how much. Theyll go up a lot more if the employment situation improves.
I suspect the next big rally in commodities will be driven by the ETF buyer rather than the traditional futures buyer.
not picking up trends. For instance, we were long some forms of energy and short other forms of energy. So, small position size and small net exposure gave us flat returns in the early part of this year. OFI: Whats happened in recent months? DM: In May our models sensed a significant pick-up in commodity momentum and shifted during the month from slightly short to increasingly long. May was a good month for us. June was more difficult. Markets were choppy. Our models reduced exposure somewhat
OFI: With all the volatility in the market, are investors still attracted? DM: Commodities are very much an investor favorite right now. Were seeing tremendous interest in our commodity product. Of course, the crisis did a lot of damage to investors, whether individuals, institutions or funds of funds. Around a third of the client base has disappeared in the last 12 months. What we sense from the people who are left is that theyre more cautious and want liquid investments where they will be able to get out when needed. That makes managed futures an attractive way to invest in commodities.
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OPALESQUE FUTURES
PRACTITIONER VIEWPOINT
10
Hot Money in Commodities: Danger Ahead

Several weeks ago we looked for insight as to whats going on in commodity markets and were lucky to connect with Walker Todd, an attorney and economist who worked for many years in the Federal Reserve System. Below he provides a perspective that is remarkably timely in view of recent regulatory discussions. Mr. Todd was a legal officer of the Federal Reserve Bank of New York and a legal and research officer at the Cleveland Federal Reserve Bank. He is now a research fellow at the American Institute for Economic Research. It is of relevance to this article that he grew up on a farm in Tennessee.
Commodity markets have changed because of the growing involvement of Wall Street firms such as Goldman Sachs, Morgan Stanley and others. We dont think of Goldman as a corn trader, for example, yet it has become a presence in commodities markets including the corn market. You can see the effect of financial speculation clearly starting in 2006, when the commodities bubble accelerated. By early 2007, the US price of corn broke all-time records. A bushel of corn went from less than $2 to more than $4 and at times up to $6 and as high as nearly $8. Even when the price came down, it remained about 50% above the 2006 average. The rise of corn prices happened in part because of natural factors like droughts in some areas and the demand for ethanol, whose futures contracts began trading that year, but those can account for only part of the price rise. Financial players coming in and pushing prices for their own reasons had to account for a significant part of the increase. While agricultural prices fluctuate year by year as harvests vary, the growing presence of financial actors has introduced a new source of instability. These players are not effectively supervised in their commodities trading, whether by the exchanges, the Commodity Futures Trading Commission, the Securities and Exchange Commission or the Federal Reserve. When I started working on the regulatory side of Wall Street four decades ago, a big price move like the one in 2006 might have resulted in regulators asking to see the futures contracts held by financial firms. There would have been an inquiry or investigation whether those with big net long or net short positions manipulated the market. But in the 2006-2008 price run-up, regulators did nothing.
Walker Todd
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OPALESQUE FUTURES
PRACTITIONER VIEWPOINT
Some 50 years ago, there was a scandal around the Maine potato futures contract. This ordinarily was a thinly traded market. A group of traders decided to corner the Maine potato futures contract, like the Hunt Brothers cornering the silver market. They sold so many contracts that the contracts outstanding exceeded the deliverable crop. Thats a kind of Ponzi scheme and regulators swore they would never let it happen again. But as commodity index investing channeled increasing amounts of money into futures markets in recent years, it has had effects similar to the potato futures scheme. crunch came with higher energy prices that pushed up agricultural costs. The crop was still bringing in $5.50 to $6.00 on the futures contracts, so despite the high costs of production farmers planted more corn. Then the price of corn collapsed below $4 a bushel during the harvest season, reaching a monthly low of $2.90 in December 2008. Farmers were squeezed between the cost of production and the falling price of the product. Financial players had a role in this. Farmers have to make a decision about planting in the winter and spring; they cant wait for the dust to settle from index investors in the futures market. So farmers had to act on prices that did not reflect the fundamentals of the corn market, which is now distorted because financial interests have a dominant role. Farmers have become very skeptical. Even with the demand for ethanol, which peaked in mid-2006 and mid-2008, there is much uncertainty about grain prices. One scenario is that demand will be weak and with a better-than-average harvest, therell be a price collapse. At this writing, that seems to be the more likely scenario. The underlying problem is that, although the financial players are buying the contracts, their demand may not be an accurate gauge of the end users demand. The alternative scenario, which now seems less likely for 2009 but could arise in 2010 and beyond, is that at some point farmers wont plant enough corn and then well run the risk of skyrocketing prices. One way or the other, by the end of the summer of 2009 we could have a blowup in the grain markets. Regulators and exchanges need to consider some key issues. Before youre allowed to take a big position in an agricultural market, shouldnt you have the capability of storing the physical commodity if you are not an end user? This question is especially relevant because you usually can play in commodity markets with a proportionately much smaller margin requirement than in stock or bond markets. We can and probably should allow financial firms to participate in commodity markets to increase liquidity. But you might want to make them post substantially higher margins (perhaps 50%) to discourage them from using their leverage to distort market conditions.
11
AIG and Corn Futures

Index-driven commodity prices have become side bets on the market. Originally the indices may have been meant to reflect prices established in the commodity markets, but now money flows are driving the indices and moving cash prices up or down according to the needs of the indices. The question is who should be the principal players in commodity markets, financial interests or end users and producers. Financial players do distort the agricultural market. We saw this when the insurance company AIG came near failure in the September 2008 credit crisis. AIG was long corn futures equal to some 5% of the entire US corn crop. And thats just one financial firm. Goldman Sachs and Morgan Stanley must have been holding contracts equal to large shares of the crop. I have seen rationally based assertions that Goldmans corn position was 50% larger than AIGs. Yet AIG was a major market maker in the corn futures index. The Fed, after taking over AIG, had the Chicago Mercantile Exchange and Board of Trade allow block trading normally not allowed on the exchanges to liquidate those corn futures. In the past, everyone had to sell in regular order and during the regular session so that the transactions would be reflected in the current price. A wave of selling would tend to depress the price. Do you think a farmer caught on the wrong side of the market could call a futures exchange and have a special trading session to liquidate his position? Think of the farmers who are on the receiving end of the market. Given the high prices in early 2007, farmers planted more corn. With the index money continuing to come in, prices remained high into the planting season of 2008. In the summer of 2008, the
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OPALESQUE FUTURES
NEWS BRIEFS
New Futures Exchange
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ELX Futures, an electronic exchange started by a consortium of Wall Street banks, launched US Treasury contracts last week. Newedge and MF Global are members. Marc Schultz, chief executive of Newedge Americas, says they have received significant interest in ELX Futures and are delighted to add ELX to the more than 85 exchanges where the firm offers clearing and execution services.
CTA Asset Outflow Continues

While hedge funds as a whole had a small asset inflow in May for the first time in nine months, commodity trading advisors experienced an outflow, according to Barclay Hedge. The information provider found that CTAs lost $4.1 billion, or 2.4% of assets, in May. Most of the outflow was from programs focused on financials and metals. Fund of hedge funds also lost assets, continuing a steep downward trend that started last year.
Record Volume at Dubai Exchange

The Dubai Mercantile Exchange had record trading volumes in late June after an announcement that the Dubai government will shift to a pricing model based on the DME Oman Crude Oil Futures Contract. The case for other producers in East of Suez markets to adopt the DME as the base line reference for their term contracts is now more compelling than ever, both in their own interest and that of their customers, DME chairman Ahmad Sharaf said in a statement. The Dubai Department of Petroleum Affairs will set the official monthly selling price for the Emirates crude oil based on a differential to the settlement price of the Oman Crude Contract.
Kospi 200 Futures Draw Non-Koreans

Kospi 200 futures trading volume rose in the second half of 2009 because of a continuing change in the composition of investors, according to Woori Investment & Securities, the top index futures and options brokerage in the Korean institutional market. Foreigners and securities firms accounted for larger shares of the market, driving volume growth (see graph).
Futures trading by investor
Call option trading breakdown by investor (volume)
In the Kospi 200 options market, non-Korean investors accounted for more than 40% of the call and put options (based on volume for calls and value for puts). Foreign institutions have emerged as options market makers. But unlike Kospi 200 futures, options trading volume stagnated this year. Woori sees declining volatility as the reason for the lack of growth in options trading.
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Source: Woori I&S Research Center
OPALESQUE FUTURES
NEWS BRIEFS
CME Offers New Petroleum Average Price Options
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CME Group launched trading and clearing for three new financially settled petroleum crack spread average price options contracts. The contracts, listed by NYMEX, are expected to be available beginning on July 19 for trade date July 20.
Changes at MF Global
MF Global entered fund management in the US with a new division that will offer investors access to commodity trading advisors via managed accounts and introduce clients to pre-screened CTAs and global macro traders. Through this natural extension of our core business, we are leveraging our US distribution network and decades of leadership in futures to broaden the services and products we offer our clients, said Bernard Dan, MF Globals chief executive. Adam Rochlin, head of the firms Alternative Investment Strategies division, says the brokerage is in a unique position to educate our clients and introduce them to professional managers who are otherwise very difficult to identify and access on their own. Separately, MF Global-owned Lind-Waldock, a commodity futures broker for individual investors in the US, started to offer similar services in Canada. Lind-Waldock will serve the companys Canadian retail clients from offices in Toronto, Montreal and Markham. In another development, a subsidiary of MF Global joined the Chicago Climate Exchange, a cap-and-trade system for six greenhouse gases. MF Global will act as an offset aggregator, that is, an administrative representative for owners of projects that generate carbon contracts.
Morningstar Adds Commodity Classes

Fund information provider Morningstar added six new commodity categories to its classification of mutual funds based in the United States. The new groups include agriculture, energy, industrial metals and precious metals. The funds can invest directly in physical assets or in futures and other commodity-linked derivatives.
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OPALESQUE FUTURES
REGULATORS & COURTS
14
Speculative Limits under Review

The Commodity Futures Trading Commission will hold a hearing on whether the Commission should set limits on speculative positions for all commodities of finite supplyin particular for energy including crude oil, gasoline and natural gas. CFTC chairman Gary Gensler says the agency currently determines limits on certain agricultural products but not on energy. While futures exchanges set limits and accountability levels in order to prevent congestion and manipulation, they are not required to enforce limits to prevent excessive speculation, he said in a statement. The Commission will seek views on applying position limits across all markets and participants, including index traders and exchange traded funds. The hearing, although treated as novel in the media, in fact follows up commitments Mr. Gensler made in May, when he was confirmed as the head of the CFTC. At that time Senator Bernie Sanders of Vermont blocked Mr. Genslers approval on the ground that during the Clinton administration this former Goldman Sachs partner and Treasury official worked to deregulate the financial industry. To get approval, Mr. Gensler promised to tackle a number of regulatory issues. Among other subjects, he stated that Position limits should be applied consistently across all markets, all trading platforms, and exemptions to them must be limited and well-defined. I will ask CFTC staff to undertake a review of all outstanding hedge exemptions Some futures industry players have already published their views. The IntercontinentalExchange pointed out: In response to volatile commodity prices, numerous studies were conducted by government and independent agencies worldwide during 2008 and into 2009. These studies largely concluded that supply and demand remain the fundamental drivers of commodity prices rather than excess speculation. It is clear that a number of issues will be raised in the discussion. For instance, ICE says current regulation by the CFTC forces ICE to adopt the position and accountability limits established by its competitor, NYMEX. ICE is provided no access to the information needed to judge the suitability or size of these limits, the exchange complained. Exchanges and market makers face greater uncertainty. The uncertain regulatory environment is the biggest challenge facing options exchanges and market makers, says Andy Nybo, a principal at Tabb Group. In a study, Mr. Nybo found that consolidation among option exchanges is inevitable, especially as new exchanges enter the options market over the next several years. There is a fear that a populist legislative or regulatory official could render the option market-maker business model obsolete with the stroke of a pen, he says. On the other side, businesses that are heavily dependent on fuel prices called on Congress to mitigate dramatic spikes in prices as occurred in 2008. The trucking industry, which spent $151 billion on diesel last year, wants Congress to increase the transparency of futures markets and impose aggregate position limits on energy commodities. Since March, the price of diesel has risen 56 cents per gallon despite supplies being at a historical high and diesel demand at a 9-year low, said American Trucking Associations chief executive Bill Graves. It seems that more is at play than just the fundamentals of supply and demand. How widely new limits may be applied is one of the many questions. Tightening up the classifications of hedgers and speculators is long overdue and justified, but having the CFTC impose position limits on the futures markets is unnecessary and counterproductive without similar position limits being imposed on the OTC markets, says senior analyst Paul Zubulake of Aite Group, a consulting firm. In any case, the CFTC is to hold a series of hearings in July and August, not only on position limits but also on other issues. Mr. Gensler appears to be determined to prove that he is an aggressive regulator, in keeping with the mood in Congress. Whether this will be useful for moderating fluctuations in the price of oil or other commodities is another matter. Commodity markets have had very volatile periods for as long as theyve existed, long before commodity indexes, ETFs or futures trading.
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Managed Account Research Inc. has recently added quite a few new commodity trading advisors to its database. But the managers in the ranking below have long-term track records. They were chosen for their 10-year performance through this May. Managed Account Research also ranks CTAs across various sub-strategies.
Top 20 Advisors for the Past 10 Years

Ranked by Compounded Annual Return for the Period June 1999 to May 2009
Manager and Program Saxon Investment Corp Aggressive Diversified Quicksilver Trading Inc Diversified Program Red Oak Commodity Advisors Impact Advisory Corp. MAP Tactical Investment Mgt. Institutional Dreiss Research Corp. Abraham Trading Corp. Diversified Mulvaney Capital Mgt. Ltd. Clarke Capital Mgt. Millennium LJM Partners Ltd. Ten-Year Compounded Return 25% 24% 21% 21% 20% 19% 19% 18% 18% 18% Ten-Year Worst Annual Drawdown -31% -26% -33% -6.8% -30.8% -32% -27% -41% -33% -63%
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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. FOR REPRINTS OF ARTICLES, PLEASE CONTACT: Denice Galicia dgalicia@opalesque.com
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ISSUE 11 July 14, 2009