OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

1
ISSUE 16 Nov 3, 2009

In This Issue
Founders Q&A
Campbells CEO looks at the development of the firm and the future of the industry . ..............................................2

A Change of Pronoun
Not too long ago a reader said to me, Youre always interviewing guys! It was true. Opalesque Futures Q&As have been with men, for the simple reason that there are very few women commodity trading advisors and hedge fund managers. So I was delighted to interview Terri Becks, president and chief executive of Campbell & Co., one of the oldest and best-known managed futures firms in the world. She has an insightful perspective on the firm and the industry. As icing on the cake, she is a pleasure to chat with. By the way, in her honor weve changed the name of our first section from Founding Father to Founders. We were also extremely lucky to have Jodie Gunzberg of AlphaMetrix give us an Insider Talk about new developments on the managed account front. Coming from the pension consultancy world, she uses a sophisticated portfolio construction approach to argue for mixing managed futures with long/short equity hedge fund investments. One of her colleagues, David Fisher, is a former agent of the US Secret Service who now heads investigations at AlphaMetrix. In Futures Lab he provides a close look at background checks, a topic that has become increasingly important in the wake of scandals. Elsewhere in this issue, you will find insights regarding recent performance in Index Tracker and trend analysis in Alan Rohrbachs Practitioner Viewpoint. And our Top Ten CTA programs are a sight to behold. Some of them started this year, others have been around for decades. They all achieved amazing returns in the first three quarters of this year despite difficult market conditions for managed futures. Chidem Kurdas Editor kurdas@opalesque.com

Futures Lab

How good is a background check? A veteran investigator discusses the key considerations. ..............................................6

Insider Talk

A managed account platform will offer a variety of liquid strategies. What does that mean for investors and managers?.........................................................8

Index Tracker

Recent performance and prospects for CTAs and global macro. ...........................10

Practitioner Viewpoint

Alan Rohrbach on trend analysis and current challenges. ...................................12

Top Ten

Best year-to-date performers ................15

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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

FOUNDERS Q&A

The Campbell Story

Founded in 1972, Campbell & Company is one of the oldest and largest alternative investment management firms in the US. President and chief executive officer Terri Becks tells us about the development of the firm as an institution as well as the evolution of its investment programs and client base. She offers a thoughtful perspective on the future of the industry. Campbell, located in Baltimore, manages global futures, currencies, and equities portfolios using systematic strategies. Widely regarded as an innovator in quantitative modeling, the firm has constructed models driven by both technical and macro/econometric data. It currently manages $4 billion in assets. Terri Becks Like any asset manager that has been in operation for 37 years, Campbell has had ups and downs. Through it all, the Campbell Composite Program has returned about 15% annualized since its inception in January 1972. Campbell made 4% this September, with gains from both technical and fundamental-based trading in currencies and equities. Keith Campbell remains the majority shareholder and chairman of the company, but his main interest is environmental philanthropy. In 1998 he founded the Keith Campbell Foundation for the Environment, which has since then given away $50 million, mostly in grants to clean up and preserve Chesapeake Bay. See http://www.campbellfoundation.org/index.html
Opalesque Futures Intelligence: How did you get into this field? Terri Becks: My background is in accounting and I previously worked for a public bank. When I was interviewed by Keith Campbell for a job in 1991, it was my very first exposure to managed futures, but he was open to the idea of hiring me, with my public company and related regulatory experience. He had already recognized the need to make the business more institutional. What Campbell did sounded very exciting and challenging. So in 1991 I joined the firm, which at that time was quite a small organization. I was employee number 16 and took over payroll from the head of research. Now 168 people work for Campbell, with more than half in research and IT. For most of my tenure here I was the chief financial officer. I became CEO in 2007. OFI: Is Mr. Campbell still involved with the firm? TB: Keith participates in strategic planning but he does not run the day-to-day business. OFI: How has the business changed since you first came through the door? TB: It has developed in several ways. When I joined the firm, the investment program consisted of trend following in US futures markets. At about that time we expanded to international exchanges and aroundthe-clock trading. We increased our financials exposure and added over-the-counter FX trading. Starting in 2000, we began using fundamentally driven models that incorporate other economic information besides price data. Weve also started systematic trading in cash equities. We have not abandoned trend following, it remains the core of our portfolio, but we are diversified across geographies, investment styles and more recently different time horizons. Our multi-strategy program is managed futures with a cash equity trading overlay.

We want there to be competition; more high-quality managers means more investors coming to the industry.

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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

FOUNDERS Q&A
OFI: Did your client base change? TB: We were probably the first manager to sponsor a public managed futures fund, the Campbell Strategic Allocation Fund. Its on dealer platforms and at one time was the largest public managed futures fund. It did very well and brought us a lot of retail clients, diversifying our investor base. Since then other managers have started public managed futures funds, some sponsored by dealer networks like Merrill Lynch. But we were a pioneer. OFI: What were the institutional changes? TB: Regarding the company infrastructure, we made an early decision not to try to escape from regulation but to build the business in a regulated setting. When we got into cash equity trading, that brought us into the securities world. So we registered with the Securities and Exchange Commission as an investment adviser. At that time, the SEC had contemplated mandating registration but many of our peers sought ways to avoid it. We decided we could deal with the requirements, so we became an RIA and launched Campbell MultiStrategy Trust, a registered investment company. OFI: Does SEC registration add a lot of work? TB: Complying with the requirements is labor intensive, but it means we have controls and best practices in place, which our clients appreciate. For instance, we have an independent review of our internal controls. It would be hard for a startup, but we have the resources for compliance and it is a comfort for the clients, especially after their experience in 2008 with valuation issues and frozen assets in hedge funds. We have a third-party custodian for all our clients assets, not just the public funds. That helps everybody sleep better at night. OFI: How does growing competition affect the firm? TB: We want there to be competition; more high-quality managers means more investors coming to the industry. When we hear about a fund blowing up, were upset. It gives the industry a bad name. But to survive in this business you need to have a large research team and develop new models. It used to be that you could have just one or two models, but now you need new ways to take advantage of evolving markets. The life cycle of a model is shorter because everybody is trying to do the same thing. OFI: As assets grew, did it become harder to find profitable trades? TB: Weve hit bumps in the road like everybody else. We lived through a tough time in 1993-1995 and were coming out of another one now. Capacity constraints were always on our mind. When I joined, people thought we couldnt grow beyond $300 million! Then we got to the first billion dollars with no sign that the trades were suffering. What we realized is that as much as our assets grew, the markets we trade in grew faster. Capacity is not really a hard wall, its more like a rubbery wall. Much as we tried to anticipate capacity problems, we have never actually encountered difficulties executing trades because of our asset size.

OFI: What differentiates Campbell from firms that do not have an institutional structure? TB: What we have at Campbell is a team approach that does not depend on any single person, so we have continuity. You can find hedge funds and managed futures shops with strong track records, but they have no continuity. If the managing partner retires or is hit by a truck, the firm may fall apart. OFI: With the growth in assets and the number of people, has the companys culture changed? TB: The culture that appealed to me when I arrived 18 years ago is still here. Because were in Baltimore, people who join us often move from the New York area or elsewhere. We reach out to their families and do what we can to help them feel welcome, so were family oriented. Another side of our culture is our interest in Johns Hopkins University here in Baltimore. Its a great place to incubate research projects. Were sponsoring graduate students in financial engineering and mathematics. Staying current with research is our priority, even as we foster out friendly traditional culture. OFI: What are the prospects for managed futures in current markets? TB: This is an environment that creates trends. And lets face it, most of us are following trends, one way or another, although the way we generate signals varies. September and so far October were very good months for us. OFI: Are institutional investors showing interest? TB: Last year was very hard on funds of funds. We are approaching endowments and pensions directly and find them open to managed futures. We have an international client base and weve become more active in Asia. OFI: Will retail investors go for managed futures? TB: The retail market now has a number of managed futures funds and were very happy to be in that market. There is a lot of diversity among the funds, offering investors choices. People can get tremendous diversification benefits from managed futures. Campbell programs have a low correlation not only with the S&P 500 as almost all CTAs do but also with other managed futures funds. People are starting to take their money out from underneath the proverbial mattress, they dont want to be too exposed to stocks and they need to put the money somewhere. Managed futures has what investors want. We offer transparency and liquidity.

Capacity constraints were always on our mind. When I joined, people thought we couldnt grow beyond $300 million! Then we got to the first billion dollars with no sign that the trades were suffering.

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EQUITIES

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CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. References to CME Group products include references to exchange-traded products on one of its regulated exchanges (CME, CBOT, NYMEX, COMEX). Products listed in these exchanges are subject to the rules and regulations of the particular exchange and the applicable rulebook should be consulted. S&P 500, S&P MidCap 400 and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by Chicago Mercantile Exchange Inc. NASDAQ-100 is a trademark of The Nasdaq Stock Market, used under license. Dow Jones Industrial Average is a registered trademark of Dow Jones & Company, Inc. and American International Group, Inc. (AIG). Nikkei and Nikkei 225 are trademarks of Nihon Keizai Shimbun Inc. and have been licensed for use by Chicago Mercantile Exchange Inc. Copyright 2009 CME Group. All rights reserved.

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ISSUE 16 Nov 3, 2009

FUTURES LAB

Checking Out Background Checks

After Bernard Madoff and assorted scandals, many investors look to background checks on traders and managers for early warning signs of trouble. But how do you know that a background investigator is doing a good job? What questions should you ask the investigator? Here are key considerations for checking whether the investigation is careful and thorough. Our source is David Fisher, who heads the AlphaMetrix financial investigations unit. He worked for the US Secret Service for 24 years, at offices in Washington, Miami and Chicago. He retired from the federal government in 2008. See the next section for more on AlphaMetrix, a managed account platform for commodity trading advisors and managers in other strategies.
The aim of a background investigation is to prevent bad outcomes. In a way, background checks are similar to what the US Secret Service does, trying to prevent bad things from happening, as opposed to investigating what has already occurred. A good background investigation is extremely valuable to the client who requested the check. If investigators do their job well, dangerous situations are averted. Here are the basic steps in any background check process: * The subject completes consent and release forms; * The information provided is independently verified; * All available public records pertaining to the subject are reviewed; * Information not provided by the subject is sought; * A thorough and accurate written report is prepared for the client; * Issues and concerns raised by the client upon review of the report are addressed. In this industry the subject is usually a manager or trader, but some managers have been known to turn the table and ask for background checks on would-be investors. A big part of a background check is to verify the information provided by the subject. The investigator looks for inconsistencies and gaps. If there is something the manager did not tell you, it may be significant. Suppose there are a couple of years unaccounted for, with no address given for that period. Well, that could indicate a period of time about which the manager is uneasy, perhaps for ethical or criminal reasons. It is up to the client usually a potential investor to decide how to use a background report. Not everyone will think that some discrepancy about a managers high school record from 20 years ago matters. But embellishing ones educational record, common though it is, suggests a lack of integrity. That could mean trouble down the road. As the client, you should get a clear answer when you ask about any part of the process and report. A good investigator will systematically go through the above steps and observe the following rules.

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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

FUTURES LAB
1. Look Beyond Databases

Information from commercial databases is typically the beginning of an investigation rather than its end point. For instance, a database search might verify everything a manager has stated, but also find an address the manager did not mention. While the manager may have simply forgotten to list a past address, it is also possible he did not include it because while living there he had a legal problem. Once the address is known, the appropriate court records can be searched to see if there was something more than forgetfulness behind its exclusion from submitted information. In fact, a review of the court records of all the counties where someone lived is necessary. Database records can indicate a direction to explore, but they are often insufficient or misleading. For example, records are frequently inaccurate and out of date and common names are difficult to authenticate. Further, due to the international scope of the hedge fund industry and its complex web of legal and regulatory codes, language barriers and local customs, background investigations often require boots on the ground. Because personal inquiries may be the only way to obtain accurate and useful details, the use of a global investigations network is what differentiates a true financial investigation from the standard background check.

2. Conduct Out of Sample Queries and Verifications.

The investigator needs to develop additional personal references beyond those provided by the subject. Often a subject will give his best friends as references, stacking the deck in his favor. I put little credence in listed references. It is best to put less emphasis on what they say about him, but to talk with them and try to find out who else might know him. Similarly, while talking to former employers the investigator should try to determine if the interviewee is aware of the subjects other previous employers. These days employment verification is almost automatic and employers are very restricted in what they can tell youoften no more than to verify that the person did work there and the dates of employment. Sometimes a co-worker will provide more information. You may hear the name of a company the subject worked at that is not on the list he gave. Did something happen there that he does not want to tell you? The investigator should call that company, check if the subject worked there and try to get more information.

3.Follow-Up on Issues Raised During the Background Check.

At this stage, there is additional information to be explored: * Fully investigate discrepancies and/or omissions * Consider the possibility some queries resulted in inaccurate information and follow up all leads to check for accuracy. * Fully synthesize all the data to insure there are no obvious discrepancies or missing pieces, conducting additional queries if an issue remains unclear. * Document all relevant information about a trader or fund manager, together with any clarifications or explanations by the subject himself.

4. Safeguard the Subjects Personal Information and Know the Laws.

A good investigator does not dig for dirt that is irrelevant to the verification. Some personal events, say a divorce, may not be germane to an investment decision. Investigators should know the laws and regulations regarding the use and safeguarding of sensitive information For instance, the Fair Credit Reporting Act requires that the subject be informed of the credit check. Sometimes credit reports are inaccurate and the subject should get a chance to correct mistakes. It is the investigators responsibility to properly handle credit reports. After the process, the completed background report and supporting documents should be carefully secured.

5. Monitor the Manager and Firm After the Check.

You need a way to periodically update the report. There may be new developments relevant to your investment. This is something to discuss with the investigator.

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ISSUE 16 Nov 3, 2009

INSIDER TALK

AlphaMetrix Diversifies: What Does It Mean?

AlphaMetrix, a provider of ready-made managed accounts for investing with commodity trading advisors, is adding new strategies to its platform. Jodie Gunzberg, who joined AlphaMetrix in June and is in charge of the expansion, discusses what this brings to investors and managers. Ms. Gunzberg, former chief strategist at Marco Consulting Group, a major consultant to union pension plans, has investment management experience across several asset classes. She started as an actuary, moved to real estate, fixed income and then equities. Since 2001 she has worked with hedge funds, managing a number of strategies and engineering risk systems.
Jodie Gunzberg

Historically there has been very low correlation between CTAs and long/short equity. Using our platform, an investor can combine these strategies to add higher return potential with lower risk to their portfolio.
Opalesque Futures Intelligence: Which hedge fund strategies do you see as promising? Jodie Gunzberg: Since the subprime market blew up in 2007 opportunities have been greater than ever, even as the industry went through a period of de-leveraging and some areas were badly hit. There is great opportunity especially in long/short equity. After long-only strategies lost a lot of money last year, investors want alpha from equities. They seek strategies that protect on the downside. OFI: What strategies do you see AlphaMetrix offering? JG: We already have FX funds and some global macro that involves futures trading, but any liquid strategy can meet the managed account requirements, whether in the equity or fixed income space.

OFI: How is that relevant for a managed account platform? JG: When you move away from long-only beta strategies, the issue is how you keep some of the characteristics that you like about traditional equity investments, such as liquidity, transparency and lower fees. Managed accounts give you certain alpha strategies with beta-like safety features. We see a huge demand for liquid alternative strategies and thats the direction in which were developing the business.

OFI: Which long/short equity styles are interesting? JG: We like mid-cap and large-cap styles, which provide more liquidity than small-cap stocks. Longonly large-cap has the most trouble producing alpha, so long/short alpha strategies in that area are desirable, coupled with indexing for beta exposure. Sector funds are also very interesting. Im thinking especially of long/short healthcare, technology, financial and energy funds. Sector specialists might be more skilled in investing in those sectors than generalists. Having them on our platform will allow with investors to create their own portfolios with low minimums and high liquidity.

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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

INSIDER TALK
OFI: Do these strategies have the same liquidity as CTAs? JG: Our goal is to make the accounts as liquid as possible. We will work with the managers to get liquidity. Overall, we will choose strategies that fit a similar managed account structure as the CTAs.

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OFI: On the basis of your pension experience, how would this setup fit a pensions needs? JG: 2008 changed peoples perspective. Like the rest of the world, pensions want more transparency and liquidity, proper custody for assets and lower minimums for extra diversification. Managed account platforms offers these features. For instance, required minimum investments are low. Once an account is funded, minimums drop to perhaps $100,000 and as low as $10,000 on retail platforms. By contrast, the minimum for a separate account with a hedge fund manager is typically a million dollars and up. Low minimums enable investors to construct a diversified portfolio much more efficiently. They get more managers with less money.

OFI: How will investors use the platform once it includes other strategies in addition to CTAs and global macro? JG: We can divide the universe into parts in order to give the investors the wherewithal to construct diversified portfolios. Investors will be able to combine fundamental versus quantitative strategies, shortand long-biased styles, concentrated and diversified funds. They can adjust allocations to get the desired levels of exposure to each asset class. We have drill-downs to managers position-level holdings so we can see how much overall risk there is in commodities, currencies, stocks, bonds and subsectors

OFI: Do investors see managers positions? JG: Investors do not necessarily see trade-level data; they might get sector exposures. It depends on the agreement they have with the manager and how many managers they invest with on the platform. It is important to managers that the world does not see their positions. But AlphaMetrix has the transparency to see all positions and investors take comfort in knowing that. We have an entire risk management department that not only generates risk measures but also monitors them.

OFI: Are there other ways investors can reduce their cost? JG: Another way to construct a portfolio is the core-satellite approach, using alpha and beta returns to decompose risk by the exposures of CTAs and hedge funds. You determine how much alpha and beta a manager has and how these overlap with other strategies. You dont want to pay so much for beta return, so you minimize the beta overlap.

We see a huge demand for liquid alternative strategies and thats the direction in which were developing the business.

OFI: What do investors want at this time? JG: Were seeing more interest on the equity side, which is partly because long/short equity is a major part of the market. Historically there has been very low correlation between CTAs and long/short equity. Using our platform, an investor can combine these strategies to add higher return potential with lower risk to their portfolio. And they can see all of their aggregate exposures. This an easy, one-stop solution for the client.

OFI: How would people construct portfolios using a managed account platform? JG: There are many ways of doing that. It depends on the investors objective. An investor looking for traditional diversification can find managers with low correlations to each other. You can specify a maximum drawdown to create a portfolio with maximum drawdown of less than that percentage. You could construct a volatility-adjusted portfolio based on risk budgets by specifying what percentage of exposure you want in equities, currencies, commodities, and interest rates. Each of these classes has a certain volatility. We have tools that clients can use to achieve their targets.

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We dont believe in one-size-fits-all.

Dedicated services for hedge funds and CTAs. Multi-asset prime brokerage, cross margining tools, cutting-edge risk calculation, start-up services and in-depth market intelligence. We work with you to develop customized solutions that match your needs. To help power your performance worldwide.

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ISSUE 16 Nov 3, 2009

INDEX TRACKER

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Good Month for CTAs and Macro

Managed futures had strong returns in September, moving indexes to positive territory after losses in the first half of the year. Market conditions also favored global macro. Several reports predict that the favorable conditions for futures trading strategies will continue. Scandinavian financial group SEB has a positive view of commodity trading advisors and global macro. CTA strategies have had a little tougher time this year compared to their successful 2008, but as markets stabilize further and trends become established, they will increasingly come into play, according to SEB. While databases contain different groups of managers and may use different methods, in general CTAs did better in recent months and some CTA indexes turned flat-to-positive year-to-date (table below). September marks the third month of positive performance for the strategy, which derived the majority of its gains from equities, long-term bonds, currencies and short-term interest rates, supported by many governments continued stimulus plan implementations, Credit Suisse/Tremont analysts wrote regarding managed futures. The gains were across the board. All eight components of the Barclay managed futures index were in the black in September. Diversified traders were up 1.13%, systematic traders 0.87%, currency traders 0.6%, and financial and metals traders 0.26%. TABLE
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September

YTD as of September

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Futures

Credit Suisse/Tremont Barclay CTA Index Greenwich

2.97% 0.96% 1.8%

-4.2% 0.08% 0.2%

Global Macro
Credit Suisse/Tremont Barclay Hedge Greenwich
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2.77% 2.77% 1.6%

9.09% 6.34% 9%
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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

INDEX TRACKER
Credit Suisse/Tremont says trend followers in particular had strong performance in September. However, energy

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detracted from returns as crude oil ended the month slightly down after making volatile moves through the month. Most high-frequency trading funds also made moneysome short-term reversals caused losses in this style, especially in fixed income markets in mid month, but these were offset by gains in trades on the long-side.

Macro Recovery
Morningstar offered another perspective. The fund data provider says the Morningstar Global Non-Trend Hedge Fund Index which includes funds in global macro fully recovered from 2008 losses as of September. The recovery happened despite macro lagging the performance of other strategies this year. By comparison, hedge funds overall have not yet returned to their October 2007 peaks. The Morningstar 1000 Hedge Fund Index declined 25% through February 2009 and has recovered 20% in the last seven months, with 11.4% to go. The appreciation of the Australian dollar and the euro versus the U.S. dollar, as well as spikes in silver and gold prices helped the global macro index rise 1.9% in September, says Morningstar. SEB chose macro as one of the most promising investment areas. As for global macro strategies, the skill of the manager determines the return to an even greater degree. Properly handled, they offer fine opportunities to generate good returns in relation to risk, says the SEB report. Global macro returns year-to-date are very widely dispersed, suggesting that managers have been pursuing divergent investment themes. From January through September 2009, the top global macro fund in the Credit Suisse/ Tremont database raked in 111%, while the worst-performer lost 100%. Managed futures had significantly narrower dispersion among funds, with the best performer at 34.5% and the worst at negative 29.4%. Credit Suisse/Tremont says quantitative macro managers had a similar turnaround as managed futures and some of the sources of profits were similar, particularly in currency trading, where many bet on the Japanese yen strengthening against the US dollar and the euro and also went long the Australian dollar and short the US dollar. Despite further improvement in economic indicators, the potential outcomes following stimulus and the restocking cycles remain wide, which continues to provide a number of opportunities for global macro managers, according to the report. Macro funds retain high levels of cash by past standards. Hence managers are in position to take advantage of long and short opportunities in a range of markets, from commodities and FX to equities and interest rates.

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ISSUE 16 Nov 3, 2009

PRACTITIONER VIEwPOINT

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Our author is Alan Rohrbach, president and chief analyst of capital markets consultants Rohr International Inc. Long a proponent of an approach that recognizes broad cyclical trends, he puts forth the reasons trend analysis is more important than ever for understanding markets in what he has christened the super-cycle correction. Mr. Rohrbach started his career on the Chicago Mercantile Exchange and taught the exchanges technical analysis course. He has worked with portfolio managers and dealers as well as corporate financial managers for over 25 years. Incorporating fundamental analysis and technical projections into a broad macro focus, he analyses trends in major financial markets along with energy and gold. This completes his trilogy of Opalesque Futures Intelligence articles on informed trend assessment.

Super-Cycle: New Quarter, Major Challenges

Market activity in the two months since my Super-Cycle Next Stage article (OFI issue #12, August 11, 2009) has reinforced the very different trend tendencies managers need to master in this new era. And the most challenging phase is about to begin. Post-crash markets have exhibited stop-start volatility and, once trends gain momentum, extreme moves. This is, in essence, a return from the 1990s Great Moderation to trends in the style of the late-1970s through the 1980s. That perspective raises significant questions about how managers who recently outperformed broad equity indices will react to any incipient top now that markets have reached more formidable resistance levels. Many mainstream managers will have reason to simply protect gains. This points to the potential advantages of the more nimble approach of managed futures and hedge funds. A brief word on complexity and risks is in order. Even the finest combined fundamental and technical macro analysis will not definitively predict market direction. It only provides indications of what the market is supposed to be doing. It is up to the experience and skill of the portfolio manager to know whether the market is confirming or aborting the predicted tendencies. And that includes adopting a suitable risk management regime. While I will avoid detailed technical analysis, some review of the trend is helpful to establish the benefits for a broad cyclical view and wellrounded trend analysis. Were talking as much about understanding the nature of the market environment in general as any specific directional trend projection.

Recovery and Resistance

As noted in my previous article, complaints of, How could we have known what was coming in 2008 were misguided. There were straightforward developments then, as now, that remain very useful. Managers should also be well-attuned by now to sustained aggressive trends. The updated DJIA trend in (weekly range) Chart 1 shows an impressive recovery from the March low. Above the previously noted 9,100-9,200 major Channel C resistance DJIA has now reached more formidable historic 9,700-low 10,000 resistance. That is the further aggressive 10% price adjustment anticipated in my July (D) assessment.

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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

PRACTITIONER VIEwPOINT
CHART 1

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While the major nature of the 10,000 area might be less than obvious from Chart 1, a quick glance at Chart 2 below is instructive. A whole series of trend decisions have occurred from that area. Whether that is in part psychological (the big penny effect) or purely technical, it is relevant to the next major phase of the equities trend.

CHART 2

The most important implication for fund managers is the amplitude of price swings. The recovery from the March lows has created very positive sentiment. There is a sense that a 10% correction would be a very attractive opportunity for investors who have failed to fully participate in the rally. Of course, that scenario would mean a retest of support around the last strong signal (C on Chart 1) back in the 9,100 area.
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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

PRACTITIONER VIEwPOINT

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Yet, any assumption that is all we can expect is fraught with risk. The fundamental aspect of any cogent macro trend analysis gives reason for pause. Strong economic rebounds followed all of the intermediate-term cycle troughs. Yet if this is indeed the Super-Cycle Correction, the recovery will take far longer to develop, and exhibit additional periods of extensive weakness along the way. That is reinforced by very strong Q2 corporate earnings reports fomenting only modest holding activity in equities. Recent weak economic data and cautionary words from central banks add to background concerns. The bottom line is this is the first global credit deleveraging since the 1930s, and further economic weakness is possible.

Comparison
CHART 3

Putting aside concerns about credit remaining tight and continued weakness in US housing, the comparison with the major previous case is daunting. While global stimulus and other programs may well prevent the worst aspects occurring, Chart 3 below is a stark reminder of how hard it is for markets to recover into major higher ranges after a debilitating shockwave.

Note that after both the initial aggressive recovery in 1930 and even the sustained bull trend of 1932-1937, there were extensive failures. Allowing that the 1930-1932 slide was due to factors not relevant in modern markets, the 1937-1938 selloff certainly was. A scenario with a similar percentage decline from recent highs would point to a retest or even modest slippage below the 8,200 area Channel B UP Break shown on Chart 1. That would be more so a 20 percent loss of value. There is also the more radical scenario for the nexus of weaker US home prices and still abysmal employment to bring about another bout of failed consumer confidence. In fact, one of the key aspects of any renewed economic weakness is how much faster than expected US Consumer Credit has been contracting. It is important to generally note the broad nature of basing activity both in the 1930s and even after the far less pernicious 1970s oil price shocks. Rather than calm expectation of a comfortable 10 percent correction, managers might benefit from ongoing review of which scenario seems to be occurring. They must also be ready to adapt to further directional trend activity. If we are indeed at a trend psychology inflection point, another 10 percent move is likely. The bottom line is that sanguine attitudes in the wake of the extended equities rally do not justify neglecting aggressive trend assessment.

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OPALESQUE FUTURES

ISSUE 16 Nov 3, 2009

TOP TEN We feature different top managers in every issue.

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This lineup is from ManagedFutures.eu, a database containing about 550 commodity trading advisor programs with combined assets of over $42 billion. We thank Pavel Topol for providing the information. The year-to-date returns are as of September.

Manager and Program YTD Return CKP Financial Associates AG CKP Masters Program, Aggressive Version Lindakivi Capital Management Theseus (Prop.) Treasury Management Services, Inc. Triad Trading Fund Carter Road LLC Options Overlay Michael J Frischmeyer Managed Account Program Taylor Growth Company Taylor Growth Co. Proprietary Account Dranger Capital Management, LLC Ascent Quantitative Investment Management LLC Quantitative Global Fund (3X) EuroCapital Management LLC Eurofin Kinkopf Capital Management, LLC Managed Accounts 136.8% 56.7% 56.2% 52.3% 51.1% 47.5% 43.8% 43.7% 42.9% 40.9% Inception 01/2009 01/2005 01/1995 01/2003 01/1985 05/2008 10/2008 06/2005 08/1997 01/2007

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ISSUE 16 Nov 3, 2009

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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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