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Archive for the ‘Uncategorized’ Category
Friday, February 24th, 2012
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Monday, January 23rd, 2012
Why was disclosure of critical MF Global documents delayed? Why were time stamps amended?
Critical documents related to MF Global’s financial condition appear to have been delayed for release by the Securities and Exchange Commission (SEC) at an important time just before a MF Global floated a bond offering to professional investors. While possibly a coincidence, approximately the same time the documents in question were finally made public, MF Global professional account holders were beginning to flee the company, leading to an eventual liquidity crisis and the firm’s bankruptcy.
The document in question is MF Global’s Annual Audited Report on Form X-17-A-5. What is critical about this report is that it contained information regarding of MF Global’s risky sovereign debt trades, including some subtle, yet important, details that were not available anywhere else. Had professional investors had this information weeks after the May 31, 2011 initial filing date, as is said to be typically the case with such documents, they may have avoided purchasing what ultimately became near worthless MF Global bonds. Here is the critical timeline:
• May 31, 2011: The date the SEC acknowledged receiving MF Global’s 2011 Annual Audit.
 Figure 1 (Above): Initial financial disclosure file stamped September 2, 2011 – well after the May 31, 2011 acknowledged filing date. MF Global floated an unsecured bond offering in August of 2011. • August 2, 2011: MF Global sold $300 million of now nearly worthless bonds to professional investors.
• MF Global’s 2011 Annual Audit document was initially file stamped by the SEC as received on September 2, 2011 (see figure 1). When the document was made public later weeks later, disclosing critical details of MF Global’s risky Sovereign debt position, professional traders were beginning to flee the firm. This fleeing ultimately caused a crescendo of MF Global account holder liquidations.
• December 14, 2011: SEC removes the MF Global Annual Report
• January 3, 2012: SEC uploads a new copy of the Annual Report with a different file stamp date. Curious written notations that appeared in the replacement Annual Audit may indicate SEC interest in MF Global’s sovereign debt exposure–the very exposure FINRA was said to be negotiating with the firm over during the summer of 2011. (Figure 3)
While the SEC is said to have no definitive timeline for publishing Annual Audit documents, compliance consultant Bob English notes these documents are typically scanned and uploaded within two to four weeks from receipt. “The process is: the documents are typically indexed and file stamped in the first week, then two weeks later they are scanned and uploaded to the public server,” he said. MF Global Inc.’s 2011
 Figure 2 (Above): Altered time stamp – taken off the SEC database in December of 2011 and replaced with a new time stamp indicating a May 31, 2011 filing date. filing, due to the SEC on May 31, would have been anxiously anticipated by astute investors. Rumors had been swirling throughout the futures industry the firm was in trouble, and industry participants could have used the information in the report for signs of trouble at the firm. When the May 31 filing did not appear it may have raised questions, according to Mr. English. Mr. English’s assertions regarding the delayed filing and document alterations are documented in a Forbes article by Francine McKenna. The key is to connect the dots. There was a bond offering that appears to have been held under questionable circumstances. There is significant “too big to fail” special privilege afforded to the president of a Futures Commission Merchant (FCM). The New York Fed would have never considered an FCM to walk up to the discount window, and yet Mr. Corzine once again received special treatment, as he is receiving special treatment in the investigation into MF Global. Mr. Corzine has yet to be questioned by authorities, something which legal sources say is unusual.
To further point out special treatment, Mr. English points out that the document was held by the SEC concurrent with negotiations that FINRA and the SEC were having with MF Global over foreign sovereign debt exposure, which has now been widely reported after the fact. “It appears as though someone at the SEC may have been holding the document while negotiating with Mr. Corzine over his sovereign debt exposure,” Mr. English speculated, noting that between the May Filing date and September release date FINRA and SEC negotiated with MF Global and finally demanded an increase of capitalization to support Corzin’s sovereign debt trade. He notes that the documents were de-indexed from the SEC database and then reposted–unusual activity given that a sampling of smaller brokerage firms found no instances of missing or amended audits. “Astute industry participants may have been watching for the Annual Audited report of the broker unit,” noted Mr. English. “That report did not surface until September at the earliest. This is clearly out of the norm with respect to how the SEC usually scans and publicly posts these reports.”
After reviewing the charges, SEC spokesperson John Nester said: “Generally, broker-dealers that carry customer accounts publish audited balance sheet reports on their own websites at the same time they are filed on paper with the SEC and available for public inspection. The reports are also scanned for posting to the SEC’s EDGAR database, but there is no deadline that establishes when they must appear on EDGAR. After it was posted in September, the MF Global report on EDGAR was amended to correctly reflect that it was filed May 31, 2011.”
SEC guidelines are apparently written with large loopholes regarding disclosure dates. While Mr. Nester’s comments point to the fact that while it might not be technically a rule violation, the special treatment provided Mr. Corzine should at least raise questions. As Mr. English notes in a survey of 20 mid-sized brokerage firms, there were no instances of pulling down documentation after the fact and changing of information.
To read the full article, click here.
All contents Copyright © Mark H. Melin, 2012. For additional information visit www.Go2ManagedFutures.com
Mark Melin is author of the book High Performance Managed Futures and taught managed futures at Northwestern University. He currently consults with professional investors regarding development of uncorrelated investment portfolios.
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Wednesday, December 28th, 2011
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Tuesday, November 29th, 2011
Our newsletter is out for the week, and it’s time for another managed futures spotlight.The last three years have been challenging for multi-market managed futures programs, to say the least. The cycle started in 2008 with the financial crisis. Most multi-market programs thrived in the fast paced trading environment of ’08, as the just the right mix of market trends and volatility mixed to produce one of the best economic climates CTAs have seen in decades.
 Since those historic days, multi-market managers have felt the full brunt of the financial crisis, with government bailouts and quantitative easing initiatives making markets more choppy (less trends) and much less volatile. The result has been average to subpar performance across the last 3 years, with multi-market managers struggling in 2009, making a moderate comeback in 2010, and down so far this year. One manager that has held up and produced consistent results during this tumultuous time for multi-market CTAs is Auctos Capital Management.
To learn more about the dynamic background of this QEP only program, click here.
To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.
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Monday, October 31st, 2011
Our newsletter is up for the week, and while we usually wait for Tuesday morning to post it to our blog, the subject matter this time around warranted the evening post.
It’s Halloween, and true to its nature, we’ve seen our own scary story unfolding in the futures industry with MF Global- one of the largest clearing houses in the world- filing for Chapter 11 bankruptcy today. While this event, in and of itself, would have been enough to shake the markets, the way the drama has unfolded has created a sense of total chaos for those who were unprepared for the storm.
We have been bombarded with calls and emails from concerned clients and industry participants. Everyone wants to know who is getting hit and what comes next. We can’t see into the future, but this situation has some distinct parallels with the Refco blow-up in 2005, and by looking back, we may be able to gleam an understanding of what market participants can expect as the saga continues.
So here it goes- how we got here, what it means for managed futures clients, and even more questions to pile on the heap.
Click here to read the full piece: http://bit.ly/tCeaLe
To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
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Monday, August 8th, 2011
As the US debt downgrade infects the stock market – an issue that could provide significant headwinds for stock investors over the next decade – it might be appropriate to recognize the value in building a truly defensive portfolio of diverse returns streams. To this end, it is useful to define the investment from a perspective not often considered: the performance drivers.
Our society is conditioned to invest by “buying” something, owning it and holding these investments in hopes the price moves higher. As you will see, a long only investment has several underlying correlation factors at the performance driver level that tie them together. It is common for financial professionals to discuss “diversification” with a stock market portfolio of different market sectors and geographic regions. But is such “diversification” really true? Nobel Prize winners have clearly stated that diversification with stocks is impossible due to systematic risk. Why is this?
It is commonly reported that the value of stocks, real estate and commodities are influenced by economic supply and demand. When the economy is prosperous, or the perception of economic growth is present, the resulting consumer demand and business spending tends to propel prices higher. Thus, to varying degrees, a significant performance driver that causes the value of stocks, real estate and commodity investments to rise or fall is economic supply and demand. This fact was graphically evidenced during 2008.
Due to this, the correlation discussion should be advanced by giving more serious consideration to the core performance drivers that underlay all investments, drawing the conclusion that it does not matter if the investment is in stocks from around the world in different market sectors, real estate in different geographic regions or commodities with a variety of different uses, these investments are hinged to economic supply and demand at the performance driver level to varying degrees.
What contributes to managed futures general lack of correlation to the stock market and other assets is the primary strategy performance driver is not necessarily hinged to economic supply and demand. From an asset correlation standpoint, this is reasonably unique and it is these core strategic performance drivers that should be given consideration when developing modern portfolios.
Understanding Managed Futures Performance Drivers
Understanding investment performance drivers is critical to understanding how the managed futures asset class integrates into a diversified portfolio. To achieve understanding, recognize that managed futures can go both long and short a basket of the four major asset classes, including equities, commodities, currencies and interest rates. As a result, in managed futures the performance of the primary trading strategies is often driven by the “market environment,” or more simply put the general price activity of an asset such as stocks or commodities. As you consider the example of market environments I’m about to describe, think about how the core performance drivers in managed futures differ from the other asset classes.
A stock might have a history consistently trading in what is known as a price “range” from $50 to $80, seldom moving out of this range. This “market environment” is commonly referred to as a “range bound” or “trendless” market. Conversely, if the price activity were to break out of the $50 to $80 price range and continue with momentum in a consistent direction either higher or lower, it would be considered a “trending” market environment. These market environments are factors that often influence performance of a managed futures strategy. In managed futures a strategy is the primary method used to determine how and when an investment manager executes trades. While fundamental traders exist, the majority of managed futures strategies are technical in nature.
The most popular technical strategy is trend following. The market environment most often influencing a trend following trading strategy is price persistence, which is the characteristic for the price of an asset to “trend” or continue in one direction. At a basic level, trend following programs work when they identify a valid price trend and then buy or sell in the direction of the trend, a strategy that most often benefits when the price of the asset continues in that direction of the trend. The direction of the price trend, higher or lower, is not as influential as the persistence and momentum behind the price trend. When markets are “trending” these trend following strategies, by definition, tend to prosper; conversely, when markets are “range bound” and inconsistent in regards to price trends, investors might expect these strategies to experience varying performance. Normally, in this environment markets are identified as choppy and volatile.
There are other strategies that determine how and when trades are executed. Within trend following there are various sub-strategies including counter trend trading, where the trader attempts to anticipate when a trend is ending. There are spread arbitrage programs, where buying one product and selling a related product makes this strategy’s performance driver temporary price dislocation and mean reversion. When the price of one product, such as gasoline, is dislocated out of line with historical price norms of another product, such as oil, the managed futures spread trader would typically sell the higher priced item and buy the low priced item in hopes that the prices would revert back to the mean, or the historical norms of their price relationships. Options strategies are often based on market volatility, with long options programs buying options, hence long volatility, and short options programs selling volatility, a strategy that can benefit from “range bound” market environments.
The key take away is that unlike many asset classes, managed futures is one of the few investments available that operate to the beat of a different drummer. The primary performance driver of the strategies is based on the market environment and price activity – factors not tied to any market moving higher in price or economic supply and demand, which is reasonably unique among major investments. This helps explain why managed futures correlation numbers and performance during stock market crisis or prolonged bear markets have, in the past, generally been so attractive and points to how advisors can differentiate themselves by offering truly asset diversified portfolios. Of course, past performance is no guarantee of future results.
When developing a modern portfolio, it is this lack of asset correlation at the performance driver level that is critical to successful implementation of an investment portfolio that has opportunity to perform in both bull and bear market environments. In later articles we examine the managed futures strategies in more detail and how managed futures performance drivers integrate into a balanced modern portfolio.
Explaining Correlation
When speaking of performance drivers we are talking on a strategic level, and now we will switch to mathematical analysis of correlation.
Managed futures have historically displayed lower or zero-correlation with other asset classes. Correlation is a statistical measure of how returns of two strategies move together over time: A correlation of 1 indicates the two returns move perfectly together, a correlation of 0 indicates common price movements are random or uncorrelated; and -1 indicates opposite movement.
As you would expect, managed futures is highly uncorrelated to the performance of the stock market, real estate and commodities, but here are a few interesting facts. Managed futures is also uncorrelated to the performance of general hedge funds and even the markets in which the managed futures programs invest. Consider two examples to understand just how uncorrelated managed futures is by looking at how agricultural managed futures traders are uncorrelated to the performance of the agricultural markets they trade, and how a managed futures program trading single stock futures is so very uncorrelated to the performance of the general stock market. In chapter nine of the book High Performance Managed Futures we point out a correlation chart that shows the Barclay Agricultural CTA Index exhibits a correlation of just 0.29 to the CRB Index, a common measure of the price of various commodities.
The key point is to understand that which is behind these numbers. The strategic reasons for managed futures lack of correlation to the stock market and even the markets in which the CTAs trade is that they can go long and short the markets and have different underlying performance drivers than most investments. The next step in this process is considering how this lack of correlation works to integrate this investment into a well balanced portfolio and the implications of doing so.
How Managed Futures Integrates into a Modern Portfolio
The diversification characteristics of managed futures is supported by research from Professor John E. Lintner of Harvard University, who demonstrated that it is desirable to invest in multiple asset classes with little correlation to one another. The performance driver concept takes this a few steps further, and points to how and why managed futures fits within a traditional stock and bond portfolio. This true asset diversification with uncorrelated investments is the goal of a theory known as “Modern Portfolio Theory,” developed by Harry Markowitz, who won a Nobel Prize for his efforts.
When developing a modern portfolio, it is this lack of asset correlation at the performance driver level is critical to successful implementation of an investment portfolio that has opportunity to perform in both bull and bear market environments.
This is a critical message that investors should understand, particularly as the largess of US Government debt becomes apparent to the marketplace.
About the Author: Mark Melin is author of three books, including High Performance Managed Futures, and has taught managed futures at Northwestern University in Chicago. Mr. Melin consults with pension funds, family offices and high net worth investors on developing uncorrelated managed futures portfolios. For further information visit his web site at www.Go2ManagedFutures.com or via e-mail at info@Go2ManagedFutures.com. All contents copyright (C) 2011 Mark H. Melin’
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CONTENT DISCLOSURE
This article and related communication substantially represent the opinions of the author and are not reflective of the opinions of any exchange, regulatory body, trading firm or brokerage firm. The opinions of the author may not be appropriate for all investors and there is no warrantee relative to the accuracy or completeness of same.
RISK DISCLOSURE
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. YOU COULD LOOSE ALL OF YOUR INVESTMENT OR MORE THAN YOU INITIALLY INVEST. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS.
THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (“CTA”). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (“CFTC”) REQUIRE THAT PROSPECTIVE CUSTOMERS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT’S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.
YOU ARE ENCOURAGED TO ACCESS THE DISCLOSURE DOCUMENT. YOU WILL NOT INCUR ANY ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, WHICH WILL ALSO BE PROVIDED TO YOU AT NO ADDITIONAL COST.
PFG BEST DOES NOT HAVE AN OWNERSHIP STAKE IN ANY OF THE CTAS WE RECOMMEND OR UPON WHICH WE PROVIDE RESEARCH. MUCH OF THE DATA CONTAINED IN THIS REPORT IS TAKEN FROM SOURCES WHICH COULD DEPEND ON THE CTA TO SELF REPORT THEIR INFORMATION AND OR PERFORMANCE. AS SUCH, WHILE THE INFORMATION IN THIS REPORT AND REGARDING ALL CTA COMMUNICATION IS BELIEVED TO BE RELIABLE AND ACCURATE, PFG BEST CAN MAKE NO GUARANTEE RELATIVE TO SAME. THE AUTHOR IS A REGISTERED ASSOCIATED PERSON AT PFG BEST.
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Tuesday, May 24th, 2011
We sometimes have clients who are attracted to managed futures by the various CTA indices, or have seen a program with 10 months of history and no losing months and want some of that performance for their own account.
Before letting them invest in managed futures, we usually take these investors to our website and show them the track record of Clarke Capital’s Worldwide program. See this, we say. This is what you should expect. This is what managed futures looks like.
Today’s managed futures spotlight is on an old stalwart of the managed futures industry, Clarke Capital Management. Clarke Capital was founded by Mr. Michael Clarke back in 1993 when managed futures and system trading were still in their infant stages. Since then, Mr. Clarke built CCM into a world class managed futures company, which it continues to be today. Now, after 18 years, Clarke Capital is ready for another chapter as Chad Butler comes on board as President.
Who is the Manager:
Michael J. Clarke, the manager behind Clarke Capital Management (CCM), is a bit of an institution in the managed futures space. With nearly 30 years of experience, Michael has seen his fair shares of ups and downs. From the first-hand witnessing of the 1987 crash to delving into the world of programming, his experience is as deep as it is wide.
Though his initial experience in derivatives was based in the options world, in 1989, he chose to break away and dive into the world of model development. After four arduous years of toil and sweat, he finally felt comfortable enough with his models to trade client money with them. His perfectionist tendencies paid off, as assets under management for Michael and Clarke Capital rocketed to $396 million by 2004.
For years, Michael immersed himself in his trade, coming up for air only to indulge in some tennis, poker or to enjoy the company of his lovely wife and twins. However, as Clarke Capital has continued to expand, changes have taken hold- especially over the past year. Michael continues to guide the firm’s strategic vision and core values as CEO, but day-to-day affairs have come under the purview of President Chad Butler in conjunction with the purchase of Clarke Capital by a Chicago based family office in 2010.
Chad is someone who is best described as a colorful character. A family man with a degree in biology whose resume boasts names like Walt Disney and whose passions include organic produce and breeding championship alpacas, he may not seem like the managed futures type at first glance. Don’t let his infectious laugh fool you, though- this man is managed futures through and through.
Mr. Butler began trading futures on his own in the 90’s, and by 1999, his passion for trading prompted him to develop a small CTA and brokerage of his own. When PFG Best offered him the opportunity to move to Chicago and aid in their marketing, he jumped at it, where he was able to enhance his skills in the world of marketing, programming and business development. From that moment on, there was no turning back. His journey in the world of futures trading took him from PFG Best to MF Global brokerage services, to RJO Futures sales to his current home at Clarke Capital. Almost instantly, Chad realized that he had found his professional home and a kindred spirit in Michael Clarke.
As he puts it, “The fit was right.”
Looking at the position Clarke Capital finds itself in today, we have to agree.
All other key personnel at Clarke remain intact, including Jim Anderson, who has over 20 years of experience in operations, with 9 as Michael Clarke’s right hand man. Dave Wesolowicz heads up compliance and has 30 years of industry experience. Finally, Terry Kennedy and Andy Owens head up programming with combined experience of 35 years. Mr. Clarke is especially proud that his company has had zero employee turnover since the inception of CCM.
How Does the Program Work:
Clarke Capital Management’s programs are a sort of microcosm of the managed futures industry, acting like traditional trend followers at times, and the newer shorter term trades at other times. This is likely because the base of all of their programs is a systematic multi-market strategy specializing in medium to long-term trend following.
The Clarke programs are designed to identify a trend as early as possible, get in line with that trend, and then ride that trend as long as possible. Sounds easy when boiled down to one sentence, but Clarke has found it infinitely more complex over the past 18 years.
Mr. Clarke and his programming team have developed all of the trading models used by the Clarke programs in house, with the original 10 models developed in the early 90’s after being in the development stage for 3 years before CCM was launched in 1993. Today, there are approximately 130 trading models in the Clarke Capital portfolio.
Clarke Capital has 7 different programs available for investment, with assets under management across all programs exceeding $130mm at the end of the first quarter of 2011. The programs share much of the same base logic, but differ in the number of models they use and market they trade. A breakdown of how the various programs differ is listed in the table below:
We list Clarke Worldwide in the first column, because it is one of the most popular programs, is considered the flagship program, and was ranked #2 in themost recent edition of Attain Capital Semi-Annual Top 15 CTA List (which we’re hopeful isn’t to blame for its drawdown since then…)
Worldwide is Mr. Clarke’s original program, and perhaps if you gave him truth serum, his favorite of all the Clarke programs. Worldwide has one of the longest track records in the managed futures industry, and according to Mr. Clarke, the program’s success can be attributed to the model development process as well as the proprietary fuzzy logic filter that is used to confirm system signals across all CCM models and programs. This filter is designed to measure trend strength across multiple time frames and analyzes market patterns over an 800-day look back period. The process identifies optimal market conditions and grants or denies permission to the model to take trade signals. In other words, the fuzzy logic filter is a pattern recognition model that confirms if market trends are strong enough for investment.
One interesting nugget on the Clarke Worldwide program is that it was originally launched as Clarke Domestic Diversified in 1993. In 1996, Mr. Clarke decided to add foreign markets for greater diversification and changed the name of the program to Clarke Worldwide to reflect this. However, he did not simply stop trading Domestic Diversified as he promised to continue offering this strategy to all clients who did not want to make the switch. Domestic Diversified continued trading until the late 90’s and performance is available for any Attain clients who request it.
As we have mentioned many times in this space over the years, risk management is the hallmark of any good trader, and in CCM’s case, they take care to ensure all of their models use a multiple “stop” approach including a hard dollar stop, trailing stop, and volatility stop. All stops work in the market on an intra-day basis, although they are based on end of day data. [Disclaimer: stops cannot guarantee an order is filled at the desired price] Other interesting risk management tools used include volatility filters that are embedded in the models, robust processing that indentifies outlier trade signals (bad data), and an automatic double check by the software to ensure all models have run properly each day (no doubt after coming in one morning many years ago and learning that they should have been making money on some trade for weeks, but missed the signal).
Other popular programs at CCM include the smaller minimum Clarke Global Basic and Clarke Global Magnum programs, which were primarily designed for smaller clients and have a much narrower focus on trade selection. Volatility and outsized price moves are the enemy of these programs, as they will skip many signals, and can get whipsawed more easily.
The other two programs on the Attain recommended investment list are Millennium and Jupiter. These programs require a higher investment level ($1 million and $3 million respectively) due to the higher number of positions taken. The advantage these two programs have in comparison to other CCM models is that they take signals across multiple time frames and inherently have an extra layer of diversification.
Finally, the Orion and FX-Plus programs get the “most overlooked” award at CCM. According to Mr. Butler, Orion is the most conservative of all the Clarke programs (if you can call a 29% drawdown conservative!) and is designed for investors who are looking for a more consistent approach to trend following. FX-Plus is a unique program that invests only in financials, currencies, and stock index futures. Considering the recent market environment, the FX-Plus program might have the most near term potential out of all the CCM programs.
Attain Comments:
At first blush, it may be hard for the average CTA investor to understand why we like Clarke. They may look at the max drawdown (and rightfully so) and say that this program has too much risk for the return. They would mainly be right, but our counter to that is a twist on the old trading adage – it’s not where you get out, but where you get in.
We are the first to admit that Clarke has had (and will in the future) some substantial drawdown periods, but we look at those not as a sign of danger, but a sign of opportunity. We analyzed the cycling back and forth of Clarke Worldwide in a newsletter last year, seeing them cycle back and forth between run up, recovery, and drawdown periods in the past with some frequency (usually about 3 year cycles).
If we accept that the Clarke is a volatile investment which cycles back and forth between run up, drawdown, and recovery periods, and accept that an investment isn’t defined just by its track record, but instead by where you, the investor, actually get involved with the program, then there is a lot to like about Clarke – with its penchant for serving up opportunities to get into the program at discounted levels and history of bouncing off those levels [past performance is not necessarily indicative of future results]. In fact, we just recommended getting in during this drawdown in a recent blog post.
In addition, with a track record stretching back to 1993, we like to counter that while there may be some warts on the Clarke track record – at least you can see them. Most other managed futures programs have only been around a fraction of the time Clarke has, meaning their warts just might not be visible yet. For us, there is some comfort in being able to see all of the bad spots. We have seen the drawdowns- the tough years in 2009, 2006, 2005, and 2001- and know that there will be more struggles to come in the future. But to us, that is a more complete picture than someone who hasn’t been around as long.
We also like Clarke because of the fuzzy logic filter mentioned above. This is a unique tool that no other trend follower (to our knowledge) is using. The ability to measure trends and compare them to what has happened in the past is an ingenious concept and one of the reasons CCM has been around for such a long time.
What’s not to like? Well the aforementioned volatility and drawdowns for one. But as discussed above, if you don’t like the drawdowns, wait until they have been hit, and then get in.
The only real point of concern we have with Clarke is the feasibility of the smaller $100k Global programs heading into the future. Both Global Basic and Global Magnum are mired in tough drawdowns and the recovery is going to be long and slow if market volatility remains high, as these programs are designed to skip trades when markets are really moving. We met with Michael Clarke in New York at the CTA Expo and he assured us that the Global programs are doing exactly what they are designed to do… as frustrating as that might be.
Clarke also does a few things which are a little out of the norm for CTAs. One, he doesn’t compound your capital for you and increase positions as equity increases or decreases, instead relying on the investor to provide instructions on when to increase or decrease treading levels. This has likely saved him in the past, as trend followers are notorious for building up profits, then putting on a greater number of contracts on new signals at the higher equity levels, only to see the trend environment go into a tough period right when more contracts were added, resulting in losses greater than the profits built up, despite the program as a whole not suffering as much. But it is worth noting that your capital would not have the compounding effect over his 15 plus years without intervention on behalf of the investor.
Finally, as we mentioned at the beginning, there is new ownership at Clarke and a new management team involved at CCM as they have brought on Mr. Chad Butler as President to help manage the day-to-day operations of the company. Mr. Butler would like to ensure investors that Mr. Clarke is still very much involved in CCM and that he has been privileged to join such an experience group of traders and programmers.
Not one to just take their word when client funds are at stake, we had Mr. Butler down in our office for a visit just last week. We are happy to report that we left that meeting knowing that Clarke is in good hands with Chad, and our opinion of Clarke (especially when in a drawdown) have not changed.
[Past performance is not necessarily indicative of future results]
To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive. Click Here.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System&Commodity Brokers. All Rights Reserved. Reprinted with permission.
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Monday, May 23rd, 2011
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Tuesday, May 10th, 2011
Fees, fees everywhere… it can be hard for an investor just journeying into managed futures territory to know which ones are necessary, and which ones aren’t- especially with new products claiming to offer exposure to the asset class all the time. We decided it was time to set the record straight.
Now, let’s be clear. Whether it’s through Attain, a platform, or a mutual fund, there will be commission rates, CTA management fees, and incentive fees to consider. In other words, unless you’re some kind of trading prodigy who can do it all on their own (which we’d wager is .1% of the population or less), you’re going to pay some sort of fee to access the managed futures space. However, how much you end up paying is up to you.
The Dreaded Load Fee
While the terms “front end load” and “no load” are rather common in the mutual fund world, the terms have (thankfully) not been very pervasive among professional Commodity Trading Advisor (CTA) programs. This is a good thing, as any mention of the word “load” involves more cost for the investor. Unfortunately, the practice of charging an investor a front end load to participate in a CTA program is becoming more and more common.
For all you investors within ear shot - DON’T FALL FOR IT - DON’T PAY AN UPFRONT SALES FEE.
We have a few problems with paying an upfront fee:
- The investor usually invests based upon a CTA track record, but that track record does not include the upfront charge.
- The investor stands to make considerably less with the CTA program over the course of the investment.
- It’s not a requirement for participation in the CTA program.
Load v. No-Load
A quick search on any mutual fund website will show categories of funds separated by load and no load. In fact, load funds usually don’t have any special qualifier, merely going by their names, while no-load funds tend to advertise the fact that they are such. What does all this mean?
Basically, with no load funds, every dollar you initially pay goes directly to the investment. Load funds, on the other hand, will charge you money to begin investing- typically between 2% and 8%. Usually, this fee is deducted from your initial investment, so a $1,000 investment paying a 5% upfront load would actually be paying $50 in expense right off the bat, and only investing $950. There are also back load and level load funds, but those have yet to rear their ugly heads in CTA territory, so we won’t confuse you with the details.
99% of all CTAs are “no-load,” meaning they don’t charge an upfront fee. So where do loads and upfront fees come in for CTA investments? What we’ve found is that brokerages are the ones instituting the fees. They simply will not advise the CTA to start trading until the fee has been paid. While, by law, the clients are informed of these fees and must agree to them, in many cases, they won’t know any better, especially if they’re new to managed futures and CTAs.
Three Issues with Upfront and Load Fees
1. Our first problem with charging an upfront fee is that the track record of the CTA investment is overstated for the investor who paid the upfront fee. Typically, investors make decisions about their investments based on the track record of the selected CTA. However, most of the time, you won’t find these upfront fees reflected in the CTAs performance.
We can hear your indignant cries a mile away, and completely agree. Performance should reflect the upfront fees, and regulations state that any such fee a CTA charges is reflected in their performance track record. But here’s the catch – if it’s not the CTA’s fee, but one charged by the brokerage, the CTA doesn’t have to include it in their track record. Because the brokerage firm isn’t managing the money - they don’t have to keep their own track record which reflects the fees either.
The National Futures Association sniffed this practice out in mid-2005, putting out an advisory that brokerage firms need to outline all fees an investor will pay in the form of a breakeven analysis which reflects the rate of return the customers must receive on the investment to break even in the first year. Still, the practice of not including these fees in the performance track record leaves far too much room for confusion, in our minds.
2. The breakeven analysis is all fine and good, but it still ignores the fact that the investor who pays an upfront fee will, by definition, under perform an investor who does not pay the fee. This is like lining up two identical sprinters in a race, but giving the one sprinter a 5 step head start. There’s no question who will win the race, and there’s no question the investor with a head start (no upfront load) will win the investing race against the investor paying the fee and starting out well behind.
Sales people who charge the fee may try and say that a small fee of under 5%, for example, won’t matter much over the course of a few years on an investment that may make 50% or more in a single year, but that argument forgets about the power of compounding returns.
The following graph shows the cumulative net profit of two fictitious investors in the Clarke Capital Global Basic program since its inception. The graphs assume both investors invested $250,000 into the program, but that the 2nd investor paid a 5% upfront load fee. This would have caused the second investor’s starting capital to be reduced by a mere $12,500. This may not seem like much compared to $250,000… but then you look at the performance.
As the graphs demonstrate, the investor who paid the load fee winds up with substantially lower total returns as of today. They’re missing out on $112,756.65. We don’t know about you, but in our opinion, it sure would be nice to have an extra $112k just laying around somewhere….
3. The final issue here is that you don’t have to pay the fee. Of all the CTA programs known to Attain, none require the broker to charge an upfront fee. Further, all work with several different brokerage firms, meaning if one broker is demanding you pay the upfront fee, you can merely open the account at a brokerage firm like Attain, who doesn’t charge the fee.
This is different than in the mutual fund world, and even in the hedge fund world, where there are a lot of load funds in which that is the only choice. Either pay the fee or don’t invest. But in the case of CTAs where you can go to a firm like Attain and not pay the fee, there is no sense in paying an upfront fee when there’s no need.
New Ways to access Managed Futures = New Fees
Seems like everyone is rushing into the managed futures space these days, launching “platforms”, public mutual funds, and privately offered funds allowing access to the Winton’s, Transtrend’s, and other big wigs of the industry. But along with these products come a whole slew of new fees to access managed futures.
Consider the following listing of fees we pulled from a few prospectuses we have looked at recently:
These fees add up in a hurry, with breakeven points for many of these products standing at 6% to 8% for the first year. We have already covered the problem with the load fee, which is just as pertinent in a fund product as it is elsewhere – and want to spend a minute getting into some of these other fees.
First up, the platform fee. Managed account platforms are a relatively new way to access managed futures, allowing well heeled investors relatively cheap access ($100K) to high profile managers with minimums in the 10s of millions. To accomplish this, the platforms essentially create a fund which opens an individually managed account with one of these managers (with the opening dependant on getting enough investors aggregate capital to meet the minimum). To cover their costs of starting and operating the fund, these platforms charge a ‘platform fee’ of between 0.30% and 1.50%.
Elsewhere, banks and brokerages may try and keep clients from going outside their brokerage to gain managed futures access by offering in house managed futures products (sometimes white labeled), which are essentially feeder funds into some of the top CTA’s own funds. For this access, they may again charge an up front load fee, and in addition, charge a management fee for running the feeder fund (even though it is only investing in another product), and/or an ongoing sales commission paid on the equity amount each year, and/or a ‘platform’ fee for providing the access to the high minimum manager.
And finally, there are the managed futures mutual funds, which attempt to track managed futures either by following an indicator (we’ve already aired our issues with these here and here), or by investing in (either directly or indirectly) individual CTA programs. The latter type look like the most expensive option for smaller investors – with load fees, ongoing sales fees, and management fees all coming off of the top before an investor can get to the meat of the returns.
To get a better idea of how all these fees can impact your bottom line, we took a look at the theoretical performance of a $100,000 investment with Winton Capital’s Diversified Program in 1997 to now. With all fees present, total returns were diminished to the tune of $400,000. We certainly could use an extra $400k- could you?
The bottom line? One, never pay an upfront fee. Two, if you are looking at getting managed futures exposure in your portfolio – make sure you know that doing so through platforms, feeder funds, and the newer managed futures mutual funds are the more expensive way to do so, while accessing managers directly via an individually managed account at a firm like Attain is the most cost efficient way to do so (as long as you don’t pay an upfront fee in your individually managed account).
The funds will argue that you need millions of dollars (and 10s of millions in some cases) in order to replicate the exposure they can offer in their products (which is why and how the market bears them charging all of the extra fees), and they have a valid point there. They are charging for access not readily available to those without 7 or 8 zeroes at the end of their net worth number.
But for those who are sufficiently well-heeled… paying the extra fees for access might not be the most cost efficient way to get managed futures exposure. For those who can afford it, individually managed accounts provide not just the transparency and liquidity usually associated with managed accounts (which the newer products have admittedly done a great job replicating), but also the control they need and want - with a lower cost structure. It’s a win/win in our biased opinion.
*Remember- the table above shows only ‘additional fees’. Standard commission rates, along with the CTA’s management and incentive fee apply, in ALL cases.
But we’re not the only ones who feel that way. We’ll leave you with a comment we received from Corestates, LLC- one of the many advisors who work with Attain to access managed futures:
“For us, with a multi-manager CTA fund and clients with investable assets in the millions – gaining managed futures access through individually managed accounts at Attain was the most cost effective way to get the exposure we wanted. We have used platforms in the past, and the technology, manager selection, and/or service did not justify the additional costs.”
Chip Bromley, AIF, CAIA
Head of Alternative Investments
CoreStates Capital Advisors
Couldn’t have said it better ourselves.
To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive. Click Here.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System&Commodity Brokers. All Rights Reserved. Reprinted with permission.
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Tuesday, April 5th, 2011
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