Managed Futures as an asset class posted a return of -1.58% to start off the year, according to the Newedge CTA index.

The culprits in January as we saw in live accounts at Attain were the sell off in Gold and Silver, choppy conditions in energy markets, and a sideways bond market. The traditional, trend following managers whom did well in 2010 were the worst performers; while diversified option sellers whom struggled in 2010 performed best in Jan.

DISCLAIMER

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. Past performance is not necessarily indicative of future results. The data and graphs above are intended to be mere examples and exhibits of the educational topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System &Commodity Brokers. All Rights Reserved. Reprinted with permission.

We like to dive into the statistics after the end of each year to help answer that age old question: What’s your BEST managed futures program?  That question is always a tricky one, as depending on who is asking it, they may want to know any one of several variations on who is best. Best last year? Best for all time? Best risk adjusted return? Best in terms of lowest Drawdowns?

Our managed futures program rankings have developed over the years into a comprehensive tool which ranks commodity trading advisors (CTAs) across over 25 different metrics measuring performance, risk, experience, and more.  The rankings are designed to measure which programs are the BEST across several statistics, then see which are consistently among the top ranked on each set of rankings - and therefore the BEST overall.

This semi-annual newsletter highlighting the Top 15 in our rankings goes a step further, however; listing the Top 5 managed futures programs across several metrics, including YTD performance, total return, lowest Max DD, Sharpe, Sterling, Sortino, and length of track record.

We list the top 5 programs in each category to not only show who has done well, but also to show that there is much more to being top ranked than just last year’s performance. We are not content to merely show you the best performers last year or a list of the top performers of all time, and instead want the rankings to reflect the risk of the program, consistency of returns, and experience of the manager as well.

THE MANAGED FUTURES (CTA) PERFORMANCE IN THE FOLLOWING TABLES SHOW COMPOSITE PERFORMANCE AS REPORTED BY EACH CTA. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

We begin by looking at the number most people fixate on – the latest year’s returns – by showing which managed futures programs have performed BEST in 2010. This is unfortunately the measure most investors use to determine what investment is best for them, and the reason the year’s hot CTA is usually regarded as the BEST. The downside to this analysis, of course, is that it ignores risk. A high return is nice, but at what cost. The BEST performers of 2010 were the following:

While programs like Crescent Bay and Pardo enjoyed great years in 2010, a simple change to looking at total return over the life of the investment quickly inserts other, more traditional managed futures programs into the top 5 lists, such as Abraham Trading and Clarke Capital’s Global Basic program, who despite below average performance recently remain big all time performers.  The BEST programs by Total Return have been the following:

It’s easy to play devil’s advocate when looking at the total return table and say how it unfairly treats newer programs and advisors. It admittedly takes a while to build up significant total return numbers, and for that reason looking at the compound rate of return may be more telling. This measure is more of a “what you might be able to expect” than a “what has happened” measure. And sure enough, you will see that the Best by Compound ROR includes “newer” managed futures programs (newer is relative in this case, with a 5yr old program newer than a 15 year old program) like Emil Van Essen and Covenant Capital.

But what if we think of BEST not as the one that surpasses all others, but rather the one which is most suitable for me. The question in that case should not be, “What is your BEST Managed Futures program?” The question should be: “What is MY BEST Managed Futures program?”, or in a more grammatically correct form: “What is the best Managed Futures program for me?”

To find which managed futures program is the BEST for you, a little soul searching is required. Are you interested in the absolute highest return? Lowest drawdown? Best mixture of the two, perhaps? Or perhaps you think the best managed futures program is the one which has been around the longest. There is surely something to be said for longevity. You will quickly find that different managed futures programs head many of these lists, showing that finding the BEST is an elusive target indeed.

To begin to filter things down, we must incorporate the riskiness of each CTA. Many investors look at Drawdown to get a feeling of the risk involved. But concentrating solely on drawdown is just as bad as looking only at return. For starters, a CTA could have a very low drawdown because it has only been trading for a short period of time. The BEST Managed Futures programs for ‘lowest’ maximum drawdown have been [please note Mesirow Financial Commodities Low Volatility and Absolute Return programs which Attain clients are invested in would still be atop this list with drawdowns less than -1.6%, but both closed to new investors in 2010]:

But as nice as it is too see a low drawdown, low risk doesn’t really help if there is also no return. We can always invest in treasury bills at 0.13% per year if we want zero risk. The next logical step, therefore, is to evaluate which programs have the BEST return per unit of risk. This is accomplished through the use of several risk adjusted ratios. The first of these is the Sharpe ratio, which measures returns divided by risk (as measured by the standard deviation of returns, or volatility). The formula actually uses the amount of return over the risk free rate. Attain uses a constant of 2% as the risk free rate of return in its calculations, despite the recent drop of T-Bill rates to near 0%. The Managed Futures Programs with the BEST Sharpe ratios have been:

One of the problems with using the Sharpe ratio is that it punishes systems and CTAs for having a high upside volatility profile. For example, the Covenant Aggressive program had a 21.5% gain in February of 2008, which caused the volatility reading for the program to jump higher. But it can be argued that upside volatility is of no concern, as that means large positive monthly gains in the distribution of returns. Does it mean an investment is more risky if it has a huge monthly GAIN? Usually not - we think a huge monthly loss is much more important when measuring risk. There is a risk measure which eliminates the upside volatility skew from the Sharpe ratio by using the volatility of negative returns only. This measure is called the Sortino ratio. The BEST CTAs by Sortino ratio have been:

The Sharpe and Sortino ratios have a flaw, however, in that they only view the volatility of returns as the main ingredient of risk. This speaks nothing of what sort of drawdown had to be encountered to get the return. As many managed futures investors can attest to, it is the drawdown period which represents the most risky part of the investment, not necessarily the volatility of returns. The Sterling ratio measures returns divided by risk (as measured by drawdown). The BEST Managed Futures programs by Sterling Ratio have been:

One last piece if information it is important to take into consideration is the length of track record. The above tables have looked at managed futures programs with at least 36 months of data, and measures such as the Sharpe ratio should have at least that much data, if not more. The shorter the length of a track period, the greater the margin of error in the statistics, thus how long a program and manager have been around means a lot. The longer someone has been at it, the more faith we can put in the stats. The BEST Managed Futures programs by length of track record are:

So which managed futures programs are the best overall? It again depends on what you are looking for, but those which keep popping up in the tables above should definitely be candidates. We unfortunately do not have space to list the rankings for all 25 categories we look, but the ‘flag rankings’ on our website put all of these statistics together into a single mathematically derived ranking, with 5 flags the best down to 1 flag being the worst.

All programs are ranked in each category, and then an overall ranking is computed. So a program which is ranked between #10 and #30 in each category may very well be ranked higher overall than a program which is ranked #1 in a single category, but averages in the 50s to 100s for the rest of the categories. The programs in the top 20^th percentile of all rankings are awarded a top 5 flag rating, with the ‘higher’ listed program amongst two five flag ranking programs the one with a better ranking.

Without further ado, the Top 15 managed futures programs monitored by Attain as of the end of 2010 are the following: [please note Mesirow Financial Commodities Absolute Return and Low Volatility programs which Attain clients are invested in would still be among our top 15,  but both closed to new investors in 2010 and have been removed].

The tables above show who the best in each category was for the period ending 12/31/2010. The rankings are based on Attain’s expanded watchlist (those programs on our recommended list plus those programs currently being monitored for inclusion on our recommended list), and do not include the entire universe of managed futures programs. Only programs with at least 36 months of data and minimum investments of $2 Million or less were included, and only a single program is considered amongst a family of programs in which all that differs is the leverage amount. For more on our ranking system,click here.

Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System& Commodity Brokers. All Rights Reserved. Reprinted with permission.

We finally got the Dow Jones/Credit Suisse Hedge Index data from December, enabling us to update the asset class scoreboard for all of 2010. The results are as follows… [past performance is not necessarily indicative of future results]

Key: Managed Futures = Dow Jones Credit Suisse CTA Index, Cash = 3 mo T-Bill rate, Bonds = Vanguard Total Bond Market ETF, Hedge Funds = Dow Jones Credit Suisse Hedge Index, Commodities – ishares GSCI ETF, Real Estate = ishares Dow Jones US Real Estate ETF, World Stocks = MCSI World Index (ex USA), US Stocks = S&P 500 Index

You can see that Managed Futures more than held their own despite their own struggles in 2010, beating out hedge funds, world stocks, bonds, and (surprisingly) commodities.  But how was real estate up for the year, and commodities down, you may be asking…. Wasn’t Palladium up 95%, and Sugar up 92%. And don’t we keep hearing on the news how real estate remains in a deep funk?

The answer to those questions is in the tracking mechanism we’re using for commodities and real estate. For commodities, we’re using the ishares GSCI ETF, which tracks the Goldman Sachs Commodity Index.  The problems with long only commodity indices has been well documented, and this ETF is no exception to those issues (Read our past newsletter: Are commodity ETFs bad for managed futures? for more).  Further, the GSCI is heavily weighted in energy markets (78%) -  with nearly 40% in Crude Oil, which did very little for the year; has no exposure to Palladium and Sugar; and has very little exposure to the other high fliers of the year (Wheat = 3%, Silver = 0.3%) [GSCI fact sheet]

As for real estate, the ETF we use a a proxy for performance there tracks the stock market value of several publicly traded REITs specializing in US real estate.  With stock markets forward looking, these stock prices have appreciated faster than the real estate underlying them, especially residential - which continues to make new lows per the Case Shiller index. Suffice it to say this number should be taken with a grain of salt, although it is investable.

(more…)

We call it the insolvency survey, but distressed investing probably attracts more attention in a headline.

As hedge funds continue to play a critical role amid the recovering financial markets, complex insolvency issues are front and center for hedge fund executives.

Reuters HedgeWorld and law firm Dykema invite you to participate in a brief survey designed to uncover the sentiment of leading hedge fund executives regarding the impact of various insolvency issues on the marketplace and their respective portfolios. It is brief and should require no more than 4-5 minutes to complete.

Your feedback is important to us and completely anonymous. In appreciation for your participation, we will provide you with an exclusive package of the survey results and analysis. To receive this report, simply send an e-mail to insolvencysurvey@hedgeworld.com and request the report upon completion of the survey.

In order to participate, you may either:
1. Click this link: http://research.zarca.com/k/SsRWYYsQQUsPsPsP.

Or

2. Copy and paste this link into your web browser: http://research.zarca.com/k/SsRWYYsQQUsPsPsP

Thank you in advance to those of you who opt to participate. Your responses help us get a handle on how the distressed investing space is faring, and what the outlook is.

Esplanade Capital’s Shawn Kravetz speaks with Reuters reporters at the 2010 Reuters Investment Outlook Summit.

Click on the image to be taken to the Insider video:

Bloomberg reports on the “network of Taiwanese contacts” used by Don Ching Trang Chu. Chu, you may recall, is the only person to be arrested so far in the expanding investigation into so-called expert networks and insider trading. And in case you’re wondering how this relates to you, if you’re a hedge fund and you worked with Chu, you may be getting a call yourself. From the feds.

“If I was a company insider that did business with Chu, I’d expect to be contacted by the FBI,” Stuart Slotnick, a white-collar criminal defense lawyer at Buchanan Ingersoll & Rooney PC who isn’t involved in the investigation, told Bloomberg.

OPERA fans

Thomson Reuters and Albourne Village released a list of firms and organizations comprising the working to develop the proposed templates, protocols and grades that will constitute the Open Protocol Enabling Risk Aggregation, or OPERA. They are:

Albourne Partners Limited, Brevan Howard, BT Pension Scheme Management Limited, CITCO, Credit Suisse Group AG, The D.E. Shaw Group, Goldman Sachs Group Inc., International Fund Services, Investcorp Investment Advisers Ltd., Lansdowne Partners Ltd., Morgan Stanley, Och-Ziff Capital Management, ThomsonReuters, UBS AG, Utah Retirement Systems and Weyerhaeuser Asset Management LLC are all on the list.

Around the web

Hedge Funds Short Clean Energy as Goldman Pares Stakes. (Bloomberg)

Goldman Fails to Vacate $20.1 Million Bayou Award. (Bloomberg)

Aberdeen Profit Soars As CEO Denies Gartmore Interest. (FINalternatives)

Hedging Breakdown Drives Investors To Managed Futures Funds. (WSJ.com)

Peak Ridge Seeks $30 Million in Morgan Stanley Case. (Bloomberg)

Goldman secrets trial starts. (New York Post)

Santiago Rizzo preparing to launch TMG focused Outlier Capital hedge fund. (Hedgetracker)

SAC Exec’s Wife Ticketed After Helicopter Landing. (HedgeFund.net)

People moves

MF Global hired Jon Bass as global head of institutional sales, according to a news release from the firm. In his new role, which the company recently created, Bass will try to expand MF Global’s relationships with asset managers, hedge funds, corporations, broker-dealers and financial institutions.

We are estimating the main Managed Futures indices were up between 1.75% and 2.50% in October, with the Newedge CTA Index up 1.86% as of 10/28 and most multi-market managers we follow up slightly through the 31st. This would mark the third consecutive month of gains for managed futures behind continued trends in grains, foreign currencies, and softs.

Highlights amongst the CTAs tracked by Attain include Rosetta Capital Management posting a +14% gain in October to push their YTD returns to just under 30%. Rosetta is a discretionary trader in the agriculture sector (Grains and Livestock) that relies on fundamental market analysis–and has greatly enjoyed outlier rallies in Wheat, while also spreading markets such as long Corn and short Lean Hogs, to push Rosetta to new all time highs.

Elsewhere, the aforementioned outlier months have not been kind to diversified option selling programs which sell into such moves, with FCI’s Option Selling Strat. and the HB Capital Management, Inc. Diversified programs suffering losses in October.

Check tonight’s newsletter for a full breakdown of October performance for those managed futures programs Attain tracks.

To read more, visit Attain’s Managed Futures Blog.

DISCLAIMER

Past performance is not necessarily indicative of future results. The data and graphs above are intended to be mere examples and exhibits of the educational topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

Copyright © 2010 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.

If you’re looking for the actual report, beyond the reporting on it in the media and on the blogs, it’s here:

lehmanreport.jenner.com/

I’m wading through it, and the reporting on it, and will have something later today. In the meantime, here’s what we’ve got for now: Lehman Insolvent Weeks before Bankruptcy: Examiner.

Blah, blah, blah … the market was down … blah, blah, blah … Toyota hearings … blah, blah, consumer confidence. Enough already. Let’s get on to CNBC’s new highest and best use: Curling coverage.

And to help you better understand what you’re seeing, if that’s possible: