CNBC’s Tyler Mathisen talks to six power players to get their best ideas for investing right now, featuring Kyle Bass, Hayman Advisors LP founder and principal; Leon G. Cooperman, Omega Advisors chairman and CEO; Philip Falcone, Harbinger Capital Investments founder; J. Tomilson Hill, Blackstone Marketable Alternative Asset Management CEO; Daniel S. Loeb, Third Point LLC founder and CEO; Anne B. Popkin, Symphony Asset Management president.
Archive for the ‘Trading’ Category
Standard and Poors, a leading developer of indices such as the S&P 500 stock index, recently launched a managed futures index designed to be â€śinvestible but also act as a benchmark for the industry,â€ť according to Jodie Gunzberg, Director of Commodities for S&P Indices.
S&Pâ€™s new managed futures product, S&P Systematic Global Macro Index (SGMI), is interesting from a number of perspectives, but also raises questions.
What is S&Pâ€™s motivation for entering the managed futures space with a new product at this moment in economic history?
Will the new index really represent broad managed futures exposure with what is essentially a singular trend following strategy? Â Does this “index” look like an individual CTA with a specific trend following formula? Â How does the new index relate to S&P’s existing managed futures index, the Diversified Trends Indicator (DTI), which is currently linked to 40% of all managed futures mutual funds assets under management and has traditionally underperformed industry benchmarks?
In this report these are the questions addressed along with a revealing look at the interesting algorithm used by S&P to create this new managed futures index.
Why Managed Futures? Why Now?
â€śThe unhealthy debt situation, the general dismal jobs outlook and uncertain economic prospects all factor into why an investor might want to consider managed futures, which have traditionally held up well during past crises,â€ť said Gunzberg in her first interview on the new index.
â€śThe motivation behind launching the S&P SMGI is to provide investors access to hard to reach enhanced beta,â€ť Gunzberg said, noting that access to individual managers is not as commonly available as one would expect. â€śTraditionally investors have had difficulty accessing managed futures and other alternatives uncorrelated to the performance of the stock market.â€ť
â€śGlobally managed futures has had a historically low correlation to stocks, bonds, and real estate plus goes beyond commodities,â€ť she said, noting common issues investors face. â€śIf investors look over the past ten years, they notice that equity returns have essentially delivered zero return. Right now investors are wondering where to put their assets. Interest rates are at all time lows and likely only have one way to go, higher, which means bonds are likely to suffer. Real estate is generally illiquid and like stocks correlated to economic health.â€ť
As a former consultant, Gunzberg initially noticed clients were looking for exposure to commodities, but found limited choices. â€śThen we discovered managed futures, which offered significantly more choices since the funds are more well-diversified than commodity only funds, yet are still generally uncorrelated to stocks and bonds typically driven by general market environment factors, not positive economic factors.â€ť
Will This â€śIndexâ€ť Represent Broad â€śManaged Futures Exposureâ€ť
It will be interesting to watch how this â€śindexâ€ť performs relative to the managed futures industry at large. S&Pâ€™s other managed futures offering, the S&P Diversified Trends Index (DTI), has a history of typically underperforming managed futures in general. While the S&P SGMI offers a different formulaic trend following model than the S&P DTI, the question remains does the S&P SMGI represent a single trend following CTA or the broad universe of managed futures exposure?
As described in the book High Performance Managed Futures, managed futures is generally driven by three performance drivers, those macro factors that can influence returns. Â Ideally a diversified portfolio has a variety of uncorrelated performance drivers as constituents. Â Trend following is driven by the performance driver of price persistence and represents approximately 60% of the managed futures universe. Â This is the strategy the S&P SMGI formula follows. Â Price persistence occurs when the price of an asset continues trending in a consistent direction, be it trending higher or lower in price. Â Price dislocation, where the price of related products is temporary dislocated from other related products, is often the performance driver that influences spread arbitrage strategies. Â Rising and falling volatility can influence options strategies, particularly the short volatility programs. Â Discretionary CTA strategies, which often combine a number of strategies and typically involve human decision logic, are the fourth primary managed futures strategy and the performance driver of this category can vary depending on the trader.
How Does the SGMI Algorithm Work?
S&P SGMI has an algorithmic formula that determines a unique time trend for each constituent, or futures contract. For instance the model may indicate crude oil has a different length trend than the German bund. The formula looks back 22 days, then 5 days iteratively until it identifies a trend. The formula that determines the length of the trend for each constituent can identify changes as market conditions change for each constituent.
S&P SGMIâ€™s approach is similar in many respects to how many individual trend following CTAs may trade, with each CTA utilizing their individual formula to determine how and when to execute trades. For instance, QIM and Winton Capital, well-known trend followers, are known to utilize 100s different algorithmic formulas to determine how and when to place trades. Â These computer-based models often have overlays that identify the market environment and then select what they consider the appropriate algorithm based on the nature of the market environment. Â From this, the computer-based “systematic” programs determine how and when to enter and exit positions. Â There is no human decision making or individual trade discretion in the trade decisions. Â Their computer formulas are constantly updated by a staff of quantitative analysts who are tasked with testing and re-engineering the formula. Â This is considerably more complex than the SGMI formula but highlights the fact that individual CTAs often use their own trading algorithms much like the SGMI.
How Does the S&P SGMI Compare to the S&P DTI?
Although close to 40% of managed futures mutual fund assets are tied to it, the S&P Diversified Trends Index (DTI) has generally performed below the managed futures industry as a whole. Â Will the S&P SGMI index generate improved performance? Â Time will tell, but it helps to understand some of the formulaic differences between the indexes to know what to consider. Â Here are the facts:
Both the S&P DTI and S&P SGMI are trend following programs.
S&P DTI utilizes 16 constituents (contracts traded) while the S&P SGMI utilizes 37, providing for additional markets traded diversification (one of five factors of correlation detailed in chapter 9 of the book High Performance Managed Futures.)
S&P DTI weighting consists of 50% commodities 50% financials, which some might considered unbalanced. Â S&P SGMI consists of 20% commodities, 80% financials, including currencies, equities and fixed income. Â Interesting to note that fixed income has the highest representation in the financial component of the index due to its low volatility. Â Thus, this index is utilizing a very interesting volatility skew to a certain degree. Â (Volatility skewing is described on page 176 of the book.)
About the Author: Mark Melin is author of three books, including High Performance Managed Futures (Wiley 2010), and has taught managed futures at Northwestern University in Chicago. Mr. Melin consults with financial advisors, pension funds, family offices and high net worth investors on developing uncorrelated investments. The author is an associated person registered with the National Futures Association NFA ID#: 0348336. For further information visit his web site at www.Go2ManagedFutures.com or via e-mail at info@Go2ManagedFutures.com
All contents copyright 2011 Â© Mark H. Melin all rights reserved.
Risk Disclosure: Past performance is not indicative of future results. There is risk of loss when investing in futures and options. Always review a complete CTA disclosure document before investing in any Managed Futures program. Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.
James Angel, associate professor at Georgetown University’s McDonough School of Business, says algorithmic trading was not to blame for the wild market shifts last week, and may have actually helped stabilize trading.
“Whenever something happens in the market, it’s tempting to blame the people who trade the most and those are the high-frequency traders,” Angel tells Reuters Insider. However, if you look, we learned a lot about them after the flash crash studies, and we discovered that most of them trade in fairly small amounts and yes, they do trade frequently, but generally they don’t like to hold overnight positions. And they generally don’t take huge positions one way or the other.” (more…)
Reuters Insider takes a look at the inner workings of a global wealth management firm as advisers face the most difficult financial markets since the 2008 credit crisis.
“The morning call is under way for advisers at RBC Wealth Management. It’s the day after the worst stock market sell-off since December 2008, and these advisers have their game faces on.” (more…)
Wall Street, the Fed and money managers are betting there will be a deal to raise the U.S. debt ceiling, but are making backup plans for what they are calling “uncharted territory” in case they’re wrong.
“â€¦ you can see this coming; it’s being telegraphed,” said Reuters Markets Editor David Gaffen. “And yet there will still be a reaction right around when this whole thing happens, right around the beginning of August, August 2 or whenever that date is. And there will probably be some sort of freak-out at that time.” (more…)
2100 Xenon’s Jay Feuerstein writes on Hedgeworld.com today that history suggests futures markets will not only return to trendiness, but yield the best opportunities of the past 30 years. Here are some excerpts from his piece:
Trading futures in 2011 has been tough because the budget, the budget deficit, the real estate crisis, the joblessness, the Federal Reserve, The European Central Bank and the IMF have all spawned surprise headlines that left well-thought-out trading strategies in shambles. Short-term traders find themselves whipsawed by the news while long-term traders own positions that appear to be going nowhere. Moreover, except for a brief respite at the end of 2010, the markets have been in this Bermuda Triangle trading environment for more than two years.
Once the global economy finds a clear pathâ€”up or downâ€”markets will price themselves accordingly, and disciplined traders will find a literal goldmine of opportunities. Just look at what happened in the 1970s. The recession of 1973-74 was the worst, at that time, since the Great Depression. War raged in the Middle East. The stock market lost 40 per cent of its value, housing prices plunged, workers lost jobs and for the first time the U.S. began to run a budget deficit. Fed Chairman Arthur Burns burst open the monetary spigots and was roundly criticized because commodities such as gold and silver began huge bull runs that saw their prices rise tenfold in less than five years. Emerging countries such as Japan were the miracle economies that kept the world afloat while the United States struggled with inflated union contracts and historic borrowing costs. Sound familiar?
At the same time, the resulting market opportunities in metals, grains, interest rates and soft commodities created the opportunities for the earliest trend followers such as Larry Hite and his Mint Asset Management. He and Ed Sekoyta are credited with being the first of their kind but they soon had company. Paul Tudor Jones, Richard Dennis, John Henry and Monroe Trout all amassed great trading records in the ensuing decade.
Today, the markets are in much the same place as they were when Gerry Ford left office in 1976. Commodity prices are booming. The stock market, though just two per cent from three-year highs, is flat over that period as well. The Fed is especially generous, and the Obama administration is desperately trying to stay afloat as the 2012 election nears. No tough medicine is yet in sight.
Meanwhile, the Fed says it is ready to continue to ease policy, though rates are already at zero. The only thing it could do is buy government debt, but that would not be the best idea given the possible downgrade that is coming. Still, the only bullets it has are in dollars, and it could flood the short-term money markets with cash in order to keep the economy afloat while Washington sorts out its problems. One of the differences between today and the late 1970s, early 1980s, is that the world is a much smaller place. Repercussions from Washington reach every corner of the world, with at least three of those corners in a pretty tough spot. The Eurozone is struggling with Greece, Portugal, Spain and Italy, whose defaults could throw French and German banks for a multi-billion dollar loss. Chinaâ€™s miracle is slowing, as inflation and real estate prices make workers there feel less successful than the economy they have struggled to build. And the Middle East, despite its oil profits, continues to be a violent place as nascent governments struggle with the new independence they have found in the wake of the deaths of Saddam Hussein and Osama bin Laden.
Ultimately, all of this will sort itself out.
Going forward, when looking at the political prospects for the country, possible results run along party lines. If the Democrats win, the markets will know what they stand for: inflation and a lack of fiscal discipline. The Obama/Bernanke team will revive the economy but at a severe inflationary cost. Nonetheless, markets will have direction. Bonds will fall, stocks and commodities will rally. Traders will have plenty of trades to choose from. If the Republicans gain office, trades will still abound but they will be the trades of a double dip, deflation and illiquidity. Most likely, the Republicans will cut the deficit, thereby removing fiscal stimulus. Bonds will skyrocket, the yield curve will flatten, stocks and commodities will swoon and swap spreads will dramatically widen. Even if the two parties work togetherâ€”Heaven forbidâ€”regardless of the presidential outcome, good trades would emerge because stocks would rally, bonds would fall, commodities would flatten out, however, but the dollar would rally. Markets would move enough for sustainable trends in any of the three cases. All traders need is some direction, and it is coming.
Read the Hedgeworld op-ed here.
Investors are using Twitter to access information and companies are springing up to sort through Twitter’s billion weekly tweets to find usable data for traders.
Josh Brown, vice president at Fusion Analytics, “You’ll notice I don’t have scrolling headlines on my main trading screen. I can access them in a click. You’ll also notice that there’s no TV, no radio on in the background.”
Brown says he now gets everything he needs and more from social media. (more…)
An arms race has erupted as telecommunications firms bore below rivers and map ocean floors to build shorter, faster routes between financial capitals to shave milliseconds off high-frequency trading. The debate over high-frequency trading’s role in the May 6, 2010, “flash crash” isn’t stopping telecom companies from chipping away at latency. (more…)
Aien Capital founder and Managing Director Ugur Arslan says that as profit margins shrink in major currency pairs, some high-frequency traders are dabbling in emerging markets currencies. His Aien Trading plans to start trading the Turkish lira early in 2012 and said he expects lira trades to comprise 1% to 2% of the firm’s trades. Aien is also looking at other major emerging market currencies to trade, including the Mexican peso and the Brazilian real. (more…)
Staying liquid and holding defensive stocks will help investors ride out the end of the Fed’s second round of quantitative easing, known as QE2, top hedge fund managers Savvas Savouri, partner at Toscafund; Chris Goekjian, chief investment officer at Cheyne Capital; and Luke Ellis, head of the multi-manager unit at Man Group, tell Reuters Insider.
“Wasn’t there an American preacher who said the world will end at 6:07?” Savouri said. “We’re still here. I think the same thing applies to QE2. Will there be a QE3? Is it a big Ponzi scheme, this game between the Treasury and the Fed? Whatever the view is out there, the catalyst for a U.S. Treasury sell-off won’t be the end of QE2. There will be a catalyst at some point, but I suspect the origins won’t be in Washington. It’ll be somewhere in the Far East.”
“So whether QE2 is the end of the QEs, whether they do a QE3 or QE4 or just some other version of it, they’re gonna keep pushing until there is inflation in the U.S.,” Ellis said. (more…)