As the introductory Commodity Corner column of the magazine I found this to be a good opportunity to introduce commodities and futures.

One could argue commodities have been around since the beginning of civilization. People have produced, paid or bartered for commodities to use for either production or to consume. Some of the uses of commodities include food, energy, construction, manufacturing, and clothing.

According to the Merriam-Webster dictionary, commodities are defined as: 1) an economic good. 2) A product of mining or agriculture. 3) An article of commerce especially when delivered for shipment. 4) A mass produced un-specialized product. [i]

In today’s global markets both large and small firms will trade and hedge commodities as part of their daily business as either a producer or end-user of the commodity. For example a chocolate candy producing firm will need to purchase cocoa, sugar and of course energy to fuel their factories. If they do business in foreign countries they may need to buy and sell foreign currencies for hedging or delivery purposes. (See “Currencies in Your Future Portfolio?” of the Spring/Summer 2012 issue).

To manage their price risk, a commodity producer, such as a farmer may sell a futures contract to lock-in their selling price. An end-user, such as a coffee chain may buy a futures contract to lock-in their purchasing price. Keep in mind commodity markets tend to be mean-reverting markets as they spike or decline from an average price and then revert back towards that average price overtime. This is often due to shocks in the system such as increased demand, reduction of supply, weather concerns, disruption of distribution channels or possibly political or regional events. If a commodity becomes too expensive, the market participants’ behavioral mechanism will appear as they seek less expensive substitutes. This is known in economics as the substitution effect and one of the differences to note between commodity and equity trading.

Commodities are traded in two common locations: either the spot/cash market usually reserved for industry or sometimes known as “commercials” such as producers, distributors and end-users as the actual physical commodity is traded. Or the products trade on an exchange such as one of the futures exchanges found around the world.  The futures exchanges are often utilized by both commercials and speculators. An exchange offers commercials the opportunity for immediate offset of their commodity risk by speculators offering liquidity to take on the risk. If a commercial has a loss from hedging, it often means they profited in the underlying cash market, because they are holding the opposite direction in the cash market. One can think of the loss on the hedge as a premium on an insurance policy.

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[i] Shore, M. (2011) DePaul University 798 Managed Futures Lecture notes

Copyright ©2013 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com Mark Shore has more than 20 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com

Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course and an Adjunct at the New York Institute of Finance. Mark is a contributing writer to Reuters HedgeWorld.

Past performance is not necessarily 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 and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

The voluntary return of $546 million in MF Global customer assets, the subject of hard fought 2 ½ year battle, was not motivated solely by the kindness of JP Morgan.  Rather, it could be considered fruit from a likely hard investigation now gearing up if not already under way.  This investigation, declared “dead” many times over in leaks to the press from official sources, has heated up, as first discussed here.

The return of illegally transferred MF Global customer assets was always a key bone of contention.  JP Morgan had summarily dismissed regulatory and public pressure to return customer assets, so the question is: why submit to authority now?

In 2012 the National Futures Association (NFA) went so far as to send the bank a public letter, which was generally brushed aside as were numerous verbal requests and mounting public pressure from groups such as the Commodity Customer Collation and its leaders James Koutoulas and John Roe.  This significant pressure was dismissed, yet an attempt by bankruptcy trustee James Giddens was successful.  The fact this occurred at this moment in time is not a coincidence.

Speculation is JP Morgan’s normally dismissive attitude towards government regulators might have changed in the face of what is expected to be a no holds bar CFTC / DoJ criminal investigation.  In other words, the specter of government actually asserting itself and allowing career investigators to do their jobs unimpeded is enough motivation for JP Morgan to return what are documented to be illegally transferred customer assets.

But perhaps more important to the future, a real investigation could also be motivation for JP Morgan to provide critical testimony regarding the criminal activity of MF Global executives, including that of Jon Corzine.

The need for deterrence that derives from a Jon Corzine conviction is more important because the future that matters most.  Since 2008, when financial crimes that damaged the US financial system were was documented not to be investigated by DoJ’s former assistant attorney general in charge of criminal investigations Lanny Breuer, Wall Street crime has imploded in its brazen disregard.  MF Global is one example, but the case of HSBC laundering money for terrorist organizations and drug cartels – after being warned on several occasions not to do so – is a sign of complete disrespect and a breakdown of law and order on Wall Street.   When the full story is known, Mr. Corzine’s disrespect for the US financial system and its cogs of justice will likely stand as the turning point in a long battle.

Is this real?  Is the investigation a serious point where the rule of law might actually apply to once exempt Wall Street players?  We don’t know for certain at this point, but one key tell is going to be the type of charges filed against MF Global executives.  If RICO charges are used, this will send the powerful message that a cop is in fact back on the beat.

Mark Melin is author of three books and taught a course on managed futures for Northwestern University’s Executive Education program.  To read more of his blog posts, click here (requires free registration).  Contents Copyright (C) 2013 Mark Melin.

Mark Shore, Adjunct Professor of managed futures at DePaul University’s Kellstadt Graduate School of Business in Chicago and 25 year veteran of the futures industry notes increased interest in managed futures for the last several years.

“Assets under management in managed futures have increased nearly 63% since 2008, and over 700% since 2000 according to BarclayHedge.” To help explain the managed futures message, Shore announced DePaul University will once again offer a graduate level managed futures course in the spring.

As the demand for asset allocation education and alternative investment education increases, Shore notes, “individual & institutional investors and the graduate students are asking more questions about managed futures, a topic often found unfamiliar to many.”

Does the recent market volatility increase the interest to understand managed futures?  “The abnormal market volatility in recent years has a number of investors increasingly questioning the core principles behind a diversified investment portfolio, he said. “What’s needed is a greater understanding of dynamic correlation and tail risk.”

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Copyright ©2013 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com Mark Shore has more than 25 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops.

Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro Mark is a contributing writer to Reuters HedgeWorld, the CBOE Futures Exchange and Micro-Cap Review.

Past performance is not necessarily 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 and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

Every year, millions of Americans tune in to the nation’s biggest sporting event: the Super Bowl. Virtually every industry has used the Big Game to promote its products and services.

Every industry except for hedge funds, that is. For better or worse, viewers shouldn’t expect that to change next year—even if the JOBS Act makes it possible.

“I don’t think you’re going to see that at all,” Evan Rapoport, CEO of HedgeCo Networks, told StreetID. “In fact, I think what you’re going to find is very targeted types of advertisements. They’re going to really want to appeal to only those that are qualified and allowed to invest.”

One of the drawbacks of advertising on TV (during a sporting event or regular programming) is that 99 percent of the people watching will not even be allowed to legally invest in the fund.

“Putting up a billboard is pretty ineffective in that manner in that you’re just not targeting the right audience,” said Rapoport.

In providing an example of a more targeted approach, Rapoport pointed to his own site—HedgeCo.net. “Let’s say someone is on HedgeCo.net and is searching for a certain fund on our database,” he said. “[One] that is worth more than $25 million, has less than five percent draw down, and produces over 10 percent return. Prior to potentially getting their answer through our database, maybe they get a pop-up ad of a fund that does meet that criteria. That’s fairly targeted.

“You may also find hedge funds advertising at golf events where they know the mass affluent attends. Doing promotional campaigns that are, again, optimized and targeted toward the financial industry.”

Don’t expect to see commercials on any of the mainstream TV networks either. “Maybe on CNBC, but again, even then I don’t think you’ll really see commercials,” said Rapoport.

However, you might see the hedge fund managers come out of their shells.

“You often don’t see a lot of fund managers on networks,” Rapoport added. “Often you’ll see people that work at funds, but not a lot of fund managers. The reason is because if they were to say something about their fund that could be misconstrued as advertisement, they would be sanctioned by the SEC. I think once this passes you’ll find fund managers going on TV and discussing not only their posture on the marketplace but their fund and how it’s performing and their strategy.

“So while it may not be an overt or blatant advertisement, you can at least talk about your product. I think you’ll see a lot more of that, and I think it will be a huge benefit to the industry.”

This content originally appeared on StreetID, a financial career networking, matchmaking and news site. To learn more about StreetID, visit StreetID.com. StreetID’s financial career news can be found on its blog, streetid.com/newsblog/.

As regular readers know, we’ve been having a few glitches with the web site of late. One of them apparently messed with the pricing for the April 3-5 HedgeWorld East event at the Seaport Hotel & World Trade Center in Boston. In fairness, we have extended the Early Bird pricing for one week. We have a truly stellar lineup this year, the best in the 10 years I’ve been at HedgeWorld, headed up by keynoter William Ackman, founder and CEO of Pershing Square Capital Management. Then there’s the usual high-quality lineup of panels, speakers and networking opportunities. Please take some time now and register while you can still save some money. Click here to register.

Here we take a look at December 2012 absolute performance for the top 5 equity market neutral funds in two categories - all funds and U.S.-only funds - as tracked by Lipper’s hedge fund database. To see more analysis, including assets under management and domicile information for the top 10 funds in each category, click here for all funds and here for U.S.-only funds. To be truly connected to all the Lipper analytics available on HedgeWorld, become a HedgeWorld Premium Plus member. To find out more about how to do that, visit hedgeworld.com/membership/.

It’s 2013: a new year, an opportunity to start a fresh YTD performance chart, and a chance to climb a little further out of the 2012 hole in which a fair amount of the alternative investment world wallowed. January is often a time when investors and managers forge resolutions to do better—take stock of portfolios, review what seems to be working and what seems to be off, and implement a course of action for the coming year.

Fiscal cliff avoidance aside, the alternative landscape appears littered with potential pitfalls, pratfalls, and protracted performance slumps. Some of us might feel that a trip to the Galapagos Islands would be more enjoyable than diving into the fiscal waters of 2013, so it could be interesting to filter this viewpoint with a little evolutionary context courtesy of Charles Darwin.

There are many proponents and opponents of Darwin’s theory, engaging in a lively debate that has spanned more than a century. The theory goes something like this:

Darwin’s general theory presumes the development of life from non-life and stresses a purely naturalistic (undirected) “descent with modification.” That is, complex creatures evolve from more simplistic ancestors naturally over time. In a nutshell, as random genetic mutations occur within an organism’s genetic code, the beneficial mutations are preserved because they aid survival—a process known as “natural selection.” Natural selection acts to preserve and accumulate minor advantageous genetic mutations. Over time, beneficial mutations pass on to the next generation and the result is an entirely different organism (not just a variation of the original, but an entirely different creature). (Source: www.darwins-theory-of-evolution.com)

Certain elements of the theory seem more likely to be true than false, particularly as applied to financial elements. Let’s examine five of these.

Time is a good thing. So, if one assumes that complex creatures evolve from more simplistic ancestors naturally over time, being an investor who has been around longer could mean having gained an ability to judge what is singular and what is systemic in the markets—in other words, an ability to separate the melodies from market noise. Investment managers with longevity have learned a thing or two about getting it right. Investors who have been in the market longer have also presumably learned both from their mistakes and have gotten better at identifying good choices. Ageism in alternatives means having been at it long enough to know what “it” is.

It pays not to follow the herd. According to Darwin, beneficial mutations are preserved because they aid survival. For investment managers, it literally pays to be a standout. Beneficial mutations in the investment world are the leaders, the outliers in the north-by-northeast quadrant of the efficient frontier. If they are considered beneficial, it is because they achieve performance results without taking on excessive risk in so doing. Managers who care about attracting investors are always seeking to improve their relationships with the top left quartile of the risk/reward chart. Those possessing the ability to land there and stay there are the ones who, by being better, dare the rest to follow.

Natural selection rewards the organism with a higher rate of survival. The theory goes on to postulate that natural selection acts to preserve and accumulate minor advantageous genetic mutations. If we consider the investor to be the organism, aligning interests with the talent that occupies the “beneficial mutation categories” of alternative investing leads to an elevated form of life, or perhaps a fully-funded investment mandate. Less desirable species (or investments) ultimately cease to exist in favor of more desirable ones. This part of the evolution process is often in a push/pull relationship when applied to investment management. As a good alternative idea/manager/investment vehicle attracts greater numbers of followers, the ability to continue to perform at the same or higher levels of performance erodes, and other opportunities arise to take its place. One could blame greediness or complacency on the manager who fails to stave off this competition, but perhaps it’s the natural selection process in action.

Being a little bit right a lot of the time sure beats being wrong one or two mega-times. This piece of natural selection is perhaps the most recognized commonality in the alternative investing world. In the long run, if an investment manager fails to control the downside, there isn’t much of an ability to last long enough to capture the upside. For investors, swinging for the fences when making investment decisions is likely to result in knocking oneself right out of the game before having amassed enough of an investment cushion to be able to take on high-risk investments. The “stay rich” mentality of slow and steady progression through all market cycles and strong risk management practices to protect against the unforeseen happenings is the investment version of natural selection that very few alternative managers or investors care to argue against.

You can’t forecast a change, but change is a constant. While Warren Buffett may have been able to get away with the now-quaint “buy and hold” strategy, the markets have proven that the “buy it and forget about it” ship has sailed and isn’t coming back. Most people would also agree that market timers, both on the buy and the sell side, are doomed to eventual failure.

While the natural selection argument is likely to continue indefinitely on into the future, with heated defenders both for and against Darwin, there is no argument about the inevitability of change. Complacency is the enemy of Darwinists, and should be of investors. Being too comfortable in deciding on a singular course of action will, over time, lead to an erosion of effectiveness in investment planning. Long-term survival in both the physical and the investment world requires vigilance, constant learning, and adaptation. As 2013 unfolds, the markets will provide undeniable opportunities and risks for both managers and investors. Those with the adaptive skills to survive will emerge fitter, smarter, and financially resilient.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

In 2012 we discussed methods of trading the CBOE Volatility Index (VIX) futures contract at CBOE Futures Exchange, LLC (CFE). In this article, we will review the previously discussed trading methods and how to apply them to the current market environment.

Liquidity is an important factor for trading. Several times during 2012 VIX futures volume reached record levels including a record high of 2,734,248 contracts in November, Which was a 233% increase from November 2011’s 822,017 contracts and which broke the prior trading volume record set in October by 12%. In November the Average Daily Volume for VIX futures was 130,202, an increase of 233% from November 2011. To date, the November VIX futures total volume is 86% higher than it was in 2011 and year-to-date trading volume is 21,344,285 contracts versus 11,455,871 in 2011.i

In past articles we discussed the use of four VIX futures trading strategies: 1) utilizing support and resistance to seek contrarian changes at range bound extremes; 2) crossing of moving averages; 3) utilizing the Aroon Oscillator; and 4) using the True Range to trade VIX futures. In this article the parameters have been set to the same level as they were set in previous articles.

We begin discussing the support and resistance methodology. We originally discussed this in the September 2012 article “VIX Trading Strategies”. The VIX futures contract historically tends to find major price support between 10 and 15 and it finds major price resistance around 40 (with the exception of the financial crisis). As you will notice in the monthly chart below VIX futures tend to rally after forming a floor at or near a price of 15. This most recently occurred in 2010 and 2011. During the last several months, the VIX contract has once again found the price of 15 to be major price support area. Could this be the foundation of a floor for a rally in 2013?

Chart 1: Monthly Nearest VIX Futures Chart with Support and Resistance
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Copyright ©2012 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com Mark Shore has more than 20 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com

Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course and an Adjunct at the New York Institute of Finance.

Past performance is not necessarily 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 and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

Creative inspiration is derived in many ways. The recent fiscal cliff debate in Washington D.C. may impact the economy at both the local and national level. I was inspired to write the following fun piece below:

Was the Night Before Fiscal Cliffness

By Mark Shore 12/28/2012

Inspired by “Twas the Night Before Christmas” and the craziness of D.C.

Everyone lets gather around the fireplace,

I have a story to tell you of a distant place,

Where everyone kicks a can without any disgrace:

Was the night before Fiscal Cliffness and all thro’ the house,

Not a congressional member was stirring, not even the speaker of the house,

The line was drawn in DC with care,

In hopes each would get what they wanted, but would not share,

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Copyright ©2012 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com

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Greetings, and happy early New Year, HedgeWorld readers.

A couple of server glitches this morning are monkeying with my ability to gather the data I need to post the daily performance tables and charts. The tech folks are on the case and hopefully the issue will be resolved so that I can publish performance information again on Monday [Dec. 31].

These same server issues are also preventing us from posting HedgeWorld News stories to the news part of the site. As a temporary work-around, look for HedgeWorld news stories on the Alternative Reality blog today. Again, hopefully the tech wizards can fix whatever ails the server and we’ll be back in business on Monday.

Thanks for following HedgeWorld this past year, and thanks for your patience.

Sincerely,
Chris Clair
Managing Editor, HedgeWorld