Continuing the series of discussing various methods of trading the CBOE Volatility Index® (VIX®) futures contract at CBOE Futures Exchange, LLC (CFE), we will discuss the utility of the True Range indicator and the Average True Range indicator. In previous articles we discussed the use of spreading, correlations, moving averages and the Aroon indicator as methods of trading VIX futures.

Liquidity is an important factor of risk management. CFE announced on November 1, 2012, record volume in October 2012 for both the VIX futures contract and total volume of the Exchange. VIX futures reached a record 2,443,878 contracts traded in October 2012, a 172% increase from October 2011 and a 2% increase from September 2012. The October 2012 Average Daily Volume was 116,375 contracts, a 172% increase from October 2011 and a decrease of 8% from September 2012. However, the markets were closed for two days in October due to hurricane Sandy.i

In previous articles we discussed VIX futures as a mean-reverting market tending to find major price support between 10 and 15 and major price resistance around 40. However, within this range, market turning points do develop from time to time. The True Range indicator is a method of seeking changes in market momentum.

The True Range indicator and the Average True Range were developed by Welles Wilder, also known for developing the Relative Strength index, Directional Movement and the Parabolic Stop and Reverse. True Range is considered a metric of a market’s activity or volatility. Wilder first published the True Range indicator in his 1978 book “New Concepts in Technical Trading Systems”. The True Range indicator posits that the higher the number, the more likely the market will change direction. A lower number would indicate a weaker trend or indication of a sideways market. The True Range is defined as the maximum value of the following: 1) today’s high to today’s low; 2) yesterday’s close to today’s high; and 3) yesterday’s close to today’s low. The Average True Range is a moving average of the True Range.

VIX futures are an indicator of S&P 500 Index volatility and True Range is a volatility of the volatility or a second derivative of the READ MORE

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. 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.

HedgeWorld has launched Marketplace, a portal showcasing companies that supply services, solutions and content relevant to readers and members.

We’ll be adding some great companies over the course of the next couple of months, but in the meantime have a look at Insurance, Finance & Investment, a newsletter covering, among other topics, insurance companies’ allocations to hedge funds, and a white paper from Fincad titled ‘The Past, Present, and Future of Curves’.

If you have any questions about the Marketplace, and how to be showcased, please contact Greg Winterton at (646) 223-6787 or via e-mail at greg.winterton@thomsonreuters.com.

A provocative elevator pitch has long been prized in sales. But in the hedge fund world of predators and prey, pitches need to be stellar to avoid swimming with the fishes. ABC’s hit show, Shark Tank, based on the original Canadian series, Dragon’s Den, offers several notable tips on delivering a better pitch for investment capital.

Shark Tank’s web site description for obtaining start-up investment lifeblood is deceptively simple: “The entrepreneurs who dare to enter the ‘Shark Tank’ must try to convince the tough, self-made tycoons to part with their own hard-earned cash and give them the funding they desperately need to jumpstart their business ideas. But these Sharks have a goal, too. They want a return on their investment and to own a piece of the next big business idea. In exchange for the Sharks’ cash investment, the entrepreneurs give up a percentage of their companies’ equity. When the Sharks hear a great idea, they’re ready to fight each other for a piece of it. The once-desperate entrepreneur can rejoice in the fact that the Sharks find value in their product, service, or business. But if the pitch is poor, the Sharks will tear into the ill-prepared presenters and pass on the idea with a simple ‘I’m out!’”

The entrepreneurs have only a few minutes to convince the Sharks that their business is ready to take off. Typically they stand next to a display of the product and rattle off standard pitch details in QVC-style: name of business, what it does, why it works, and how much capital they are seeking from the Sharks to grow to the next level. This takes 90 seconds or so in TV time, close to a typical elevator pitch. The interchange that follows from the Sharks is illuminating for the typical hedge fund start-up trying to become a business.

The Sharks then begin to circle the prey (entrepreneur) and fire off a series of questions, which the entrepreneur must navigate successfully or the dreaded “I’m out!” will propel a Shark out of the tank of potential funding. These questions focus on essential business viability issues that ultimately determine whether or not a Shark believes taking on the risk of the project is worth its potential pay-off.

The first question is invariably about the current valuation of the business and what proof the entrepreneur can offer to justify the amount. The Sharks will be lending based on this information, and negotiating for a piece of the business equity. If the answers to these issues fall short, the potential deal is dead in the water. A hedge fund business hopeful should take note of this critical point when seeking angels and seeders, as alternative investors often offer to take an equity slice of somewhere between 10%-50%, with the negotiated split averaging 15%-25%. This is partially determined by the fund strategy, how crowded it is, and what the investment appetite is likely to be going forward for it in the alternatives space. Hedge fund business owners needs to consider in advance if they will be able to meet the payback schedule and exactly what their tolerance is for equity sharing prior to negotiating these issues with an investor.

Second, the Sharks will challenge the entrepreneur to define what his or her plan is for scaling up the business. This typically includes distribution issues, strategic partnerships, patent developments (if appropriate), and the clarity of the marketing message. The entrepreneur gets mere seconds to address each of these items in front of the Sharks, but hedge fund business owners should be prepared to address these same topics with an investor as directly. They need to show that they have a solid understanding of all facets of building a business, and have already considered the factors they are being assessed on prior to seeking investment capital.

Third, if the entrepreneur has survived the Sharks’ initial probes, the next issue they likely face is how well they can take in criticism of their business model and adapt on the fly to the Sharks’ suggestions for change. Often the Sharks, savvy business opportunists all, zero in on the weak points that present the biggest obstacles to overcome. They attempt to determine if the entrepreneur has the clarity of vision and business acumen to accept change and input from a potential equity partner. A hedge fund business hopeful will need to possess these skills as well, given that cooperation and negotiation are essential to gaining an investor partner.

Finally, if the entrepreneur has made it through the process, the Sharks who are interested in owning a piece of the business will make their bid. The entrepreneur then faces an exciting but nerve-racking negotiation with an investor (Shark) who has more experience (been there, done that), more leverage (cash), and more control over the outcome (”I’m out!”). The crux of the deal often comes down to the ownership percentage that must be given up. The amount of cash to be lent to the entrepreneur is incidental to the Shark; they have cash to lend to generate a preferred rate of return, and no shortage of solicitors for their business to deploy it. What gets the Sharks thrashing amongst themselves is the unknown upside potential, as represented by their equity stake in the fledging business.

This is where the novice entrepreneur, or hedge fund business hopeful, should be prepared to compromise. The goal is to balance giving up the least amount of equity with avoiding the killing of the deal. Giving up a 20% stake in a new business may be vastly preferable to walking away with no deal and 100% of a failure to thrive. Hedge fund hopefuls need to spend some serious time considering these pitching and negotiating issues prior to finding themselves in front of a shark. The objective is on creating the best chance possible to obtain the investment or risk ending up swimming with the fishes at the bottom of the capital pool.

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 panegyricmarketing.com.

In the September 2012 newsletter, the article “VIX Trading Strategies” was the first in a series discussing various technical and quantitative trading strategies beginning with a simple moving average approach to trading the CBOE Volatility Index (VIX) VIX futures contract. This article discusses the use of the Aroon Oscillator.

The VIX futures contract tends to be mean-reverting, thus seeking overbought conditions is a logical approach to trading this market. As we noted in the previous article, VIX futures tends to trade between a major resistance near 40 and a major support of 10 to 15, and within that the market may trend.

Developing trading strategies involves the investigation of a market’s liquidity for various reasons, including the potential for slippage. On October 1, 2012, CBOE Futures Exchange, LLC (CFE) once again reported record volume in VIX futures. In September 2012 the Average Daily Volume reached a new record of 126,345 contracts versus the previous record of 102,587 contracts traded in June 2012. A new record was set in September 2012 of 2,400,552 contracts traded surpassing the previous record of 2,154,325 contracts traded in June 2012. i

For those not familiar with the Aroon Oscillator, it was developed by Tushar Chande in 1995. The oscillator first appeared in the September 1995 issue of Technical Analysis of Stocks and Commodities magazine. The word “Aroon” is Sanskrit for “dawn’s early light”, thus seeking changes in a market. The oscillator is the differential between the Aroon Up and the Aroon Down indicators which creates an oscillator indicating a market’s strength in a trading range.

It is defined as an oscillator because it ranges between READ MORE

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. 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.

In anticipation of the SEC’s final rulemaking on the JOBS Act, the hedge fund industry is preparing for what are expected to be landmark changes. With the elimination of the prohibition against general solicitation and advertising, hedge funds will now have the ability to openly communicate with investors and the broader public. But to what extent will these changes affect the way hedge funds currently do business? And who will these changes benefit?

The industry seems to have taken a wait-and-see approach since the President signed the Act into law in April. As expected by many, the SEC has shuffled its feet, missing the original 90-day deadline to finalize the rules, followed by an additional announcement that it would be accepting public comments for 30 days. During this time, we have yet to see Bridgewater Associates billboards in Times Square, or AQR Capital ads splashed on the back page of The Wall Street Journal, and still no D. E. Shaw Stadium, but will we ever? It is our belief that the titans of the industry won’t be changing their strategy any time soon; however new rules will create a huge opportunity for smaller funds to distinguish themselves from competitors by communicating more broadly.

Before diving into the benefits that the JOBS Act can provide smaller hedge funds, it is important to understand the issues raised by the Act’s supporters and the dissenters. On one side you have hedge fund industry groups, the HFA (Hedge Fund Association), MFA (Managed Funds Association) and AIMA (Alternative Investment Management Association), which adamantly support the elimination of the 80-year-old prohibition on advertising established by the Securities Act of 1933. Their overarching belief is that this will open the door for the industry to achieve greater understanding and transparency through increased communication.

On the other side, the investor protection agencies (Public Citizen, ProPublica, and Consumer Federation of America, etc.) take more of a glass half-empty view that by eliminating regulation, investors will be at greater risk of being defrauded. The rational response: investor fraud is nothing new. A money manager who is determined to break the law is more than likely going to find a way to do so. The Madoffs of the world will always be out there.

Like all issues, there is not a black-and-white solution. There has to be a middle ground between the hedge fund trade groups supporting an “open kimono” approach and the investor protection agencies screaming “investors are doomed.” The SEC must lay out a set of rules that eliminates the gray area in the law that many have cited as a detriment to funds over the years. By simply approving the proposed rules as is, after reviewing public comments, the SEC would have essentially delayed the process multiple times without truly benefitting anyone.

Hedge fund industry advocates have asked the SEC to provide further clarity on what firms must do to remain in compliance. In a letter to the SEC dated Sept. 13, the HFA recommended that the SEC adopt a definitive “safe harbor” standard to help funds manage the process of verifying an investor’s accreditation. Others in the industry have suggested further guidance on how hedge funds report performance numbers. Should there be a benchmark or specific method for calculating historical returns? How will investors know what to believe in advertisements? Will the SEC restrict where funds can advertise?

In order for hedge funds to benefit from the JOBS Act they must know what they can and cannot do. Not only will this encourage funds to act, but it will also become the standard for what investors will come to expect. Mystique and secrecy are no longer an allure in the financial industry. Instead, investors want a proven investment strategy with historical returns, increased transparency and access to fund managers. Many of the large hedge funds understand this shift and that is why the institutional money continues to pile up for these managers. It is harder than ever for small hedge funds to attract institutional money, so many have continued to focus on high-net worth individuals and family offices, while trying to break through the institutional barrier.

The passage of the JOBS Act presents a new market opportunity for smaller funds to explore different avenues to get in front of accredited investors through targeted communications. While many of the large funds may be content with keeping the status quo, small hedge funds need to take advantage of the new rules and take a strategic approach to communications. In an industry where even the slightest advantage is cherished, every millisecond and opportunity matters.

In the post-JOBS Act world, small hedge funds should consider taking the following steps to reach investors and the broader public:

1. Increase communication with the media. Funds should educate reporters through background meetings and by providing additional details on strategies, funds, and historical performance. The new rules will allow funds to proactively reach out to a broader audience and effectively increase transparency. In addition, funds should also continue to reactively manage false information and negative perceptions spread through the media.

2. Participate in thought leadership conferences and investor events. Many managers have been hesitant to speak openly at thought leadership events because of the gray area in the law. If the SEC promulgates rules that ensure investors are accredited through a safe harbor, then managers and funds will feel a level of comfort and be more willing to speak at industry conferences, which will benefit the investment industry and the general public. Smaller funds will also benefit through an increased number of investor events that demonstrate the breadth and depth of senior management and potentially generate additional capital.

3. Website development. The new rules should allow funds to move beyond the generic log-in pages and password protected websites that many firms currently have. Funds will finally be able to catch up with the times by building robust websites that will serve as an additional avenue to reach investors by highlighting firm objectives, senior management, investment strategies, funds’ performance, and news and events.

Will the benefits outweigh the negatives for the hedge fund industry as a whole? Only time will tell, but if small funds take the lead by increasing communications then investors should come to expect the same from large funds in due time. While the final rules have yet to be released, one thing is for certain, new regulations are forthcoming and small hedge funds need to embrace the changes and be prepared to take advantage of the new communications landscape.

Nick Lawler is an Account Supervisor at Intermarket Communications, a strategic communications and public relations agency that serves financial services firms. He can be reached at nlawler@intermarket.com.

In the May 2012 newsletter article “Volatility Futures: Relative Strength: A Family of Futures Products”, we discussed various methods of trading volatility futures products as spreads or indicators, with some discussion of their basic characteristics.

This article will provide discussion of trading methods for individual volatility futures products. The CBOE Volatility Index® (VIX®) futures contract tends to be mean-reverting and trades within a range bound market.

Excluding the 2008 financial crisis, the VIX level tends to fluctuate between 40 and 10. For liquidity seeking traders, hedgers or managers, the chart below demonstrates the increasing volume and open interest in VIX futures, making it a viable choice for a liquid portfolio.

VIX futures trading volume recently reached a new high on three fronts:

1) In August 2012, the VIX futures average daily volume increased by 4.6% to 83,016 contracts versus August 2011 volume of 79,402 contracts.

2) The total volume year to date trading volume in VIX futures has increased by 59% to 13.7 million contracts versus January through August of 2011 volume of 8.6 million contracts.

3) On September 13, 2012 the VIX futures contract reached a new single-day volume record of 190,081 contracts traded. The previous record was 159,744 contracts traded on June 8, 2012.

In a range bound market, long term directional trading may not work as well as it would in other futures markets. Overbought and oversold indicators may have greater utility value. However in the shorter term (duration of days and weeks), directional trades may offer some value.

Read more

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. Mark is a contributing writer to CBOE’s Chicago Futures Exchange and 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.

First and foremost, do not ever lie in a hedge fund interview.

“Then you don’t have anything to remember,” said Mitch Ackles, President of the Hedge Fund Association and CEO of Hedge Fund PR. “Make sure that everything is truthful and above board. Be completely clear if you’ve ever had any black marks on your record, if you’ve ever had any disciplinary actions from a regulatory agency. Be very clear. Be honest and upfront about everything.”

Ackles said that job seekers should thoroughly investigate the firm that they want to work for. “Learn everything you can about the firm’s culture,” Ackles advised. “See if they have a LinkedIn group. See if there are press releases. See if there’s a sense of their corporate approaches, how well they treat their employees. Be informed going in, that is vitally important.”

Many of these films like to build a team of people that are a family, Ackles explained. “So if you get a larger firm, it might be 200+ people, and they have a cafeteria, and a restaurant, and a softball team,” said Ackles, reiterating the importance of being informed.

“Definitely dress for the job you want, not necessarily the job you have or don’t have. It’s very important that you dress appropriately. That doesn’t mean you have to have the most expensive suit, but be presentable. Clean-shaven. Look like you expect they want you to look. In Europe, long hair might be okay, but you only need to walk through Midtown in New York to see what most hedge funds look like.”

Ackles acknowledged that the rules are a “little different” for women. “Don’t wear too short a skirt, don’t have too much makeup on, realize that you’re working in Wall Street, which is an industry still predominantly men, and you need to be taken seriously, and part of that is how you present yourself,” said Ackles. “That doesn’t mean you can’t look beautiful like you might be, but you want to take that into account.”

Whatever you do, don’t forget your references. “If you get the interview and you get to sit down with people, make sure you’re prepared,” Ackles recommended. “[Make sure] you have physical copies of your resume, you have reference letters, you have people that are willing to speak up on your behalf.”

Last but not least, Ackles said that the other thing to figure out is, “What about their strategy is interesting?”

“If you’re coming in and you want to be a trader, which means you want to be part of a team that delivers alpha to their investors, see if you can get hold of their performance reports,” Ackles suggested. “See if you can get hold of what they’ve done, what their approach might be. Get as much information as possible so that you go in understanding what value you can bring to the table. They execute in bonds—what’s your thesis? Does it match theirs?”

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/.

Chief Compliance Officers (CCOs) at alternative asset management firms are facing increasing challenges overseeing and monitoring compliance with respect to investment guidelines and portfolio compliance mandates. To meet the new and growing challenges of effective compliance and risk management, a new trend is emerging among CCOs—namely, an expansion of the role to include greater involvement than ever with the investment process and, at the same time, expanded monitoring of portfolio compliance risk. Compliance risk can be broadly defined as monitoring compliance of investment style, portfolio construction and investment risk management, where these and other key areas relate to investment mandates, risk management guidelines and investor disclosures.

Several Factors Behind Heightened Oversight

CCOs are also introducing a wider regulatory focus on matters that reach beyond traditional “hot topics,” such as code of ethics and insider trading. These additional areas include investigating the control structure of the firm’s investment management practices and adhering to investor disclosures. Collectively, this heightened scrutiny stems from several contributing factors, including:

- Market events over the last several years have forced fund managers to meet investor demands for greater visibility into risk management policies and practices. As a result, there has been an increase in the level of investor disclosures surrounding portfolio strategy risk and compliance (e.g., control over “style drift” and concentration risk).

- Many larger, more experienced investors have been turning to separately managed accounts to gain access to prominent alternative investment managers. In doing so, these investors have been able to secure increased transparency and risk monitoring with respect to investment managers’ trading strategies, portfolio construction, risk metrics and portfolio performance.

- Additionally, with the implementation of Dodd-Frank, there has been a significant increase in the sheer number of SEC-registered advisors. This brings with it the attendant burdens of demonstrating and documenting appropriate compliance with investment policies, procedures, and other elements that comprise fund offering memorandums, external marketing materials and internal operating manuals.

To meet these and other new dimensions of external scrutiny, CCOs are more acutely focused on thoroughly understanding their firm’s investment and risk management environment in order to measure, monitor and report on portfolio risk against established investment policies and limits. While the extent and involvement of the CCO will vary by firm, “best in class” CCOs will focus on closer interaction and collaboration with risk managers in learning both the qualitative and quantitative dimensions of investment styles and strategies, portfolio construction processes, risk management framework, pre- and post-trade limit monitoring, periodic portfolio compliance reviews and testing.

Larger alternative asset management firms have responded to these demands by formalizing the risk management function through the addition of an independent Chief Risk Officer (CRO) to assist the Chief Investment Officer (CIO) and portfolio managers in making sound investment decisions. CROs are also playing the role of policing investment guidelines and risk management rules. To support the CRO and the risk management function, firms are making significant investments in building a comprehensive and integrated risk management framework. This may include establishing the proper governance to define appropriate measurements based upon investment guidelines and investor disclosures, defining policies and procedures to properly monitor compliance with such measurements, implementing advanced risk technology to measure risk limits and portfolio performance, and conducting stress testing and scenario analyses. Even with the sufficient levels of risk management experience and resources available at larger firms, implementing risk frameworks remains a challenging and time-consuming task and an even bigger challenge for smaller firms.

New Hedge Fund Launches Spur Scrutiny

As reported recently, new hedge fund launches during the first quarter of 2012 reached the highest level since the fourth quarter of 2007. At the same time, we are seeing a significantly sharpened focus on newly registered alternative asset managers by regulators. The SEC’s short term strategy includes examinations of a significantly large number of newly registered managers and reviews of marketing materials as well as all compliance policies and procedures, among other materials.

Although start-up funds typically lack the budget and resources of larger, more established firms, they still bear the same “burden of proof” in terms of fulfilling their fiduciary responsibilities and contractual obligations. For this reason, newly launched alternative managers are facing major challenges in the area of compliance risk monitoring. Whether they bite the bullet and invest in advanced risk technology and staff resources or leverage third-party service providers with the necessary scale and risk-management experience, newly launched alternative asset managers must ultimately check the same compliance and risk boxes as their largest, more seasoned rivals.

To be precise, firms are not looking to outsource the risk management function, which is the mandate and responsibility of the portfolio management team. What they seek are experienced risk professionals along with the risk technology needed to help them meet the demands of investors and regulatory requirements. This can range from establishing a sound risk governance framework and designing customized risk reporting to advising on customized stress testing and scenarios analyses, and more.

While they face fierce competition for investor allocations and must closely manage costs, firms increasingly view operational, compliance and risk infrastructure as a competitive advantage. Sustaining that competitive advantage while continually adapting to a dynamic regulatory environment has led to ever-widening demands for complex, cross-functional capabilities, intelligence, analytics and intensified reporting horsepower. It is in the midst of this historic transformation that firms need to be thinking pro-actively about the solutions they are implementing in the course of managing formalized risk management and compliance practices within a continually evolving alternative asset management industry.

Shyam Prakash is Director of Risk and Steven Richard is Managing Director of Risk at Gravitas Risk Analytics & Advisory Services, a provider of co-sourcing solutions for technology, investment operations, risk and research support to the alternative investment and financial services industry. Gravitas is based in New York with offices in Chicago, Greenwich, Mumbai and Ahmedabad, India. (www.gravitas.co).

Forget the fact that the industry is salivating over Congress looking to roll back Reg D under the JOBS Act, allowing hedge funds and private equity groups to advertise their offerings like any other investment product. Ignore the visions of ridiculous advertising war chests assembled by the private placement industry to launch ad campaigns that will rock the alternative world. It all misses the point: alternative products are sold through relational marketing that takes place over time. Alternatives are bought by professional investors (institutions) and sophisticated individuals (family offices, high net worth people) as a means of capturing upside gain and minimizing downside risks across an overall portfolio of holdings. Always has been, and likely always will be.

What’s really important to the scads of alternative managers vying for a piece of the wealth pie is to serve the customer, first, last, and always. To gain access to this money, a manager must first earn the investor’s trust. This tenet will not change no matter how the government tries to jump start our small business efforts. Managers in the alternative space are much better served by paying attention to what influences investors to change allocations to a new producer in the allocation amalgam.

So what exactly will help foment this cause for alternative managers? I recently conducted a survey of professionals in a position to know about this issue — specifically, prime brokers, third party marketers, and advisors in the wealth industry — and asked them to share their more memorable reflections on what went wrong during face-to-face interchanges between their clients and the investors. It reveals some interesting and, at times, rudimentary, opinions and impressions of which managers should take note. The issues raised aren’t difficult to understand, and they aren’t hard to avoid. It really comes back to basics: investors want to understand what they are getting into and to feel comfortable that their partner in the process is committed and capable of delivering the goods.

The issues of note that follow were raised post-meeting between investors and managers, when investors felt comfortable speaking their mind about how they really felt after a face-to-face encounter with a money manager looking to gain their business. All comments and impressions are anonymous: it’s not important who said what, but that what was said was stated multiple times, and reveals that the issues are occurring on a regular basis.

Why did they really start this business? Managers should be prepared to answer the basic question of “Why did you leave your high-paying job to undertake this arduous and risky effort to build a business in a cutthroat environment?” More importantly, they should be proactive in offering the explanation before being asked. It’s reasonable to expect that investors will want to hear the genesis of the business model without having to probe for it.

How much time are they spending on the road raising money versus managing the investment side of the business? Oftentimes, the start-up manager has a small operation with limited personnel. If the portfolio manager is on the road attending meetings to gather capital in order to survive, who’s minding the investment shop while that’s happening? It may take 18-24 months of asset-raising for even a well-planned out organization to reach critical mass in alternatives. But it will never happen if the portfolio manager can’t run the strategy while a marketing hat is fixed firmly to his/her head. The manager should designate either someone within the group or an outsourced professional to lead this asset-raising effort, minimizing his/her presence at meetings to the appropriate time and place for decision-making.

What is their real cap size for this strategy? Everyone says they are scalable and repeatable. But some valuable boutique strategies are fairly limited in scope and investment opportunity set. When asked this question, managers should be straightforward about their plans for growth, both from an investment universe and from a business perspective. It makes more sense to discuss what will be feasible for the approach than to spin what isn’t likely to occur and risk setting up a false front. If the capitalization size for the strategy is $250 million, then say so.

What attribution information are they really going to provide once we’re in? Again, managers say they are fully transparent and can provide detailed position statements every month for each investor. Great if it’s true; terrible to promise if it’s not. If it’s a case of poor reporting mechanics from the service provider, then fix it and sign up a better administrator and broker. But make sure what’s said in a meeting can be delivered on day one of an investor’s subscribing to the fund.

What a blowhard. Managers beware: don’t dominate the discussion at the risk of not hearing the questions. Less is more when trying to impress investors in describing your investment expertise.

I can’t see them as part of our team. Do a little research in advance and conduct the meeting accordingly. Dress appropriately for the event. Take behavior cues from the level of formal or casual style the investors are demonstrating and act in a manner that meshes with the style of the group.

They seem awfully cocky. Don’t let enthusiasm for the business look like conceit. Managers need to balance passion with restraint and plain good manners to show respect for the investors they are trying to win over.

I wish they had spent more time telling us where they see their strategy working this year. If managers make the mistake of dwelling on how they outperformed during the last Black Swan event, or devote half the meeting time to lamenting the trials of 2008, then they are not going to have the time needed to discuss their ability to navigate what’s ahead in the markets. We know it’s rocky out there, and investors want to determine if a manager can move forward with conviction and success. Take the investment admonition to heart: ‘Past results are not necessarily indicative of future results.’

I just don’t get why they think their investment sources are unique. Just because you say it doesn’t make it so. Every manager feels they see the winners others miss. Maybe it’s so, perhaps not. Managers need to get their rationale clear in advance of meetings and articulate with some specificity how the markets can yield the trading results needed to run the strategy on a long-term basis. Is it proprietary access to research? Is it an internal systematic process? Whatever the secret sauce is, bottle it and be ready to describe it in five minutes or less. The ability to do so will be worth its weight in gold.

H/She is a smart trader but is h/she a business leader? This comment is the death knell for a fledging business manager. If portfolio managers come across as immersed in the markets and fully engaged in doing so, they are missing the mark in terms of convincing investors they can also spearhead the management team necessary to create a money management firm. Unless this impression can be changed, managers might as well spend their time looking for a proprietary trading position for someone else’s business.

I don’t see how they can run the company (being that size) for long. Unfair or not, investors worry about the management ‘burn rate,’ when start-up capital is being funded externally from the profit able to be generated by the business itself. They worry about this coloring or jeopardizing the decisions made by the manager, both on the operations side (shortcuts), and the investment side (positions taken on a more aggressive basis than would be the case if funding were not an issue). Managers need to address where this working capital will come from before it’s raised as an issue of concern. It can be from their personal stake or from external sources through seeders, angels, or other interest groups, but should be disclosed freely to minimize the assumption that start-up working capital has not been accounted for in advance of asset-raising.

Knowing how many dollars h/she is up or down for the day doesn’t constitute (our definition of) risk management. More important to the wealth set than the ability to make money is the ability to protect money, otherwise known as capital preservation. Investors in today’s markets are typically driven by a ’stay rich’ mentality versus a ‘get rich’ quest. If they are qualified, they are already rich, and desire to remain so. The discussion with investors around risk management practices should center on capital preservation and how the methodology undertaken by the manager will achieve this goal. A detailed recitation on stop/loss triggers is far less effective than a step back to describe the overall process designed to seek upside potential while minimizing downside movements over the long run.

Why did he spend so much time telling us how to evaluate them? Being defensive about explaining the maximum drawdown or the latest lackluster period of returns serves very little purpose to either side of the discussion. Rather than correct an investor’s method of assessing performance, a manager should address the issues under discussion and work to understand what the investor is trying to ascertain about the performance history.

If I wanted the pitch book read to me, someone in my own office could have done that. Is there anything else that needs to be said about this heinous error? Perhaps restating that it’s a colossal waste of both the investor’s and the manager’s time to have story hour in place of a conversation. If the pitch book can serve to augment the dialogue and discussion points, fine to use it for illustrative purposes. But head down reading from the deck is a no-no under every scenario.

When I asked for a trade example, I didn’t mean a dissertation. This could also fall under the ‘blowhard’ umbrella, but specifically, a drawn-out trading example that drills down into detail no investor cares to hear or learn about is far less effective than a couple of highlights about trades that were successful and why, and trades that went opposite and why. In all cases, ending with the lessons learned and portfolio adjustments in the wake of the examples serves far better to help an investor understand where a manager is coming from.

Well, after that meeting, the right trade is to short that manager’s fund. Or, that was an hour of my life that I can never get back. Both of these are saying the same thing: the manager blew it. The meeting was a failure, and waiting for a follow-up appointment is going to be a waste of time.

Not every meeting will lead to another, and not every investor will be suited for a manager’s offering. But wasting viable meeting time failing to engage investors who could benefit from a manager’s abilities strictly because the initial discussion was botched is often an avoidable error. A little preparation and some introspection on past meetings that failed to pan out can help managers achieve a better return on positive outcomes moving forward.

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 online. Contact her at dharrison@panegyricmarketing.com.

By Mark Shore
mshore@shorecapmgmt.com

Since the economic decline in 2008, there has been a growing demand of individual and institutional investors to consider various choices of non-correlated investments to reduce tail risk (downside deviation)(i) and correlation risk, often known as alternative investments.

There is a good chance an investor will have stocks and bonds in their portfolio via a 401k, IRA, pension fund or directly into mutual funds. Perhaps they have some real estate either as an investment or the home they live in and maybe some private equity.

In 2008 and 2009, most stocks both domestically and foreign became highly correlated as they headed south and everyone was seeking the exit door simultaneously, thus causing losses to extend as panic selling and the need to liquidate increased.

One of the increasing areas of non-correlation investment is the currency market or sometimes called forex or FX (foreign exchange). In August, 1971 President Nixon removed the U.S. dollar from the gold standard, ending the Bretton Woods agreement and causing currencies to float at market rates. In December 1971, Professor Milton Friedman wrote “The Need for Futures Markets in Currencies”.(ii) May, 1972, the Chicago Mercantile Exchange introduced currency futures.(iii)

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

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.