Agecroft Partners’ Don Steinbrugge discusses hedge funds and his investment strategy with Deidre Bolton on Bloomberg TV’s “Money Moves.” The top performing strategy in the first quarter of 2013 was Asia-focused funds, Steinbrugge says, followed by long-biased strategies and long/short equity.

Mark Yusko, CEO of Morgan Creek Capital Management told attendees at the HedgeWorld East/PartnerConnect East conference last week that investing in U.S. equities is a thing of the past. Future growth will come from emerging Asian economies like South Korea.

“The press says that hedge funds are dead, everybody should get out of hedge funds … long-only lives forever. Long-only is the best way to invest. Over 20 years, long-only took you from a dollar to four dollars. Long/short—and this is the average long/short, this isn’t the good guys ’cause the good guys don’t even report … you made 12 times your money, not four times your money. And how did you do it? You did it by paying attention to the three rules of managing money: One, don’t lose money. Two, don’t lose money. And three, don’t forget the first two rules.”

In the continuing series of discussing methods of trading the CBOE Volatility Index® (VIX®) futures contract traded on CBOE Futures Exchange, LLC (CFE®), this article will discuss utilizing the Commodity Channel Index (CCI).

In each article, readers are reminded that the liquidity of a trading instrument is always very important. On March 1, 2013, CFE again reported a continuing trend of increased volume in the VIX futures contract. Specifically, February 2013 was the second consecutive month that achieved record average daily volume, total volume and single-day volume for the VIX futures contract and for CFE.i

The average daily volume (ADV) for the VIX futures contract reached a record 161,176 contracts traded. This was an increase of 141% from February 2012 and an increase of 17% from January of 2013. February 25 and 26, 2013 experienced record volume days of 302,278 and 299,566 contracts traded respectively. This was also the first time that the VIX futures daily volume exceeded 300,000 contracts. The previously single-day record volume of 221,323 contracts was set on January 2, 2013. In February 2013, 3,062,344 VIX futures contracts were traded, representing an increase of 129% from February 2012. February 2013 trading represented a 6% increase from the record of 2,897,739 traded contracts set in January 2013. February 2013 was the sixth consecutive month in which trading exceeding two million VIX futures contracts and it was the first month in which trading exceeded 3 million VIX futures contracts.

The CCI was developed by Donald Lambert and introduced in the October 1980 issue of Commodities magazine (aka Futures magazine). Application of the CCI is not limited to physical commodities and may apply to financial instruments as well. The CCI is a metric of an investment’s variance from its statistical mean. The CCI reports high values when a market reaches an extended high price relative to its average price. It will report low values when a market reaches an extended low price relative to its average price. In basic terms, the CCI is an overbought/ oversold indicator.ii

The CCI is based on the premise that all markets have cycles from low to low or high to high. The CCI is calculated by calculating a typical price of the day from the high + low + close and then creating a simple moving average of the typical price. The final equation of the CCI = (typical price – moving average)/ (0.015* mean deviation). Lambert applies a constant of 0.015 to keep 70% to 80% of the CCI value between +100 and -100.iii

The CCI is considered overbought when the value exceeds +100 and is considered oversold when the value is below -100. However the CCI may extend beyond +100 and -100 and the market could remain overbought/ oversold for an extended period of time. If a market continues to remain overbought/ oversold, but the CCI is reversing (divergence appears) it may imply the market is nearing a correction. Some examples of divergence are provided in this article.

Parameters of the CCI are based on cyclical periods of the market. For this article we assumed a 60 day cycle, using a 20 day (1/3 of the cycle) CCI parameter setting. The lower the parameter setting, the greater the probability of the CCI to reach overbought/ oversold values.

Chart 1: Nearest Monthly VIX Futures Chart, 20 Month CCI

The fastest growing segment of the financial services industry was the one hardest hit by MF Global’s suspicious demise and overt fraud at Peregrine Financial Group (PFG).

The managed futures industry, which had grown from $14 billion under management in 1991 to over $329 billion to end 2012, was a shining star of the new economy. Offering the unique ability to zig when other investments zagged, the lack of correlation and performance during crisis were key points of attraction. This attraction came to a screeching halt with the MF Global and PFG criminal incidents. Not only were investors getting acquainted with the asset class shocked to learn their accounts were looted of assets, but more troubling criminal behavior appeared the cause - casting a shadow over all participants.

“There is a severe loss of trust, a loss of confidence. There is incredible anger and frustration. Things need to change,” said Diane Mix Birnberg, president of Horizon Cash Management. Her firm just released a study, The Aftermath of MF Global and Peregrine Financial Group Meltdowns: A Crisis of Trust, showing that a whopping 91% of respondents believed there was a breakdown in audit procedures.

The study themes that emerged included:

• The laws and rules that govern the industry need to have ‘teeth’ – and those involved in fraud and theft need to be punished.
• Customer segregated funds must either be kept completely out of the FCM and/or be verified in real-time by regulators.

A strong and rare female voice inside a Type A male dominated industry, Ms Birnberg’s firm, Horizon Cash Management, has become the top cash management firm for participants in the managed futures industry. Starting in the 1970s as a secretary in a stock brokerage firm in Atlanta, where “women generally didn’t think about career aspirations,” she later joined Lehman Brothers in the bond business. After moving to New York City to work on Wall Street, she was recruited in 1980 by investors to operate a cash management firm in the futures industry and in 1991 founded Horizon Cash Management, which currently has $2 billion under management.

In MF Global “there was very little institutional leadership (from exchanges, regulators and major firms),” she said. “This resulted in rumor, innuendo and ultimately a lack of trust. The void in leadership is terrifying.”

Looking back on the MF Global and PFG disasters, Ms. Birnberg has the experience of witnessing 10 FCM implosions. “In every FCM implosion it has negatively touched the CTA / CPO segment of the industry.”

“Think about a plane crash,” she said. “When it happens? Key issues and facts are addressed by the airline, the FAA and even the US president. Information is available regarding what happened, why it happened and steps being taken to address the problem.”

With MF Global a plane crashed and there was silence.

This is the first part of a two part article.

Mark Melin is author of three books and taught a managed futures course for Northwestern University’s Executive Education program. To read additional blog posts visit www.UncorrelatedInvestments.com (requires free registration).

Although it hasn’t been written about nor formally discussed, understanding a managed futures investment from the standpoint of market environments and macro performance drivers first solves many problems for asset managers.

· It enables a quick description of the investment to provide the investor and understanding of how beta performance is generated

· Allows the asset manager to establish logical performance expectations in two sentences

· Sets up further structural analysis with performance measures relative to the strategy

· It enables logical strategic correlation consideration

· It explains how and why the investment operates

How Beta Performance Drivers Work

Each of the primary managed futures strategies have an environment in which they are expected to find success and relative failure.

For instance, several strategies are based on the market environment of price persistence.  These include trend following, breakout, momentum among the many similar named strategies.

Other strategies are based on the market environment of relative price divergence and then convergence back to a statistical mean.  These include relative value, arbitrage and strategies based on how pricing of one asset relates to a related asset.

Strategies based on the market environment of volatility utilize options and have a different set of considerations depending on the specific strategy type.

Describing The Investment

The first step in the analysis process is to identify this beta performance factor, which leads to an understanding of performance generation factors and can assist in setting expectations.  Using the market environment performance driver, an asset manager may describe the investment as such:

“This trend following program has a macro performance driver of price persistence.  It is expected to prosper when the price of a given asset moves in one consistent direction.�

In two sentences, the investor can set macro performance expectations when the investment should and should not work, as well as provide the core strategic logic as to why the investment is so uncorrelated to that of the stock market.

Performance Measures Relative to Strategy

Another reason to understand the performance driver concept is that the performance measures should be relative to each strategy.  For instance, trade time frame might be given a different weighting in a trend following program than certain volatility programs.  Expected margin to equity usage, win percentage and correlation to the equity markets during times of crisis are all examples of performance measures that are different relative to each strategy.

The important takeaway is with each performance driver, the relative alpha strategy considerations of the managers can vary.  Thus starting at the high level and working downward is most appropriate.

Mark Melin is author of three books, including High Performance Managed Futures, taught a course for Northwestern University’s executive education program and edits the web site www.Uncorrelated-Investements.com.  Entire contents Copyright (C) Mark Melin 2013

How does one define a previously un-definable topic such as High Frequency Trading (HFT)?

Sources close to the Commodity Futures Trading Commission (CFTC) indicate new thinking may be underway regarding the topic of High Frequency Trading (HFT). Speculation is this thinking could look at the relative market impact HFT may have in a given market move as a legal definition. Such a definition could consider the relative impact of a particular HFT player as a percentage of a market damaging move and could be used for potential CFTC action on the issue. This new thinking could be outlined sometime in March, sources said.

Current US regulation regarding HFT is considered by some market participants to be behind the curve relative to the European Union. In the EU, for instance, algorithm type is used as an identifier to determine market participant behavior during crisis conditions.

“There is significant uneasiness on the speed in markets,” noted Vassilis Vergotis, Executive Vice President, Head of Eurex, Americas.

For the full article, visit the source web site (requires free registration): http://www.uncorrelatedinvestments.com/blog/?p=59

Mark H. Melin is author of several books, including High Performance Managed Futures and taught on the topic at Northwestern University’s Executive Education program

400 Capital’s Chris Hentemann says he still sees investment opportunities in residential mortgage debt despite the housing recovery, and is increasing his exposure to commercial real estate debt.

You can tune in to all of Reuters Insider’s exclusive GAIM 2013 coverage by clicking here.

Seed investor Charlie Friedberg of Stride Capital says it’s harder to find hedge funds that pass muster, and that he sees more hedge funds just following the trends than taking contrarian positions.

You can tune in to all of Reuters Insider’s exclusive GAIM 2013 coverage by clicking here.

Natural gas prices may be low, but former energy trader turned hedge fund manager Bill Perkins, of Skylar Capital Management, is making big bets on volatility swings in natural gas.

You can tune in to all of Reuters Insider’s exclusive GAIM 2013 coverage by clicking here.

Reuters hedge fund correspondent Svea Herbst-Bayliss says that after years of favoring fixed income, investors are ready to put their money back into equities and might be rewarded with big returns.

You can tune in to all of Reuters Insider’s exclusive GAIM 2013 coverage by clicking here.