Top fund managers at the GAIM 2013 Hedge Fund Conference discuss whether they’re finding the best opportunities in the United States, other developed countries, emerging markets or frontier markets.

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

Despite low volatility, Cairn Capital’s Andrew Jackson says there are opportunities to make “very real returns” from credit markets in Europe. He also said he sees no bond bubble in the United States.

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

The hedge fund industry has become fragmented recently. Top managers at the GAIM 2013 Hedge Fund Conference discuss the themes driving their investments and debate where they are seeing opportunity. (more…)

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.

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.

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.

There are thousands of hedge funds competing in the marketplace. They come in all shapes and sizes, but all too often they approach investors with the same thesis.

“The things that everyone sees all the time are long/short and global macro, basically people that are saying, ‘We’re gonna be better than the market’ because we’ve got XYZ experience and we’re so smart or we have backtested all our results,” said Nathan Anderson, co-founder and CEO of ClaritySpring, a company that aims to bring efficiency and transparency to the hedge fund industry. “That’s not unique. At this point there are 13,000 hedge funds, so the burden is on the manager to prove that they have something that is focused and unique.”

Before ClaritySpring, Anderson evaluated hedge fund and private equity fund managers for Blue Heron Capital. He said that he prefers hedge funds that have a particular focus over those that promote a generic thesis.

“I think the best funds are when someone has found a very specific segment of the market that has an inefficiency that has not been yet exploited by a lot of capital,” said Anderson, providing an example. “There’s this one fund that invests in aircraft-backed securities. It’s a fixed income-type of investment.”

Airlines are a volatile investment. Between bankruptcy expenses, the costs of running the business, and the fluctuating customer base, the airline sector is one of the most challenging industries in the world.

“However, air travel as a transportation medium is not going away,” said Anderson. “Regardless of what happens in and out of bankruptcy court, air travel is here to stay. One of the major expenses for every airline is, of course, the aircraft. In many cases they don’t own the aircraft, they lease them.”

Anderson said that the fund—which he could not name due to regulatory restrictions—has “identified a specific inefficiency within the aircraft security because these are securities that can’t really be run through a quant model too easily because each plane has completely different collateral characteristics, so the quants have kind of stayed on the sidelines.”

“There aren’t a lot of buyers focused on the space because airlines and aircrafts kind of have a negative connotation,” he added. “So a lot of these securities are trading at a very significant discount to the liquidation and loose value of the plane.”

Regardless, Anderson said that planes are “ultimately fundable assets.”

“They can be leased out anywhere in the world, so if a [domestic] airline is doing poorly, but another is booming in China, it might be a Chinese airline that leases the plane,” Anderson explained. “The lease revenue is relatively stable. The resale value is fairly quantifiable.”

Anderson said that he has not dug into this fund too deeply. “But on the surface of it is a very unique investment thesis, and I think it’s potentially compelling,” he said.

A Substantial Advantage

In his quest for other unique hedge fund concepts, Anderson came across a few that specialize in shorting fraudulent Chinese securities.

“In the early 2000s, a lot of Chinese companies would reverse IPO onto U.S. exchanges or came to U.S. exchanges through a reverse merger,” said Anderson. “It turned out that many of these companies were complete frauds. The reason they weren’t listed on the Chinese exchanges is for that reason.”

Anderson said that the punishment for defrauding investors in China is much harsher than the punishment for defrauding investors in the United States. “There’s no extradition and there’s very little recourse, so all these companies produced phony numbers,” Anderson explained. “There are a handful of long/short funds that compare the SEC filings in the U.S. with local filings in China that have investigators that will go to the factory simply to see if they’re empty or operating. They will speak with competitors, and most competitors, if you ask them about a particular company, they will know something about it.”

In cases where the company is a complete fraud, “a lot of times the competitor hasn’t even heard of this company,” Anderson warned. “So if you run into a Chinese company that is claiming to be number-two or number-three in the market, and none of their competition has even heard of them, obviously that’s a red flag.”

In general, Anderson said that these funds are doing “very straightforward, basic research on these companies.”

“When they do find that there’s a fraud, they short the stock, release that information to the market, and then the stock goes down 50% to 100% over the next weeks and months,” said Anderson. He believes that this thesis is far more compelling than a hedge fund that says, “I think Coke is going to outperform Pepsi, so I’m going to short Pepsi and go long Coke.”

Instead, “They’re doing research that says [some Chinese company] is a complete fraud, and their research is moving the markets significantly,” said Anderson. “They are creating their own advantage because they are a catalyst themselves, and that type of stuff is rare. If Goldman Sachs releases a research report that gives a buyer a recommendation to a particular stock, maybe their stock will move three or four percent, which is significant. But if you can provide traders with a report that can move a stock 100%, you’re obviously providing a substantial advantage.”

Share a Glass

If you need further inspiration for starting a hedge fund, Anderson provided one more example of a fund with a unique thesis.

“There’s a fund that focuses on investment-grade wine,” said Anderson. “There’s an exchange for wine, and it’s actually cleared and traded as any other future. These individuals basically buy investment-grade wine at the source—so they’ll buy from the supplier, cut out the middlemen—trade around their positions, hold them if they think it’s going to go up in value over time, and the way they deal with the wine market is to treat it like any other commodity.”

Anderson said that there are “less eyeballs and less people trading the wine market than, say, corn, wheat, and other commodities.” He believes that the players in the wine market are not as profit-motivated “because the other competitors aren’t trading around a position and doing everything they can to find the best wine at the lowest price.”

“A lot of the other participants are really just managing their inventory,” said Anderson. “They’re purchasing futures just so that they can get delivery of the wine in three to six months or whatever, then they buy the futures and forget about it. It’s a unique market. It’s dominated by non-profit-motivated participants, which provides some opportunities to make an excellent return.”

“And, of course, they let their investors drink some of the wine,” Anderson said with a laugh.

“Stuff like that piques my interest. It doesn’t have to be just another fund that figures out whether Apple is going to go up or down. The reality is that there are so many people competing in global macro, there are so many people competing in long/short equity, and when you have a mainstream strategy without a differentiator, it’s a harder road to convince potential investors that you can win in that market. For a strategy like shorting fraudulent Chinese companies, you don’t even have to be the smartest manager in the world. You don’t have to have 200 years of combined experience.”

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/.

Agecroft Partners founder Don Steinbrugge talks about hedge funds and his investment strategy on Bloomberg TV’s “Money Moves” program.

Fixed Income Arbitrage is most famous for going bankrupt. There is no shortage of examples, starting with Long-Term Capital Management in 1998-1999. The strategy is full of concepts that investors love to hate, such as leverage and adding to trades that lose money initially. However, 2012 has been a particularly good year for this type of relative value strategy.

In 2008, in the wake of the global financial crisis, many of the large fixed income relative value shops either went out of business (Endeavour Capital, Ross Perot’s Park Central, JWM) or shrank dramatically (Myron Scholes’ Platinum Grove, London Diversified). Since then, Dodd-Frank and the Volcker rule have also reduced the competition from bank proprietary desks. Considering the 2008 crisis, increased government regulation and the despised concepts of leverage and adding to losing trades, Fixed Income Arbitrage is a marketing disaster. As a result, the space is sparsely populated.

During this same post-crisis period, governments have increased their market interventions. Recently, the Europeans injected €1 trillion via the Long Term Refinancing Operation (LTRO) and another €200 billion via the Securities Market Program (SMP). The U.K. and the U.S. have also been active in their own versions of quantitative easing. These market interventions have produced a bevy of opportunities in the fixed income space.

As with any business, reduced competition and increased opportunities make for an appealing situation. Our Fixed Income Arbitrage fund, The Barnegat Fund, was able to survive 2008 and has outperformed for the last twelve years. Barnegat has a compound annual rate of return of 18%/year since our launch in 2001. Our share price has gone from 1.00 to nearly 8.00 during that time.

Founded after the collapse of Long-Term Capital in a time of incredible opportunities—but impossible fundraising—Barnegat began only with an investment from myself in 1999. The first two years were very difficult times. I had put all my money in the fund and was enjoying solid returns, but did not earn any fees since no one else had invested at that point. I was living in the walk-in closet of a friend in Manhattan. I had driven my expenses to $0 so that I wouldn’t get stopped out of my own trade. I was using the New York Public Library Bloomberg terminal and writing down the quotes each day to bring home and enter into the computer.

The stigma of Long-Term Capital continued to hang over Fixed Income Arbitrage for a long time after 1998. Fundraising was very difficult, but opportunities were plentiful due to the reduced competition. After two years in the marketing wilderness, Barnegat finally found an initial trio of institutional investors and began an offshore hedge fund in Bermuda with $25 million. Returns continued to be strong, up 13.5% in 2001 and up 55.9% in 2002. The fund’s Assets under Management (AUM) quickly grew. By 2003, AUM was up to $500 million at which point we closed the fund to new investments.

Hedge funds and the world’s economy really started to accelerate from 2005 through 2007. In the past, we had great opportunities, but no one would touch Fixed Income Arbitrage. However during these three years, everyone was calling, had seen our strong returns, and wanted to invest in the fund. But we didn’t have the opportunities to invest in. The markets had become too efficient. We returned capital three separate times between 2005 and 2007. Prospective investors would call and occasionally be irate when told that no new investments were accepted and that current capital was actually being returned. I told them at some point the world would become inefficient again and I would call them. Little did I know how quickly that time would come.

On Sept. 15, 2008, Lehman Brothers went bankrupt and the world entered the global financial crisis. We re-opened the fund and were back to having fantastic opportunities, but brutal fundraising. I called some of the people that were irate at our refusal to accept their investment in 2007, but they were now too scared to invest in 2008. I contacted current investors and told them that we had fantastic opportunities again. This was a very difficult time for them. Our fund was down 37% in 2008. Nevertheless, our investors stuck with us and we had net investments in 2008, something of which I am quite proud.

Those new investments have worked great for both us and the investors. We were up 132% in 2009, 16% in 2010, 11% in 2011 and nearly 40% so far this year. However, it is still very difficult to market. The market remains fearful and the Fixed Income Arbitrage collapses of 2008 are still fresh in investors’ minds.

There is no shortage of bad things to say about Fixed Income Arbitrage, but with this fear and hatred of a particular market comes reduced competition and plenty of opportunities. For investors in for the long-haul, this much maligned corner of the Fixed Income market has The Barnegat Fund, which has outperformed all major investment indexes since 2001.

Bob Treue is the chief executive officer and president at Barnegat Fund Management. He can be reached at bob@barnegatfund.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.