Our weekly newsletter is out, and we’re tackling one of the questions we here more than you might think: how can I start my own CTA? From managed futures billionaire David Harding of Winton, to the legend of John Henry leveraging managed futures success into ownership of the Boston Red Sox, to the tale we recently told of Bill Eckhardt and the Turtle Traders – there are plenty of alluring stories to entice skilled traders to try their hand at becoming professional Commodity Trading Advisors (CTAs). Taking the leap from trading your own money to managing others’ is the first step toward building a legend of your own, but how realistic is it to turn that gleam in your eye into a successful enterprise and tens of millions in the bank?

You might think that your worries extend no further than: 1. Make money, 2. Be operationally sound, and 3. Be properly registered and compliant. But even when you do everything you are supposed to do, the assets don’t always just come pouring in. What other challenges must an upstart CTA overcome? Well, for starters…

Jumping into the managed futures space means entering a David versus Goliath situation, as just a handful of huge CTAs control the bulk of managed futures wealth (in terms of assets under management). Does this mean all hope is lost? Definitely not. It isn’t easy, but there are a few things you should know before getting started.

- - - - - -

To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.

DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Copyright © 2013 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.

Our weekly newsletter is out, and we’re examining some of the Emerging Managers on our CTA rankings. You see, picking a CTA from amongst the thousands of available managed futures programs can be a daunting task, and it’s why we created the Attain Capital Managed Futures Rankings. Our proprietary algorithm gives a single snapshot of hundreds of CTAs by ranking them on a scale of 1-5 flags. While it’s no substitute for due diligence and a careful evaluation of an investor’s goals and expectations, we believe it is an excellent starting point. Of course, no methodology comes without its quirks, and close watchers of our rankings list may have noticed that, on occasion, programs will suddenly “pop” onto the rankings. One day they aren’t on the list, and the next day they appear – sometimes with a 4 or 5-flag ranking.

It’s no mistake, and it isn’t that these CTAs are suddenly transforming into the best of the best at the stroke of midnight. It’s actually a consequence of the way that we filter the programs that are out there. You see, before we ever get into the nitty-gritty of comparing stats such as downside deviation and 3 year compound returns, we narrow the field with one simple rule – a CTA must have at least a 36 month track record before it is eligible for inclusion.

So when an up-and-coming manager hits their 3rd birthday, so to speak, we include them in our rankings universe and calculate a ranking for them. But just finding out about a program the day it hits its third anniversary wouldn’t do our clients any good, so we take a closer look at their record and trading style prior to hitting the rankings.

What we find when looking into these emerging managers is a classic risk/reward dilemma. On the one hand, their early success could be a fluke – they may not yet have proven themselves by performing well under a diverse array of market conditions. But on the other hand, these young programs could represent an opportunity to invest with the next great CTA before they make it big. Only time will tell how successful the programs which have recently jumped onto our rankings will be, but we wanted to share some quick profiles of three of the higher ranked ones: Stenger, Protec, and Global Sigma. Click on to read more.

- - - - - -

To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.

DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Copyright © 2013 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.

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).

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.”

Read More

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.

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

Our weekly newsletter is out, and no, this isn’t the start to a trite “inside baseball” financial joke. Don’t get us wrong – we love a laugh – but bad investing habits are no laughing matter. We’ve found that some investors become their own worst enemy, as reliance on familiar investing tropes mutates into a tunnel vision that handicaps their portfolio. No, this is no joke. This has to do with different types of investors and how they become interested in different managed futures programs.

What kind of investor are you? Do you chase returns? Look for bargains? Do you buy the hype of a brand new manager? Or stick with the “brand names” of the industry? Are you a sucker for low correlations?

It’s not that these metrics are unimportant. The problem comes when one metric is given all the power, and that’s the kind of investing we discourage. However, as the saying goes, talk is cheap, so we decided to put our money where our mouth was, and put some numbers to these different types of investors to show just how well – or poorly – they do relative to the average CTA. Click through to see what we found and why, sometimes, the results surprised even us.

- - - - - -

To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.

DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Copyright © 2013 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.

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

Our weekly newsletter is out, and this week we’re going into a bit more detail on one of the most common investing mistakes: performance chasing. As is the case in every asset class under the sun, managed futures investors love to chase performance. The sustainability of a strategy often comes second to double or even triple digit returns. We do our best to discourage such decision making, because in our experience, this is uniquely damaging in managed futures allocations.

The fact is that drawdowns – or extended periods of severe losses – are a fact of life for managed futures investors. There is no way to avoid them; every program goes through them. But in our experience, performance tends to be cyclical for quality programs. They will have a run up, face a drawdown, experience a recovery period, and repeat the process all over again. An investor making allocations at the peak of a run up period usually sets themselves up for losses in the short-term – losses that typically don’t sit well with an investor who was chasing returns in the first place.

However, we’ve found that the best way to explain the significance of such cycles to investors is to show them how it’s happened in the past. In 2010, we did just that, looking into the performance cycles of Clarke Capital. However, with the overarching trend of the asset class’ performance cycling between up and down years being called into question by back to back losing years, and a great deal of the trend following space in drawdown, we thought it would be helpful to take a closer look. Here, we examine the reasons why investors chase performance, the cycle they step into when they do, and what that looks like in an individual track record.

Spoiler alert: it ain’t pretty.

- - - - - -

To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.

DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.