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Five thought provoking books on alternative investments:
April 7, 2008
After poring over the “Learn About” section of Attain’s website and grilling several of Attain’s team over the past week with even more questions on Alternative Investments, a new client of Attain finally asked: “do you know of any good books where I could learn even more?”
Well, as is often the case, I was glad he asked…..and instantly had a topic for this week’s newsletter. A recommended reading list of sorts, including some of the most thought provoking and interesting books we know of at Attain focusing on (or at least touching on) alternative investments.
The list below doesn’t include hands on, how to, books which tell you to buy here and sell there. We frankly find those pretty boring. These are actually stories in their own right, whose interesting characters just happen to be real life traders/investors mixed up in one way or another with the world of investing.
· When Genius Failed, the Rise and Fall of Long Term Capital Management by Roger Lowenstein
I’m not sure who gets the credit for the line, but we’ve all heard in one form or another that growing as a person (or investor) is to learn from one’s mistakes. Well, this book details the very large mistakes that were made by one of the biggest (and supposedly smartest) hedge funds ever, Long Term Capital Management and their pair of Economics Nobel Prize Laureates. Their collapse nearly crippled the financial system, resulting in an unprecedented bailout from the US fed (sound familiar to current times). Just how such smart people who literally wrote the book on risk got it so wrong is truly an intriguing story which helps the every day investor understand there is much more to risk than meets the eye. The sheer size of the numbers of dollars being made or lost in this book make it a compelling read.
· Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb
One of my personal favorites, Fooled by Randomness stands a lot of conventional wisdom on its head by questioning the very fabric of skill and success. Are traders/investment managers actually good? Or just lucky? Mr. Taleb would have you believe there is a lot more luck to it than one would think, and not really even luck as you or I would think about it, but luck in terms of not yet having experienced an outlier event such as a 1 in 100 year storm or “black swan”, as he would call it. The end result for Mr. Taleb is a market that is much more random and crazy than can be modeled or predicted, leading those who believe it can be modeled or predicted down a dangerous path. Warning for option sellers – Mr. Taleb is wholeheartedly against option selling, and in fact runs his own hedge fund which specializes in option buying in hopes of profiting from the impending outliers he believes the rest of us aren’t thinking about. I am currently reading Mr. Taleb’s new book – The Black Swan
Quite the opposite of the book above, this book details the trials and tribulations of a group who actually did believe the markets could be modeled and profitably predicted. If you have ever thought of writing your own trading system – these guys sure did, and took it to a whole new level. The title is a little misleading, as they were mainly dealing with derivatives markets, not Wall St. stocks and bonds – but it is an interesting read on just how far some will go to “beat” the market. And just how much big money or banks are willing to believe that such “beating” of the market is possible, even if the proof isn’t exactly there. The beginning of this book paints a great picture of the now nearly defunct, controlled chaos that is/was futures trading pits in Chicago, and is worth the price of admission just for those few dozen pages.
· Handbook of Alternative Assets by Mark J. P. Anson
While this is more of a textbook than a narrative like the other books listed here, and rather statistically heavy, this is a great book for learning the different types of alternative investments, along with the benefits and dangers of each. The many different types of hedge funds, commodity and managed futures, private equity, credit derivatives, and corporate governance are all covered. Anson is the former Chief Investment Officer of CalPERS, the huge California Pension which is the largest Pension fund in the US with nearly $250 Billion in assets, and as such one of the largest investors into alternative investments. With that type of experience, it is worth hearing what he has to say.
· The Prize : The Epic Quest for Oil, Money & Power by Daniel Yergin
For anyone who gets excited whenever the prices at the pump go up and down, or takes a peek at the news or online to see what Crude Oil prices did each day – this book is for you. It is the history of the modern world, in a way, told through the eyes of the oil industry. Did you know the first oil wells in the world were in Pennsylvania, that the rights to Saudi Arabia’s oil was first secured for just $175,000, or where the name Shell Oil came from. The Prize is a Pulitzer Prize winning must read that puts you behind the scenes at important cross roads in history where oil was often the main character. With the current state of affairs in the world regarding oil, seeing how we got there is a great exercise.
But life isn’t all markets and statistics, or so they tell me, and the following two non-market related books are good reads we felt belonged on this list.
· Moneyball: by Michael Lewis
This may be the most well known book on this list, and at its base level is about putting together a winning baseball team with a shoestring budget. But there is a very interesting corollary to assembling a winning portfolio. In the book, Billy Beane figures out that poring through massive amounts of statistical data can be a more reliable method for building a team than going with high priced past performers. What could that mean for a portfolio – not picking household names that may be overvalued? Taking a chance on a relatively unknown manager, etc. that has the statistics to back it up? This book will get you thinking about your portfolio in a different way.
· Hug Your Customers: by Jack Mitchell
This is required reading for every Attain Capital employee on their first day, and is the basis of our old fashioned customer service culture at Attain. Know your customer, and do whatever you can (and them some) to help them are the basics for author Jack Mitchell, who runs two men’s clothing stores in two of Manhattan’s most affluent suburbs. For anyone who has customers, and wants to take care of them, this quick read is for you. Although, Nassim Taleb of ‘Fooled By Randomness’ (above) might just say that Jack Mitchell was merely lucky, in the right place at the right time.
We hope you found a book or two on our short list which piqued your interest, and look forward to hearing your thoughts on any of the above. Hopefully some friendly debates on statistical randomness, whether oil really started this war or that, or whether Long Term Capital Management would have profited on their positions will surface. In the meantime, if you have some must reads of your own that touch on alternative investments – we would love to hear what they are. Email your favorites to email@example.com.
- Jeff Malec
IMPORTANT RISK DISCLOSURE
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Many commodity markets around the world saw a serious correction in March as investors and speculators suddenly shifted money out of commodities after two months of strong gains to start 2008. The largest decliners were Coffee, Soybeans, Palladium, and Sugar which fell -23.62%, -22.08%,-21.93%, and -20.04% respectively (pretty big declines for a single month!) Most of these declines were caused by traders exiting positions and taking profits on long trades.
Other commodities suffering declines included Cotton which was down -13.56%, Lean Hogs which fell -11.41%, Live Cattle which was down -8.71%, while Wheat fell -6.30%. Precious metals also had a rough month with Silver -13.08%, Platinum -7.01%, and Gold -5.94% all suffering large declines.
On the plus side energies prices rallied higher due to cold temperatures and the weak US Dollar. Natural Gas futures led the way climbing +7.12%, Heating Oil gained +5.93%, while Crude Oil was only up +0.89%. RBOB Gasoline futures did not follow the trend and moved slightly lower at -2.33%. Corn (+1.89%) was the only other major market to post gains as flooding and heavy rains disrupted planting season in the Midwest.
Meanwhile stocks finished March mixed with SP 500 futures falling -0.61% and Dow Jones futures losing -1.82%. Tech stocks rallied higher however and NASDAQ futures finished the month with gains of +2.06%. In smallcap trading the Russell 2000 futures were up +0.59% while SP Midcap 400 futures fell -1.10%. Treasury futures also had a choppy month of trading before a late rally caused the bench mark 10 year note to finish +1.43% higher. 30 year bond futures finished unchanged. Finally in currency trading the Dollar continues to get hammered with US Dollar Index futures falling -2.68% while Eurocurrency futures +4.06%, Swiss Franc futures +4.95%, and Japanese Yen futures +4.08% all traded higher against the Dollar.
The month of March saw mixed results across the CTA space, with many multi-market commodity programs giving back some of their yearly profits as option sellers and multi-strategy programs saw gains. All in all, March capped an impressive first quarter of the year in the CTA space.
Among Attain's recommended CTA's; Clarke Capital stole the show as their multi-strategy Millennium program returned an estimated 12.76% in March and is ahead 51.97% for the YTD and their World Wide program earned an estimated 5.85% in March and is ahead 24.59% for the YTD. The Millennium program began trading in 1998 and according to the manger, "offers maximum diversity with regard to commodity interests followed and utilizes intermediate, long-term, and very long-term models". According to Mr. Clarke's records he is managing 67.2 Million in client assets between the two programs and $176 Million across all client programs.
Other multi-strategy managers that performed well for the month and quarter included Attain's own Strategic Diversification Program , the Attain Modified Program, and Nu Wave’s Combined Futures program. They returned an estimated 3.52%, 4.91% and 1.27% respectively in March and 8.54%, 22.28%, and 8.23% respectively for the first quarter.
In comparison to the S&P 500 which was down -9.29% for the first quarter other recommended CTA strategies that performed well in the first quarter include Rosetta Capital +23.28% YTD, Dighton Capital USA +12.6%, Meyer Capital +18.4%, Crescent Bay PSI +12.54%, NDX Shadrach +8.83%, Raithel Investments +7.68%, FCI +5.71%, Cervino Diversified +3.62%, Zenith Diversified +3.04%, NDX Abednego +2.26%, and Zenith Index +2.14%.
On the negative side of things for the first quarter it is no surprise that some of the more aggressive index options strategies were among those seeing losses after "coasting along" for the past several years of low volatility. Programs struggling during the increased volatility in the 1st Quarter included Diamond Capital -12.09%, Zephyr Moderate -10.55, and Ace Investment Strategists -7.18%. These three advisors continue to manage over 110 Million in client assets and are pressing forward with their "short volatility" trading strategies despite the heightened market volatility.
While it is often emotionally difficult to remain invested in a strategy during the drawdown phase, we want to remind investors that the best cure for losses in a single program are a diversified portfolio of CTAs. It wasn’t too long ago that many of the multi-market trend following type strategies were suffering drawdown phases themselves, only to see their type of environment return over the past 18 months. Seeing how different program types cycle in and out, we’re sure option sellers will have their day in the sun again.
To view the latest March estimates please log into our website at http://attaincapital.com/cta_performance.
***Day & Swing***
Volatility in equity markets pulled back in the second half of the month as investors finally started to test the waters after several months of being on the sidelines. The strength in stocks pushed the VIX index lower by approximately 30 % from the monthly high made on March 17th and closed just off the March lows. Trading systems had mixed results from the bullish move in stocks and corresponding bearish move in interest rate prices.
Starting with the day trading systems, Compass SP had no problem changing from bear to bull and profited +$9,992.15 for the month. Compass is up over 40 % through the end of the 1st quarter and has added a few more winning trades in April.
Waugh eRL had a breakout month in March as well with profits of +$2,106 while averaging about four trades per week. Newcomer AK47 ES was able to make a modest profit of +$495 on six trades for the month. AK47 is a long-only system with some of the underlying logic from both AG Xtreme and AG Mechwarrior by system developer Andrew Gibbs. BetaCon 4/1 ESX managed a small profit of +$200.37 for the month.
On the losing side, BounceMOC eRL lost -$411.98, BounceMOC eMD -$678.36 and Rayo Plus Dax -$12,636.80 in March.
Among the swing trading systems, Signum TY was the top performer in March with open trade profits of +$3,921.87. The system is currently holding long two contracts and made the majority of the profits in the first half of the month before interest rates futures reversed their course. PGA Powergrowth 2 had similar success trading stock index futures and profited +$3,570 in the month of March. Signum EBL had a slightly different sequence of trades than the TY system-but profited +$2,952.58 in open and closed profits. Signum EBL came into the month long and reversed short around mid-month and is currently holding the short position (two contracts).
Elsewhere, Ultramini ES timed its entries well and profited +$1,912.50 for the month. The Tzar suite of systems had mixed results with the ES +$631.20, NQ +$620 and eRL -$4,908.45. Bounce EMD had a positive month +$175.39 on three trades including one trade that reached its profit objective. Bounce eRL finished the month -$756.74 after just missing its profit objective on the most recent trade. Mesa Notes was down -$1,393 on its short position but seems to be set up well if and when we see continued selling in bond markets as we have in the first few days of April.
Long Term traders continued to eye the Agriculture/Food, interest rate, metal sectors during March, although the heightened volatility made for a tough atmosphere as the battle between inflation and recession roared on. Recent heavy buying in the commodity sectors due to worries of tightening world supplies seemed to subside as investors seemed to fear a global economic slowdown led by financial crisis and lack of consumer confidence ion the U.S. The interest rate sector did post slight gains during March as weak U.S. stock indices on further credit concerns kept this sector supported especially with another round of rate cuts by the FOMC. The energy markets did post slight gains for the month as a sharply rally early all but evaporated on worries of poor consumer demand in the future due to slowing economies world wide. New historic lows were again seen in the U.S. Dollar against some foreign currencies as the inflation and supply worries sparked another downside move.
There was a little disconnect in the grains and oilseeds in March as corn continued to surge on ideas upcoming U.S. crop plantings would be significantly reduced to plant spring wheat and soybeans due to lower input costs and other economic factors. Soybeans and wheat also experienced heavy losses due to a large supply of newly harvested crops in the Southern Hemisphere. Higher grain prices coupled with higher production totals in beef, pork, and poultry sparked more selling pressure in the livestock sector however, higher grain cost continue to support back month contracts due to the higher input costs associated with raising livestock. The cocoa, coffee, cotton, and sugar also experienced selling on ideas that the consumer sector demand will wane due to tightening economic conditions.
Current system positions has Aberration long TY with a gain of +$11,167.00 (open trade) and short DX making $2,285.00 (open trade). Aberration exited the following positions during March, long BO +$10,572, long SB +$3,366.00, long C +$5,225.00, short CT -$3,260.00 and long mini-silver +$1,778.00. Relativity is currently short DX making +$120.00 (open trade), and long MP sitting right at breakeven. Relativity exited long Five-year notes -$1921.82, long Tocom Plat. -358,000JY, long mini-silver $199.00, long Robusta -$1,130.00, long Palm Oil -3,725MR, long Canola -238.00CD, long CC +$1,530.00, long AD -$1,550.00, short DX +$2,415.00, and short LH +$1,800.00.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.
Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.