Sign Up

Managed futures newsletter


Sign up now to receive our   free newsletter

Click here to gain free access. Build portfolios, set watchlists, and view more data and statistics.

Call us at 800.311.1145 to speak with one of our alternative investment specialists. We answer the phone in One Ring. Try It.Sign up to view performance on 100s of Managed Futures Programs, Trading Systems, and Managed Forex Programs. Sign up FREEWhat are Managed Futures? Is this the same as CTAs? How do I invest? Click here  to learn all of this and more on our extensive managed futures education pageHow to set watchlists? Build portfolios? Find correlations? and more. Click here to take a tour of our advanced toolsUse our most popular tool to create custom multi-program portfolios. Click here to get started today by signing up for FREE ACCESSClick below to learn how attain can assist your CTA in everything from back office creation and trade execution to finding a lawyer to create your D-DocNo upfront fees for managed futures funds is one of the unique benefits of a managed futures account at AttainOur alternative investment books list includes some of the most thought provoking and interesting books on alternative investmentsLearn how family offices outsource the managed futures research, due diligence, data collection, and ongoing monitoring of accounts to AttainWhat is a trading system? Who develops them, and how are they executed for client accounts? Our trading system education explains this and moreWe assist talented traders in getting their trading ideas into an automated trading system, do testing, marketing, and more

Why Not Alternatives?

May 7, 2012

 

This week, Attain’s publications (our weekly newsletter, Managed Futures Blog, Facebook and Twitter) ask a seemingly simple question: why alternatives? Easy enough, right? Two words, five syllables. The problem is, the answer to this question cannot be understood in as short a time-span, but, to be frank, after years of market research, collaboration and conversation, there is one question we struggle with far more: why not alternatives?

We work with institutional investors, funds of funds, and Registered Investment Advisors (RIAs), at no additional cost to them, to help meet their portfolio diversification needs through managed futures. We like to think we've got a pretty good system in place. Managed futures isn't going to be right for everyone, but what is truly befuddling to us is the number of qualified, well-suited investors who have dismissed the asset class altogether – or worse – settled for an "alternative" where the only alternative thing about the investment is the way the marketing describes it.

We get it, to some extent. The word "alternative" is often associated with terms like "scary" or "dangerous," which isn't exactly what you want to hear when you're looking for a long-term investment strategy. While we won't tell you there's no risk in alternatives (there is, and it can be substantial), we will say that there is also some level of risk in every single investment you make. At the end of the day, it's not a matter of avoiding risk; it's about managing risk. This distinction is one that is all too often lost in the conversation with investors. 

What we've found, however, is that the average RIA, in particular, that chooses to invest in managed futures on behalf of their clients, often goes through a predictable cycle – one that involves letting go of misconceptions, educating themselves along the way, and eventually learning how to best leverage the opportunities presented by the asset class through strategic partnerships. In the hopes of making this cycle an easier one for RIAs to progress through, we thought we'd outline it a little further – including some tidbits of information from peers who have been there and done that.

The point? Well, by the time this piece is over, it will no longer be the simple question of why you should choose alternatives that we ask. That answer is way too easy. We'll want to know why not.

Step One: Discovery

In the RIA cycle of alternative investing, we've found that the first step, without exception, is one of discovery, particularly as it relates to managed futures. Managed futures made a name for itself in 2008, but has still managed to stay under the radar for most RIAs.

In fact, over the past several months, we've had the opportunity to speak with dozens of RIAs, one on one. We've asked, point blank, if they're familiar with managed futures. The responses we've heard?

"Yeah, they did well in 2008, I know that."

"No, what is that?"

"Something about trading futures, right?"

"Some type of hedge fund."

"Managed what?"

We can't really fault RIAs on this; the pace of "financial innovation" has yet to slow from its pre-2008 days, making it difficult to keep up with every investment opportunity on the books.

That being said, we also frequently came across RIAs who showed very little interest in learning more about the asset class. Sometimes, it was clearly a branding thing (like the adviser who had made his living marketing himself as a passive index strategist), but in other instances, it almost seemed like the advisers were afraid of their own shadow – uninterested in anything that was not mainstream.

And yet, multiple studies and surveys over the past year have indicated that the majority of RIAs are using or are open to using alternatives in their clients' portfolios.

Jefferson National survey in September of 2011 found:

Financial advisors continue grappling with record drops in leading indexes and unprecedented spikes in volatility, and they see the increasing use of alternative investments and tactical asset management as key to navigating the current market, according to a survey conducted recently by Jefferson National [...] More than 500 responses were recorded, and a significant percentage of the advisors surveyed—roughly 2 to 1—have increased their use of alternative investments, while an even greater number—roughly 3 to 1—believe tactical management can outperform a passive approach over the long term.

American Century's survey of financial advisers and planners revealed in October of2011:

[...] 80% report they are currently using alternative investments with their clients, while 95% have some level of experience with these strategies. And, among those currently using alternative strategies, 55% plan to increase use in the next year[...]

Among financial professionals participating in the study, almost one third of their clients have alternatives in their portfolios; the average allocation to alternatives in a typical client portfolio was 17%. Intermediaries who indicated “extensive” experience with alternatives reported higher use across their client base (an average of 49% of their clients) with the average allocation of a typical client at 23%.

Current use of alternatives varies by type of financial professional, with wirehouse brokers (90%) reporting the greatest level of use, while registered investment advisers (68 %) report the lowest level of use.

And in April of 2012, more evidence surfaced, showing not only a larger acceptance of alternatives by advisers, but by the investors themselves:

More than three-fourths of Americans familiar with retirement accounts are interested in investing their individual retirement accounts (IRAs) in alternative assets.

Despite the interest, 44% do not understand how to achieve that goal, according to opinion research from PENSCO. The PENSCO Market Barometer, which polled investors and high-net-worth advisers, also found that eight in 10 advisers say their clients are interested in investing in alternative assets, but only 10% of the advisers offer that capability.

The research also found that two-thirds of advisers say that investing in alternative assets can build wealth for clients, and 82% of advisers expressed interest in providing this option to clients. Investors and clients agree that the top alternative investments are real estate, precious metals and private equity.

Cognitive dissonance? Confused? How appropriate.

Phase Two: Confusion

The second, and most prominent, phase in the journey to alternative investing for RIAs has been one of mass confusion – confusion that is fueled by marketing spin and misinformation, leading to an overall conflation in our understanding of whether and how RIAs use alternatives.

The first manner in which we see misguided alternative allocations is through a misinterpretation of marketing spin. While this isn't a phenomenon exclusive to the managed futures space, the asset class does provide an excellent case in point.

Managed futures is often deemed attractive for the diversification value it offers to an overall investment portfolio. Historic non-correlation to traditional asset classes paired with a history of strong crisis performance is attractive for obvious reasons. Past performance is not necessarily indicative of future results, and no one knows this better than RIAs, but in a post-2008 world, investors have been clamoring for investment opportunities that can thrive when traditional investments struggle, as we’ve seen in the five crisis periods depicted in the graphic below:

 

So out came the financial innovation machines with a slew of retail products that boasted alternative exposure a la managed futures, but once you cut through the marketing hype, you frequently find hollow promises.

Diversification

Go on Morningstar and look for managed futures mutual funds. Now go look at the prospectus documents. You'll find some that are doing it "right," with a portfolio of allocations to various managers in the space (though we fervently disagree with the "one-size-fits-all" approach they use from a risk management perspective), but you'll find others that are managed futures in name alone (can you tell us which one trades ETFs?). The diversification value is substantially diminished in a world where the strategies are so out of whack, but for RIAs searching for access and without experience in the asset class, spotting these inconsistencies can be difficult.

Costs

Most advisers we've spoken with are very much about the bottom line: how much is this going to cost to invest? These same advisers tend to balk when hearing about the 2 and 20 fee structure that many CTAs charge, opting instead for the "low cost" mutual fund options. What many of these advisers don't understand is that they are still, in most cases, being charged that 2 and 20... it's just happening behind the scenes – the fees are paid by the company the mutual fund invests its capital in, not by the fund itself – and thus is not required to be included in the “cost” calculation of the mutual fund itself.

Performance

Ignoring the fact that many of these mutual funds aren't executing a strategy that looks anything like a managed futures portfolio, they're all resting on generic explanations of managed futures as an asset class to sell their product. The problem is that the performance they describe is not what you're getting from the mutual funds that boast the asset class' name, as we highlight every month.

One would hope that advisers would be able to cut through  this marketing spin to see managed futures mutual funds as the charlatans they often are, but it doesn't help when the mainstream media, in their limited coverage of the asset class, most frequently will use the mutual funds and the asset class interchangeably, muddying the intellectual conversation of allocating.

As we said, this trend is not unique to managed futures and their red-headed stepson mutual fund spinoffs. We see the same types of conversations taking place around hedge funds and inverse or leveraged ETFS and a host of other vehicles. They are "alternative," but not by reputation. Their strategy may be outside of the box, but at the end of the day, you'll frequently find their correlation levels with stocks to be much higher than true alternatives.

This phase of confusion is where we find most RIAs. They know they need alternatives and they know their clients want them, but their understanding of alternatives is based on a marketing machine on the retail side... and nobody wins listening to them.

Phase Three: Frustration

Here's the thing with the lack of information being addressed with misinformation: even if advisers fall for it, it's going to be temporary. Eventually, the truth comes out, and these advisers find themselves back at square one, in search of alternatives and real information on the options.

Such was the case for David Gratke of Gratke Wealth, LLC of Oregon. Gratke started out as a "long only" adviser. He quickly realized that this approach was a losing one, and that further diversification was needed. It was at this time that he discovered managed futures, and began exploring opportunities for his clients.

"I've seen crisis after crisis," he explained. "I saw the '87 crash, tech bubble, Long Term Capital meltdown, Russian default, and, of course, 2008 and 2009. People worry about getting sued? I would think I'd get sued for just leaving people in the S&P indices for the past ten years. And global markets are still brewing, with quantitative easing forestalling true discovery of prices."

But cutting through the marketing spin and finding helpful analysis of the asset class? Easier said than done.

"I'd describe the information base as skimpy," he quipped. "Deep and narrow – hard to find."

Of course, if you’re reading this, you’ve already found the best source of information on managed futures… but enough shameless self-promotion. At the end of the day, Gratke is not alone. Chip Bromley of Corestates Advisors, LLC, which provides wealth management services to institutions, endowments, foundations and individuals, including high net worth investors, explained the struggles of trying to work out efficient access to the space.

"A lack of available education for RIAs has been a hurdle for acceptance of the asset class. It's easier for [RIAs]  to say, "I have a good understanding,"  but they often feel most comfortable doing it through ETFs and mutual funds, whereas if they could grasp the difference between a managed account and those vehicles... well, you'd probably see expanded exposure."

For Bromley and his team, the beginning of their managed futures exposure had them working inside LPs, or stand alone managed futures funds. While these are not anywhere near as bad as managed futures mutual funds and ETFs as far as fees are concerned, they do have slightly higher fees than managed accounts in exchange for lower minimums. The more the firm learned, the more they wanted to find a way to gain more efficient exposure.

"When we saw the influx of managed futures mutual funds, and people beginning to think they could just buy that strategy and exposure and the returns people talk about, it pushed us to say, ‘let's offer the best access,’” he explained.

Phase Four: Expansion

It's when RIAs get to this point that they have to make an important decision: go it alone, or work with an expert. With an ever-expanding universe of CTAs out there that require evaluation and consideration, more and more RIAs are looking to find a partner in the space – someone who can provide the in-depth information and resources they need to get their clients the best possible access.

Bromley decided to seek support from the Attain team, and the result has shown how such partnerships can work for an RIA of any size, whether it’s a one-man shop or a 20-man team.

The initial work stemmed from the research Attain was publishing. Bromley reached out to find out what assistance Attain could provide, and the wheels were set in motion. From custom due diligence to portfolio recommendations, the Attain team worked closely with Bromley to help determine the best allocation options for his clients, using our scrubbed database of managed futures programs offering managed accounts and technology such as our portfolio builder tool.

But the assistance didn't stop at the recommendation process. Attain guided Bromley and his clients through all of the paperwork and account set up with the required actors – a process that can be daunting for anyone looking to get started in the space. Our dedicated investor relations team served as a liaison between all parties the whole way through, making the complex labyrinth of documents and forms more of a roadmap. But that was not the end of the work, either. Attain continued to perform ongoing due diligence on the managers in question, monitoring the accounts on a daily basis.

After about a year of collaboration, the time had come for expanded efforts, as more of the advisers on Bromley's team became interested in providing access to the asset class for their clients. Attain partnered with Corestates to develop a special white-label version of their site and tools for internal use at the firm, leveraging our technology, research and development to create a unique point of access for the advisers, with scheduled training in portfolio construction for the Corestates team.

The best part of this is that all of the due diligence, research and recommendations came without cost to Corestates or their clients. Expertise and assistance for free? It doesn't get much better than that.

The Next Frontier

Corestates, in our opinion, provides an excellent case study for RIAs that are considering entering the asset class. Their experience reflects the value of working with managed futures experts to the benefit of the RIA client – and the ease with which that can be accomplished.

What do we hope for moving forward? We hope that more advisers will become open to alternatives. We hope that they will find the right information about alternatives, in order to make better decisions for their clients. And we hope that more RIAs will adopt the Corestates approach – seeking out support in order to provide the best kinds of alternative exposure for their clients.

In our years of providing managed futures research and education for investors and RIAs alike, we’ve answered many questions. We've explained the difference between perceived alternatives and true alternatives. We've covered the diversification and performance value of managed futures. We've broken down the cost benefits of managed accounts. We've explained the value of working with a broker. We'll continue to provide similar research.

The more we research, publish, and talk with investors and RIAs, the easier we find it to answer the question “Why alternatives?” And that’s why we find it increasingly difficult to answer our present question:

Why not alternatives?

 

IMPORTANT RISK DISCLOSURE


No Yes Was this article particularly interesting or helpful to you?

No Forward this email to a friend who might find it useful.

Not on our mailing list? Sign up now to receive this weekly newsletter.

Feature | Week In Review: The week of bonds… US bonds

It was a tough week for just about every market we watch, with US bonds standing as one of the few markets that didn’t finish the week lower. In indices, the Dow was down -1.57%, the S&P 500 fell -2.57%, the Nasdaq was down -4.07%, the S&P Mid-Cap 400 E-mini lost -3.70%, and the Russel 2000 E-mini lost -4.52%. In bonds, US 10-year notes rose 0.35%, and US 30-year bonds were up 0.68%. In currencies, the US Dollar rose 1.05%, the Japanese Yen rose 0.64%, the British Pound was down -0.76%, the Euro lost -1.30%, and the Swiss Franc was down -1.30%.

In metals, Gold was down -1.18%, Silver was down -3.12%, Copper fell -2.72%, Platinum fell -2.52%, and Palladium was down -4.31%. In energies, Crude was down -6.14%, Heating Oil lost -5.49%, RBOB Gasoline was down -5.36%, while Natural Gas continued its contrary relationship with the other energies by racking up the first significant streak of up days in months, finishing the week up 4.25%.

In grains, Corn lost -0.84%, Wheat lost -6.23%, and Soy lost -1.02%. In meats, Live Cattle showed no lingering hangover from the Mad Cow scare, rising 2.24%, while Live Hogs lost -3.32% to hit a fresh 10-month low. In Softs, Cocoa was down -0.87%, Orange Juice suffered a blistering down week, losing -16.18% and hitting a new 1-year low, while Cotton fell -3.55%, Coffee was down -1.08%, and Sugar fell -1.89%.

Trading Systems

It was a very quiet week for trading systems; on the day trading side, there were no active programs. On the swing trading side, Jaws US 400 was down -$30 on a single trade, MoneyBeans S lost -$455 on one trade, and MoneyMaker ES lost -$155 on one trade. Only Strategic ES finished the week up, gaining $510 after three trades.

CTAs

May is still young, but there have nevertheless been some relatively significant moves among the CTAs we track. So far no single strategy type stands out, with the top 5 performers MTD each employing different trading strategies. Agriculture programs have lost a bit of last month’s luster, with all of the programs we track posting a loss for the first 4 days of the month. However, with plenty of days left on the calendar, there is still plenty of time for those who began the month with a rough start to turn it around. Check out the full heat map below:

 

Program

%**

Max DD*

Strategy Type

Dominion Capital Management (QEP Only)

5.70%

-15.22%

Short Term

HB Capital

3.30%

-13.79%

Option

Clarke Capital Management, Inc. Worldwide

2.26%

-30.83%

Trendfollowing

P/E Investments FX Strategy - Standard

1.34%

-15.01%

Currency

Emil Van Essen, LLC Commodity Only (Low Min)

0.83%

-36.21%

Spread Trading

2100 Xenon Fixed Income Program:

0.62%

-7.46%

Fixed Income

Clarke Capital Management, Inc. Global Basic

0.57%

-46.49%

Trendfollowing

Emil Van Essen, LLC Combined (Low Min)

0.52%

-36.21%

Spread Trading

Futures Truth SAM 101

0.40%

-12.62%

Multi-Strategy

GT Capital

0.33%

-11.79%

Discretionary

Hoffman Asset Management, INC. Managed Account

0.27%

-19.38%

Trendfollowing

Attain Portfolio Advisors - Strategic Diversification Program

0.15%

-24.39%

Multi-Strategy

Paskewitz

-0.09%

-18.21%

Stock Index

Bluenose Capital Management LLC - BNC EI

-0.09%

-9.98%

Option

Integrated Managed Futures Corp. IMFC Global Concentrated

-0.13%

-10.31%

Multi-Strategy

Bluenose Capital Management LLC - BNC BI

-0.15%

-5.77%

Option

NDX Shadrach

-0.17%

-19.38%

Agriculture

NDX Abedengo

-0.17%

-10.28%

Agriculture

AFB LLC FortyEighter Gold Options

-0.17%

-44.10%

Gold

Clarke Capital Management, Inc. Global Magnum

-0.17%

-41.50%

Trendfollowing

Reynoso Capital Management - Small Accounts

-0.17%

-16.05%

Option

Mesirow Absolute Return

-0.22%

-1.56%

Discretionary

Futures Truth MS4 (QEP Only)

-0.27%

-9.18%

Multi-Strategy

FCI CPP

-0.42%

-18.73%

Option

Rosetta (QEP Only)

-0.49%

-39.67%

Agriculture

Crescent Bay BVP

-0.52%

-32.69%

Option

Cervino Gold

-0.55%

-6.69%

Gold

2100 Xenon Managed Futures (2x) Program:

-0.69%

-18.40%

Multi-Strategy

Bel Air Capital Asset Management

-0.70%

-24.05%

Multi-Strategy

Briarwood Capital Management Diversified Trading Program

-0.95%

-13.00%

Trendfollowing

James River Capital Corp. - Navigator

-0.97%

-18.60%

Trendfollowing

Cervino Diversified Options

-1.10%

-8.34%

Option

FCI OSS

-1.10%

-52.73%

Option

Quantum Leap Capital (QEP Only)

-1.36%

-24.44%

Short Term

Auctos Capital Management

-1.54%

-12.25%

Multi-Strategy

Global Ag (QEP Only)

-1.80%

-17.57%

Agriculture

Cervino Diversified 2x

-1.96%

-17.32%

Option

Bouchard Capital, LLC Short Term Multi Commodity

-2.41%

-13.79%

Short Term

White River Group Diversified Option Writing

-3.06%

-15.08%

Option

Tanyard Creek Capital (QEP Only)

-3.17%

-14.17%

Agriculture

Covenant Capital Management Aggressive

-7.25%

-20.41%

Trendfollowing

 

*Max DD= A drawdown is the “pain” experienced by an investor in a specific investment. As an example, an investor starting out with a $100,000 account who sees it fall down to $80,000 before it runs back up to $110,000 saw a $20,000 loss ($100K – $80K), which would equal a -20% ($20K/$100K) drawdown. The so called Maximum Drawdown (Max DD) is the worst such peak to valley down period for an investment.

**Disclaimer: Past performance is not necessarily indicative of future results.  These performance numbers are calculated using the liquidating value of a single client at Attain trading the listed program, and are believed to be representative of all similar clients invested in the program.  A 20% incentive fee and 2% annual management fee are deducted from all profitable months, regardless of whether the program is at a new equity high.  These numbers may vary from the actual performance numbers presented by the CTA upon completing their accounting for the month gone by, and should not be considered apart from the performance numbers listed in the disclosure document for the program listed.

 

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.