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From the Horse's Mouth

September 25, 2012

 

 

If you follow our newsletter and blog regularly, you know we tend to speak with one voice on a variety of subjects related to managed futures and portfolio construction, but to be fair, it's never just one person behind the curtain. Our materials are a team effort, with a dozen different hands touching a piece before it heads out the door and to your inbox. And these pieces rarely get put together without some level of debate occurring on different portions. Everyone comes at the subjects from a unique perspective with diverse opinions and input, which is the way we like it. After all, if steel sharpens steel....

But the process behind the construction of our research- how sausage gets made, if you will- belies the portfolio construction process as a whole, and the unique approach taken with each individual investor. As we've said before and we'll say again, if you can afford a managed account investment tailored to your investment goals, risk tolerance and available risk capital, your experience in the managed futures space is going to be a more efficient and satisfying one, in our opinion. When we speak with investors, you're not hearing a pitch script or the "deal of the day"; our recommendations will change based on the person with whom we're speaking.

So this week, we're doing something a little bit different. Instead of resolving differences of opinion into a singular perspective, we're highlighting those differences, and giving you a glimpse into a few of the minds working on client portfolios on a daily basis. This space, at its best, isn't about the one-size-fits-all investment; it's about the investment that fits YOU best, and here are some of the custom designs that our portfolio tailors are working on these days.

Jeff Malec, CEO

In 20 words or less:“Don’t give up on traditional trend following type programs, they're due… “

The long version: This was supposed to be the year in which managed futures, as a whole- specifically long volatility type trend following programs- bounced back, reversing the current down trend they have been in with losses in two of the last three years. But here we are at the end of September with just three months left in 2012 and we’re looking at perhaps a second consecutive losing year for managed futures- the 3rd out of the last 4.

Many investors I speak with are starting to doubt the ability of these types of programs to continue to perform at historical levels. Their reasoning – everything from the space is too crowded, the large programs are too skewed towards financial market performance, the central banks are interfering too much, skewing the natural moves these models make, and more.

My view is that this sort of talk is just the sort of thing which usually marks a bottom in an investment, and I’m looking at a couple of data points to support my view that now is the time to be looking at the increasingly overlooked traditional, long volatility, trend following type managed futures programs which have essentially been flat to down since the end of 2008. In layman’s terms - they are due.

More technically – being due is a statistical reversion to mean. And I’m thinking we’re going to see a reversion to the mean in the stock market (down) and as consequence, in managed futures (up) as the normal flight to safety in bonds happens and commodities sell off in sympathy to a global recession.

Now, it is always dangerous to try and call a top – and my personal trading account is littered with wrong calls on tops in Gold, Apple, Netflix -later proved correct- and the stock market overall - but surely stocks/commodities looking more and more toppy, in my opinion; and there is no shortage of people calling for trouble ahead (which in and of itself might be a contrarian indicator):

My first data point is the historical outperformance of managed futures in the second half of the year, which we’ve covered before on our blog. Now, this doesn’t hold true every year, by any stretch of the imagination, and past performance is not necessarily indicative of future results, but it has happened 13 out of the past 18 years in the DJCS Managed Futures Index.And the variance in performance is nothing to shrug at, with the latter half of the year more than 4 times better than the beginning of the year. Is it due to stock crisis periods tending to happen in Sep/Oct, or because of portfolio rebalancing, or some unknown factor? We don’t know – and it could be mere coincidence – but when looking at where we’re going over the next few months - it is worth noting that managed futures usually bounce in the second half of the year.

Disclaimer: Past performance is not necessarily indicative of future results.

Three,a look at the charts shows an interesting pattern.While I’m not necessarily a believer in technical analysis on an index of managers (believing it works better on an index of prices) – the following chart is of great interest nonetheless.

It shows the Newedge CTA Trend Sub-Index since January of 2000, and a very interesting trend line supporting lows in 2000, 2002, 2006, 2007, and now again in 2012. What’s more, the action of this index is creating an interesting flag pattern with support just below the current levels and lower highs since the Oct 2010 high, which the index is still below.

Disclaimer: Past performance is not necessarily indicative of future results.

Now, again, technical analysis on an index of managers versus a price index is iffy, at best – but to the glass half full investor in me – I’m seeing a bullish flag pattern where the index is about to breakout of that flag to the upside, and support from the long term (12yr) up trend line. Again, not something I would use as a lone model informing my decisions, but when paired with the below average performance of most trend following strategies over the past three years, the contrarian feel I’m getting from many investors, and the history of 2nd half performance – it is something I’m willing to factor into my thinking.

Email invest@attaincapital.com to find out which programs I’m looking at to capitalize from this coming reversion to the mean.

Walter Gallwas, President

In 20 words or less:“I’m not ready to say the Ag trade is over yet”

I am still looking at the managed futures category which has been doing the best this year, and the best over the time period where traditional programs have struggled (past performance is not necessarily indicative of future results).I’m not saying investors should give up on trend followers, but many clients are asking what’s the point after having waited three years for the outlier returns to come… all the while seeing Ag programs beat the pants off their counterparts.

What if they are right? Those traditional programs may be due for a come ack as Jeff Malec outlines above, but I’m not ready to say the Ag trade is over yet.I don’t think they are mutually exclusive events (and by the way, neither do the Ag managers, who say they don’t rely on a trending environment, a non trending one, or anything in between…they are just looking at the grain market fundamentals and making decisions) .

 

 

2009

2010

2011

2012

 

Average ROR

Max DD

Average ROR

Max DD

Average ROR

Max DD

Average ROR

Max DD

Ag Traders*

3.75%

-11.23%

38.41%

-7.29%

6.82%

-10.07%

24.42%

-4.56%

Newedge CTA Index

-4.30%

-7.54%

9.26%

-5.32%

-4.51%

-7.60%

0.38%

-3.76%


* Average of 4 Ag Traders on Attain Focus List, not inclusive of entire universe of Ag Traders, past performance is not necessarily indicative of future results.

 

 

For one, I think we’ll continue to see crazy weather due to climate change over the coming months and years.The recent drought which spiked grain prices was a great opportunity for Ag traders, and I don’t think that is the only such opportunity they will have for the next 12 to 18 months. I’m not trying to get political here, nor claim that I've become a climatologist overnight- just pointing out that if climate change is here to stay (as put forth in a recent NY Times op ed), I would rather have exposure to an investment which can profit from extreme weather events.

And if it is weather moving grain prices, not central bank actions and the health of the global economy, then I want to be with professional traders who know the inter-connected relationships between weather, crop production, demand, and price. And I want to be with an investment which can make money in grains both on the up and downside, not just the long only, poorly tracking commodity market ETFs we track monthly on our blog.

As we wrote about in our strategy spotlight on Ag traders, this is a unique area of investment unique to the managed futures space. While many people get into managed futures for exposure to such traditional commodities as Corn, Soybeans, and Wheat – very few managed futures products these days actually give significant exposure to those markets.

While we’re unlikely to see Soybeans up 45% again over the next 12 months, Ag traders don’t necessarily need such a move to see continued success, and no matter where grain markets go – I believe every managed futures portfolio should have some Ag Trader exposure.

Give me a call at 312.604.0926 or email walter@attaincapital.com to hear what programs I am currently analyzing in the Ag sector for clients.

 

Jeff Eizenberg, VP

In 20 words or less:“How the future looks depends on how you approach it”

I’m in agreement with Jeff Malec on the macro picture and great opportunity in traditional, trend following type programs – although the million dollar question there is when does it come? Next month would be great, two years from now would be way too long for most investors to continue waiting. I would also add to that discussion short term traders and multi-strategy programs – both of which have been in a funk similar to their longer term counterparts since 2008 despite their construction (and marketing) as diversified portfolios capable of picking up the slack for a poor trend following environment.

Disclaimer: Past performance is not necessarily indicative of future results.

However,while multi-strategy programs are as "due" as more traditional trend followers, I am increasingly skeptical of most multi-strategy programs available today over a pure trend – asthe non correlation of the models in the multi-strategy CTAs appears to more often than not add to risk rather than reduce it. Remember, non correlation does not equal negative correlation, so those non correlated models within a multi-strategy program can just as easily lose money at the same time as they can win at the same time. The result, the multi-strat programs have tended to make less than pure trend followers when times are good, yet lose as much – or more – when pure trend followers struggle. All in all, I like the idea behind a multi-strat program – but I haven’t been as impressed with the results.

And while I like the Ag space as much as Mr. Gallwas – I’m more inclined to wait for those programs to enter a bit of a drawdown phase before rushing in after their fast rises over the past few months (fyi, the recent pull back in Corn and Soybeans has brought some Ag programs into drawdown…stay tuned).

Along those lines, what I continue to discuss with the clients I speak with is being themselves. What do I mean by that?Well, each investor is different, and each investor has different needs. So while the statistics may show that it is best to simply continue trading a CTA and let their profits compound, that might not be right for a particular investor.

I’m looking at having those conversations with clients. Nervous about a huge run up in a program? Take some profits. Flush with cash from other investments? Then let your CTA profits run. Facing losses? It may be time to add to the investment. Losing sleep? It may be time to get out of the investment. Too many times we talk about statistics and the mathematical side of investing in managed futures, and forget about the human side. So my best "trade idea" right nowis sort of cheating, as I’ll put it back on the investor and ask what YOU are trying to do. What exposure are you after? What exposure are you trying to avoid? What keeps you up at night, and what would make you sleep tight?

If you’re looking for concrete ideas, I’m happy to share my own investing strategies and ideas I’m talking about with others.  For example, we have covered entering into drawdown in past newsletters and blog posts: see here for a general overview on investing in drawdowns, and here for our call on Emil Van Essen in Dec. 2010, and here for our somewhat recent call on Clarke. But that is just the beginning – there are numerous other opportunities for allocation sizing, entries, exits, and more.

Give me a call at 312.604.0926 or email jse@attaincapital.com to have a real conversation about how you fit into the managed futures space.

 

IMPORTANT RISK DISCLOSURE


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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.