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February 2011

JLN Managed Futures: February 1, 2011

February 1, 2011 by Ron Sebonia   Comments (0)

Observations - Statistics - Commentary

Kevin Jamali of Auctos Capital Management has it going
by John J. Lothian

Kevin Jamali has it going. Kevin is a Principal of Auctos Capital Management, a firm we first profiled in JLN Managed Futures back in February of 2010. Auctos is a Commodity Trading Advisor that is building a CTA business the right way.

Of course, I am conflicted. Very conflicted. You see, Kevin has some partners that include one of my oldest friends in the business. In fact, I have known John J. Ruth just about as long as I have known what futures were. He was a partner in a CBOT member firm named Victor Grain, and I worked for another partner, Tom Cashman. That was from 1978 to 1983.

Later, in 1989, he was a senior executive with LIT America when I was hired as an off the floor futures trader by a proprietary trading group that was backed by LIT. He has more recently been one of the owners of Century Trading Group, which has offices literally a floor right under where I sit in the CBOT’s Annex. John Ruth is one of the most respected men in the futures industry and one of the humblest. He is also one of the industry’s most private, eschewing the limelight and working comfortably behind the scenes. For him to step out in public as a Principal of Auctos is a significant statement.

I am also conflicted because Auctos is the type of CTA product I would very much like to sell to my brokerage clients. And my being registered with Price Asset Management, a company that among other things helps raise money for CTAs, is another conflct. We could well end up representing Auctos to clients and other brokers.

All of these and other conflicts of interest make me pause before praising Kevin and Auctos too broadly for fear of sounding like a shill. So you have to make me a deal. If you forgive me my conflicts, I will share my transparently disclosed, but biased thoughts here. Besides, you are supposed to do your own due diligence anyway.

To start, I am not going to talk about the trading performance of Auctos. If you want to find that out, you can read the disclosure document on Auctos Capital Management’s website, Needless to say, I would not be wasting virtual ink by praising a CTA whose quantitative performance was not worthy of consideration for investment.

Kevin has built a company, not just a track record. There are eight people who work for the company now, though they may have other jobs or responsibilities as well. He is looking to expand by adding another person to the research function. In fact, he says 80% of the company’s expenses are for research. Kevin makes it sound like it is a team effort at Auctos, which is a good foundation.

“It is important to have solid people around you,” Kevin told me in a recent interview from The Price Group’s offices, upstairs from his. "Team chemistry is key.”

Auctos now has $25 million under management, which is up from $10 million when we wrote the story in JLN MF almost a year ago. Kevin and the Auctos team built the company and the trading systems to be able to manage much larger sums. Much larger.

When they launched in 2007, Auctos had two systems they traded. Now, they have eight trading models using three strategies sectors. They have trend following, spreads and pattern recognition strategies.

Their strategies have 70 different profit and loss line items generated from markets around the world, which includes a combination of 40 outright markets and 30 calendar spreads. They are not just in commodities, they are in financials. They don’t just trade directional, they also trade spreads. When they made improvements in 2009, adding six systems, they saw their average holding period for a position change from more than 250 days to 120 in their trend following system.

Kevin says “2011 is a critical year for us.” So far they have grown by investments mostly from individual investors, many with ties to Century Group as customers. Next they need to attract investments from institutional investors.

That looks promising, as Auctos now has two key elements in place to attract institutional investors - a 3-year track record along with the critical threshold of $25 million in assets under management. That will lend a hand in convincing allocators that the firm has long-term viability.

I believe they have the right ingredients to make that leap. They have very solid people, some of the most upstanding people I know. They have wisdom on the team, which is unusual for young hot shot CTAs. That wisdom and good team chemistry are keys to growing successfully.

However, their weakness (because everyone has a weakness) is marketing. This is not an uncommon problem for CTAs. (See last month’s JLN Managed Futures Newsletter interview with Kristin Fox.) The good part about this weakness is that they have concentrated on developing a quality product and company. They have not focused on marketing and sales and are not unduly influenced by marketing considerations.

Kevin is a trader. He was a proprietary trader in a company full of proprietary traders. He approached this as a trader, not as a marketer, broker or salesman. I consider Kevin’s and the team’s weakness in marketing to be a company strength.

I believe they have their priorities straight. They are in this for the long term. They are in this to grow it to a significant size. Maybe I have seen the Kevin Costner baseball movie “Field of Dreams” too many times. However, this is a good case for “build it and they will come.”

Kevin and Auctos have built a good qualitative and quantitative track record. They have diversified trading strategies. They have good offerings with individual managed accounts with a $1 million minimum and a fund for smaller investments (consult Auctos or your broker for more details). They set out to establish a CTA firm with the values and integrity to match that of the Principals behind it. Now, I am biased, conflicted and fully disclosed, but I think Kevin Jamali and Auctos have it going.

Now that’s marketing.

Of course, there are many other firms out there in a similar position, either starting out and building a track record, or growing and looking to take it to the next level. All of it starts with the strong foundation of building a CTA the right way. That’s a story everyone in this space should aspire to.

(Jim Kharouf, Jessica Titlebaum and Sarah Rudolph contributed to this commentary)

Lead Stories

Barclay CTA Index Up 2.85% in December; Rallies in Stocks, Bonds, and Commodities Contribute to 6.26% Gain for 2010
Managed futures gained 2.85% in December according to the Barclay CTA Index compiled by BarclayHedge. The Index was up 6.26% for the year.

Barclay Hedge Fund Index Gains 2.88% in December, Up 10.86% in 2010; Most Hedge Funds Recoup 2008 Losses
Hedge funds gained 2.88% in December according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index is up 10.86% in 2010.

CFTC rules to add to Dodd-Frank cost burden-funds
Hedge funds are concerned that compliance with reporting regulations proposed by the U.S. futures regulator last week will require too much time and money, creating an unnecessary cost burden for the industry.
**JK - The fun of having two regulators.

Factbox: CFTC proposes reports for funds, advisors, pools
The first of the proposals is a joint rule making with the Securities and Exchange Commission and is mandated by the Dodd-Frank financial reform law.
The other would require similar reports to CFTC by commodity pool operators (CPOs) and commodity trading advisors (CTAs) who register solely with CFTC.
**JK - More in Regulation section

Ackermann Says Bailout Risk Lurks for Hedge Funds
Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn’t increased.
**JK - Just a call for more regulation.

Hedge Fund Industry Responds to Goldman Rap
Paula Schaap -
The hedge fund industry came out with a sharp retort to statements made by Gary Cohn, Goldman Sach’s president at a Davos conference that it deemed critical of the asset class.
Cohn was quoted by the Financial Times as saying Wednesday that if the banks were heavily regulated, the “shadow banking sector,” which was less regulated, would take on riskier activities.
**JK - Please pass reg reform to the left and step aside.

AIMA Says Hedge Fund Managers Well Regulated

Hedge fund managers are ‘rigorously’ regulated, according to the Alternative Investment Management Association, a group representing 1,200 corporate members.
**JK - Thank you, no, I'm fine.

Greenwich Composite Investable Index gained 1.88 in December (3.20 YTD) managed futures hedge funds lead the way
The Greenwich Composite Investable Index gained 1.88% in December to close 2010 with one of its best months of the year. Equity markets sustained a global rally in December driven by positive economic reports and strong seasonal trends. All of the Greenwich Investable Indices moved higher on the month, with Futures and Long-Short Equity strategies exhibiting the best results. Laggards on the month were more market neutral strategies, such as Arbitrage and Equity Market Neutral funds, as each respective Investable Index gained 0.52% and 0.88%. For the year, the Arbitrage, Futures, and Event-Driven Investable Indices produced the best results, with returns of 10.77%, 8.56% and 8.46%, respectively.

The Experience of Uncorrelated Assets

Newedge - Ryan Duncan

WisdomTree Unveils Managed Futures Strategy ETF
The new WisdomTree ETF will strategically be like the Rydex Managed Futures fund in terms of investing in both commodities and financial instruments while having the trading flexibility of other exchange-traded products including the LSC ETN.
**JK - Does anyone here remember X-Funds?

WisdomTree Launches Actively Managed Long/Short ETF
Murray Coleman -
The actively managed ETF market is getting quite interesting these days. Today, another competitor joined the fray, the WisdomTree Managed Futures Strategy Fund (WDTI).

WisdomTree Launches Managed Futures ETF
Index Universe
The WisdomTree Managed Futures Strategy Fund (NYSEArca:WDTI) have an expense ratio of 0.95 percent, the same as an ETF it will compete against, the iShares Diversified Alternatives Trust (NYSEArca:ALT).
**JK - Not the first managed futures ETF and probably not the last.

Managed futures strategies and S&P500 can be correlated 'over certain periods'
It is often said that managed futures funds are market neutral: they are investments that are not correlated to the rest of the market. But according to recent research by Newedge Prime Brokerage, managed futures strategies and the S&P500 can and do demonstrate a high level of correlation "over certain periods."

Last Year Golden For Paulson, Who Earns $5B
John Paulson’s returns last year didn’t nearly match his huge gains in 2007, but that didn’t stop it from being better in one crucial aspect.
The Paulson & Co. chief is personally more than $5 billion richer today than he was at the beginning of 2010. That tops the whopping $4 billion he made for himself in 2007, when his bets against the subprime mortgage market paid off with triple-digit returns, and likely sets a new record.
** JK - Just what do you do with $5 billion? Answer: whatever you want.

Managed Futures/Managed Funds

Newcits launch: New managed futures fund from London hedge firm
London-based commodity trading adviser (CTA) specialist Apect Capital has launched a Ucits III version of its flagship fund, Aspect Diversified Programme.
The new Aspect Diversified Trends fund will look to replicate the flagship quantitative momentum-based CTA strategy through a total return swap on the Aspect Diversified Trends Index.

FRM Sigma returns 18% in 2010
FRM’s Managed Futures fund, FRM Sigma, returned approximately 18% in 2010, maintaining its position as one of the industry’s top-performing CTA funds. Sigma’s performance was generated through a dynamic approach that uses managed accounts to invest in a concentrated number of CTA managers and actively vary trade exposures.

NuWave ponders Ucits version of flagship offering
Hedge Fund Manager
NuWave Investment Management, a $950m managed futures manager, is planning to launch a Ucits-compliant version of its flagship Combined Futures Portfolio, as institutional European investors continue to show an interest in the strategy.

A Strong December Leads to Double Digit Gains for Paulson’s Funds HedgeTracker
Paulson’s flagship fund, Advantage Plus Fund, gained 17% in 2010 after being down 11% as of August thanks to returns of 13% in December.

Ex-Goldman executives launch active commodity fund
UK-based Fulcrum Asset Management has launched a fund designed to tap the growing demand for active commodities strategies from investors unhappy with the returns from commodity index trackers.

Galleon Co-Founder Starting Firm
Gary Rosenbach, who co-founded Galleon Management with Raj Rajaratnam, is launching an investment firm with James Burritt, a Thomas H. Lee Capital executive. The new firm, Rockledge Capital Management LLC, will invest in hedge funds.

Man Group Hires Consultant Relations Head
Seth Fraser -
Publicly traded Man Group hired a new head of United States consultant relations Thursday, further expanding their institutional market operations in New York. "

Ex-Deutsche Bank Trader Weinstein Launches 'Black Swan' Hedge Fund  FINalternatives
Like its predecessor, the Saba Capital Tail Risk Fund will bank on so-called "black swans," or extreme but difficult to predict events. The new fund, which opened to outside investors in November, debuted with $160 million.

Newedge appointed swap counterparty by Aspect Capital on new UCITS launch
Press release
Newedge, a global leader in multi-asset brokerage and clearing, announces its appointment by Aspect Capital Limited, as swap counterparty to the Aspect Diversified Trends Fund, a Dublin domiciled UCITs-compliant fund with daily liquidity.

Triton Capital Advisors is expanding its team with a new senior hire
Adam Ray is joining the firm as a senior vice-president, Triton said in a statement.


Regulators Seek to Boost Oversight of Hedge Funds
The plans, drafted by the Securities and Exchange Commission and the Commodity Futures Trading Commission, or C.F.T.C., would require some investment advisers to periodically turn over private data, including details about their trading and the amount of assets they manage.

Is No Hedge Fund Too Big to Fail?
But then there is the systemic risk reporting, which is still something of a question mark. Any hedge fund deemed systemically risky could be forced to report a level of detail previously unknown in the industry.

New Hedge-Fund Disclosure Rules Probably Won't Help at All
The new disclosure rules for hedge funds proposed by the CFTC and SEC this week are much better than I would have expected.
For one thing, it's nice to see the Commodity Futures Trading Commission and the Securities and Exchange Commission jointly drafting rules, instead of creating their own sets of regulations that would inevitably conflict in the details.

NFA permanently bars Las Vegas commodity trading advisor Diligent Management LLC and bars its principal for three yearsNFA
National Futures Association (NFA) has permanently barred from NFA membership Diligent Management LLC (Diligent Management), a Commodity Trading Advisor located in Las Vegas, Nevada.


Riding the Yield Curve
Newedge Research
Riding the yield curve, which one can do by borrowing short and lending long, has for years been the bread-and-butter trade in the world of banking. The purpose of this snapshot is to report on how riding the yield curve has worked since the financial crisis of 2008. What we have found is that, even though the target Fed funds rate during the past two years has been zero, riding the yield curve has been tremendously profitable. For that matter, riding the front end of the yield curve over the past two plus years has been about four times as profitable as it had been on average over the previous 15 years. The trade also has had its risks, which have been considerable and which are illustrated clearly in Exhibits 2 and 3.
**JK - Galen Burghardt rides again.

Bloomberg Trading Solutions releases Hedge Fund Tool Box

The Trade News
The product connects to all major prime brokers and administrators, provides compliance and audit reporting, pre-integrated data and execution tools plus real-time profit and loss and exposures across 65 countries globally.

S&P Unveils Contango-Killing GSC
Olivier Ludwig - Index Universe
Standard & Poor’s, one of the world’s biggest index providers, launched a version of its S&P GSCI commodity index that’s designed to reduce the potential negative impact of contango on roll returns, making it the latest benchmark provider to get into one of indexing’s new hotbeds.

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