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January 2012

January 17, 2012 - Hedge funds lobby SEC over secrecy rule; How Managed Futures Fit Into Your Portfolio; MF Global Customers Wrapped in Red Tape

January 17, 2012 by Ron Sebonia   Comments (0)

Observations - Statistics - Commentary

Now that we have entered the latter half of January 2012, we possess all of the data necessary for an objective look back at 2011, and we can use that data to identify key trends for 2012. In this issue of JLN Managed Futures, several recurring themes have manifest themselves:

  • 2011 was a bad year for returns on managed futures funds, and on hedge funds in general. However, net capital flows into managed futures, and of hedge funds in general, continue to grow.
  • Access to managed futures continues to trickle down to retail investors through managed futures funds and ETFs. Now, private fund managers are lobbying regulators to sever the "information firewall" between accredited and non-accredited investors.
  • The fallout from the MF Global bankruptcy continues to affect the industry. Money is still missing, clients are still angry and the calls for reform are getting louder.
  • Pensions, endowments, and other institutions are increasing allocations to alternatives. Is this an indication of the importance of diversification, or is it a "Hail Mary pass" to stay in the game after a decade of flat equity returns and ultra-low interest rates? Probably a little of both.

As 2012 progresses, some trends will continue; some will reverse. Other trends will come into play. It should be an interesting year.

Quote of the Day

“Managers generally take a cautious approach and strictly limit all types of communications about their business. For example, private fund managers generally will not respond to press enquiries, even to correct inaccurate reports.”

Richard Baker, MFA’s president in the FT story: "Hedge funds lobby SEC over secrecy rule."


Hedge funds lobby SEC over secrecy rule
Hedge fund lobbyists have petitioned the US Securities and Exchange Commission to repeal the rule that lies behind one of the industry’s most notorious traits: its secrecy. The Managed Funds Association, which counts George Soros, John Paulson and Louis Bacon as members of its founding council, has implored the SEC to eliminate rule 502(c) of Regulation D – an arcane piece of Depression-era legislation that defines how the modern hedge fund industry operates.
**DA: I have always been a critic of Regulation D. Really, for a non-qualified purchaser, is there any harm in receiving information about hedge funds? I can't afford to buy a Ferrari, but should that preclude me from reading the spec sheet or watching a Ferrari commercial on TV?

Hedge fund indices down -5.28 in 2011 on average
The Dow Jones Credit Suisse Core Hedge Fund Index was down -0.41% in December, (-7.40% in 2011); The IndexIQ Hedge Composite Beta Index returned -0.17%, (-2.32% in 2011); The HFRI Fund Weighted Composite Index declined -0.18% (-4.8% in 2011); The HFRX Global Hedge Fund Index declined -0.42% (-8.87% in 2011).

Agecroft Partners Predicts Hedge Fund Industry Trends for 2012
Hedge Fund News "Based on several dominant and emerging trends Agecroft has identified through their conversations with more than 300 hedge fund organizations and 2,000 institutional investors during 2011, Agecroft Partners predicts 2012 will be the best year for net flows into the hedge fund industry since 2007 despite the lackluster investment performance for the industry in 2011.

RenTech Best, Paulson Worst In 2011
It may go down as the second-worst year in hedge fund industry history, but 2011, like all other years, produced a mixed-bag of hedge fund returns for the biggest names in the business.
**DA: Paulson Advantage Plus down 52 percent in 2011. Ouch.

Billionaire Paulson Persists With Property
Mortgage securities are drawing buyers after tumbling last year and handing billionaire hedge fund manager John Paulson his first loss in the bond market.
Paulson, who made $15 billion in 2007 betting against U.S. subprime mortgages, is sticking with bullish investments in residential and commercial mortgage securities, helping his Credit Opportunities Ltd. fund gain about 1 percent last quarter to narrow its 2011 decline to 18 percent.
**JK - Question, is he looking at the very ratings that brought down the real estate market in 2008? Just asking.

China and Japan offer best options for hedge funds in terms of talents and opportunities
Tony Morrongiello - Opalesque
Asia is offering the most fertile space for hedge funds opportunities, particularly China and Japan which could become the biggest talent pool in the world in the next five or 10 years next to the United States, agreed panellists in the recent Opalesque Geneva Roundtable sponsored by Custom House Group and Taussig Capital and held at the offices of Caliburn Capital Partners.

Managed Futures Scorecard 1/17/2012
Newedge Indices MTD Return YTD Return
Newedge CTA Index 0.29% 0.29%
Newedge CTA Trend Sub-Index 0.61% 0.61%
Newedge Trend Indicator -0.06% -0.06%
Newedge Short-Term Traders Index -0.06% -0.06%
Newedge Macro Trading Index -1.49%
Newedge Commodity Trading Index -3.61%
Newedge Volatility Trading Index 0.86%
Barclay Indices MTD Return YTD Return
Barclay CTA Index -3.05%
Barclay UCITS Index -8.55%
Barclay Hedge Fund Index -5.33%
BTOP FX Index -0.31% -0.31%
Morningstar Long/Short Com. Index 1.49% 1.49%

Lead Stories - MF Global

MF Global Probe Focuses on Back Office
Investigators on the hunt for an estimated $1.2 billion in customer money missing since MF Global Holdings Ltd. collapsed are zeroing in on the securities firm's back-office operations in Chicago, people familiar with the situation said. One back-office employee has told people she disputes congressional testimony by Jon S. Corzine, MF Global's former chairman and chief executive, that she provided assurance that a $200 million transfer was proper, according to people familiar with the matter.

MF Global Trustee's Presentation to Customers and Clients, January 12, 2012
Epiq Systems
The Trustee’s presentation to former MF Global Inc. customers and other creditors. During the meeting, held on January 12, 2012, the Trustee provided information about the customer claims process and an update on the progress of the court-mandated liquidation of MF Global Inc.
**DA: Reading between the lines on page 9 of the presentation: $6 bn in customer claims, less $5.283 bn in "assets marshalled" equals $717 million in missing funds.

MF Global Customers Wrapped in Red Tape
Stanley Haar says he knew how much money MF Global Holdings Ltd. owed him after about five minutes reviewing old account statements. But completing a claim form, he said, took more than two days. "That's nuts," said Mr. Haar, a Boca Raton, Fla. commodity-fund manager, who had about $10 million in customer money—about 10% of the total fund—with MF Global when the firm sought bankruptcy protection on Oct. 31.

National Futures Association Board of Directors Contested Election
With regulatory issues faced by the National Futures Association (NFA) punctuated by the MF Global saga, two well-known industry veterans are running for two separate slots on the NFA board, jointly proposing a fresh look at the managed futures regulatory structure. Ernest Jaffarian and Doug Bry are challenging two other well-known industry participants Aleks Kins and Craig Caudle. Mr. Kins and Mr. Caudle were the only candidates recommended by the NFA nominating committee while Mr. Bry and Mr. Jaffarian successfully petitioned to be on the ballot. Ballots are being sent out and must be returned by January 17, 2012.

Managed Futures/Managed Funds

361 Capital Launches Two New Mutual Funds
361 Capital, a provider of alternative investment portfolios to institutions, financial intermediaries, and high-net-worth investors, today announced the launch of two mutual funds built on two of the firm's existing alternative strategies, the 361 Long/Short Equity Fund and the 361 Managed Futures Strategy Fund.
**DA: BarclayHedge estimates around 100 managed futures fund launches in 2010-11. Here is another.

Horizon Cash Management seeks to expand in Europe
Investment Europe
Chicago-based Horizon Cash Management has announced plans for an extended drive for European business.
The 20-year old operation, which manages some $2.5bn in cash deposits and near assets, said its intentions reflect manager and investor recognition on both sides of the Atlantic of the importance of the cash process within investment portfolios, and the value of independent, third party cash management services to maximize investment returns.
**DA: Third party cash management services also provide an additional layer of collateral protection. Not a bad idea.

Asian hedge fund size increasing as managers embrace better corporate governance
Hedge Funds Review
**Subscription required.

European hedge funds line up bets on China downturn

European hedge fund managers are betting that China's once red hot economic growth will cool dramatically in 2012, hitting companies, economies and commodity prices that have been fuelled by the world's second largest economy in recent years.

How Managed Futures Fit Into Your Portfolio
Managed futures assets add juice to a portfolio in times of economic stress because they are uncorrelated to the broader markets, explains fund manager Dave Kavanagh. He also details how his fund makes investment decisions, and why he avoids making sector bets.

Pensions & Institutions

Institutional investors in $1bn club set to allocate even more money to hedge funds in 2012
Hedge Funds Review
Data and intelligence provider Preqin says institutional investors allocating $1 billion or more to hedge funds will be key to shaping the industry. Many are allocating to emerging hedge fund managers. A group of 150 investors representing over $430 billion in assets invested into hedge funds are key to shaping the industry as it evolves into an institutional quality market, according to research* from Preqin.

2012: What lies ahead
Hedge Fund Manager
In what promises to be an unpredictable year for hedge funds, HFMWeek takes on the unenviable job of predicting the main themes to look out for in the coming 12 months

Pensions turn to alternative investments
It’s no secret that pensions, facing cringing future liabilities as the ranks of pensioners grow, are near-desperate for returns. They have turned aggressively to alternative investments, much to the cheer of hedge funds and private equity funds. But is this a mistake?
**DA: Flat stock market, zero interest rates, and mass retirement of baby boomers on the horizon. Many pension funds have no alternative to alternative investment.

Commentary: Is Rube Goldberg managing state pension funds?
by Phil Troyer, Indiana Policy Review
It wasn’t mentioned in his State of the State message, but Gov. Daniels will leave for his successor a frustratingly complex and under-performing pension-management system.
**DA: The author obfuscates the nature of portfolio construction and benchmarking, but one fact from the article was quite interesting. "The system shelled out more for “investment expenses” during 2011 than it paid in actual retirement benefits for police officers, firefighters, judges, excise police, gaming officers, conservation enforcement officers, prosecutors and legislators – combined."


The Volcker Rule Will Kill Government Bond Markets
It looks like more than just one part of Dodd Frank needs fixing, not just the rules on conflict minerals. The Volker Rule is producing a certain amount of disquiet as well. The essential problem is that the rule stops banks from engaging in proprietary trading. But proprietary trading is the way that government bond markets work, through market makers. So the ban will, if not kill, at least seriously reduce liquidity in government bond markets and thus make the whole process, both of borrowing and investing in them, more expensive.

The 2012 Regulatory and Market Landscape
Depending on whom you ask, the so-called Volcker rule will mean either the end of banking as we know it or toothlessly allow banks to continue to bet the house—with the backing of the U.S. taxpayer. Neither of these extremes are true, of course.

Custodians get to grips with new rule for private fund managers
Financial News (subscription required)
Custodians and fund administrators are setting up new services to deal with the latest reporting rule put in place by regulators, concerning the managers of non-mutual funds.

CFTC Final Rule: Protection of Cleared Swaps Customer Contracts and Collateral
On January 11, 2012, the CFTC approved its final rule on the protection of cleared swaps customer contracts and collateral. Under the final rule, swaps customer funds will be legally separated, but operationally commingled (the "LSOC Model"). Cleared swaps customer collateral will be segregated from the FCM’s own property, but cleared swaps collateral of all FCM cleared swaps customers will be permitted to be kept together pre-bankruptcy in one account.

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JLN Managed Futures, January 3, 2012

January 17, 2012 by Ron Sebonia   Comments (0)

Observations - Statistics - Commentary

Top Videos of 2011

Here are our top 3 videos of the year.

Emil Van Essen
December 1, 2011
Emil van Essen has 25 years experience trading and modeling in the futures markets and has been a CTA since 1997. His firm, now with $240 million in assets under management, has been successful with its spread trading program launched in December 2006. JLN Managed Futures editor Jim Kharouf spoke with van Essen about his trading program, how the industry evolved and the issue on most minds in the industry, what impact will MF Global have on the managed futures space.
Disclaimer: Futures and options trading involve risk. Past results are no indication of future performance. Investment in this fund is open to QEP investors only.

Jay Feuerstein - 2100 Xenon
October 3, 2011
Channel(s): Featured, JLN Managed Futures
Jay Feuerstein is chief executive officer and chief investment officer of 2100 Xenon, the managed futures affiliate of Old Mutual Asset Management. From January through August 2011, its managed futures program was up 13.83 percent, while its Global Long/Short Fixed Income program rose 8 percent, outpacing the BarclayHedge CTA Index, down 0.51 percent through August. JLN Managed Futures editor Jim Kharouf spoke with Feuerstein about 2100 Xenon, market volatility, challenges in the CTA space and where his firm got its name.
Disclaimer: Futures and options trading involve risk. Past results are no indication of future performance.

Ranjan Bhaduri - AlphaMetrix (2 Parts)
July 6, 2011
Ranjan Bhaduri is chief research officer at AlphaMetrix, a Chicago-based company providing hedge funds and investors with an independent platform, administration, transparency, risk monitoring and analytics, due diligence, background investigation and hedge fund event services. JLN Managed Futures editor Jim Kharouf spoke with Bhaduri about how the CTA space is changing, its diversity and its interesting follow-up to the well-known John Lintner managed futures study.

Upcoming Events

Managed Funds Association Network 2012 Conference
Sunday-Tuesday, January 29-31, 2012, The Breakers Hotel, Palm Beach, Florida. MFA’s Network series is the alternative investment industry’s premier networking conference and exposition. Launched in January 1995, Network has grown to become MFA’s flagship conference event and is expected to draw nearly 1000 delegates in 2012.

FIA Boca 2012
Join 900 of the top names and faces in the industry at the FIA 37th International Futures Industry Conference in Boca Raton, FL, March 13-16, 2012. Along-side a top-tier program comes the best networking experiences you'll find all year. One delegate said, "The FIA conference at Boca Raton should be an annual pilgrimage for any executive in the futures industry. This event brings together, in one great location, the key decision makers and industry leaders... allowing one to squeeze months worth of meetings over just a few days!" The first registration deadline for this event is mid-December, so register now for the best prices.

CTA Expo New York, April 19, 2012
Don't miss your opportunity to promote your business to the top managed futures industry professionals. For additional information visit or to sponsor please contact Frank Pusateri at or Bucky Isaacson at
**DA: Last year's Chicago and New York events were sellouts; the program continues to grow. For 2012, they have added a Miami show as well.

Lead Stories

Investigation Into MF Global Expected to Heat Up
When customer money disappeared from MF Global over Halloween weekend, it seemed implausible the cash would remain at large come New Year’s Day. But two months later, the hunt for roughly $1.2 billion in client money continues. Some MF Global customers, including farmers and hedge funds, are still without about a third of the money in their accounts at MF Global, the brokerage firm once run by Jon S. Corzine, the former governor of New Jersey. Against this backdrop, and as 2012 gets ready to begin, the investigation into the MF Global debacle is expected to heat up.

The Unraveling of MF Global
In September, MF Global Holdings Ltd.'s management sent a memo to the securities firm's 2,800 employees: Start printing on both sides of paper. The unusual request was a sign that executives at the New York company then led by Jon S. Corzine, a former New Jersey governor and Goldman Sachs Group Inc. chairman, saw tougher times ahead. They were right.

Hedge Funds Raise Bullish Bets on Commodities
Speculators increased wagers on rising commodity prices by the most since August 2010 on signs that sustained economic growth will drive a rebound in raw materials from their first annual slump since the recession. Hedge funds and other money managers increased combined net-long positions across 18 U.S. futures and options by 18 percent to 536,907 contracts in the week ended Dec. 27, Commodity Futures Trading Commission data show.

Making the case for alternatives
If ever there was a time to embrace investments in alternatives, this is it. More than 300 distinct open-end mutual funds now are available across seven alternatives subcategories, according to Morningstar Inc., making the days when only the ultrarich and well-connected could access noncorrelated and hedging strategies seem like ancient history.
**DA: From the article: A recent Rydex/SGI survey found that the number of investors with NO alternative exposure dropped from 28 percent to 17 percent from 2010 to 2011. That is quite a drop.

The Opalesque Uncorrelated Investments Show
Opalesque's Uncorrelated Investments Show is a new program that focuses on investments that exhibit a lack of dependence on economic strength and stock market performance.
**DA: The host, Mark Melin, is a good friend of ours. He has been an avid cheerleader for managed futures as an asset class.

Managed Futures/Managed Funds

Newedge - Newedge Indices
As of December 29, 2011, the Newedge CTA Index up 0.27 percent for the month; down 4.45 percent year to date. Its Trend Indicator Index up 4.69 percent in November, which turned it positive for the year. The company also tracks quantitative and discretionary macro, commodity, and volatility indices.

Managing Volatility with Managed Futures
So many of the supposedly “non-correlated” asset classes sure were correlated during the economic crisis in 2008 and 2009, leading to investor disappointment and a re-evaluation of their role in the portfolio. However, the managed futures class wasn’t one, performing to expectations and fueling a boom in their use as a hedge against Europe, a possible double-dip and wild market swings that increasingly put the norm in “new normal.”

Merrill: Hedgies Sell Gold & Silver, Bet Short On S&P 500
By Murray Coleman,
Large managed futures funds, including hedge funds, in the past week sold gold and silver, kept buying U.S. dollars and added to their short positions in the S&P 500, according to an analysis by Merrill Lynch using data from the Commodity Futures Trading Commission as well as its own sources.

How to Use Alternative Investment Strategies
Currencies, commodities, and managed futures can be part of a portfolio that complements more traditional equities. Direxion Funds’ Ed Egilinsky describes why alternative investments are a good idea when it comes to assets with a long-term record of showing positive returns during equity bear markets.

CTA funds could prosper in volatile 2012
COO Connect
CTA (commodity trading advisor) hedge funds could be net beneficiaries of market volatility and see capital inflows in 2012 as a result, one manager has argued. “Historically, volatility has been good for CTA managers and I believe they will benefit from their exposures in oil, gold and other commodities. Investors are going to take note and allocate money into these outfits,” said Peter Kambolin, chief executive officer at Systematic Alpha Management, a short-term systematic CTA with $150 million in assets under management (AuM). "

Boutique money managers lead way with alternatives
When the average investor looks at the biggest alternatives mutual funds, the fund world's most familiar names probably won't show up. Unlike traditional asset classes, which tend to be dominated by funds from giant money managers, the new and fast-growing world of funds that invest in alternative strategies has opened opportunities for smaller, less well-known firms. So even though they are not household names, firms like Hussman Funds, AQR Capital Management LLC and Altegris Investments Inc. have been able to gain traction.
**DA: Mutual fund "big boys" such as Oppenheimer, Janus, and BlackRock are finally getting into the managed futures game.

Pensions & Institutions

100 largest public pension plans see first asset declines in 5 quarters: Census Bureau
Business Insurance
Total assets of the 100 largest public defined benefit retirement systems declined 8.5% in the third quarter, their first overall quarterly loss in more than a year, according to the Census Bureau. The top 100 plans had total assets of $2.5 trillion as of Sept. 30, a 1.1% increase over the same quarter in 2010, but investment returns were negative for the first time since the second quarter 2010, with $198.6 billion in losses recorded in the third quarter.

Ten Trends For Hedge Fund Flows In 2012
Last year was the second-worst for hedge fund performance on record, according to data from Eurekahedge. But Agecroft Partners, a third-party marketing group based in the U.S., thinks things will be better in 2012 and has outlined its reasons for predicting $100 billion of net inflows. If Agecroft is proved right and hedge funds do go on to attract $100 billion from investors this year, it would make 2012 the best year for inflows since 2007. Below are 10 trends that Agecroft thinks will impact inflows in the sector this year.
**DA: Pensions, endowments, foundations and family offices top the list.

How risk factors influence the investment strategy of a sovereign wealth fund
For some inkling of where investment theory is headed, take a look at the debates and forums being hosted by the Norwegian Government Pension Fund. Fund officials are in the midst of an inquiry into why their fund, which invests proceeds from Norway’s vast petroleum exploits, performed so poorly in 2009 and how it should re-orient itself . Unlike, say, a hedge fund, Norway’s pension fund conducts a big portion of its business in the public eye, which means you can get a heck of an education simply by tuning in to the presentations given by the bevy of academics the Norwegian government has brought in to look at the performance.
**DA: Leave it to the Norwegians, who encounter 20 hours of darkness this time of year, to shed some light on the subject.

Nuveen Investments Completes Acquisition of 60% Stake in Gresham
Nuveen Investments, a leading global provider of investment services to institutions as well as individual investors, today announced the completion of its acquisition of a 60% stake in New York-based Gresham Investment Management LLC. The transaction, which was previously announced in November of 2011, was completed on December 31, 2011. Gresham is recognized as one of the world's leading investment managers focused exclusively on portfolios providing clients around the world access to a diversified array of commodities.


Washington’s uneasy dance with Wall Street: 2011 in financial regulation
The Washington Post
It was a long, hard slog this year for financial reform-- both for the federal agencies tasked with carrying out Wall Street reform and the politicians fighting over its future. Industry lobbyists swamped regulators in an effort to shape the new regulations, while Republicans tried to use the confirmation process and the budget to rein in Dodd-Frank. At the same time, outside events, both in the United States and Europe, added a new sense of urgency to the financial overhaul. Here is a closer look at the biggest developments in 2011.
**DA: Of course, MF Global appears in the article.

Convicted Ex-Lawyer Scott Rothstein Says That Funds Didn’t Warn Investors
Scott Rothstein, the Florida lawyer sentenced to 50 years in prison for running a $1.2 billion Ponzi scheme, said officials at three Manhattan hedge funds helped him prop up the fraud in its final months, according to transcripts of a court deposition. Rothstein, 49, said his scheme began to collapse early in 2009, when he could no longer pay customers. Officials at Platinum Partners Value Arbitrage, Centurion Structured Growth LLC, and Level 3 Capital Fund agreed not to tell potential new investors he failed to make payments to them, he testified.

SEC Ups Its Game to Identify Rogue Firms
It is the Securities and Exchange Commission's new "most-wanted" list: a chart covered with handwritten notes, yellow highlighter and the names of about 100 hedge funds. The hedge funds have one thing in common: Their performance seems too good to be true, with some trouncing the overall market and others churning out modest results without ever suffering a down month. Some funds on the list stumble but still always outperform rival hedge funds.

Former Deutsche Bank CEO Hilmar Kopper: 'Money Needs Laws'
As the former head of Deutsche Bank, Hilmar Kopper was once the most powerful banker in Germany. In an interview with SPIEGEL, the 76-year-old takes stock of his career and the current crisis shaking Europe. The three main constants he has seen in the world, he says, are "money, avarice and greed."
**DA: From the article: "I am an old man and no longer have to worry about offending people." Happy New Year.

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