Breaking News

JLN Managed Futures: AlphaMetrix settles with Commodities Futures Trading Commission; CTAs exit drawdown, setting new high watermarks in November 2014; Man Group Buys Merrill Lynch’s $1.2 Billion Fund of Hedge Funds

Observations/Commentary

AlphaMetrix settles with Commodities Futures Trading Commission
By Lynne Marek, Crain’s Chicago Business
The Commodity Futures Trading Commission has reached a settlement with former futures fund manager AlphaMetrix that requires the defunct company to pay $5.6 million, though it’s unlikely that payment will ever be made in full. The agreement was filed yesterday in the U.S. District Court for the Northern District of Illinois in Chicago and a hearing on it is scheduled for Dec. 16. It calls for AlphaMetrix to pay restitution of $2.8 million, plus interest, and a civil monetary penalty of $2.8 million. While there would be a priority on paying the $2.8 million to investors still owed money, the penalty isn’t likely to be collected.
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***DA: I assume the checks written to speakers and entertainers, from Tony Blair to CeeLo Green, all cleared.

Six Key Takeaways From Returns Of Eight Asset Classes YTD
Attain Capital Management via ValueWalk
While us Managed Futures folk are a little giddy over recent performance (the best performing asset class the past three months), even we need a reminder that Managed Futures strategies (and true alternative investments) aren’t trying to outperform stocks or real estate. Managed Futures is meant to be a diversifier in your portfolio, ideally representing anywhere between 10-30% of your portfolio. It’s there to make sure when the other highly correlated assets in your portfolio go down with the stock market, you have something that’s truly different.
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Commodity ETFs That Know How to Navigate the Futures Market
ETF Trends
Most commodity-related exchange traded funds track a basket of futures securities. Consequently, investors should understand how the underlying futures markets work and the effects they will have on ETFs. In a paper titled The Strategic and Tactical Value of Commodity Futures, Claude Erb and Campbell Harvey argue that returns on commodity futures can be broken down into four parts: the risk-free rate, the spot-price return, the roll yield and the diversification return, writes Morningstar strategist Samuel Lee.
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NFA Election Board Profile: George R. Berbeco
By John Lothian, John Lothian News
George R. Berbeco is running for the board of the National Futures Association as a CTA/CPO. He began as a CTA back in 2006 after a long and fruitful career as a serial entrepreneur. He is the president of The Devon Group, Inc. based in Weston, MA.
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**DA: John interviewed George Berbeco, who is running against James Koutoulas and Bernard Denis, III for a CTA/CPO spot on the NFA Board. He has also spoken with John Roe, James Koutoulas and Brendan Kalb, all CPO/CTA candidates. We will publish those well in advance of the January 20, 2015 deadline. Meanwhile, here is a viewpoint directly from Roe and Koutoulas:

Roe/Koutoulas ask for two more years
By James Koutoulas & John Roe
In November the National Futures Association (NFA) named the candidates its nominating committee proposed for the upcoming Jan. 20 NFA board of directors election. Below is a position paper written by NFA board members John Roe and ]]James Koutoulas]], founders of the commodity customer coalition, in support of their re-election. Futures welcomes and encourages other candidates for the NFA board to share their positions and thoughts on the upcoming election.
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Lead Stories

CTAs exit drawdown, setting new high watermarks in November 2014
Automated Trader
Newedge, the prime services division of Societe Generale, and provider of multi-asset brokerage and clearing, has announced the November performance data for its CTA performance indices. Managed futures enjoyed a stellar November, with all of the Newedge indices posting the fourth consecutive positive monthly return in a row.
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***DA: Newedge CTA Index up 5.62 percent for the month; 13.81 percent YTD. Lots of double digit returns. Click to see the table.

Hedge fund assets virtually unchanged in October, says eVestment
Hedgeweek
Aided by rebounding US equity markets and strong moves in currency and interest rate markets, November’s biggest winners were managed futures strategies and activist funds. Credit and commodity-focused strategies posted aggregate declines, while funds focused on the energy sector and with Brazil exposure faced the industry’s largest losses during the month.
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Man Group Buys Merrill Lynch’s $1.2 Billion Fund of Hedge Funds
Bloomberg
Man Group’s FRM unit will acquire the contracts to manage Merrill’s $1.2 billion multi-strategy investments, the London-based firm said in a statement today. Man will pay Merrill Lynch $2.9 million when the deal closes and 35 percent of the management fees generated annually for five years, not to exceed $30 million.
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***DA: Man has been on an acquisitions tear this year, with Pine Grove, Numeric, and now Merrill AI.

MF Global’s underwriters to settle suit for $74 mln
Reuters
Seven underwriters of the failed MF Global Holdings Ltd reached a partial settlement with investors, who had filed a lawsuit in 2011 seeking to hold them and some of the brokerage’s executives, including its CEO, responsible for its collapse.
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Commodities Go From Hoard to Floored; Oil and Iron Woes May Be Far From Over
By Justin Lahart – WSJ
In understanding the latest commodities selloff centered on oil, consider a raw material lurking in your kitchen: rice.
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Commodity Benchmarks Are Open to Manipulation, Law Firm Says
By Andy Hoffman, Bloomberg
Almost two-thirds of commodity market participants say that benchmarks used to set the price of everything from crude oil to ethanol to zinc are vulnerable to manipulation, according to a new study.
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Managed Futures/Managed Funds

Finally — alternative investments for the rest of us
Financial Post
There’s no doubt some Canadian investors are cynical about the rise in popularity of alternative investments over the past few years. And really, who can blame them?
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Wealth Adviser: A Personal Bias in Crafting Clients’ Portfolios
by Kevin Noblet, WSJ MoneyBeat
Financial advisers may have a very personal bias when they’re designing clients’ investment portfolios. According to a recently published academic study, the asset allocation in an adviser’s own portfolio might be one of the biggest factors in determining how he or she allocates clients’ assets. While most advisers say they customize portfolios to meet each client’s circumstances, they “don’t really seem to pay that much attention to what their clients look like,” one of the study’s authors tells Wealth Adviser at WSJ.com. The study looked at data from nearly 600,000 clients of commission-based advisers in Canada. The authors say it wouldn’t be unreasonable to find similar behavior among U.S. advisers.
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***DA: Hey, if these investments are good enough for me, they are good enough for you.

This Hedge Fund’s Machines Are Making the Right Calls on Oil
By Kelly Bit, Bloomberg
Hedge funds that rely on computer programs to trade are producing some of the highest returns in the industry after a particularly profitable November. Two Sigma, a $24 billion firm run by a former artificial intelligence academic and a mathematics olympian, rose 10 percent last month in one of its strategies and is up 47 percent this year.
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***DA: They should take some of the profits and invest in a couple more sigmas. Two is not nearly enough for this market.

Hedge Fund Manager Finds Stalking Lions With Camera Harder Than Tracking Markets
By Stephanie Baker, Bloomberg
A black-and-white photograph of a charging rhinoceros dominates one wall of David Yarrow’s $230 million hedge-fund firm, Clareville Capital Partners LLP, in London.
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***DA: The only difference between the market and a lion is I have never been eaten alive by a lion.

Phibro to Shut Down U.S. Business; Commodity Trader Failed to Find a Buyer
By Christian Berthelsen, WSJ
Phibro Trading LLC is closing its doors in the U.S., marking the end of an era for a commodities firm that came to prominence under oil trader Andrew Hall.
The 113-year-old company, founded in Germany by two scrap-metal dealers, is winding down its U.S. operations after it failed to find a buyer, according to a person familiar with the situation. The sale process for units in London and Singapore continues, the person said.
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***DA: Eh; it’s been a good run.

Swiss group Vontobel unveils Alt Ucits commodities fund
Citywire
Swiss group Vontobel Asset Management has launched a dedicated commodities fund aimed solely at the energy, industrial metals and precious metals sectors.
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‘Replication Funds’ Prove Some Worth
By Rob Copeland, WSJ
Mutual Funds Designed as Hedge Funds for Small Investors Pass a Test
For Andrew Beer, this fall’s market jitters couldn’t have come soon enough. “I wish October had ended up worse,” says Mr. Beer, chief executive officer of Beachhead Capital Management in New York.
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***DA: In my early years I remember a group of traders whose strategy was to watch Tom Baldwin in the T-bond pit and do whatever he was doing. I guess that was my first exposure to replication funds.

Hedge Funds Shut as Managers Struggle in Year of Two Percent Returns
Bloomberg
Hedge funds are shutting at a rate not seen since the financial crisis, as many managers post disappointing returns and an elite group of firms dominate money raising.
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Pensions & Institutions

SEC Commissioner Warns Harvard of Vulnerability; Gallagher Says Harvard’s Shareholder Rights Project Could Spur Legal Action
By Jean Eaglesham and Liz Hoffman
A top official at the Securities and Exchange Commission has taken the unusual step of saying Harvard University could be vulnerable to legal action from the agency or investors over a corporate governance project. In an academic paper, Daniel Gallagher, one of five SEC commissioners, criticized the Shareholder Rights Project at Harvard, which helps large investors like pension funds file shareholder ballot measures meant to help investors get more influence over corporate boards.
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Hedge Funds Urged to Beat Benchmarks Before Charging Fees
By Saijel Kishan, Bloomberg
Hedge fund investors are catching up with their private-equity peers. Five years after clients of leveraged buyout firms released a set of best practices for the industry, hedge fund clients are following suit.
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Congress Says It Has to Cut Pensions to Save Them
Businessweek
Joshua Gotbaum doesn’t like telling retirees that their pensions are about to be cut. After all, until August he was the director of the Pension Benefit Guaranty Corporation (PBGC), the federal insurance fund that’s supposed to safeguard pensions. But yesterday Gotbaum interrupted a vacation in Madrid to return my call asking about a bill working its way through Congress that would allow multi-employer pension plans to cut benefits. He’s a huge supporter of the legislation.
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BlackRock Investment Institute’s 2015 Investment Outlook: DEALING WITH DIVERGENCE
MarketWatch
The return of volatility – as valuations and investor complacency remain elevated – will make it vital for investors to consider hedging against downside risk and cut back on “me too” investments in the new year, according to the BlackRock Investment Institute’s 2015 Investment Outlook.
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Are all Christmas Sandwiches the Same?
Pension Funds Insider
Iain North of Aurum Funds makes a case for hedge funds as a risk reducer, arguing that some critical analysis easily separates the bad apples from the rest of the bunch.
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***DA: Who eats sandwiches on Christmas? Must be a British thing.

Regulation

Wealth managers hit out over ‘crippling’ suitability requirements
Laura Dew, Investment Week
Wealth management firms say they are being “crippled” by suitability requirements as the Financial Conduct Authority (FCA) increases its scrutiny of the sector.
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***DA: You think we have it bad here in the states? The FCA is taking “know your customer” to a new level.

CFTC Chairman: We Have Oversight of Bitcoin Derivatives
Joon Ian Wong, CoinDesk
The chairman of the US derivatives regulator has told a senate committee that digital currency derivatives fall within his agency’s remit.
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***DA: In case you were wondering.

CFTC Chief Pledges to Address Employee Unrest Plaguing Regulator
By Robert Schmidt and Silla Brush, Bloomberg
The head of the U.S. derivatives regulator is promising employees he will try to address low morale that has caused the agency to be labeled one of the worst places to work in government.
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***DA: The agency has been tasked with writing, implementing and now enforcing an entirely new industry, while being starved of resources, under a former leader who many said spoke out of both sides of his mouth. Mr. Massad has his work cut out for him.

Effective Date of Interpretive Notice to NFA Compliance Rules 2-4 and 2-36: Prohibition on the Use of Certain Electronic Funding Mechanisms
NFA
The Commodity Futures Trading Commission recently approved NFA’s Interpretive Notice entitled “NFA Compliance Rules 2-4 and 2-36: Prohibition on the Use of Certain Electronic Funding Mechanisms.” The Interpretive Notice, which becomes effective on January 31, 2015, prohibits NFA Members from permitting customers to fund their futures or forex accounts with a credit card or other electronic methods tied to a credit card (e.g., using a payment facilitator such as PayPal that draws funds from a credit card).
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***DA: Fair warning.

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About Author

Doug Ashburn is a former editor-at-large of John Lothian News. He left in late 2016 and is now the managing editor of T3 Custom.