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JLN Managed Futures: Risk Parity, CTA Flows ‘Pose Risk for Fundamental Investors,’ JPMorgan Says; CTA/managed funds lose out to global macro allocations; ‘Alternative’ Mutual Funds Providing Limited Protection

Observations/Commentary

CTA Expo Update
Doug Ashburn – John Lothian News

CTA Expo returns to Chicago on September 17, 2015, at the UBS Center at 1 N. Wacker Dr. On the afternoon of the 16th, there is a half-day program for registered traders,”The Rules of the Game – Business Guidelines for Emerging Managers.” I will be co-hosting the 3 pm session along with BarclayHedge president Sol Waksman on the effective use of media and databases in an emerging manager’s marketing plan.

CTA sells out every year, so sign up today.

Historically, registered capital sources make up a little less than half of CTA Expo participants. Roughly a quarter are CTAs and another 25 percent are service providers. CTA registrations still start at just $500, Service Providers at $700 and Capital sources, including asset allocators, pool operators and professional clients, attend CTA Expo conferences for free. For what you get, the event is a bargain regardless of which category you are in. And I am not just saying this because I qualify as media.

The event features a number of panels specifically addressing the most pressing issues in the CTA space. Gerry Corcoran, CEO of R.J. O’Brien, kicks off the event with a look at the futures industry – “Where are we and where are we going.” Other panels cover institutional investors, family offices, the art of communication, due diligence and more.

For more on this year’s program, click HERE

See you there.

Risk Parity, CTA Flows ‘Pose Risk for Fundamental Investors,’ JPMorgan Says
Barrons.com
JPMorgan’s Marko Kolanovic weighs in: “Trend following strategies (CTAs), Risk Parity portfolios, and Volatility Managed strategies all invest in equities based on past price performance and volatility. For instance, in our June market commentary we showed that if the equity indices fall 10% (and don’t recover immediately), these trend followers may need to subsequently sell ~$100bn of equity exposure. These types of ‘price insensitive’ flows are starting to materialize, and our goal is to estimate their size and timing. These technical flows are determined by algorithms and risk limits, and can hence push the market away from fundamentals.”
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***DA: Funny – the stock market euphoria over the past five years has been attributed to solid fundamentals. When the market comes back to earth, though, there must be a scapegoat. Evil derivatives. High frequency traders. And now CTAs? Really? China, the second largest economy in the world, and driver of half of world growth over the past decade, is in freefall.

NFA Board Update–August 2015 Meeting
NFA
NFA President and CEO Dan Roth joins Chairman Chris Hehmeyer to review cybersecurity and other issues discussed at NFA’s August Board of Directors meeting.
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***DA: The video was produced and edited by John Lothian Productions.

CTA Challenge participants in final stretch of 2015 competition
Coquest Inc.
The CTA Challenge, a year-long competition for commodity trading advisors (CTA) organized by Dallas-based Coquest Inc., is hitting the home stretch of 2015, and at this point the winner is too close to call. Several different trading programs, judged by a combination of risk adjusted return and volatility, have held the pole position, jumping as much as five levels in a month.
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***DA: The Challenge is much more fun to report on this year, as there are some solid winners. Back when managed futures was in its mini-doldrums a few years ago, the leader board was less impressive. “Less negative than our peers” is not a great marketing slogan.

Lead Stories

CTA/managed funds lose out to global macro allocations
FTSE Global Markets
According to Credit Suisse’s latest survey of the alternative asset allocation preferences of some 200 global institutional investors in hedge funds, the top three investment strategies favoured in the Americas was global macro (38%); event driven (47%) and equity long/short (54%). In EMEA meanwhile, global macro was the most popular allocation among institutional investors (54%), equity long/short (46%) and event driven (43%) while in APAC global macro (44%), multi-strategy (44%) and credit long/short (39%) predominated. The ability to capitalise on macroeconomic opportunities, such as an expected hike in US Fed interest rates, looks to underlie its popularity. However CTA/managed futures has declined in popularity among respondents.
jlne.ws/1XbJ1s8

‘Alternative’ Mutual Funds Providing Limited Protection
By ANNE TERGESEN and ANNA PRIOR, WSJ
Since the market crash of 2008, more investors have embraced the idea of owning an array of investments—from commodities to hedge-fund-like mutual funds to energy partnerships. The goal is to reduce risk and moderate the ups and downs of owning stocks.
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**JK – More 60-40 portfolio chatter, with selective amnesia of 2008.

How did Managed Futures do While the Dow was Down 1000
Attain Capital Managed Futures Blog
Now that the dust has settled somewhat after the mini crash of last Friday and Monday – we’re getting calls fast and furious asking how managed futures fared during the Dow losing a few thousand points.
Here’s how the Managed Futures indices did on Monday, and how they stand so far for August and YTD versus the S&P 500.
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***DA: And selective memory of last week, if these numbers hold.

Asness Attracts $360 Million as Liquid Alternative Funds Hold Up
Bloomberg Business
As U.S. stocks suffered their worst month in more than three years in August, Clifford Asness’s managed futures fund was able to profit. Investors are taking notice. The $9.12 billion AQR Managed Futures Strategy Fund pulled in an estimated $360 million in net subscriptions last month through Aug. 28 as bets against commodities and currencies paid off. That’s the most among 366 U.S. liquid alternatives funds that provide daily updates, according to data compiled by Bloomberg.
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**JK – A personable and engaging individual – and Pinnacle Award winner

Are Hedge Funds Fake?
Bloomberg View
Of course it is possible that hedge funds as a group underperform the market net of fees, that hedge fund fees overall are too high, that most hedge fund investors rue the day they ever heard of “hedge funds,” etc. It is certainly possible that some hedge fund managers just put all the money in index funds and play solitaire at work. Here is a much longer paper, by Mila Getmansky, Peter Lee and Andrew Lo, with the weirdly bland title “Hedge Funds: A Dynamic Industry In Transition,” that rounds up the evidence on hedge fund performance and how much of it can be attributed to identifiable systematic factors rather than idiosyncratic skill. It is not, shall we say, an unalloyed case for the wonderfulness of hedge funds.
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**JK – Fake? No. Perplexing? Yes. For “sophisticated investors?” Yes.

Carlyle Finds Hedge Funds Hazardous
By ALEXANDRA STEVENSON, NY Times
If nothing else, the last week has proved it can be very difficult to run a hedge fund. The Carlyle Group, the private equity giant, has known that for much longer.
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Why the commodities super cycle was a myth
FT View
Falling prices show the world is not running out of resources
In 1980, the economist Julian Simon challenged doom-mongering biologist Paul Ehrlich to a bet that the prices of any five metals would be lower in 10 years’ time. He won, and made his point: over the long run, technological progress means commodity prices are likely to fall in real terms.
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Managed Futures/Managed Funds

Did Alternative Funds Stand Tall or Fall Down?
Morningstar
When the markets swooned in late August, many eyes pivoted to liquid alternatives. Would these newfangled investments, promoted in part for their ability to provide a cushion to portfolios during times of turbulence for the markets, fulfill their promise? A sharp six-day market correction (or even a multimonth downturn, if you count the S&P 500’s decline from its high point in May 2015), is probably not sufficient to take the full measure of these funds, but it’s enough of a deviation from the largely placid bull market of the last half-decade to at least offer some relevant insights. Call it a stress-test, if you will, of alternative mutual funds’ resiliency.
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SAFT ON WEALTH-Are hedge funds just pricey and passive?
By James Saft, Reuters
Investors in hedge funds are likely to be paying for a product more like an index fund than a skill-driven market beater.
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Hedge Funds Can’t Exit Crop Markets Fast Enough Amid Big Supply
Luzi-Ann Javier, Bloomberg
Farm hands stack bales of straw as they are collected in a field of where soft red winter wheat has been harvested. Photographer: Daniel Acker/Bloomberg
With excesses building in everything from cotton to wheat, hedge funds can’t seem to get away from crop markets fast enough.
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Aberdeen Joins EU-Wide Alternative Assets Market With Fund
Bloomberg Business
Aberdeen Asset Management Plc, a $483 billion U.K.-based investment firm, started its first alternatives fund that can be marketed across the European Union as it seeks to grow business with clients seeking protection from declines in the stock and bond markets. The $500 million Aberdeen Alternative Strategies Fund, which invests mainly with hedge funds, started this month and has “attracted significant early investment,” the company said in a statement on Friday. Such funds, which can also include managed futures, real estate, commodities and derivatives, are becoming more popular among customers concerned about the price level of fixed income and equities, it said.
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Pensions & Institutions

Malcolm Gladwell attacks Yale for $480 million payment to hedge fund managers
Business Insider
Malcolm Gladwell is lashing out at Yale University for what he says is exorbitant spending on hedge fund management fees.
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***DA: If a hedge fund guy gives millions to the Yale endowment and then gets millions back for managing the same endowment, what is that called? Click to see Gladwell’s answer. Parental discretion is advised.

Largest Dutch pension fund exits Mylan over death penalty concerns
By Thomas Escritt, Reuters
The Dutch public employees’ pension fund, the world’s third largest, has sold all its shares in pharmaceuticals maker Mylan after it emerged that one of the company’s products is in stock at a U.S. prison where death sentences are carried out.
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Pension Advisers Learn the Folly of Trying to Beat the Market
By RON LIEBER, NY Times
The Carson Nugget casino takes up the better part of a downtown block in this state capital, and a sign on the side beckons bettors with a promise of “Extremely Loose Slots.”
jlne.ws/1LsuuSf

Hedge Fund Industry Overstates Performance Claims: New Research
International Business Times
A growing body of evidence suggests hedge funds don’t live up to the hype — a finding especially important for institutional investors, including the pension funds that ensure the retirements of millions of teachers, firefighters and other public employees. Now, two studies reveal the chief marketing strategies employed by the hedge fund industry substantially overstate returns and benefits.
jlne.ws/1J6sqyC

Endowment and Pension Managers Stay Calm Amid Market Volatility
Institutional Investor
The heads of several major endowment and pension funds agree that the market gyrations this week are hardly cause for fear.
jlne.ws/1XbKoqG

Kentucky teachers allege federal constitutional violation in lawsuit against pension fund
Pensions & Investments
Monday’s lawsuit alleges that KTRS allowed the state to shirk its own required pension payments, did not clearly inform teachers of the “severity” of the system’s underfunding and that it inappropriately invested in “high-risk alternative investments” such as hedge funds, as well as invested with managers that have been identified by the American Federation of Teachers as managers that “work against teacher funding nationwide.”
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Foundation Investment Growth Slowed Substantially Last Year, Study Says
The Chronicle of Philanthropy
The investment portfolios of private foundations grew 6.1 percent in 2014, a slower pace than in the previous two years, when endowment officers cheered double-digit gains. Returns at community foundations slowed as well, dropping from 15.2 percent in 2013 to 4.8 percent last year, according to a study released Thursday by the Council on Foundations and the Commonfund Institute.
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***DA: Word is community foundations are also backing off on allocations to alternatives.

Regulation

Senators Start Asking Questions About Hedge Funds Betting on Lawsuits; The “litigation finance” industry provokes a skeptical look from two powerful Republican lawmakers
Paul Barrett, Bloomberg
Hedge funds have been speculating on lawsuits, a new form of financial engineering that some business interests say encourages wasteful courtroom warfare. Now two top Republican senators—Chuck Grassley of Iowa and John Cornyn of Texas—have a few questions of their own. The lawmakers announced a move to start “examining the impact of third-party litigation financing is having on civil litigation.” Their starting point is not one of enthusiasm.
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Client Margin Protections Should Be Recognized
Scott O’Malia, ISDA derivatiViews
Big strides have been taken in increasing the share of derivatives cleared through central counterparties in recent years, meeting one of the key objectives set by the Group of 20 (G-20) nations in 2009. Today, roughly 75% of the interest rate derivatives market is cleared, according to US swap repository data compiled by ISDA. But the leverage ratio in its current form could threaten continued progress.
jlne.ws/pZFQ0O

CFTC Approves National Futures Association Rules Enhancing Protections for Retail Forex Customers
CFTC
The U.S. Commodity Futures Trading Commission approved rule amendments and a new interpretive notice filed by the National Futures Association (NFA). NFA is a registered futures association under section 17 of the Commodity Exchange Act (Act), and is a self-regulatory organization for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency transactions, and swap transactions. NFA submitted the proposed rule amendments and interpretive notice to the Commission for review and approval pursuant to section 17(j) of the Act.
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***DA: For a full summary and links, visit the rule page in MarketsReformWiki. Also, click to read statements from Commissioner Bowen and Chairman Massad

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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.