Documente Academic
Documente Profesional
Documente Cultură
In This Issue
Founding Father Q&A
Tim Wong, Chief Executive of Man Groups AHL, talks about how the firm continues to improve its trading approach...........................3
News Briefs
Insider Talk
Seasoned hedge fund investor Jon Knudsen, co-chief investment officer of Tapestry, discusses what he looks for in CTAs ....................7
Futures Lab
Learn about ways to control the risks associated with managed futures .........................................9
Manager Profiles
Top Ten
OPALESQUE FUTURES
EDITORIAL
Notwithstanding the complexities of investing in the strategy, managed futures assets have grown rapidly in the past 10 years and especially after 2002, as the graph below shows. Last year the hedge fund industry as a whole shrank substantially due to a combination of heavy losses and redemptions. By contrast, managed futures had doubledigit gains and assets were flat.
Since other hedge funds contracted while managed futures remained stable, the latter now account for a significantly larger share of the industry. For details, see News Briefs. To say that were living in difficult and uncertain economic times is an understatement. Under these conditions an accurate appreciation of the risks and benefits of managed futures may be more important than ever for successful investing. We hope this issue contributes to a realistic view. Chidem Kurdas Editor kurdas@opalesque.com
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Since we began trading in 1987, AHL has continually researched and refined its trading systems in order to enhance its systematic trading approach
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NEWS BRIEFS
Managed Futures Gain Asset Share
Managed futures assets were flat last year while hedge fund industry assets were decimated by redemptions and trading losses. The latest data from Barclay Hedge has commodity trading advisor assets at $206 billion at the end of 2008, about the same as in 2007. Meanwhile, total hedge fund assets shrank from $1.9 trillion in May 2008 to $1.1 trillion in December, according to Barclay Hedge. That means managed futures assets are at 19% of hedge fund assets. In 2002, by contrast, the ratio was close to 6%. The managed futures sector may get an even larger percentage share of the shrinking asset pie, but how much additional money that would bring is unclear. With managed futures the top-performing strategy after short selling in 2008, many CTAs hope to gain assets in 2009. Investors continued to redeem heavily from hedge funds in January, according to press reports. Because databases contain different groups of managers and use different criteria in extrapolating industry assets, the numbers vary across data sources. For instance, HedgeFund. net estimated that hedge fund assets fell to $1.84 trillion in December, down from a peak of $2.97 trillion in the second quarter of 2008. This estimate is larger than the Barclay number due to the application of different criteria, among other reasons. Despite the disparity in the numbers, the growing size of managed futures relative to the rest of the industry shows up in different databases. The exact percentage varies, however.
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NEWS BRIEFS
Global Advisors Eases Redemption Terms
Global Advisors LP, a specialist commodity hedge fund manager located in London and Jersey, agreed to remove all gating provisions contained in the terms and conditions of its Global Commodity Systematic Fund. Daniel Masters, who co-founded Global Advisors in 1999 with Russell Newton, says GCS is a highly liquid program that trades the largest of the exchange-listed physical commodity futures contracts. In the current investment climate we are passing on our underlying liquidity to investors in our fund, he says. This action is in response to demands from investors globally, that we feel are justified, that hedge fund managers should always be able to meet redemption requests. The Global Commodity Systematic program has returned a compound annualized rate of 19% since its inception in 2005. In the past year or so many funds used gates to delay withdrawals by investors, often arguing that this was necessary to avoid selling the funds assets at extremely low prices under crisis conditions .
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OPALESQUE FUTURES
INSIDER TALK
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INSIDER TALK
changes or other variations in markets. Much like you blend stocks in an equity portfolio, here you have long-term, short-term and relative value traders. OFI: Is there anything specific about doing due diligence on CTAs versus other hedge funds? JK: With a systematic CTA, you need to look at how the system was constructed and the idea behind it. Equity managers tend to tell you exactly what they do and the metrics they use, but may not want to show their positions. Its the opposite with CTAstheyll give you the details of their positions but might talk only vaguely about how the signals are generated! OFI: How do you get a handle on those signals? OFI: Why do some funds of funds not invest in managed futures?
JK: If you look at the past few years, until relatively recently managed futures returns were by and large not as attractive as returns from other hedge fund strategies like long/short equity. A second barrier is that CTA and macro returns tend to be lumpyyou can have a period of substantial returns followed by a period of flat or negative returns. By comparison arbitrage strategies were yielding consistent returns. If people just followed the numbers and did not look ahead, they saw no reason to invest in managed futures. A third factor is some CTA returns are very volatilebut not all of them are, and recently we saw how volatile other strategies can be. OFI: What would you advise a would-be investor?
JK: It helps to have both some technical analysisstatistical background and trading experience in order to understand whether a CTA really has insight into how markets function. Some people can construct models but do not really understand markets. You have to see whether they have market knowledge to match their modeling skills. OFI: Dont investors complain that CTAs rely on unfathomable black boxes? JK: Investors fail to understand the systematic managers, largely because the CTAs themselves make the process too opaque. Many managed futures strategies are simple, though applied in a very precise way.
JK: While its a good idea to analyze the numbers using quantitative methods, you need a lot of qualitative work to see where the returns came from and what one can expect in different market conditions.
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OPALESQUE FUTURES
FUTURES LAB
Leverage
Futures and forwards are traded on margin meaning that only a small deposit is required to take a position. Depending on the volatility of a commodity, margins can vary between 0.05% and 5% of the notional value of the commodity. One can therefore achieve 100% investment exposure with just a fraction of the capital required through the inherent leverage of futures contracts. This frees up capital, which can be invested elsewhere or used to adjust the leverage of ones portfolio to match the clients risk appetite. Because margin requirements are low, there is inherently a high degree of leverage, which will increase returns but will also magnify losses. A relatively small movement in the price of a futures contract may result in immediate and substantial loss or gain to a fund holding a position in such contract. A fund may also invest in forward contracts, options, swaps and over-the-counter derivative instruments, among others. Like other leveraged investments, trading in these securities may result in losses in excess of the amount invested. There is also the risk that counterparties will be unable to fulfill their obligations, whether due to insolvency, bankruptcy or other causes, which could result in losses. If a Futures Commission Merchant retained by a manager were to become bankrupt, it is possible that the fund
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FUTURES LAB
would be able to recover none or only part of its assets held by that FCM. different techniques to analyze the vast quantities of data available. The zero-sum game of futures trading forces all participants to continuously research the behavior of their peers and to adapt their strategy in an effort to stay ahead in the pursuit of excess returns. In many respects research and risk management go hand in glove, as new trading ideas will often require new or additional risk monitoring tools. Of course, there is no guarantee that a managers risk controls will be successful.
Risk Measures
Risk management is crucial and increasingly more complicated, requiring a significant portion of a managers time. To mitigate the dangers CTAs apply risk controls and mostly trade with counterparties on risk-averse financial exchanges. At the end of the day a CTAs infrastructure is key. Only managers that stay at the forefront of new research and trading ideas will be able to cope with the challenges of monitoring and limiting risk. Todays trading systems are complex and rely on
Diversified Trading
The increasing liquidity of new instruments and markets such as credit derivatives, emerging markets, exchange-traded funds and swaps has generated many more trading opportunities for CTA managers, emphasizing the importance of strong research capabilities. In order to detect new trading opportunities CTAs must constantly develop their systems. Exposures across a wide range of sectors may help to smooth returns, as individual sectors often tend to exhibit different behavioral characteristics. The factors affecting the world commodity markets, for example, differ from those influencing financial futures. While in both cases long-term trends are usually driven by economic growth and stability, short- or mediumterm movements in commodity markets are sensitive to seasonal effects as well as sudden changes in supply or demand that result from environmental or political factors. Hence there is a high degree of uncertainty in commodities markets and futures trading allows investors to reap gains (or experience losses) from the sometimes fervent upward and downward price movements that result from the uncertainty. Geographical diversification can help reduce risk. The significant growth in the number and diversity of futures markets in recent years has facilitated a broadly diversified approach across regions and asset classes. This approach aims to control risk by avoiding over-concentration within particular sectors and markets. (See next page.)
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FUTURES LAB
Top 30 Derivatives Exchanges Ranked by Number of Contracts Traded and/or Cleared
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 CME Group Korea Exchange Eurex Chicago Board Options Exchange Liffe International Securities Exchange BM&F Bovespa Philadelphia Stock Exchange National Stock Exchange of India JSE (South Africa) NYSE Arca Options Dalian Commodity Exchange Russian Trading System Stock Exchange IntercontinentalExchange American Stock Exchange Zhengzhou Commodity Exchange Boston Options Exchange Osaka Securities Exchange Moscow Interbank Currency Exchange OMX Group Taiwan Futures Exchange London Metal Exchange Shanghai Futures Exchange Hong Kong Exchanges & Clearing Australian Securities Exchange Tel-Aviv Stock Exchange Multi Commodity Exchange of India Mercado Espaol de Futuros Financieros Mexican Derivatives Exchange Tokyo Financial Exchange Jan-Oct 2008 2,901,709,573 2,343,607,538 1,907,749,030 1,033,816,153 915,891,375 883,864,868 642,499,555 472,640,506 467,212,144 409,534,082 368,630,879 258,453,517 208,858,253 201,193,121 181,632,092 168,556,419 152,666,603 138,099,321 128,008,861 124,575,959 114,452,854 94,713,908 94,442,774 89,384,940 83,840,354 78,334,573 75,373,290 68,089,896 62,282,005 59,400,463
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Change from 2007 9.91% (-)2.03% 18.50% 33.40% 14.63% 35.66% (-)8.80% 45.52% 48.75% 64.58% 42.39% 95.85% 93.83% 22.18% (-)9.60% 144.66% 47.27% 58.69% 74.48% 3.18% 19.66% 23.05% 44.90% 24.92% (-)13.01% (-)8.53% 32.49% 75.31% (-)69.38% (-)9.86%
Source: Futures Industry Association
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MANAGER PROFILES
Up-and-coming managers with diverse approaches describe their strategy and what they see happening in the markets. Their comments have been edited.
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MANAGER PROFILES
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On a separate matter, the CFTC seeks public comment on a proposal to change the requirements for Acknowledgment Letters. These are letters that a futures commission merchant or derivatives clearing organization must obtain from any depositor holding segregated customer funds or funds of foreign futures or foreign options customers. The proposal can be obtained from the website www.cftc.gov and those interested can submit their comments via email to secretary@ cftc.gov. All comments are to be posted on the website.
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TOP TEN
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Silver Conservative Aggressive Growth Ultra S&P (Proprietary Trading) Stairs Program VCM-Global Futures 2X Trading Edge Standard Growth FX Global Yield Option Selling Strategy Diversified Futures Program
Pearlman CTA Madgroup Invs. Paragon Capital Mgt. White Indian Trading Co. Vision Capital Mgt. Stein Inv. Mgt. Madgroup Invs. Waypoint Capital Mgt. Financial Comm. Invs. Marchese Capital Mgt.
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PUBLISHER Matthias Knab - knab@opalesque.com EDITOR Chidem Kurdas - kurdas@opalesque.com ADVERTISING DIRECTOR Denice Galicia - dgalicia@opalesque.com EDITORIAL ADVISOR Tim Merryman - tmerryman@opalesque.com CONTRIBUTORS Bucky Isaacson, Frank Pusateri, Pavel Topol, Ty Andros, Walt Gallwas.
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