Weekend Reads- New Year’s Edition

We’re headed out of the work week and into the weekend, but more importantly, out of 2011 and into 2012. What better way to celebrate than by looking back over the events of the year AND gathering some excellent reading materials?


  • Forex Brokers Draw Scrutiny (WSJ)
  • Manager Selection: Getting it Right (Financial Advisor)
  • FBI Arrests commodities trader for threats against NFA, CFTC, FINRA,  and SEC (CNNmoney)
  • Food Inflation: Retail meat prices in December climb by most in seven years (Drover)  [gotta love a publication named ‘drover’]
  • MF Global converting to Investment Bank (Reuters)
  • Steelers win Superbowl in 52% of 2500 computer simulations (WhatIf Sports)
  • The business of running a Hedge Fund [or CTA] (FINalternatives)
  • Middle East through the Oil looking glass (Platts)


  • Japan Quake Sets Off Market Aftershocks (Attain)
  • Funds Find Opportunity for Volatility (New York Times)
  • The Making of a Bond Debacle (Business Week)
  • Examining the Yen-Dollar Relationship (CNN)
  • 10 Ways to Win Your NCAA Bracket Pool (We Got This)


  • Where your taxes that paid for the bailout went…  (Rolling Stone)
  • The Risk of Risk Management (ReformedBroker)Ten reasons the world economy may be going soft (Telegraph)
  • CME explains the method behind the madness in margin changes (CME)
  • Algorithms aren’t only for trading models – did they help us track down Bin Laden? (The Daily)


  • Pay attention bond traders… Predicting Unemployment number with Google Correlate (Freakonomics)
  • Copper as collateral game over in China? (FTAlphaville)
  • May commodity slaughter (Attain)
  • Goodbye Oprah (in song)  (Youtube)
  • CTAs and hedge funds struggle in May  (HedgeWorld)
  • John Paulson loses half a billion in less than 24 hours  (ZeroHedge)
  • Is the Fed the World’s Larged Fixed Income Hedge Fund? (Ritholtz)
  • People are finally realizing that the commodity ETF market may be a little oversold (Index Universe)
  • Screencast: When commodities are financialized, managed futures win (Abnormal Returns)


  • Dumbest Moments in Debt Ceiling History (MoneyCNN)
  • Who is watching the banks? (Fiscal Times)
  • Commodity Bubble infographic (Focus)
  • Financial Beer Goggles? Who’s driving the economy? (Paul Kedrosky)



  • The debt problem nobody is talking about…   (Yahoo!)
  • Buying Tomorrow- Risk, Speculation and Seeking the Divine (Lapham’s Quarterly)
  • Spam and High-Frequency Trading (FTAlphaville)
  • Delta One Desks- How we got to UBS and the Rogue Trader (NYT)
  • Operation Twist 101 (Freakonomics)


  • Volatility killed the IPO Star (Motley Fool)
  • Don’t like the ratings from the ratings agencies? Just ban them… (Reuters)
  • The Next Big Bank Bailout (Matt Taibbi)
  • Ratings Agencies show preference to those paying the most (Business Week)
  • Remember Occupy Wall Street? (Attain)


  • Best explanation you’ll find of those MF Global European Bets you’ve heard so much about (MoneyControl.com)
  • Everything you need to know about the Eurocrisis in one post (Washington Post)
  • First new poverty formula since 1964 (CSM)
  • The best Halloween play for parents…. ever. It gets good around 2:18. (Youtube)
  • How to Save the Futures Industry (Attain)


  • Disagreement between investors and analysts on the value of the EU Summit (WSJ)
  • How NOT to Get a Second Date: Lessons from an Investment Manager (HuffPo)
  • 50 Economic Stats You’re Probably Not Ready to See (Zerohedge)
  • US Troops out of Iraq (AFP)
  • Ending 2011 with 11 charts about 11 year trends… (Zerohedge)
  • Biggest Bankruptcies of the Year (Forbes)

And in case you’re more of a picture person: The Most Powerful Images of 2011

That’s it for 2011, folks. Don’t worry- we’ll be back at it all next year. Until then, here’s wishing you a happy, healthy and prosperous 2012 from everyone at Attain!

Long-only Commodity ETFs v. Futures – 2011 Final Score

The year has drawn to a close, and while the powers that be are still hard at work tallying up the 2011 results for various asset classes, the year has already issued its verdict on commodity investment options. We’ve posted throughout the year on the underperformance of long-only commodity ETFs- especially when you have the opportunity to invest in futures instead and see better results. Futures trading is complicated, presents a risk of loss, and isn’t for everyone- especially since past market performance doesn’t necessarily indicate future results- but given the numbers, we’re left scratching our heads. We’ve yet to receive a good answer to the question: why invest in an ETF when you can just roll December contracts annually?

Read ‘em and weep…

Feeder Cattle (+20%) and 30 Year Bonds (+18%) top 2011 commodities performers

Everyone’s talking about Milk as 2011’s top performing commodity, but we’re more interested in markets that managed futures professionals actually trade, like Bonds, Crude Oil, Natural Gas, and Cotton. Per our favorite quote site, Finviz.com, we find the following 2011 stats for commodity markets. [Please note – finviz does some weird things around contract rolls, which can make their percentage gains over longer periods different than what would be found using a continuous contract or the cash/spot market, nonetheless, we feel it is representative of each market’s 2011 movements].

The highlights:

  • 40% (16 of 40) of markets up for the year (compared to 85% in 2010)
  • 57% of markets down for the year (compared to 15% in 2010)
  • 3 markets down more than -30% (Cocoa, Cotton, Natural Gas)
  • 12 markets down more than -15%
  • Only 3 markets up more than 15% (Heating Oil, 30 Year Bonds, Feeder Cattle), compared to 4 markets with gains over 75% in 2010
  • 3 markets within 3% of their 2011 highs (US Dollar, 30 Year Bonds, 10 Year Notes, Feeder Cattle)
  • 2 markets withing 3% of their 2011 lows (Natural Gas, Platinum)
  • Cotton, after posting the second highest gains in the field last year, fell to the bottom of the heap with losses of -36%.

What will 2012 bring?  That is the million dollar question, to be sure. Will this finally be the year Natural Gas breaks out of its slump? Will Cotton and Cocoa bounce back? Can US Bonds continue to put in positive years?  Will Gold break its multi-year win streak ?

Luckily, managed futures investors don’t need to know the answers to those questions before hand in order to have a successful 2012. The managers don’t even need to know the answers, they just need to be able to identify and capture any such moves when they happen (no small task).

Putting Numbers to the (Smiley) Faces

We always enjoy when Barry Ritholtz, one of our favorite market/economy bloggers, puts out his collection of market sentiment charts, as he did last week. Our favorite is the simplistic one below with the cute faces.

We actually put numbers to this chart in a newsletter a while back, showing how getting in at the highs and out at the lows (those points of emotional distinction) might look like if the model were applied to a trading system. The trick was defining what euphoria and despondency looked like in terms of performance numbers, and we came up with a simple way of defining what each of the emotional stages represented in terms of actual numbers by assigning each stage a corresponding new multi month high or low reading. For example, Euphoria is represented by a new 21 month high, hope by a new 3 month high, and so on.

Barry’s posting of these charts again got us thinking as to how the stock market performs, on average, on the market emotions cycle. Mainly, we wanted to see if the Euphoria stage actually is the point of maximum financial risk, and conversely whether the Despondency stage really is the point of maximum financial opportunity. We found that to generally be the case, with Euphoria (as represented by a new 21month high in the S&P 500) followed by below average returns over the following 12 months, and Despondency (as represented by a new 21 month low in the S&P 500) followed by above average (well above average) returns over the following 12 months.

Anyway, some food for thought, and support that it is never a good thing to be getting in at the highs and out at the lows.

For those of you who like tabular format better:

The 5 Questions Every Investor Needs to Answer

With 2011 coming to a close and 2012 just around the corner, it’s only natural to start contemplating your New Year’s resolutions. While the traditional resolutions that come to mind are often personal (better fitness, less stress and more philanthropy are some of the most common if you ask the government), we urge you not to neglect financial contemplation as you outline your goals for the dawning year.

To be fair, after the way the markets have behaved  this year, the thought of delving into your investment portfolio may be cringe-inducing, but, as they say, “No pain, no gain.” It’s years like this that really picking apart your portfolio is crucial. Take a look at your investment portfolio, its performance, its balance, and what you’re hoping to accomplish with it over the next year. Unsure of where to start in this fiscal self-examination? Here are a few questions to kick things off:

1. What is my Investment Window?  How much time have I given a certain program (investment strategy) – how much more time am I willing to give it? Too often investors jump on a hot program, and then jump off of it at the first sign of trouble. We wrote earlier this year about how this disconnect between expected and realized performance results in a vicious “in at the top/out at the bottom” cycle that can deliver swift losses to the foolhardy investor.  For managed futures in particular, we advise a minimum investment period of 2-3 years if you’re going to have proper context for program performance evaluation. Using this as a filter- how is your portfolio doing?

2. How diversified am I?  Is my portfolio filled with all option sellers? All day trading systems? All trend followers? If you’re an Attain client, you’ve probably been warned away from such imbalances, but these questions are important as you recalibrate for the new year. We just broke down 2011 managed futures performance by strategy type last week, and viewing your portfolio through the lens of those strategies  can help you make informed decisions about how balanced your strategy exposure may be within your portfolio, which may help hedge against a year where one particular strategy struggles. For instance, many investors had way too much trend following exposure back in 2004/2005 – and then ditched it all and loaded up into option selling programs in 2006/2007 just as volatility spiked in 2008, then flopped back into trend followers in 2009 just as they struggled and option sellers shined. These investors would have been better served to have had equal exposure between the two strategy types the whole time.

3. What Markets am I exposed to? Which do I want to be exposed to?  Do I have exposure to Crude Oil, Wheat, etc.? Do I want exposure to those markets? What markets is my exposure in? Am I overexposed in any one sector? These are all great questions to ask of yourself, and the answers very well may surprise you, as investors are usually much more exposed to stock indices than they think. After a year that has been as risk on/risk off as 2011, it may seem silly to even worry about which markets you’re in; they were all swinging on every headline out of Europe, anyway, right? Even though this may be the case, there’s much more to analyzing market exposure. What kind of liquidity do these markets have? How volatile were the moves made there? Which markets ended up yielding the most profits for you, and- most importantly- why? Were you missing out on more favorable trading conditions in other markets, and, if so, were the movements in that market a product of new developments or fluke-ish events? Understanding these answers may help you better understand the risk within your portfolio, and give you insight as far as how it could be better managed.

4. What are my Stop Trade Levels?  Drawdowns can and will happen in the future. Do you have a plan, written down, on what you will do when the drawdown hits for one the components in your portfolio? It is important to set a stop trade level for each of the programs in your portfolio, so you don’t make emotional decisions during a stressful drawdown. The problem is that, while we may understand when sitting at equity highs that drawdowns are a part of investing in managed futures, and often (though not always) come up in a cyclical manner, once that drawdown actually hits, we have a bad habit of morphing from a rational investor into a panicked, frenzied mess.  It is much better to make decisions regarding your stop trade levels today, with a clear head, on what you will do when a certain program gets to a certain level than dissolve into pieces alongside your account statements in the heat of the moment.

5. What does my overall portfolio look like? Your managed futures portfolio likely doesn’t exist in a vacuum, and it pays to make sure it can play well with others in your portfolio. If you’ve allocated a large chunk of your risk capital to a long-only commodity fund, like GLD, you may not want to be allocating to a program that may increase your long exposure during critical times. For most investors, your main concern will be making sure you’re not overexposing yourself to stock market performance, which may mean avoiding option sellers that will suffer when stocks sell off and volatility spikes. The bigger picture question may have to do with your overall asset class allocation. We’ve written in the past about the updated “Efficient Frontier”- arguing that balancing your portfolio between stocks, bonds and managed futures with a 40%-20%-40% split, respectively. Does your portfolio fit within these parameters? Could it benefit from a shift?

As we said, these questions are only a start, and should not be considered exhaustive as you sit down to analyze the current state of your investments. But that’s the nice thing about asking questions- they often lead to even more questions. The end goal of asking these questions should be the development of your New Year’s Financial Resolutions for your portfolio- what comes next? What programs are on my shopping list? How do I measure my success- especially as it pertains to process?

More questions than answers? Maybe… but when it comes to investing, we think you should ask as many questions as possible; an informed investor is often the more successful one.

Managed Futures Matchmaking: Program Categorization the Sexy Way

 It was last week that we sent out our end of year recap of how managed futures had fared over the past 12 months. Bypassing the idea of doing a program by program breakdown in favor of strategy performance analysis, we found ourselves facing a common question- how, exactly, should these programs be classified?

We eventually settled on a fairly conventional approach to strategy categorization- guided by the elements that drive the performance of a program- and while these categories are certainly helpful when trying to understand the general performance of various strategies, when it comes down to evaluating individual programs and making decisions about your portfolio, it may not be the most elucidating method of strategy division. Let us explain…

The Problem

Anyone who has ever had to conduct due diligence research on a host of managed futures programs will likely tell you the same thing: the traditional labels we apply to these programs are rarely a perfect fit. Part of this might be attributed to the evolution of strategy development for CTAs as a whole. As managers have attempted to enhance their opportunities for profit and better manage their risk exposure, various elements of strategy have melded into a host of hybrid programs that are not so easily sorted into distinct piles.

For instance, the Rosetta program is the poster child for defiance of conventional managed futures categories. Their fundamental trading style intuitively places them in the discretionary trader category, and yet they are incredibly distinct from, say, a Dighton Capital. They also engage in complex spread trading strategies, and specializing in agricultural trading, but their discretionary approach makes them very different from systematic agricultural trading program Global Ag, and even more different from the hybrid spread trading program we see with Emil Van Essen. In this light, effectively categorizing these programs under traditional labels becomes exceedingly difficult.

For the organizational nutcases among us, the intuitive response is to develop some sort of strategy category hierarchy- a road map of reflective questions that ultimately spits out a very specific, final categorization. Even this approach, as appealing as it seems in theory, falls victim to a logical fallacy, insofar as it assumes that these categories are mutually exclusive, which is the only way that a branching categorization system works.

For some, the category conundrum may seem silly. At a certain point, you have to wonder, Why bother with sorting through the details at all? Why not compare the programs based on performance and risk metrics alone? Why not simply group the programs by their correlation levels?

You’re talking to a group of huge statistic junkies. We aren’t going to tell you that performance, risk and correlation aren’t important considerations when constructing a managed futures portfolio, because believe in their significance. However, just as these figures, in and of themselves, cannot paint a complete picture of a managed futures program, the numbers can fall short of helping investors really understand what, exactly, they’re investing in. Numbers may construct a vivid picture for the John Nashes and Matrix hackers of the world, but for most, they fall woefully short of establishing a clear explanation of behaviors and philosophies.

Perhaps more importantly, in a world of wild variance in track record length, assets under management and manager experience amongst the various managed futures programs, these data points cannot paint the panorama view of the managed futures landscape. Categorization provides an equalizer that is not dependent upon anything other than the defined mechanisms of trading associated with a given program. As such, an understanding of the strategic categories underpinning these programs can provide the context that connects the dots in a way that nothing else can.

Proper categorization can  provide valuable perspective for investors and portfolio advisors alike, but the industry’s attempts to batch up the entire universe of managed futures programs into neatly defined categories just doesn’t seem as effective they could be. After countless hours white-boarding out the issues, crunching the numbers, and writing and rewriting this piece, we finally realized what the solution was… in the most absurd of analogies.

A Relational Perspective on Program Categorization

Those involved in the managed futures space will tell you that advisers and CTAs don’t really sell managed futures. The asset class doesn’t fit into supermarket-style aisles of options (though, really- are supermarket aisles ever perfectly arranged, either?). Applying that kind of retail taxonomy to a process that only vaguely resembles the business models historically associated with selling is a mismatch of sorts.

No, advisers and CTAs don’t sell to clients- they court them.  We are the matchmakers, and our clients and managers are the potential lovebirds.

Stay with us, now.

Every investor is unique- they come with their own combination of prior investing experience, risk capital, risk appetite and tolerance levels, and understanding of portfolio construction. Sure- similar levels may result in similar investors, but no two clients are going to be exactly alike. In the same vein, managed futures programs are all unique as well. Sure- they may share common characteristics that make them easier to comprehend, but at the end of the day, the reason new programs are developed every year is because there will always be slight differences in how these characteristics are arranged. When you look at things from this angle, the matching of investors with managed futures programs requires a more nuanced understanding of personality composition than it does pitching a sale.

Now, admittedly, matters of the heart aren’t exactly black and white. Opposites can attract. Cultural divides can be bridged. Age gaps can be irrelevant… unless you’re Demi and Ashton. While investing certainly has its grey areas, we wouldn’t go so far as to say that this matchmaking analogy is perfect. We all know someone who just has a knack for setting up matches, often guided by intuition. Here, it’s not enough to have a “hunch” that an investor will hit it off with an individual program- you have to “psychoanalyze,” if you will, the compatibility of the two. This point is furthered when you think about managed futures categorization in the context of personalities. We’re not aware of anyone who requires a Myers-Briggs examination of their dates prior to dinner (and would be creeped out if we did), but by seeking to categorize managed futures programs, we essentially do just that… and it’s anything but creepy here.

For context, the Myers-Briggs assessment is a psychometric personality test that evaluates an individual’s association within four characteristic pools based on established dichotomies related to attitudinal, functional and lifestyle determinations. Based on the realm of possible combinations, the test outlines 16 different personality types. There may be variations within each four-characteristic combination, but the idea is to provide a general overview of a specific grouping of qualities.

In our mind, it’s high time that managed futures developed a Myers-Briggs test of their own.

If you look at a managed futures program’s strategy as its personality- or grouping of characteristics- the methodology of categorization- and investor analysis- shifts dramatically. It’s no longer just about including a spread trader in your portfolio or wanting some ag exposure; it’s about finding a program that most closely matches an investor’s risk tolerance, trading preferences and diversification on a totally different level. We won’t go as far as to we’re trying to be the Myers-Briggs of our space… but then again, maybe we will.

Introducing- the Attain Capital Program Category Assessment- or PCA.

While the differences between managed futures programs may be widespread and difficult to smash into a preconceived hierarchy of categories, the ways in which these programs can differ are more easily outlined. Based on our thousands of pages and hours of due diligence research, the major areas of distinction that we note are as follows:

Let’s break it down:

  • What They Trade- What kind of contracts is the program trading? Are they generally constraining themselves to outright futures trading, or are they participating in options trading? Does their program trade both kinds of contracts? If none of the above, the program likely does not qualify as a managed futures program. This element is an important consideration, as different contract structure participation can carry unique risk profiles.
  • Where They Trade-What markets does the program participate in? Do they, like a Cervino Capital Gold Covered Call Program, only trade one market? Are they focusing on a given sector, as stock index traders such as Paskewitz do? Have they built their program around a set of select sectors, like Rosetta’s trading of grains, softs and meats? Maybe, like Clarke Capital Worldwide, the program participates in a wide array of sectors. This characteristic is an important one for investors to consider. On one hand, focus on a single market or sector, particularly when traders rely on fundamental or discretionary signals, can play a significant role in the ability of a program to succeed, whereas diversification of market exposure may help other programs hedge against one trend wiping out the positions of an entire program.
  • How They Trade- If we know what contracts are being traded in which markets, the next obvious question is what the guiding philosophy behind the trades might be. The most common classification here is that of trend following or momentum trading, where a manager will attempt to latch on to the momentum of an emerging trade in order to capitalize on the price movements therein; these are the more traditional managed futures programs. Another strategy might be mean reversion. Call it contrarian or counter-trend if you will; this strategy bets that the trend will reverse. The medium between these two would be a relative value strategy, where positions are offset in such a way that they culminate in neutral market exposure- a strategy that some might include spread trading under. A program that doesn’t quite fit within these strategies may be using a hybrid of these perspectives, such as a program embracing a variety of trading models. This distinction can be indicative of the amount of risk taken on by a manager, and the volatility of a program in general.
  • Why They Trade-What makes a program place a trade? Is it a systematic signal, such as a breakout from a moving average? Is it a fundamental signal, such as a report on industrial demand for copper? Is it a blend of the two, where the manager executes their discretion by interpreting a variety of signals in order to gauge the prudence of a given trade? Maybe the program is a hybrid of these ideas, with a discretionary overlay when  it comes to a specific sector, and pure systematic reliance in another. The why provides an element of predictability- not necessarily in performance, but in process- that may appeal to investors of varying risk appetites.
  • When They Trade- Speaking of timing… this may be the more complex elements of categorizing managed futures programs, as the interpretation of the brightlines dividing their meaning may change depending on who you talk to. On our side of things, we want to know if a program looks to get in and out of trade within a one day period, a 2 to 7 day period, or longer. It’s entirely possible that a program will have a collection of models that trade on different timeframe levels. This element of evaluation can be incredibly important to understanding how a program works, as different timeframe guidelines for trades may perform differently under specific market circumstances.

That’s great… now how do I use it?

As we played around with the various combinations of characteristics outlined here, we found the descriptions they provided us with wound up being pretty accurate. This was a bonus… until we started to do a “strategy breakdown” following these lines in the sand; at that point, we were functionally were back to doing program by program reviews. That’s not necessarily a bad thing, but for functional purposes, it made the relational approach to categorization a little unreasonable for instances where you’re trying to look at things from 20,000 feet.  In fact, using this methodology, there are 764 different category profiles in the managed futures space- enough to make Myers and Briggs insanely jealous and drive the average investor crazy.

The relational approach to program categorization may not be useful to those doing big picture industry analysis, but its specificity can be of great use to the individual investor when it comes to understanding the differences between programs available and figuring out which are best suited for inclusion in their portfolio. In essence, the relational approach serves as a framework for evaluation of a program’s makeup; a 3D view of its composition and ideology. It basically provides a compatibility assessment for an investing relationship, forcing the investor to look behind the impressive physique of a program’s performance and the age of the track record to what lies within.

Now, just as we would never advise making a major relationship decision based on the outcome of the Myers-Briggs assessment alone (again, creepy- and are we really supposed to believe there’s only 16 kinds of people out there?), the relational approach outlined here is not the end-all, be-all for managed futures program selection. It’s just one piece of the puzzle, and is ultimately most helpful when used in conjunction with evaluation of past performance, various risk metrics, non-strategy related program attributes (assets under management, track record length, etc.), and the qualitative due diligence that dedicated IBs like Attain can provide. We understand how these pieces work together, and, further, that the road to allocation is a long and complicated one. That’s why we’ve invested so heavily into creating tools that make that journey a little more comfortable for the wary investor. In our experience, when you see the full picture- well, that’s when the magic begins. That kind of self-awareness and general understanding of the field in which you’re operating, in our minds, is a match made in heaven (sorry, couldn’t help ourselves).

Managed Futures 2011 Performance: Strategy Breakdown

As 2011 draws to a close and everyone begins to reflect over the happenings of the past year, those with money ‘at work’ usually become particularly pensive. Could I have done better? Could I have done worse? Does my portfolio need adjusting? The self-examination process this year is perhaps even more strenuous than usual. With managed futures set to round out the year with losses overall, those invested in CTAs may have more questions than usual as they look at what worked (if anything), and what didn’t amongst the managed futures programs they follow.

These are loaded questions- especially in the chaos that has been 2011- so we took some extra time to make sure the perspective here was what we needed. Plus, there will be no newsletter the next two weeks with our offices closed Mon. the 26th and Mon. the 2nd. We typically end the year by breaking down how individual programs had performed throughout the year, but usually end up repeating ourselves quite a bit through that process (i.e. this program, like the rest of the trend followers, did xyz because of the same market environment). To avoid this repetition, we instead looked this year to break down managed futures performance by strategy type.

The difficulty in this kind of analysis is establishing what categories are most appropriate to use. There are a wide variety of factors that can differentiate one program from another. That being said, in our analysis of a wide universe of managed futures programs, we found a series of elements that created unique enough distinctions to warrant specific categories.

To learn about the categories we decided upon, and how managed futures programs within those categories performed during 2011, click here.