Trade Commodities instead of ‘Invest’ in them?

Ben Carlson has been nailing it lately over in Tumblr-ville on the new Yahoo Finance Contributor network. There was him pointing out the issues with using risk adjust returns, then some stats showing even Warren Buffet has had some very big Drawdowns… (consider that all of you who pull the plug at the first sign of trouble in the alternative investment world), and the one that most caught our attention – “Are Commodities for Trading or Investing?

The commodities piece was right up our alley, being in the business, so to speak. The piece echoes some of what we said in our newsletter last year: “3 Big Reasons Commodity ETFs aren’t Getting the Job Done,” which is basically that commodity ‘investing’ doesn’t look so great when it is a “long-only“ approach (only makes money when commodities go up) because:

  1. Commodities don’t always go up (e.g. iShares GSCI ETF (GSG) -37% since inception in ’06),
  2. Even when they do, they are very volatile,
  3. Even when they do, the access points are complex and won’t necessarily provide a return equal to what the commodity did.

Carlson goes a step further, however, quoting some academic research which shows commodities actually add volatility and reduce return… not reduce volatility and add return as is supposed to be the case with a non correlated investment.

So trade commodities instead of ‘invest’ in them?

Now, some might take that to mean that commodities should be avoided, and here’s where it gets a little confusing – because the lesson from this shouldn’t be that ‘commodities’ are to be avoided and that ‘commodities’ add volatility and reduce return.  The lesson should be that Long-Only Commodities do those bad things. The lesson should be that diversification into the commodities space isn’t as simple as buying and holding those volatile commodities. The lesson might be that they are better for ‘trading’, as Carlson points out, then ‘investing’.

Trading commodities can still give you exposure to moves that have nothing to do with the stock market (like Coffee being up 71% this year or grains selling off 30% the past few months). And that’s really what having exposure to commodities is all about. It’s about gaining exposure to outlier moves in commodity markets brought about by non-financial, non economic catalysts. Like droughts and snow storms.

But not everyone wants to sit around and ‘trade’ commodities. That’s not quite a retirement plan… “I put 40% in stocks, 30% in bonds, and trade 30% in commodities”… as it would cut into your golf time quite a bit.  For those who still want the commodity exposure, but not the trading screens – the target is professional commodities traders, or registered Commodity Trading Advisors.  Now, there are thousands of such registered professionals out there – but the grand majority of them don’t actually trade in commodities, despite their name. The grand majority do systematic trading on a portfolio of markets including bond, currency, and stock index futures.

The ones which trade commodities and commodities only – are what we call Ag Traders (short for Agriculture). So while Mr. Carlson’s question seemed to be of the rhetorical type – we can actually put some data to it and compare professional commodity trading with commodity investing via ETFs. Who wins?

Investing in the ‘trading’ of commodities versus just plain ‘investing’ in commodities has won out handily over the past 9 years. [Past performance is not necessarily indicative of future results].

Ag CTAs vs Long Only Commodity ETF(Disclaimer: Past performance is not necessarily indicative of future results)
(Data= BarclayHedge Ag Traders Index, GSG = iShares GSCI Commodity Index)

For more on how these professional commodities traders operate, download our whitepaper detailing Agriculture (or Ag) Traders.

 

Top Ten Managed Futures Performers of July

While one month’s performance is no way to judge an investment that has 3 to 5 year cycles, a glance at who’s doing well in the different environments month to month can be a useful data point at times. Here’s the top managed futures performers (by return only) for the month gone by:

Note: These programs are not necessarily recommended by Attain. For a list with much more thought behind it – check our semi-annual rankings (updated July 2014).

 (Disclaimer: past performance is not necessarily indicative of future results. Programs listed consist of those with at least a 3 year track record tracked by Attain Capital Management for investment by clients via managed accounts and do not represent all available programs in the managed futures universe.  The Max DD represents the worst drawdown of all time for the listed programs).

Top 10 CTA's of July
July ROR
Max DD
Min. Invst.
Global Ag (QEP)15.67%-20.90%1,000,000
Tactical Investment Management - Instl Comm (QEP)14.42%-41.51%10,000,000
Clarke Capital -- Global Basic14.03%-46.50%50,000
Heyden & Steindl GmbH -- TOMAC2 10.22%-42.12%5,000,000
Dreiss Research Corp. -- Rosetta (QEP) 9.31%-51.44%1,000,000
Rosetta Capital -- Rosetta Program (QEP)9.08%-39.67%250,000
EMC Capital Advisors - Classic (QEP)7.60%-45.16%5,000,000
Quantum Leap Capital (QEP)7.43%-25.31%150,000
Typhon Capital - Tauros Livestock (QEP)7.13%-15.46%250,000
Serac - Diversified Reversal (QEP)6.67%-16.37%200,000

A Global Macro take on Crude, FOMC, and Everything in Between

In case you missed it, we took to the airwaves with BTFDtv via a Google Hangout yesterday to talk everything from Corn plantings to interest rate levels with Mr. Roland Austrup, manager of the Attain Global Macro fund, one of our newly launched family of alternative funds.

We knew Roland would be a great guest as he has a great TV face, and loves to talk markets. Did he Ever. From geo-political risk, opportunities in the commodity and currency markets, the problem with crude oil, interest rates and the FOMC, hedging European markets, and  U.S. drought but plentiful crops; there was certainly no topic that wasn’t touched on. See the full interview below.

For more information on the IMFC Global Macro strategy utilized by Attain’s IMFC Global Macro fund , download the report here.

How I Missed 1,300% in $GOOG

Sometime in 2003, I looked down at the FedEx package that had just arrived at the office and saw the silicon valley address of Google. I curiously opened the medium sized box to see what in the world could be inside. What was it?  A black fleece blanket with the Google colored letters logo on one corner, and a simple card reading something along the lines of:

“Thanks for being a Google Adwords customer”

I tried to find a picture to show you, but I think we threw it away finally after using it under the Christmas tree one year and ironically, it was difficult to find a picture of one via a Google search (image searches remain one of their worst bits of technology in my opinion).  But anyway, why are we talking about fleece blankets?

Because it’s the 10th anniversary of one of the most successful IPOs of all time, the now ubiquitous Google, providing us all with a rare chance to look back and see just how stupid we were to not get involved in that offering. How stupid were most of us?  A $10,000 investment in Google at its $85 IPO price would now be worth $139,458.82 today, for a smooth 1,294% return, or about 30% per year.  I’m sure more than a few of us could have found $10,000 somewhere back in 2004, and could use over $100 grand extra today!

Nasdaq Google

Everyone knows the name Google by now, and even way back in 2003 most people knew what Google was and used it on an increasing basis. But how many people had gotten fleece blankets? And how many people in the financial world had gotten blankets?

Looking back now, I can see that I was not only an early adapter of Google Adwords, but also representative of just how powerful of a platform it could be. It was 2003 and we were a small company with 4 employees and about $600,000 in revenue spending about $50,000 on Adwords a year. That spend on Google seems excessive looking back on it today, but this was money well spent, with the bulk of our early business growth coming from “online” sources via traffic driven by Google Adwords.

What’s more – the altruistic founders Larry Page and Sergey Brin had decided on a Dutch Auction IPO, meaning that anyone could, in theory, participate at the offering price, not just the first trade price once it went public. The WSJ described the fairness of such approach:

“Fans of auctions say they are more democratic, because price is the only thing that determines who gets shares. A bid by Fidelity for 1 million shares would go unfilled if it fell below the clearing price; a retired teacher’s bid for 100 shares would be accepted if it was above that price.”

So, in review – I was intimately aware of the product, able to bid for IPO shares via the Dutch Auction, in the financial world, living proof that they had a very broad customer base willing to pay for online traffic, and financially able to invest $10,000 to $20,000.  All systems should have been go, but how much did I actually invest?

Exactly ZERO dollars :-(

Why not? The stars were aligned for me in a way they weren’t for the $1.9 Billion worth of money that did get involved that fateful day. What was I thinking?  Well, it’s hard to remember what I had for breakfast yesterday much less what my mental arithmetic was 10 years ago. But they were the usual list of excuses along the lines of:

-          $85 was too expensive

-          I wasn’t going to make the same 1999 IPO mistakes again

-          The initial value of the company would be over $20 Billion!! Way too much.

-          I was going to wait for it to trade down and then get in

-          The articles touting it as the “hottest IPO in years” made me nervous

-          There were a lot of competitors like MSN Search, AltaVista, Looksmart, Yahoo,

-          Microsoft could move in and reduce profitability (ha..)

-          They wanted to be a “company that does good things for the world even if we forgo some short term gains.”

So why beat myself up about it now, 10 years later? Because if we can’t learn from missed opportunities, we’re doomed to miss them again and again. In my best Yogi Berra impression – if we can’t know now what we should have known then, we won’t know then what we can know now.

Fact of the matter is there was no process in place for me to recognize this opportunity, and weigh these mental ‘excuses’ against the probabilities that Google would become one of the largest and most profitable companies on the planet. It wasn’t my day job to analyze my use of the product and craft an investment thesis out of that use. We were (and are) after all, an alternative investment shop, not financial folks who did analysis on individual stocks.

And here’s the thing – almost nobody else got this ‘trade’ right. The IPO raised a mere $1.9 Billion, out of the roughly $40 Trillion in investable assets under management across the world, meaning only  a select few who were really, really good or really, really lucky got it right.

The real lesson, perhaps, is that picking individual stocks is downright hard. Harder than Jim Cramer makes it look. Harder than it seems when reading the articles this week about Google’s 10 year anniversary of its IPO or Apple back at all time highs. It is so hard that professionals with decades of experience get it wrong. It’s so hard that the better approach for 99% of us is to simply buy a low cost index tracking ETF.

As someone, somewhere once said about something, which applies to stock picking:  “Don’t quit your day job”.

-          Jeff Malec, Attain Capital Founding Partner

Alternative Links: The Next 5 Years

Managed Futures in the Next Five Years – (Hedge Fund Intelligence)

Feature – Advisors that are ready for the bear market with alternatives – (Barrons)

Education:

Deconstructing Management Fees In Alternative Funds – (Forbes)

How to Think About ‘Alternative’ Investments (Managed Futures gets bad mention) – (WSJ)

Recognition:

NIBA Member of the Month: Attain Capital Management – (NIBA)

Futures and Miscellaneous

Speculators widen corn net short position-CFTC – (Reuters)

General insurance accounts increasing use of alt investments – (Hedge Week)

CME Group launches Eurodollar bundle futures and options – (Futures Magazine)

Invest like a Billionaire?

When someone first starts investing, there is the sort of high that comes with it; a high that convinces you that you just might be the next Warren Buffet. Sure. You watched a couple investing tips videos on Youtube, and you think you found some ETFs (with extremely low or no fees) that no one else knows about.

The thing is, that feeling never really goes away. The overly active investors are confident that with a little hard work they too will eventually become Warren Buffet. We all know the likelihood of that, so instead the people at Direxion decided to take that idea and turn it into an ETF. What are we talking about? The newly launched ETF Direxion iBillionaire (IBLN). Now you can feel like you’re trading with the greats, without actually doing it. Here is the description:

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Who needs the USDA when you can Live Tweet Crop Conditions

What gets Ag folks excited on a Monday morning on Twitter? Live Tweeting crop conditions. All day, the people of the “2014 Pro Farmer Midwest Crop Tour,” have been tweeting their hearts out with the hashtag #PFtour14 to show the conditions of corn and soybeans across the Midwestern states.

Crop Tour Logo

The goal of this four day tour is to provide accurate information of the condition of corn and soybeans as harvest season approaches. We can’t think of a better way to do such a thing then traveling state to state live tweeting the conditions in the field in real time.

Now you might be wondering, doesn’t the USDA already collect data from around the country to provide the conditions of various crops? Yes, but this crop tour is unique in that they don’t want to focus on  yield numbers specifically, but the big picture.

“Don’t focus on yield calculations from individual fields,” says Brian Grete, Pro Farmer senior market analyst and leader of the tour’s eastern leg. “That isn’t what we are trying to do, and we actually discourage scouts from tweeting individual yield results. Instead, we look at the entire area we cover as one big corn field. Twitter is most useful for getting a general idea of what scouts are finding. And the pictures are valuable.”

Essentially, give people the opportunity to tweet about the condition of their corn with pictures, and you got yourself one heck of a trend (pun intended). Take a look at some of the pictures from the first day of the tour, via the Ohio County Journal.

Corn 1 [Read more...]