Weekend Reads: Rules and Warnings

Liquid Alternatives and Regulation:

Massachusetts’ Galvin to investigate alternative fund sales by advisers – (Investment News)


FINRA requests comments on proposed amendments to Rule 2210 and issues additional FAQs – (Morrison & Foerster)


China stock suspensions opens can of derivatives worms – (Reuters)

Why Can’t I Trade Chinese Stock Futures? – (Attain Alternatives Blog)


Stop the Presses: BlackRock has a Passive Index Outflow – (Reformed Broker)

Big US fund managers fight off ‘systemic’ label – (FT)

Managed Futures:

Preqin Quarterly Hedge Fund Update – (Preqin)

How Alternatives Perform vs traditional investments when volatility hits – (Investment News)


China and Commodities: Corning the Market – (The Economist)

Soldier Turned Math Wonk Shaking Up World of Commodity Trading – (Bloomberg)


Volatility-products + prayer – (Statistical Ideas)

Stock Market ≠ Economy – Exhibit A – (Dana Lyons)


U.S. watchdogs urge review of Treasury market rules after Oct. 15 price swings – (Reuters)

Democratic lawmakers ask regulators for data on U.S. bank swaps – (Reuters)

Just for Fun:

In Texas, a French Killer Is Hired to Do Job Americans Couldn’t – (Bloomberg)

Four Ways To Fund A Presidential Campaign – (FiveThirtyEight)

Interactive: Census Demographic Projections – (Time Labs)

Eric Garner’s family to receive $5.9m settlement from New York City – (The Guardian)

Infographic: Senate Votes to repeal No Child Left Behind – (National Journal)

The Incredible Story of the Baddest Female Pirate to Ever Sail the Seas – (RYOT)

Stats wiz Nate Silver: For black Americans, US is about as dangerous as Rwanda – (Raw Story)

Alternative Links: Growing Fivefold in the Next Decade


Investors Plan to Boost Alternatives Allocations – (Think Advisor)

Alternative investment growth to boom in next five years – (Reuters)

Managed Futures:

GAIM 2015: What’s next for managed futures? – (Automated Trader)

Managing the Future With These Alternative Funds – (Morningstar)

Suppressing volatility? Easy. Eliminating risk? Not so easy – (Investment News)

Managed futures/macro most sought after alts strategy – (CTA Intelligence)

Have wealth managers overlooked the best hedging strategy in town? – (Investment Week)

High Volatility Reduces Risk – (Top Traders Unplugged)


How Long do Investors Have to Wait Before They See the Benefits of Diversification? – (Irrelevant Investor)


With 61 Seconds in a Minute, Markets Brace for Trouble – (Bloomberg)

What if Risk-Free Returns Slowly Go Away? – (A Wealth of Common Sense)

U.S. Corn, Soybeans Rise on Smaller-Than-Expected Stockpiles, Planting – (Wall Street Journal)

Rain Makes Grains (Die?) – (Attain Alternatives Blog)

Oil Prices Fall After Inventory Data – (Nasdaq)

Weekend Reads: The Future of Equities

We asked traders about the future of equities – (Futures Magazine)

How To Prepare For a Lower Rate Environment – (All Star Charts)

Drawdowns happen…get used to it – (Abnormal Returns)

MFA Recap: There’s no Crumpets at the Four Seasons – (Attain Alternatives Blog)

Just For Fun:

13 Practical Ideas That Have Helped Me Make Better Decisions – (Farnam Street)

Why everyone is so keen to agree new trade deals – (The Economist)

A Brief History Of Gay Rights At The Supreme Court – (Five Thirty Eight)

Scientific Retractions are on the Rise, and That May Be a Good Thing – (Priceconomics)

MFA Recap: There’s no Crumpets at the Four Seasons

The life of a hedge fund manager can be so very tough at times…

Take the just concluded Managed Funds Association’s “Forum 2015”, where managers have to make it through the squalor, noise, and smells of (wait for it…) the Four Seasons Hotel, dressed in nothing but a suit (usually without a tie).  All sarcasm aside, many of the industry’s best and brightest were here in our home town swapping war stories and comparing track records at MFA’s flagship conference highlighting education on managed futures and macro strategies.

And as you can imagine – no self respecting managed futures focused firm would miss such an event, and multiple members of the RCM team were there rubbing elbows with managers, poring over fact sheets, and hearing about firm’s risk controls in between tea and crumpets (we made that last part up, there weren’t any crumpets, much to our surprise, at the Four Seasons).

So what was the buzz there on the ground:

From the investor side, we heard about sizable commitments to the space, about an increased interest in the ‘short term space’ (hey, didn’t we just talk about that); about the continued need for education about this particular brand of Alternatives (despite some of us doing that for more than a decade now), about trend following becoming popular again (albeit now talked about as beta more and more often), about big institutional investors still leaning on consultants for advice in this arena, and those same institutions still having an aversion/lack of full understanding of futures markets and derivatives.

From the manager side, we heard about a lack of investors at the event… although managers always say that unless it’s a 10 to 1 ratio; about regulations in Europe making it very difficult to cater to investors there – while more and more European managers seem to be catering to US investors, about newer innovative products launched during the dark times of 2012 now coming up on three year track records, and about everyone’s desire to be part of (or bigger part of) a 40 Act Mutual Fund product.

Of course, the current king of the Managed Futures Mutual Fund, Cliff Asness, was in attendance, giving a sit down talk while everyone ate lunch (do they get hungry talking while everyone is eating?)

We couldn’t help but press Mr. Asness on the size and capacity of his fund, and with the only question in the room – asked him about larger managers having declining performance and how much money they could manage in the managed futures fund. He said, “that’s a hard question”, and that they are aware of the research , yet haven’t yet been able to prove that it is true.  Saying the real challenge in modelling for capacity isn’t how much liquidity is out there to support your strategy in good times, but what happens when there is no liquidity or a big liquidity event in any one market, concluding with the sentiment that they think they can handle two times the assets . That would be Winton territory, and quite impressive from an asset raising standpoint… while a real time test of the bigger isn’t necessarily better thesis, so we’re all for seeing how that turns out. For those smaller managers out there, if $16 Billion in a managed futures mutual fund scares you, go read this.

As for comedian Jay Mohr at the Pinnacle awards… his best lines (beyond lamenting at going the wrong way in his career, starting on a Tom Cruise movie and ending up on AM radio) were in his bit on BarclayHedge’s Sol Waksman, telling everyone they were in Vietnam together, how good Sol smells, and that they went in to get glasses in tandem at Pearl Vision once.

Alternative Investors are Asking the Wrong Questions

As the registered investment advisor space continues to grow, and the use of Alternative Investments by those advisors continues to grow; we find ourselves talking with more and more ‘RIAs’, helping them truly understand what’s under the hood of the managed futures labeled mutual fund or private placement they’re considering.

Which brings us to Wealthmanagement.com, a popular spot for advisors to keep tabs on the industry and find commentary and research to help in their ongoing education, where our own Jeff Malec has been asked to post a few pieces on Alternative Investments:

Investing in alternatives has become all the rave the past few years, but there isn’t quite as much literature out there as in the traditional investment space (by a factor of about 1000 to 1), which leads to a lot of well intentioned due diligence and pre-investment questions to really miss the mark.

The essential question is: “how has it performed recently?” But that’s just the tip of the questionable question iceberg. Here’s a few more we hear from time to time, with suggestions for more insightful inquiries:

Question/Idea The Flaw(s) in the Question A Better Question
How much is it up this year?The performance day to day, month to month, and even year to year is virtually random – Remember: past performance does not indicate future results.Can you explain to me why the investment is up/down/sideways so far this year (or in xx year) for me to better understand your investment philosophy?
Every alternative investment will help diversify my portfolio with non-correlated assets.There are a lot of products out there that have ‘alternatives’ on the label – but when it comes to return drivers and true diversification – not so much. Many of these alternatives rely on freely moving credit markets, a rising economic environment, and strong corporate earnings.How is the investment likely to react in a concentrated sell off across asset classes? What are the main return drivers?
Is the Sharpe Ratio high enough?The Sharpe has numerous flaws, outlined here, but what you need to know is that there’s more to risk than volatility.How are the returns per unit of: downside volatility, the max drawdown, and average annual drawdown?
Am I getting commodity exposure?A yes answer here doesn’t help. How much? Long and short? One popular ‘trend following’ model doesn’t even go short energies… a tough pill to swallow as Crude went from $100 to $50What percent of historical returns have come from physical commodity markets? Does the investment go both long and ‘short’ commodity markets?
I need daily/weekly/monthly liquidity… does this investment allow me to get out quickly?Daily liquidity is like sleeping with a gun under your pillow for protection. You’re more likely to accidentally shoot yourself than protect anything. Needing instant liquidity for investments that can take 3-5 years to run a full cycle is a mismatch.What are the liquidity constraints so I can fit this into the appropriate liquidity bucket in my portfolio, and know whether or not I can count on it in a pinch.
This is a managed futures program… great! I’ve been looking to add that asset class to help protect my portfolio in a market correction.There are a lot of products that trade futures markets, but are anything but classic managed futures programs, trading stock index futures and such or doing counter-trend models.Will this provide the negative correlation/crisis period performance managed futures are known for?

Adding ‘alternatives’ to your portfolio has never been as easy as today with the plethora of so called ‘liquid alternatives’. And the marketers have never had such an easy time separating the uninformed from their money in their bids to raise money for these funds. For example, a prominent national firm we will leave unnamed put out a 5-page piece explaining how to utilize 15 different hedge fund strategies in portfolio construction. It has all you would ever need to know about these highly complex investments, dedicating four to six sentences to each one!

Four to six sentences. That’s all you need to know? So much for the Chartered Alternative Investment Analyst designation or decades of experience with the asset class. Just grab the nifty cheat sheet here and start building portfolios – what could go wrong? What could go wrong indeed – how about mismatched performance with investor expectations, high fees, poor relative performance to benchmarks, a concentration in the largest managers counterparty risk, credit risk, and the propensity of the correlations and relationships listed all blowing up during a crisis.

Marketers, take note: keeping it simple is how you sell a complex idea to investors. Investors, take note: it’s a lot more complex than that—you have to ask the right questions.