Alternative Links: Trend Following, Managed Futures, and CTAs

Trend Following:

A New Anomaly: The Cross-Sectional Profitability of Technical Analysis – (Han, Yang, Zhou)

How Trend Following at its core is quite simple – (Top Traders Unplugged)

Predicting market direction is silly – (Michael Melissions)

Performance:

CTAs push on higher in October with more positive returns, says Newedge – (Hedgeweek)

Despite Volatile October, North American Hedge Funds Up 5.2% YTD – (Valuewalk)

Autumn volatility puts managed futures top in class – (Financial News)

Positive returns drive ‘resurgent’ investor interest in managed futures – (CTA Intelligence)

Attain Funds October Performance – (Attain’s Alternatives Blog)

Commodities:

Corn multi-year lows and lower USDA forecast should feed bulls this winter and spring – (Almanac Trader)

Commodity Curves Bury Passive Investors – (Wall Street Journal)

Barron’s talks the sell off in Commodities without a single mention of long/short strategies (CTAs) – (Barrons)

CME Group reports a record open interest for NYMEX Brent Futures – (Metal)

Social Media:

How Endowed is your Endowment?

Vanguard has an interesting whitepaper out about how Endowments performance differs based on their size (sorry all those in the, “it’s not the size of the boat, it’s the motion of the ocean” camp… the large ones do much better), and there’s some interesting tidbits in it even though it’s a glorified ad for the type of low cost  indexing Vanguard is known for.  But instead of their normal tilt toward the retail investor,  they’re targeting the endowment space – breaking down small, medium, and large endowments vs low cost index funds and concluding that small and mid size endowments shouldn’t try and replicate large endowments success – they should just do low cost index funds (otherwise known as talking your book).

First, some of their cool charts:

    1. Endowment breakdown  (90% of all endowments are small/large)

      Endowment by sizeChart Courtesy: Vanguard

    2. The growth of Alternatives amongst Endowments of all sizes, with Large Endowments having  moved significantly above 50% after 2008 and having stayed there.Allocation to Alternatives
    3. The huge outperformance, and current underperformance of large endowments versus the traditional 60/40 portfolio:

Performance of Endowments(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Vanguard

We applaud Vanguard for the piece, and for the thoughts it brought to mind… including in no particular order the following:

  1. When do alternatives start to lose their name… If 60% of a portfolio is alternative, then it’s not so alternative… it’s the core holding.
  2. A lot of the Alternatives they talk about aren’t so alternative. See our “Truth and Lies in Alternative Investments” for more on how some of these aren’t so alternative.
  3. While the rolling 5-year Annualized returns might have suffered in 2012 and 2013, how about Yale and Harvard’s  huge outperformance of the traditional 60/40 portfolio over the past 25 years highlighted on page 2. Yale has done about 5% better (per year!)  and Harvard 3% better (per year!) over the traditional 60/40 portfolio.
  4.  This whole exercise ignores RISK… and assumes small and medium size endowments are after the highest possible returns, only.  There is a chart showing sharpe ratios, but it has well known problems (see here and here).
  5. This whole exercise ignores the fact that we’ve been in a 40 year bull market for bonds, across the entire history of this study, skewing the “40” in the 60/40 portfolio beyond what one could reasonably expect moving forward given how low interest rates are.
  6. They conveniently leave large endowments out of their chart showing endowment returns (and sharpe) against low cost funds.
  7. This is quite the opportune time to be highlighting a non diversified portfolio versus the 60/40 portfolio, given it has been one of the best 5 year runs perhaps ever for the 60/40 portfolio. The comparables won’t be as rosy when looking out 5 years from now, when aren’t coming off the 2009 lows.
  8. Digging in a little deeper on Figure 5, showing the excess return of small and large endowments over 60/40 portfolios – you can see that the endowments out perform during low periods for stocks (2000-2005 and 2008) and tend to underperform during big moves up in stocks (late 90’s, past 3 years). This is not by accident – and it’s only to be expected that when allocations to alternatives get bigger, the performance will deviate from the 60/40 performance more and more. The endowments aren’t diversifying into alternatives in order to beat the 60/40 portfolio during bull markets. Their diversifying in order to avoid being down -50% during down turn.

All in all, this looks to be another argument that diversification is dead. Call us skeptical, but we always get a little nervous when hearing “this time is different.”

Asset Class Scoreboard (where’d that stock loss go?)

The month’s Asset Class Scoreboard numbers is a perfect example of just how much noise is out there in the markets. If you were glued to your twitter feed in October, you may have been freaking out about the -5% drop, but someone who checks in monthly doesn’t even see it… October finished just fine for them after a somewhat rare stock market bounce.

And then there’s managed futures, which somehow amidst all the ‘trend following is dead’ commentary and articles about Paul Tudor Jones losing money – posted its third consecutive month of gains, and 6th out of the past 7 months, to find itself sitting in third place on our YTD scoreboard.  Of course, this is an index, not all managed futures programs are up. But just the same, it sure is nice to be around the upper tier for a while after spending most of the past few years towards the bottom.

PS – take a look at the buy and hold commodities trade, down double digits on the year as Crude Oil joined the commodity sell off in October, to join grains and metals which had done so in the month’s prior.

Table of Asset Class ScoreboardChart Asset Class Scoreboard(Disclaimer: past performance is not necessarily indicative of future results)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy Tracker ETF (QAI)
Commodities = iShares GSCI ETF (GSG); Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Shock and Awe Reads of the Week:

Quote of the week:

“he described as {being success by} “basically investing heavily in alternatives, not investing heavily in public markets, and having the skills to select which pools you get into.”

New York Area University Endowments Are Sitting Pretty Yale Leads the Pack With $24 Billion– (The Wall Street Journal)

Our piece on the Yale Endowment a Year ago – (Attain’s Alternatives Blog)

CFTC collects $3.27 billion in sanctions in fiscal 2014 – (Pensions & Investments)

Overcrowded Trade Du Jour: Short Volatility – (The Felder Report)

An Opportunity in Precious Metals Stocks? – (A Wealth of Common Sense)

JPMorgan Spars With CME Over $375 Million – (Bloomberg)

Just for Fun:

Video Map of People Tweeting about the Election – (USA Today)

Timelapse of Chicago II – (Eric Hines)

Shedd Aquarium helps rescue orphaned baby otter – (Redeye)

Bringing Mom & Dad to work bridges generation gap – (AP)

3 Year Old Loses it because he can’t Vote – (NBC)

Wheel of Impressions with Kevin Spacey – (Jimmy Falon)

Beef: Why there’s a Five Guys in your Town

It’s been a little over 10 months since we’ve looked at the Meat markets (Live and Feeder Cattle) hitting all time highs, and if you think that’s because the ascent has slowed down… think again.  It’s almost become S&P-like boring to talk about…. Ho hum, another all time high in Cattle today as the market has marched on and on this year. . Feeder Cattle is up 42%, while Live cattle is up 22% YTD. But it’s not just this year. The cattle markets have been in a consistent uptrend the past 4-5 years, more than doubling in price since 2010 {past performance is not necessarily indicative of future results}.

Feeder Cattle
Live Cattle(Disclaimer: Past performance is not necessarily indicative of future results)

Here’s where we’ll throw you a curve ball – because unlike the stock market, which is discounting what is excepted to be going on over the next 12-18 months, the cattle markets are factoring in conditions from 2 to 3 years ago. Puzzle me that one, futures markets affected by the past.  For further explanation, we turn to the Texas Department of Agriculture explaining that it was the drought all the way back in 2010 that’s pushing prices higher today, via the Texas Tribune.

At this point, the biggest impact of the drought has been on beef prices,” said Bryan Black, spokesman for the Texas Department of Agriculture. “The drought that began in the fall of 2010 forced cattle raisers in Texas, Oklahoma and elsewhere to reduce the size of their herds. As a result, beef production has declined, and that has pushed prices higher…. Donnell Brown, the owner of R.A. Brown Ranch, said he has had to reduce his 1,000-cow herd by 50 percent over the last three years.”

Shrinking production(Disclaimer: past performance is not necessarily indicative of future results)
Chart Courtesy: Wall Street Journal

What’s that reduction look like in numbers, the Wall Street Journal has a graphic, showing production (not sure that’s the word the cattle getting slaughtered would use) to hit its lowest year to year change since at least 2006, down 5.3%, to 24.4 Billion pounds.

And now there’s a new factor – the high beef prices themselves… which can lead to more ranchers slaughtering the cattle they do have, to take advantage of the high prices, leading to less cattle and even higher prices. Although the flipside to that is also likely to happen. Just like money flew into the Dakotas to take advantage of high energy prices, money will fly into ranching in order to ‘produce’ more cattle and take advantage of the higher prices. Which will eventually lead to more supply… in turn pushing prices back down. It’s why commodity markets are cyclical – with those looking to profit from higher prices by growing more, drilling more, or birthing more cattle, ultimately causing the end of those high prices.

For now, we’ll just hope prices at our local hamburger joint don’t go up too high… Which come to think of it, might be another reason for high beef prices. The number of fast-casual burger spots in Chicago has increased a lot since the financial crisis, when restaurateurs decided on cheaper burger options over more expensive concepts (according to an article we read back in 2009/2010ish… that we just spent way too long trying to find… anybody got it out there?). There’s the national guys… Five Guys, SmashBurger, Epic Burger (our favorite), M Burger, and dozens of local entrants.  Now we’re getting hungry for a (more expensive) burger!

 

 

 

 

Attain Funds – October Performance

We launched a family of alternative investment funds earlier this year, and each month, we share its performance numbers and match them against its liquid alt counterparts (see below). To get the full platform report emailed monthly with commentary on how each fund made/lost money, full track records, and all the relevant stats – register here.

FundMonthYTDAnn DD
Attain Trend Following Fund+4.15%+14.10% -5.74%
Attain Relative Value Fund+1.80%+0.88%-6.46%
Attain Global Macro Fund-0.60%+3.33%-6.03%
Attain Short Term Alpha Fund-3.80%+3.22% -14.07%
Attain Ag Fund^(hypothetical)-11.83%-7.16%-11.83%
Liquid Alternative Comparisons
AQR Managed Futures Strategy I Mutual Fund (AQMIX)-1.04%-1.13%-6.42%
361 Managed Futures Strategy A Mutual Fund (AMFQX)+2.81%+4.42%-2.56%
Morningstar Managed Futures Mutual Fund Category^+0.73%+3.79%

^ = Morningstar Managed Futures Mutual Fund Category performance through November 5th.
Annual DD = The worst drawdown experienced by the strategy for the calendar year.

Disclaimer:  The return numbers herein include estimates of the full month performance for the previous month, and include assumptions for accrued fees, the effect of additions and redemptions, and other factors which may cause the final numbers compiled by the fund administrator to differ slightly. ^The Attain Ag Fund is awaiting seeding, and performance reflects the M6 Capital Mgmt. trading program performance multiplied by 1.5x and reduced by 1% annually for expected periodic expenses from fund operations. Regulations require performance adjusted for a leverage factor to be considered hypothetical performance and a hypothetical performance disclaimer to accompany such performance.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.

Please refer to each fund’s disclosure documents for more information. Past performance is not necessarily indicative of future results. Futures trading is complex and presents the risk of substantial losses. As such, it may not be suitable for all investors. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses.

Alt Links: Word of the Week (Commodity Trading Advisor)

Managed Futures:

Bloomberg’s Word of the Week is a Commodity Trading Advisor – (Bloomberg TV)

Skip to 2:20 for Word of the Week

Managed Futures October Performance – (Attain’s Alternatives Blog)

Alts:

Alternative Strategies Gain Traction in College Endowments – (Think Advisor)

Futures & Miscellaneous

Kids Explain Futures Trading – (Wall Street Journal Video)

Pain in Trains Falls Mainly on Grain – (Wall Street Journal)

CBOE may cut VIX futures trading hours after glitches – (Reuters)

Liquid Alts:

Liquid alts get warning from SEC’s Norm Champ – (Investment News)

Are ‘Alternatives’ an Asset Class? Maybe Not. – (Wall Street Journal Blog)