The Top Ten Managed Futures Performers of August

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 August
August ROR
Max DD
Min. Invst.
Brandywine - Symphony Preferred (QEP)13.85%-26.34%1,600,000
KeyQuant SAS -- Key Trends (QEP)13.20%-19.15%10,000,000
Robinson-Langley Capital Management 12.49%-43.29%200,000
Schindler Capital Management -- Dairy Advantage 10.80%-41.49%100,000
DUNN Capital -- World Monetary (QEP)9.83%-60.06%500,000
Mulvaney Capital -- Global Futures 9.33%-45.02%10,000,000
Eclipse Capital -- Global Monetary (QEP)
Global Ag (QEP)7.45%-20.90%1,000,000
Drury Capital - Diversified 7.37%-32.51%5,000,000
TradeLink Capital Integrated (QEP)7.27%-36.53%1,000,000

CalPERS Hedge Fund Exit: Earthquake or Godzilla?

The big news in the alternatives world this week is of course that the largest pension in the world CalPERS is ditching it’s Absolute Return unit and unloading $4 Billion worth of hedge funds. Is this the end of hedge fund investing by institutional investors (an earthquake), typical performance chasing by an investor (albeit a very large one), or a result of their enormous size (Godzilla).

If you believe Barry Ritholtz over at Bloomberg – this is an “earthquake” for hedge funds, with other pensions following suit and advisors and the rest eventually waking up to the realization that hedge funds don’t provide higher returns than equities.

This is a huge change… It has enormous potential for disrupting the consultants and infrastructure of the 2 & 20 firmament.

If you believe some hedge fund managers who were quoted in a Business Insider piece – this isn’t about the hedge fund industry’s ability to meet investor expectations, it’s about CalPERS inability to pick managers who could meet their expectations. We even get a little insight into how their manager selection may have suffered:

They got what they paid for since they only invested in managers who would cut fees. So the best funds wouldn’t do that, so they had a mediocre portfolio.

So is this proof that hedge funds don’t deliver on their promise (note to Mr. Ritholtz, most hedge fund’s “promise” isn’t to get “higher” returns than equities… it’s about non correlated returns and better risk adjusted returns), or is it about CalPERS being a poor investor?

We agree with Ritholtz that there are a lot of under performing hedge funds out there and a lot of them are expensive. But institutional investors don’t seem to be as upset about fees and correlation and all the rest of it. A recent survey showed 95% of institutional investors planned on maintaining or increasing their hedge fund allocations (58% maintaining, 36% increasing).

That’s not to say we don’t agree that the grand majority of hedge funds are way more correlated to equities than people investing in ‘alternatives’ would be led to believe. But we also don’t think a group like CalPERS was duped by this. They knew full well the correlation to equities they were getting involved with. Indeed, they likely viewed the absolute return portfolio as more and more a way to capture equity-like beta with lower risk, like many institutional investors do. The problem CalPERS faced that doesn’t pop up for other pensions and investors, is their gargantuan size.

CalPERS $4 Billion in hedge funds was just 1.3% of their portfolio, meaning they have a staggering $298 Billion in assets their controlling for future California state employee retirees. Trying to invest that much money is like turning the proverbial battleship. They just can’t be all that nimble. And indeed, that was one of the reasons given by CalPERS for their hedge fund exit:  “the lack of ability to scale at CalPERS’ size”

So say CalPERS actually loved the hedge fund model, and saw that they could get equity like returns (after fees!) with less risk over a full market cycle. Now what?  They have $160 Billion of stock market exposure! Porting that over to the hedge fund world simply wouldn’t work. They would immediately become over 10% of the entire hedge fund industry ). They would max out the capacity of nearly every manager they worked with. They would become a huge tail wagging the dog.

More than anything, what we’re may really be seeing here is the upper bound of the hedge fund/institutional investor asset allocation game. It’s the curse of being the Godzilla of institutional money. CalPERS seemed like the best client a hedge fund could have… with nearly $300 billion in assets which could be allocated to hedge funds, but some boring performance on what really amounted to a test run (1.5% of assets), likely made them see that even if they were good at picking the right hedge funds – they couldn’t play in that pool in any real meaningful way.

PS – maybe Calpers should move fully into the discount fee camp and just use a Robo-Advisor

Alt Links: Hedge Funds finally going to advertise?

It was all Apple all last week, now it’s all Alibaba and Scottish independence. If need something besides those stories to munch on, here’s some mid-week reads on alternatives:


CFTC eases marketing rules on private hedge funds (CFTC)

Meet the New Fund, Same As the Old Fund? Thoughts on Alternative Investments – (The Independent Market Observer)

Why labeling investments as ‘alternative’ tells you nothing – (Financial Post)

Data, Risk: Themes Shaping the Outlook for Alternative Investments – (CFO Journal)

Whiskey Whisks the Alternative Investments Market – (Financial Buzz)

Do Alternative Investments Belong In Most Individuals’ Portfolios? – WSJ

Commodity Exposure 2014 YTD Breakdown (Attain)

150 Asset Class Returns in One Chart

We love these new looking charts that keep popping up (the latest was over here on Ritholtz) showing how the different asset classes go from the top to the bottom, to the middle, and so forth depending on the year… implying if not outright saying that it’s a fool’s game to try to pick which one will be best… just diversify into them all.. (which is what the AA gray box represents)

But we have two issues with these charts.

  1. They don’t include managed futures…. An easy fix.
  2. They do a good job of showing how the different assets can be the best or worst performer in different periods – but they don’t really give a good view of how good or bad they were in those periods.

For us, a more telling graphic would show each ‘block’ in a ranking above and below the ‘zero line’ (in dark red), so you could more easily see when certain asset classes lose money in a year. In addition, comparing the volatility of a few different assets would be nice, showing how far they move year to year…

Here’s our amended graphic… with a Managed Futures & Emerging Market line included to show its consistency of performance over the past 15 years. What else does this chart tell you?

(Click here to enlarge)

Asset Class Compare 15 YearsData Courtesy: Novel Investor

Asset Class IndexManaged Futures = Newedge CTA Index

Commodity Exposure Breakdown YTD

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.

Some notes:

  1. Impressed by that UNG outperformance? check these stats
  2. The averages of the ETFs and Futures all are within a percentage of each other.
  3. Ag CTA’s (Active long short agriculture trading) are posting a 8.99% return, beating out the Commodity Index DBC. (See Trade commodities instead of “invest” in  them?)

(Performance as of 8/31/2014)

Commodity ETF Over/Under Performance 2014

Crude Oil$CL_F
Brent Oil$NBZ_F
Natural Gas$NG_F

Live Cattle$LE_F
Lean Hogs$LH_F
Commodity Index $DBC-2.42%
Long/Short Ag Trader CTAs8.99%

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

Weekend Reads

As music sales fall, sax player Kenny G turns to stockpicking – (Reuters)

The Long and Short of Long/Short Strategies – (Attain Alternatives Blog)

CBOE looks to shed some regulatory duties – (Crains)

Are you prepared to make an exit from the stock market? – (Investment News)

Cambria Raising a Crowdfund Round – (Meb Faber)

Just for Fun:

‘Dancing’ Bear Invades Golf Course, Puts on Adorable Show – (NBC News)


Teen Just Wants This Photo of Him and His Cat in the Yearbook – (Gawker)

The Long and Short of Long/Short Strategies

One of the lasting effects of the 2008 market crisis may turn out to be the flood of assets into long/short equity strategies, which promise to give the upside of the stock market without the nasty downturns (although they don’t always deliver on that promise). What do we mean by a flood of assets…. Long/Short Equity strategies account for 35% of all alternative mutual fund assets, having brought in $35 Billion in inflows over the past 2 years. While Long/Short Equity Hedge Funds recorded their 17th consecutive month of positive net asset flows recently; with net capital allocations at US$46.9 billion year-to-date. Total assets in long/short equities hedge funds stand at $708.7 billion, close to their December 2007 historical high of $756 billion, as investors and advisors perhaps wake up to the fact that buy and hold can be quite painful at times, and a more sophisticated strategy which attempts to lessen that downside makes sense.

Fast forward to the present, and we’re seeing that same strategy of deploying a more sophisticated approach boil over from equities into commodities, which have been decidedly out of sync with the ‘commodity super cycle’ promoted by Jim Rogers and others back in 2005 to 2007.  People are sick of seeing their commodity exposure do little to nothing, and exploring the idea of using a long/short approach in commodities – just as the nearly $750 Billion in long/short equity strategies are doing on the stock side.

But what is long/short commodities? For that matter, what is a long/short equity strategy.  We caught up with Tom Rollinger of Red Rock Capital, who happens to run a Long Short Commodity Strategy, for some answers, and he had the following insight:

There are some big differences in Long/Short Equity and Long/Short Commodity strategies. Long/short equity attempts to dampen volatility and “hedge” positions via (usually, but not always) offsetting positions in similar instruments (other stocks), while Long/Short Commodity strategies also have long and short positions in different instruments, but their long and short positions on at the same time is a result of market action, not a pre-determined strategy design. In addition, any offsetting commodity instruments are usually a lot less related and a lot less likely to move in tandem. Imagine being long IBM ($IBM) and short Dollar General ($DG) in a long/short equity strategy, versus long Coffee ($KC_F) and short Cotton ($CT_F) in a long/short Commodity strategy. While still two quite different companies, the former are much more related than the latter – which share almost no similarities besides being priced in US Dollars.

Equity Long/Short

Long/short equity is the oldest and most prevalent alternative investment strategy.  Since Alfred Winslow Jones established the first hedge fund back in 1949, equity long/short strategies have proliferated within both hedge fund and separate account structures and have more recently gained popularity with registered vehicles like mutual funds and exchange-traded funds. While there are notable differences between the various structures, these funds take both long and short positions in equities (individual stocks, options, or ETFs) with the intention of damping downside risk.

Typically, equity long/short investing involves going long (buying) equities that are expected to increase in value and selling short equities that are expected to decrease in value. Oftentimes the investing decisions are based on “bottom-up” fundamental analysis of the individual companies but there may also be “top-down” analysis of the risks and opportunities offered by industries, sectors, countries, and the macroeconomic situation.  An equity long/short manager typically attempts to reduce volatility by either diversifying or hedging positions across individual regions, industries, sectors and market capitalization bands and hedging against un-diversifiable risk such as market-risk.  In addition to being required of the portfolio as a whole, neutrality may in addition be required for individual regions, industries, sectors, and market capitalization bands.

[Another “long/short” approach often lumped into long/short equity category is “130/30”or short-extension strategies. These strategies start with a full portfolio of long stocks ($100 for example), take on leverage ($30 for example) to purchase additional long stocks, and simultaneously short the same amount of stocks ($30 in this example), for a total net equity exposure of 100%. ($100+$30-$30=$100.) The amount of leverage and short extension may vary (for example, 120/20 or 110/10). Because these 130/30 strategies maintain 100% net equity exposure, usually to a traditional benchmark, they exhibit correlation and beta characteristics similar to traditional investments.] 

Because most long-short strategies maintain some degree of equity exposure, their performance relies more heavily on the stock market environment than other alternative strategies. Although some hedge fund managers can switch between long and short exposure, most long/short equity hedge funds and mutual funds tracked tend to stay net long. As a result of this net positive equity exposure, long/short equity strategies generally remain highly correlated with equities.In general, good environments for long/short stock-picking strategies are ones in which stock markets are trending up but with significant dispersion among stocks, within and across sectors and geographies.

Commodity Long/Short

Unlike equity long/short strategies which aim to hedge positions in an attempt to dampen volatility, the predominant Commodity Long/Short index, the Morningstar Long/Short Commodity Index, employs a momentum-based, directional outright position methodology to generate alpha with no attempt to hedge.  Morningstar was accurate in observing that, due to the fundamental mechanics of how futures markets actually operate, “long-only” commodity indexes are at least somewhat flawed in design and a suboptimal choice for investors’ capital.

This is because hedgers, who utilize the commodity futures markets as a means to transfer price risk to speculators or investors, could be ‘producers’ or ‘consumers’ of vari­ous commodities and, depending on which one they are, could benefit from the price of that commodity either rising or falling. This means that while the net supply of commodity futures contracts may be a “zero sum”, there is more to the story, since one group of par­ticipants (hedgers) is regularly willing to pay a premium (i.e. initiate and hold losing posi­tions) to limit their risk.  Producers of commodities are able to hedge their price risk by taking short positions in futures contracts on the commodity that they produce. Conversely, consumers can hedge their risks by buying long positions in the futures contracts on the commodities that they consume.

Morningstar created a set of single-commodity index­es to serve as constituents for the Long/Short index by calculating a “linked” price series that incorporates both price changes and roll yield. The weight of each individual commodity index in the Long/Short index is the product of two factors: magnitude and the direction of the momentum signal. They initially set the magnitude based on a 12-month average of the dollar-weighted open interest of the commodity. They then cap the top magnitude at 10% and redistribute any overage to the magnitudes for the remaining commodities. The direction depends in part on the type of composite index and in part on the type of commodity in the Long/Short index.

In the Morningstar Long/Short Commodity Index each month, if the linked price exceeds its 12-month daily moving average, the index takes a long position in the subsequent month. Conversely, if the linked price is below its 12-month moving average, the index takes the short side. An exception is made for commod­ities in the energy sector. If the signal for a commodity in the energy sector is short, the weight of that commodity is moved into cash; that is, the index takes a flat position.

This is a simplistic long/short commodity model, similar to the traditional systematic trend following type models which bracket markets and enter long or short when prices break above or below 1 or 2 standard deviations of recent price activity. So, in many ways, traditional trend following/managed futures type strategies are doing some long/short commodity type trading already.

However, due to their size, the majority of the largest and most popular systematic trend-based CTAs only offer 25% exposure or so to commodities with the rest of their trading occurring in financial futures such as currencies, fixed income, and stock indices.  Part of the motivation behind the ‘long/short commodity’ naming convention is that the newer wave of tactical commodity program managers and indexes want to make sure that they are noticed for their 100% exposure to commodities.

Our own strategy, the Red Rock Capital Commodity Long-Short Program, utilizes proprietary measures and combinations of volatility and price discovery in an attempt to capture directional alpha while trading 29 commodity futures markets either long or short.  Originally we referred to the program as the “Commodity Long/Short” program,  but for reasons outlined above – felt some people were confusing it to be too similar to an “Equity Long/Short” strategy in design – which it is not.

[Sources:  Morningstar Long-Short Equity Handbook: and Putting Momentum into Commodities:]

P.S. – Check out Red Rock’s whitepaper on Long Short Commodity strategies for more information.