Risk On/Risk Off Shutting Off

There’s no doubt Commodities are receiving more attention this year than years past, and it’s because of breakouts in Natural Gas, Coffee, Cattle, Lean Hogs, Sugar, Wheat, and Corn. Now some of the these trends have reversed course, not allowing long term trend followers to fully capitalize – but we’ve seen markets moving on their own fundamentals, not based solely on the Fed Minutes or view on the economy (what became known as the risk on/risk off environment back in 2009/2010).

There haven’t been too many Risk On/ Risk Off days to speak of in 2014, with just 1 ‘risk on’ day in both February and March. We define risk on as an average gain of over 1% for “risk” assets; risk off is an average loss of over -1% for “risk” assets. (Click here for a more detailed breakdown.)

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

This is no doubt another sign that the ‘recovery’ is in full force, with markets dancing to their own beat instead of following equities higher or lower on big moves. But it also could be a sign of further compression in volatility and a pending volatility spike – no chart goes/stays down like this forever.

Overall, Global Macro and Managed Futures strategies should be enjoying this move away from the risk on/risk off environment- as markets moving  in different directions/amounts at different times allows for the benefit of market/sector diversification such strategies rely on for risk control. Now if they could just stay in whatever direction their independently moving for a little bit longer – we could capture some nice trends.

What a Hedge Fund Failure Looks like:

The twittersphere couldn’t get enough of the news last week that hedge fund legend Paul Tudor Jones was shutting down one of his eponymous funds, the Tudor Tensor Fund (try saying Tudor Tensor ten times fast).

And critics of hedge funds will jump to the conclusion that it’s a dangerous world out there among alternative investments, and investors need to be careful because even a legend like Paul Tudor Jones can’t make money, having to shut down his futures fund.  Some will throw around the term survivorship bias too, concluding that the indices composed of hedge fund returns won’t include this program moving forward as a way of saying the index over reports the performance of the asset class – never mind that the program is shutting down, that the Dow no longer includes buggy whip companies, either – or that the index still includes the past performance of the shuttered fund.

But just how bad was the Tensor performance that they decided to shut the fund down?  What does a hedge fund ‘failure’ actually look like? The answer is, not that bad… Here’s a snapshot of just how the Tensor Fund has performed since inception, having returned a total of 42% over that time after running up 77%, then drawing down -20% over the last three years.

Tudor Tensor Vami_1 (Vami growth of 1,000; Disclaimer: Past performance is not necessarily indicative of future results)

The relative performance wasn’t all that bad either, with Tensor outpacing their benchmark (managed futures) as well as the markets they track (commodities) as well as a few little known asset classes called Bonds and World Stocks.

Tudor Tendor Asset Class(Disclaimer: Past performance is not necessarily indicative of future results)
Performance from Inception of Tudor Tensor Program (Sept. 2005)
Sources: Managed Futures = Newedge CTA Index,
Bonds = S&P/CitiGroup International Treasury Bond Ex-U.S. Index
Hedge Funds= Dow Jones Credit Suisse
Commodities = UBS Commodity Index (DJC)
Real Estate = iShares DJ Real Estate ETF (IYR) 
World Stocks = MSCI ACWI ex US Index, US Stocks = SPDR S&P 500 ETF (SPY)

The real story here isn’t really how this program performed or that Paul Tudor Jones can’t cut it in managed futures, the real story is the business side of the hedge fund business. I have no doubt that Tudor and their team believe this program will perform over the long-term and that this point likely marks a low for the model. But big hedge funds like Tudor know how the asset gathering game works.

The Tensor Fund went from over $1 Billion ($1.5 per our numbers) down to just $120 million times over the last three years, and that is the reason the fund is closing, not anything to really do with performance, the skill of the manager, or expertise of the team. The closing of Tensor is more of a commentary on investors buying in at the top of a cycle and getting out at the bottom than anything else.

Here’s a picture of the Tensor equity curve with the assets raised – green money coming in, red money going out – overlaid (using a simple formula of growth in AUM less the performance multiplied by last month’s AUM to arrive at an estimate of how much of the growth in AUM was from performance verses from asset raising).  You can see that the largest concentration of money came into the program (over 34% of all the money raised) just as it had made new equity highs and was poised to begin a (rather normal) drawdown period.

Getting in During the Highs_1
(Vami growth of 1,000; Disclaimer: Past performance is not necessarily indicative of future results)

The real story is that nearly $700 million came flying into the fund on 4 years of good performance and the Tudor name almost exactly at the wrong time. The real story is the same story we’ve heard a million time and see play out again and again with mutual fund flows and the rest – investor’s getting in at the top, and out at the bottom.  This is nothing new to those in the investment industry – and goes to show that even a hedge fund ‘brand name’ like Tudor isn’t immune from performance chasing.

As for the business side of things – the bottom line for a multi-billion shop like Tudor is that a $100 million fund is simply not worth the time and effort to keep going, no matter how well they think it will perform moving forward. The playbook on the business side of hedge funds is to shut this one down, and move on to the next project.

Weekend Reads

  • Morgan Stanley pays fine after index hedge topped soymeal limits – (Reuters)
  • Martin Bergin Interview with Michael Covel on Trend Following Radio – (Trend Following)
  • How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring – (Zero Hedge)
  • MF Global trustee may sue Corzine, others over collapse: judge – (Yahoo Finance)
  • PFG Update: J.P. Morgan to Pay $15 Million – (Attain Capital)
  • King Has Biggest Debut Drop Since November Even With Discount – (Bloomberg)
  • Want To Retire With $1 Million? Here’s How Much You Should Already Have Saved – (Business Insider)
  • Why Value Investing is So Hard (Russian Edition) – (Meb Faber)
  • Survey: Mid-Sized Hedge Funds Performed Best In 2013 – (FIN Alternatives)
  • Tudor to Return Money From Managed-Futures Fund Amid Loss – (Bloomberg)

Just for fun:

  • (They can’t be serious!?) Hedge Match – (Hedge Match)
  • Why Millennials would choose a root canal over listening to a banker – (TIME)

PFG Update: J.P. Morgan to Pay $15 Million

Some good news for former PFG customers today, as the PFG trustee Ida Bodenstein is requesting the bankruptcy judge approve a $15 Million settlement with the bank. Here’s what the court document states:

“(ii) Obtain the release of $14,000,000 for the Estate, which is currently being held by JP Morgan as a security for JP Morgan’s contingent claims against the estate.”

“(iii) Resolve the Estate’s and the Customer’s Representative Plantiff’s claims against JP Morgan in exchange for cash consideration of $1,250,000 from JP Morgan, which is in addition to the reduction and cap on JP Morgan’s claims and the eventual release of the funds held as security for those claims.”

“(iv) implement a cooperative course of proceeding with the Customer Representative Plaintiffs with respect to (a) the claims against the remaining defendants in the class action and (b) the disbursement of any proceeds under the Settlement Agreement and an account of the remaining claims in the class action proceeding.”

In layman’s terms, JP Morgan is agreeing to pay $1.25 Million to settle any claims against it by the customers, and release $14 Million in customer money it’s been holding as collateral against what we would call ‘phantom’ claims against PFG.  It’s a far cry from $200 million, but it is another victory for former customers and step towards getting entirely whole.

For JP Morgan, this is a drop in the bucket… or whatever is less than that. Last year they paid almost $13 Billion to the Justice Department in fines, and before that paid $100 Million in its connection to MF Global.  Jamie Dimon’s secretary probably makes more than the $1.25 million they agreed to pay.

Now if the lawyers at US Bank could just agree to settle with the CFTC in its lawsuit, everyone would be happy.

Finding the Next Dayton for Your Portfolio

As the Sweet 16 games get underway tonight, it’s the just about the time where we see who made their NCAA picks based on favorite mascot, who picked based off of favorite/disliked teams, and who tried to pick by statistics. There’s no other statistician out there that knows how to use his ability to appeal to the masses like, Five Thirty Eight’s, Nate Silver.

At the beginning of the tournament he came out with the probabilities of each team advancing to the next round (original stats here), and he would update the numbers as the tournament went on (current predications). At the beginning of the tournament, Dayton had a 24% chance of beating in state rival Ohio State rival, and if you’re familiar with Ohio sports culture, that was a very meaningful game, with the Dayton Daily News poking some deserved fun at those NFL players from Ohio St. who like to announce their school during Monday Night Football as ‘THE’ Ohio State:

The University of DaytonPhoto Courtesy: The Dayton Daily News

But Dayton’s chances got even smaller to advance to the Sweet 16, with only a 7% chance, according to Silver’s original stats. But Dayton must have been emboding the words of Dumb and Dumber’s famous quip, “So you’re saying there’s a chance.” In fact, Dayton did beat Syracuse in the 3rd round, and this is what happened.

President Dayton

Now, Dayton is slated to be the underdog for the third time in a row tonight – taking on #10 seed Stanford to see who advances to the Elite 8. Before the tournament started, Dayton’s chances at an Elite 8 run were 2.28%, and that now stands at a 50% chance! Surprising what a little success does for your odds.

So who do you usually pick for your portfolio – the Duke’s of the investment world, or the Dayton’s? Do you play it safe and go with the best record and highest seed? Or try and uncover talented teams which have flown under the radar but are ready for a big upset (we actually did a Managed Futures Bracket for those who want to find some underdogs).

Consider the following two charts of managed futures programs since their inception to December 2008:

The #1 Seed Man AHL:                                        The #11 Seed M6 Capital:

Man AHL InceptionM6 Capital

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

Who would you have picked for your investment bracket? The decade long track record, billions under management, 900%+ return, and brand name of the #1 seed? Or the three year track record, 40% return, millions under management #11 seed?  Most investors go with the ‘safe’ pick. But how have these two seeds performed in the ‘tournament’ over the past 5 years? AHL is down -15.09%, while M6 is up 28.91% {past performance is not necessarily indicative of future results}.  Only a very small fraction of investors chose the #11 seed over perennial favorite Man AHL back in 2008, but managed futures version of the march madness Cinderella didn’t listen to the hype or the investors voting with their checkbooks. They just kept practicing, kept working on their fundamentals, and got down to outperforming the orders of magnitude larger manager. David can beat Goliath every now and then.

So who’s an under the radar sleeper (investment) team right now, looking to pull off the upset over the next three to five years? We just happen to have a few good ideas on that, having studied the managed futures brackets day in and day out for the past 10 years. We think these five managers have just the right mix of seniors, ball handling, and coaching to upset the #1 seeds Winton, Transtrend, and the like…

- Emil Van Essen

- M6 

- Covenant 

- Integrated

- Eco


Gross or Net, Winton, and 5 vs 29

We got a comment the other day from an investor who reads our newsletters, touching on the fees involved with managed futures – something we covered in depth last year after Bloomberg Magazine trotted out a misinformed piece on ‘Futures Fund Fees’ (see our response here) – but we hadn’t seen the question of fees posed quite like this before:

“You wrote an article a while back addressing the critiques of Managed Futures Indices.  One area you didn’t address in those articles is the fact that performance numbers are reported gross of fees to those indices.  One of the biggest knocks on this space are the high fees involved, so this almost makes the indices useless, one could argue.”

This investor is somehow under the impression that the various managed futures indices are comprised of manager performance numbers gross of fees (that is, not including the usual 2% annual management and 20% of new profits incentive fee), wherever could he have gotten that idea Bloomberg.

To set the record straight – the main managed futures indices are calculated from manager level performance reported NET of fees. Here’s the language from both Newedge and DJCS:

Newedge Language:

“The index calculates the net daily rate of return for a pool of CTAs selected from the largest managers open to new investment.”

DJCS Language:

 ”Does the Credit Suisse Hedge Fund Index use net or gross data?

Performance data used in the index is net of all fees. “

We’ll even take it a step further and tell you that NFA and CFTC regulations require managed futures managers registered as CTAs and CPOs to report their performance NET of fees, and that the overwhelming majority of managed futures programs which report to the indices are of a size where they use a third party accounting firm or ‘administrator’ to calculate their monthly performance numbers, insuring the correct deduction for accrued fees, any additions and withdrawals, and so on. It’s actually quite hard for a manager to ‘back out’ the fees and arrive at a gross performance number.

Now… what isn’t included in the performance reported to the indices are any additional fee layers which may be added on for a feeder fund or similar such access point to a manager. For example, we recently assisted a client of an Advisor we work with move over to an Attain fund from their investment in something called the Winton Direct fund.  The client assumed, like the reader mentioned above, that the reason he was up just 5% in his “Winton” investment over the past 5 years while Winton’s stated performance was +29% over the same time – was because Winton was reporting their performance gross of fees.

But that isn’t the case… Winton is reporting net of fees just like they’re supposed to and just like everyone else. The 25% difference between the investor’s returns and Winton’s reported returns isn’t due to a gross vs net problem – it was the investor’s access point, coming in through a big broker/dealer which was charging an additional 5% a year for the access. Maybe that’s an acceptable price to pay for access to the ‘Blue Chip’ manager of the managed futures space IF they are returning 25% per year. But when they are doing only 6% per year (NET of their fees), and you are paying 5% extra to access that 6% return – the numbers stop making sense in a hurry.

For a reminder on the various access points to managed futures and the layers of fees involved – here’s our handy chart breaking it down.  This can also show you how the indices can be net of fees, but not net of ALL possible fees. The managed futures indices are typically calculated from performance numbers reported after the first and second access points (the managed accounts and manager offered funds), not after the distributors (B/Ds and mutual fund wholesalers) have gotten their hands on them.

Chart of Fee Structure

Top 10 Managed Futures Managers of February

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.

 (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 in February
Feb. ROR
Max DD
Min Invst.
AIS Capital Management -- 3X-6X (QEP)18.71%-89.67%$5,000,000
JKI - Futures -- Etiron 15.86%-37.28%$1,000,000
Quality Capital Management -- Enhanced (QEP)13.02%-77.25%$5,000,000
Keck Capital Management -- (QEP)11.91%-28.98%$2,000,000
Cordova Capital Management -- Trend Following (QEP)11.90%-20.69%$250,000
Southwest Managed Investment -- Global Diversified11.38%-32.79%$200,000
Dorset Futures Corporation -- Emini11.08%-33.65%$100,000
QuantScape Asset Management -- Equity Index10.50%-9.36%$200,000
White River Group -- Diversified Options9.58%-40.97%$20,000
Dreiss Research Corp. (QEP)9.48%-51.44%$1,000,000