Weekend Reads

  • Japanese Investors Call Abenomics A Huge Success – (Valuewalk)
  • Hedge Funds Are Now a $3 Trillion Industry – (Barrons)
  • Wickr raises $30 million; investors include CME Group, Wargaming – (Reuters)
  • Are leveraged ETFs a threat to the industry? – (Investment News)
  • Climate Forecast: A Heat More Deadly Than the U.S. Has Ever Seen – (Bloomberg)
  • VIX trading available around the clock  — (Seeking Alpha)
  • Cracks In Market Chemistry – (J Lyons Fund Management)
  • When a ‘Liquid-Alt’ Fund Loses Steam – (Wall Street Journal)

Just for Fun:

Alternative Links: Taking the Fall

Taking the Fall:

“Indeed, the performance numbers (of the Yale Model) for the past 10 years make it clear that this model has failed to live up to its promise for a while, perhaps because there just aren’t enough good alternative investments to go around.” – Barry Ritholtz

Barry Ritholtz blames pension underfunding on alternative investments – (Ritholtz)

Regulatory:

Popular liquid alts funds face regulatory scrutiny – (Investments News)

U.S. House votes to loosen derivatives’ regulations with CFTC bill – (Reuters)

US CFTC appoints deputy director and chief counsel of the division of enforcement – (Hedgeweek)

News:

Equinox Funds teams with BlueCrest Capital Management to launch systematic macro fund – (Hedgeweek)

Education:

Back to (Managed) Futures – (Open Markets)

Alternative’ Mutual Funds: Different, Yes. Better? Not Lately. – (Wall Street Journal)

Futures & Miscellaneous

FX Futures Expand Overseas – (Markets Media)

Rise of the Robo Advisors?

The Economist CoverForgive us for stealing from the cover of the Economist, but given the topic it seems fitting. Ever since the major technological advancements of the 20th century, there’s been a growing fear that soon enough robots will control the world (cue the Terminator franchise). Fast forward to today, and this fear has creeped into the financial advisor space of all places, with articles using  words and phrases like “afraid” & “risk irrelevancy” to display the attitudes and dangers all advisors face if they don’t adapt to the shifting mentality when it comes to investing. What are we talking about? And what is a robo-advisor anyway?  Why are people supposedly fearing it?

Who are the Robo-Advisors?

Just like Amazon ($AMZN) ruined Borders and the local bookstores, Netflix ($NFLX) killed Blockbuster, Facebook ($FB)  killed talking to your friends, and Tesla ($TSLA) is trying to disrupt the big auto-makers; the whole idea behind Robo-Advisors is to disrupt the financial advisor space with new technology and lower costs:  mainly algorithms instead of advisors; websites instead of branch offices, and automated text messages instead of hour long meetings. A few leaders have emerged so far in the space, with names like Betterment, Wealthfront, and FutureAdvisor, and a quick view of their websites will show essentially the same message:  ditch your father’s golfing buddy and invest like it’s the 21st century, with easy, intuitive tools to set things up and automated processes after that so you don’t have to worry about it. 

Why is Everyone Talking about them Now?

It’s the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel. And it’s gone beyond the idea stage to real money. Wealthfront launched in December of 2011 and in those 30 months, they have since grown to $1 Billion in AUM, which is roughly an average growth of 33.3m a month. Betterment is doing well too, with $502 mm in assets under management. As for FutureAdvisor, they now have over $118mm AUM, with only 18 employees.  And the Venture Capital folks are falling all over each other to get in on the game wondering if this is the next Twitter or Facebook or whatever, pumping over a quarter of a billion into the space, and $95 million in just a few weeks earlier this year.

Bo Lu, the CEO of Future Advisor had this to say about the size of the opportunity

[Read more...]

Lessons Learned From 37 Years of Futures Trading

Originally From Attain’s 3/’11 Newsletter:

Managed Futures have come a long way in the past 37 years, and so has Barbara Mueller, who will be retiring at the end of March after nearly four decades dealing with futures trading. Barbara has been working in the industry since 1973, and has been an invaluable asset to Attain Capital since 2006.

In honor of her retirement, we’re taking a break from our traditional analysis this week to pay tribute to Ms. Mueller. It has been an honor to work with someone as knowledgeable, talented and motivated as Barbara, and here she provides us with her (often comical) insight from 37 years of experience in the world of futures trading.

Moving Forward, Looking Back

When Attain asked me to come up with a list of the best things I’ve learned after more than 3 ½ decades in the futures industry, it was pretty daunting.  After all, 37+ years ago, we were in the stone age of trading. We did have the wheel (and telephones), but there were no personal computers, no fax machines, no stock index futures, no US options on futures, no 24 hour markets, and gold was trading at $135 an ounce.  There were no Treasury bond futures or other financial instrument futures. The CFTC and NFA (the futures regulatory agencies) did not exist yet.  We were governed by the CEA -the Commodity Exchange Authority.  And the list goes on.

Typical commissions were $75 to $100 round turn. Account forms were only 1 page!  Some of the prices were still written on blackboards at the Chicago Board of Trade and you could inspect physical grain there as well.   The whole managed futures industry was an still an embryo, with Richard Dennis not teaching his Turtles until 1983 and Paul Tudor Jones still a clerk on the trading floor. S&P futures, the most popular trading system vehicle in the world, wasn’t launched until 1982 (the minis didn’t start trading until 1997!) Options on commodities in the United States weren’t authorized until 1984 and System Writer, the precursor to Trade Station, wasn’t launched until 1989.

As one of the first women brokers in the futures industry, it’s been quite a journey-and an accidental one at that.  I was just waiting for a teaching job to open up in the Chicago Public School System and my Dad suggested I go to work for one of his friends at the Chicago Board of Trade in the interim. Thirty seven years later, I guess I can no longer call this an “interim” job!

[Read more...]

The Top 10 Managed Futures Performers of May

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. (Be on the lookout for the latest semi-annual rankings in the coming weeks).

 (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 May
May ROR
Max DD
Min. Invst.
Strategic Ag Trading -- Balanced7.79%-37.35%100,000
Bayou City Capital, LP -- (QEP)7.09%-80.35%100,000
Dreiss Research Corporation -- (QEP)
6.98%-51.44%1,000,000
Kelly Angle, Inc. -- Genesis (QEP)

6.98%-45.59%2,000,000
Serac -- Diversified (QEP)

6.67%-16.37%200,000
Insignia Managed Capital -- Medallion (QEP)

6.35%-30.78%50,000
Estlander & Partners -- Global XL (QEP)
6.34%-28.15%5,000,000
KeyQuant SAS -- Key Trends (QEP)

6.10%-19.15%10,000,000
Rho Asset Management AG -- Altius (QEP) 6.00%-27.38%10,000,000
Tanyard Creek Capital, LLC -- Livestock5.92%-14.17%100,000

Reading for the Weekend

  • Gross Opens Up on Interest Rates … and His Image – (Morning Star)
  • Winton Capital pays out £150m to Harding and staff – (Financial News)
  • Man Group acquires Numeric for as much as $494m – (FT Advisor)
  • A Massive Global Map Of Where All The Cattle, Pigs, And Other Livestock Live – (Fast Co Exist)
  • A College Major Matters Even More in a Recession – (The New York Times)
  • The Folly of Prediction (World Cup Style) – (Attain Blog)
  • How New York City Works – (Reformed Broker)

Just for Fun:

  • Grumpy and negative people are more efficient than happy colleagues – (The Daily Mail)
  • Cliff Jump With a Great White Shark – (Youtube)
  • Teachers, Be Careful With Adding Pokemon References To Tests – (Dorkly)
  • 8 Reasons Children of the 1970s Should All Be Dead – (Anorak)

The Folly of Prediction (World Cup Style)

Anybody else having a problem with these seemingly scientific “odds of winning” statistics being thrown about by Bloomberg and Five Thirty Eight around the World Cup? Here’s the chance of England beating Uruguay today from Bloomberg:

Bloomberg World Cup Predictions

And Nate Silver’s new FiveThirtyEight Blog’s advanced look:

Five Thirty Eight Predictions

 

Now, we’re big fans of Nate Silver, and wouldn’t mind seeing more data in journalism as a whole – but this whole exercise of providing odds of winning seems a bit off to us.  For one, it’s been a little annoying to hear people around town saying things like Australia has a 9% chance of winning versus the Netherlands, like they just measured the temperature outside or are quoting a stock price.Moreover, there have been some really off “predictions”, like Spain having a 53% chance to beat the Netherlands in its opening game, but losing 5 to 1 and being eliminated from the whole tournament in just two games. For you non soccer fans, that’s like the Seattle Seahawks making it back to the playoffs next year and losing 56 – 3.

The temperature, your height, and IBM’s stock price are all measurable things, with actual scientific answers. The percentage probability that England will beat Uruguay is not measurable, and there is no correct value for it. Despite the pretty graphics and official sounding “predictions”, there’s actually no statistic you can assign to such a prediction. There’s just three possible outcomes – a win by Team A, a win by Team B, or a tie. So technically, the odds of winning are 1 out of the three possibilities, or 33%.   But the data journalists take it much further – with Nate Silver explaining that they use the SPI algorithm (Soccer Power Index) to come to such predictions, which is in fact quite thorough, looking at each players stats and performance between international and national play. (more on SPI see here and here).

Mr. Silver earned the right to be making soccer predictions by doing a great job predicting elections.  But predicting elections is a bit different, as there is statistical data of registered voters, election turnout data based on weather, population sizes of counties, and people who actually get asked who they will vote for. You get “inside information,” in a way. You get to know how the players are going to play the game before the game is played. Nate Silver’s genius was stripping out all the biases and noise in those polls and zeroing in on what the right ‘inside information’ was.

But analyzing the past performance of a soccer team and its players isn’t “inside information,” it’s past performance. And past performance has a nasty way of being a terrible indicator of future performance, especially when you get 11 different people on each team. At the very least, that’s 22 degrees of freedom put into the mix. Add in what they ate the day before, how their feeling, whether  they got in a fight with their significant other, the weather, the referee, and all of the rest; you’re talking hundreds if not thousands of moving parts. That is – as they say – why they play the game.

Why do we care?  Because there’s a whole lot of prediction nonsense in the financial markets that is almost continuously wrong:

-          Stock price targets

-          End of year Dow or S&P targets

-          GDP targets

-          Unemployment

-          Housing Starts

-          Crop Reports

-          And the list goes on and on…

Where is Nassim Taleb on data journalism and spurious correlations and the role of luck and all the rest? Where is Barry Ritholtz on the folly of prediction (see here, here, and here)?

To be fair, Nate Silver does point out the more complex algorithms does mean there is more possibilities for errors, and he has done studies “checking their work”. Still, the world cup predictions are just that, predictions. They are saying more that this team will beat that team about 65% of the time, all else being equal and if they played 10,000 times – than they have a 65% chance of beating the other team today! It’s semantics, but we think it’s important to bear in mind.

The World Cup is one thing, but what happens when the data journalists start posting likelihoods of the market finishing the year up such and such, and real people with real money act on it. As Freakonmics put it in a podcast a few years ago:

It’s impossible to predict the future, but humans can’t help themselves. From the economy to the presidency to the Super Bowl, educated and intelligent people promise insight and repeatedly fail by wide margins.

Maybe the data journalists should be regulated and have to put big ‘Past Performance does not necessarily guarantee future results’ disclaimers on their articles, or at least admit that while fun to do, and good for page views, the odds of correctly assigning all of these probabilities is about the same as the 1 in 9.2 quintillion chances of perfectly filling out the March Madness bracket.