Weekend Reads

Fired Managers Outperform Hired Managers – (Reformed Broker)

How to Make More Money in Stocks – (Dilbert)

The Top 25 Business Schools In The World [INFOGRAPHIC] – (Business Insider)

New for traders: CME Group margins update – (Futures Magazine)

As Grain Prices Cool Down, Options Volume Heats Up – (John Lothian News)

More signs of extreme fear in the options market…maybe – (Dana Lyons’ Tumblr)

Wall Street Criminals are Still a Protected Class  – (VICE)

Mama Said Knock You Out

For those of you who weren’t rocking to LL Cool J in 1995, his ‘comeback’ song famously begins with the line, “Don’t Call it a Comeback.”

Well, we bet Emil Van Essen, the quirky (in a good way) Canadian who runs the self named Emil Van Essen managed futures shop here in Chicago, may have been humming that first line (if not the entire song) throughout the month of July. You see, Van Essen managed to post estimated returns of 6.00% in July, his best month since May of 2011, a year the program returned 33.99%. Since that blowout year, it has been more of a struggle for Emil and his team, however; with losses of  -11.63% in 2012, -6.60% in 2013, and a weak first quarter of this year, down about -3.9% {past performance is not necessarily indicative of future results}.

Anyone falling for the trap of chasing performance likely wouldn’t be looking at Van Essen at all in 2014 given the past three years. Josh Brown at Reformed Broker just had a great piece on how fired managers actually outperform hired managers for institutional investors. But for those who like buying into drawdowns and looking for some value, Van Essen’s unique strategy is quite attractive after they put in a postive 2nd quarter followed by the impressive July numbers.  In deference to the song… it is a bit of a “comeback.”

The Van Essen strategy takes long and short positions on the futures  “curve”.  What’s a price “curve”?  Glad you asked. You see, futures markets are unique animals, quite different from their stock cousins. One unique item is that they have specific end dates and many different contracts of the same market; like Dec. ‘14 Crude Oil, Dec. ‘15 Crude Oil, and Dec. ‘16 Crude Oil and so forth. Those prices are either more expensive or cheaper than each other, creating a “curve” of prices; referred to as Backwardation and Contango depending on the shape.

Historically, crude oil has been the fund’s go to market so to speak, and the strategy profited from near term crude oil prices falling throughout the month as production levels rose domestically and abroad. But the bulk of gains in July was from trading lean hogs as near term hog prices fell much quicker than those in the back month, a classic relative value trade. Finally, coffee was another top performer as well with the further out months falling at a quicker pace. All in all it was a good month to be looking for (relative) value opportunities in commodities.

For more on the Emil Van Essen program as utilized by Attain’s Relative Value Fund, download our detailed report.

P.S — You might also enjoy the following video interview of Emil.

Do we still need to do this? A Trend Following Rebuttal

We’ve been known to help straighten out some wayward journalists from time to time, and our friend Michael Covel pointed out just such a journalist in need of some help last night via twitter:

Now, Michael could be accused of drinking the trend following Kool-Aid a little too much at times, but there’s worse things to be passionate about, that’s for sure. And we don’t think Noah Smith is actually attacking ‘trend following’, despite the article’s headline and conclusion that “the trend is your friend till the bend at the end.”

Mr. Smith appears to be warning investors from taking on hidden risks in exchange for consistent gains, and cautioning against chasing performance. Mr. Smith appears to be telling investors in his ‘Investing’ column on Bloomberg View – to steer clear of the selling deep out of the money options. He is teaching us not to fall for the put-option fallacy, where investors get lulled into a false sense of security right before things blow up. He trots out examples of this fallacy in the mortgage backed securities bust in 2007, hedge funds in the 1990s and early 2000s, and Japanese workers (??).

The rub for Covel and ourselves is… He is warning against selling volatility. He is warning against booking small, consistent gains in return for the possibility of large future losses. But he conflates those warnings with “Trend Following,” seemingly not aware that Trend Following does the reverse. Trend Following is a LONG volatility strategy, which books small, frequent losses in exchange for the possibility of large future gains. It is quite literally the exact opposite of what is described in Noah Smith’s article.

The proof is in the past three years. The proof is in 2007 and 2008.  If trend following were falling for the put-option fallacy – the returns would be a LOT better the past three years, but it’s been a skinny few years for trend following. See here, here, or here. Those selling volatility (ignoring the big risks of the past) are the ones making money, as can be seen in the short VIX ETF (XIV) or plain old $SPY.  And what about 2008?  What about when the hidden risks came flying to the forefront?  How do you explain Trend Following’s outperformance during that time, Noah?

We suggest taking a short trip through a few blog posts and our educational materials on Trend Following, and maybe reading one or two of Covel’s excellent books on the subject, maybe rewriting the article.

–    ‘Trend Following’ whitepaper

–   Here’s a Guy Managing $25 Billion with Trend Following

–    100 years of Trend Following

–    Covel’s Books:

o  Trend Commandments

o  The Little Book of Trading

o  Trend Following

o  The Complete TurtleTrader

–    Our series on how a trend following trade works:

Anatomy of a Trend Following Breakout – Crude Oil

Crude Trends and Cursing your Manager 

Anatomy of a Trend Following Trade – the Short Side

Anatomy of a Trend Following Trade – the Short Exit

Anatomy of a Trend Following Trade – the Journey

Until then, on behalf of all the trend followers out there, we’ll echo Michael Covel’s sentiment.

“Please get a clue.” 

 

Alternative Links: The Same old Song and Dance

There Is No Alternative (Face palm) – (Wealth Track)

Exotic Investments ≠ Alternative Investments (contrary to what Bloomberg says) – (Bloomberg)

Trend Following is Your Friend Til it Isn’t – (Bloomberg View)

Do we still need to do this? A Trend Following Rebuttal – (Attain Alternatives Blog)

Regulation:

CME Group seeks feedback on Livestock trading hours on CME Globex – (CME Group)

Education:

Use Alternative Investments to Hedge without Hedge Funds – (Nasdaq)

CTAs:

Man Group Reports Rise in Assets – (Wall Street Journal)

Futures & Miscellaneous

LME begins position reporting data for base metals — (Reuters)

The Changing Face of World Oil Markets – (National Bureau of Economic Research)

Managed Futures July Performance

At first glance, this month’s performance appears to be a bit of a head scratcher, with three of the four indices we watch reporting negative performance for the month of July (thus far), despite a major down trend in grains, providing the best returns in years for many agriculture trading CTAs we track.

The reason is the indices are comprised mainly of the largest managers, who are generally trend followers and generally not very exposed to the grain markets. It just goes to show the diverse amount of strategies that represent the Managed Futures Industry, which in July was quite wondrous, or terribly frustrating, depending on whether the strategy type you were invested in caught the down move in grains.  Here’s the month by month performance of Managed Futures for 2014 thus far:

Managed Futures July Performance(Disclaimer: past performance is not necessarily indicative of future results)
(Only 23% of returns reported to the BarclayHedge CTA Index)

Here it is, the Big Sell Off… has been Wrong the past 169 Times

In case you missed it, the Dow was down around 300 points yesterday to bring the index into negative territory for the year (just a handful of days after hitting a new intra-day and all time closing high) – spiking the Vix 27% and no doubt bringing a bunch of worrisome headlines around the financial world today along the lines of:

Here it is… this is the big one = Marc Faber followers

Eureka! Volatility is back!  = Managed Futures & Global Macro managers

Stocknado = Josh Brown

We’ve been due for a pullback  = such and such asset management co.

Relax, it’s all in your mind = Barry Ritholtz

The easy thing to do today is write about how this shows just how scary stocks can be… We’ve surely done it before (here, and here). To talk about how and why you should be diversified (here), and to talk about this could be the start of a move lower as evidenced by a few chart patterns (divergences in the Russell and MidCap). But every time we’ve done that for the past 5 years, we’ve been wrong.

Every dip like this over the past five years has been little more than that – a dip. It hasn’t been the start of the next big bear market. It hasn’t been the crash we’ve been waiting for and the return of big volatile swings. It’s usually been one off. A quick bout of selling in the otherwise boring day after day slow grind higher, leading to those complaints about there being no volatility.

Consider the numbers since the lows in March of 2009. Since then the S&P has experienced a single day loss of -1% or more 169 times, -1.5% or more 88 times, and -2% or more 52 times (with about 45% of all of those happening in 2009 and 2010). That’s not a whole lot of days out of the 1,300+ days the market has been open, but it’s not all that  rare either. These days happen. But what concerns us more than the fact that they happen, is what typically happens after them. What’s the average return of the S&P  1 day, 30 days, and 90 days after experiencing a -1% loss or greater?  That’s the type of question we’re interested in.  Turns out – buying the close on such a day the past 5 years has been an excellent strategy.

Day After Returns(Disclaimer: Past performance is not necessarily indicative of future results)
Data = Since March 2009

The average next day performance after a big down day (loss of more than 1%) has been about three times the average daily performance (.25% versus .09%). Talk about BTFD… (look it up). We’re told as young investors to be very careful trying to catch the falling knife, but this has been more like catching a falling balloon, untying it, and watching it zoom higher.

Who knows what today, the next month, and next 90 days will bring. Is this drop a falling balloon unable to do any damage, or the proverbial falling knife which might cut your hand off? We won’t pretend to know – but we’re sick of treating every one of them like the falling knife. They won’t all be dangerous to catch… and indeed they’ve been anything but for the past five years. “This time is different” is notoriously wrong, and to say this sell off is any different from the other 160 or so we’ve seen in recent memory would be stretching it.

One of these times it will be different, and long volatility strategies such as managed futures and global macro will be waiting – but the odds here likely favor another bounce higher and new all time highs on the horizon for stocks.

PS – Mr. Market – this is an attempt at some reverse psychology. We really do want some volatility and down moves, not a return to the slow crawl higher… We’re hoping a nod to the likelihood this amounts to nothing may in fact make this time different. 

 

CNBC didn’t screw up their interview with Winton’s David Harding

If you haven’t noticed… Winton Capital’s CEO David Harding is taking the press by storm this summer. We’d like to think that our interview with Harding a little over a month ago was the start of it all. Or perhaps it was Harding receiving the Managed Futures Pinnacle Achievement Award. Or the simple fact that Winton is big for a hedge fund, and absolutely enormous for a managed futures manager (even though they technically don’t classify themselves as a CTA). Either way, since our interview, they’ve been featured in a Pensions & Investments article, and now… Mr. Harding’s in the one-on-one interview on CNBC found below. (Unfortunately, this isn’t CNBC’s first attempt at interviewing Harding…the first one was a train wreck).

This time around, we must say, CNBC chose the right person to interview Harding as Julia Chatterley came prepared to ask the right questions.

Here’s our takeaways:

[Read more...]