Get your Comments in (CTA/CPO Capital Requirements)

In late January 2014, the National Futures Association (“NFA”) announced to its membership they were considering requiring Commodity Pool Operators (CPO’s) and Commodity Trading Advisors (CTA’s) to have minimum net capital requirements similar to what the clearing firms (FCM’s) and Introducing Brokers (IB’s) have:

“…reviewing the current regulatory structure applicable to Commodity Pool Operator (“CPO”) and Commodity Trading Advisor (“CTA”) operations. In particular, NFA is looking at ways to strengthen the regulatory structure governing CPO operations to provide greater protection for customer funds… [and] exploring ways to ensure that CPOs and CTAs have sufficient assets to operate as a going concern.” 

The review of the CTA/CPO regulatory structure also includes possible measures such as the verification of CPO fund balances similar to what is done now for FCM’s, and the possibility of requiring all CPO’s to use third party administrators, or at least have a third party approve all movement of money out of funds.

These are wide ranging possible changes, and every CTA/CPO should consider how these changes might affect their business, especially how their costs might increase, and whether that increase in cost would actually do anything to strengthen customer protections. The deadline for submitting comments is fast approaching, and we urge any and all CPO’s and CTA’s out there to get their comments in before tax day, April 15th. Email the comments to with the specific answers and commentary they are looking for here:

We won’t bore you with our full response, which is likely a little too much ‘inside baseball’ for most. But here’s some questions to ponder before writing up your comments (and please do, CPO’s/CTA’s).

1.  Should CTA’s and CPO’s be lumped together in this?  CTA’s do not hold customer funds.

2.  Did capital requirements help at all in the case of Griffin Trading, Refco, Sentinel, MF Global, and PFG?

3. What will it cost you to have a third party administrator for your fund?  Are your investors willing to bear that cost? Do they feel the need for greater protections?

4.  What sort of certification would an admin need to be qualified to perform this role if mandated by NFA? What sort of slippery slope are we headed down if this new requirement create the need for admins to register, a new class of NFA member, new fees, new dues, etc.?

5. How would the NFA verify hard to value assets held by CPO’s which do only nominal futures trading but are required to be registered as a CPO?

6. Is this even a problem?  Are customers of your CTA/CPO asking you about protections, are they worried that your insolvency can cause them problems?




Weekend Reads – 4/4/2014

Today’s report from the Labor Department indicated that the economy created a net 192,000 new jobs last month, with the jobless rate holding steady at 6.7% . Another major story this week is the ongoing Federal Bureau of Investigation probe of whether high-frequency trading violates laws against insider trading. The topic attracted extensive media attention with the release of the new book “Flash Boys,” by “Moneyball” author Michael Lewis that charges high-frequency trading has rigged against investors.

  • Economy adds 192,000 jobs; unemployment rate holds steady at 6.7% — (Los Angeles Times)
  • Holder Vows Probe of High-Speed Trading to Protect Markets — (Bloomberg)
  • Dollar dips after U.S. data shows jobs growth — (Reuters)
  • McDonald’s pulls out of Crimea, closes all restaurants, as trade fears grow — (Newsday)
  • Energy Department revives auto loan program despite Fisker flop— (FOX News)
  • Should you stand up to your employer? UPS fires 250 over protest — (CBS Moneywatch)
  • GrubHub Stock Surges in Public Debut After Raising $192 Million — (Entrepreneur)
  • Watch Out AT&T? Google Might Launch Its Own Wireless Network — (Fast Company)
  • ePantry Launches An Online Grocery Offering Sustainable Goods, Automatically Shipped To Your Door — (TechCrunch)

Just for Fun:

  • Humans beating horses in race to get faster — (BBC)
  • How to Cold Read People – (Mental Floss)
  • Stocks and Surf: How Tesla Drivers Are Using Their In-Dash Browser – (Quantcast)
  • Google’s Project Loon Internet Balloon Traverses The Globe In Under a Month – (TechCrunch)

Chart of the Week: The Incredibly Boring Crude Oil Market

Remember the good old days when Crude was at $150, Saudi Princes were having Audis made out of Silver, and trader’s were storing oil on tankers to turn a profit…. Everyone had an opinion on where Oil prices were headed, with crazies throwing out $1,000 Oil and others saying there’s $75 of risk premium built into the price. Those were the good old days when Crude Oil stories read like the tabloids…

But fast forward a few years and Crude Oil has become…dare we say… boring.  Just take a look at the incredible shrinking range of Crude over the past 3.5 years to see what we mean.

Crude Weekly(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy:

Crude had over a $100 point range in 2008, a $60 range in 2009, and about $40 in 2011. But since then it’s been smaller and smaller daily, weekly, and annual ranges for the poster child of commodities.  Just look at last year, where despite tensions tension’s in the Middle East last summer and a train holding thousands of gallons of oil derailing, the volatility in crude oil decreased by -18% {past performance is not necessarily indicative of future results}.

But here’s the thing, contracting volatility and decreasing ranges can be compared to a spring being coiled up (compressed), with only one way out – a fast, swift decompression. Is Crude Oil about to stop compressing and spring back into activity? Nobody knows for sure, but the chart is doing a little thing the technical analysis folks like to call a “pennant” chart pattern.

See how the triangle sort of looks like a baseball pennant (not that us Cubs fans in Chicago know much about what a pennant looks like outside of the one’s on the Wrigley scoreboard).

Cubs Pennant Flags

The “pennant” chart pattern is a triangle shaped pattern where prices continue to fit into the smaller and smaller range between the converging sides of the pennant, until…. they breakout to one side or the other. Now, those with more of a background in this sort of thing can debate where the flagpost is, whether this is a bull or bear pennant, and the rest. But for most trend followers, they don’t really care which way Crude Oil breaks from this pennant range – they just want it to break.  Some pennant formations can last days, and others can last multiple years (such as this one). But inevitably, as the range of the market continues to be constrained, a new breakout from that range will occur.

Here’s hoping…

Managed Futures Q1 Performance: Get in the Game

We’re a quarter way through 2014, and Managed Futures as a whole has yet to kick its performance into gear. Out of the four managed futures indices we track, the average performance for the month of March came out at -0.57%, putting the average Q1 performance at -1.80% {past performance is not necessarily indicative of future results}.

Managed Futures March Performance(Disclaimer: past performance is not necessarily indicative of future results)

While Commodities as a whole are on the rise in 2014, a lot of markets experienced a reversal in trends in March; including Coffee, Sugar, Wheat, and Gold. Meanwhile, the energies markets were choppy, while on the flipside, Lean Hogs continued its upward trend. We need more trends like in Lean Hogs, and less reversals like seen in stock indices and bonds, to erase the red off the board. That’s not to say individual programs can’t outshine the asset class over any one period, see here.

Lackluster performance towards the beginning of the year is nothing new for managed futures, with the asset class known for a history of strong 2nd half performance, but we sure could use that kicking in earlier this year.

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)