Infographic: 7 Traditional vs 7 Alternative Assets in 5 Bear Markets

We tried our hardest to find an easy to read article (or graph) of the major asset classes and how they performed over the various crisis periods in the last 20 or so something, and couldn’t… so we decided to do it ourselves.

Enter the infographic, which we’ve tiptoed into before with Han Solothe Nasdaq, and Risk On/Risk Off Roller Coaster. However, all of those look a little silly next to this infographic looking at 14 different asset classes performing during 5 different crisis periods over the past 20 years, thanks to our newly found graphic designer, which came as part of our merger with RCM.

P.S. — If you like this infographic and want more from us, sign up for our weekly (sometimes bi-weekly) blog digest emails.

(Click on the image to enlarge) 
Infographic_Investments in Crisis_Full Image_5

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Managed Futures June Performance

The only conversation in the markets in June was Greece. We talked about its influence on the German Dax here, and how we should have all seen this coming here. Most of the Managed Futures industry was short bonds, long stocks, and short foreign currencies; all of which were either choppy or down on the month. Put that together and the average of the four managed futures indices we track experienced its worst loss in 2015 {past performance is not necessarily indicative of future results}.

Meanwhile, Grains experienced quite a jolt the last days of June. As we enter July, the managers that can access the grain markets, have gone long corn, soybeans, and canola oil.

Managed Futures Table_1
(Disclaimer: Past performance is not necessarily indicative of future results)
(Barclayhedge CTA Index: 46% of funds reporting)

P.S. –Attain’s Family of Alternative Funds performance will be posted shortly. To get the monthly performance and research updates on the family of funds, sign up here.

Closing Time for the Pits

A long standing tradition in Chicago is officially coming to a close, with the CME starting to shutter its pits starting Monday, July 6th (was supposed to be today, but they delayed it. Maybe the ‘pit closer’ had the 4th of July weekend off, and they didn’t realize that until last minute).

What started as a way for farmers (both grains and pigs) to hedge their crops, boomed into a full blown, career opportunity for those willing to take on “the pits”. Now, after more than a century (167 years to be exact), most of the trading is done online – with the trading pits looking like an old mining town to those who saw them in their full glory in the early 90s.

Electronic Pits Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Crains Chicago

Suffice it to say, this is more than just a business decision to those who cut their teeth on the trading floors. This is the end of an important piece of the entrepreneurial cycle in Chicago. This is the end of a proving ground for new young trading talent. This is the end of a brotherhood (and sisterhood) of close friends who shared the joys and pain of making money in real time together. Life will go on. Futures trading will go on. But the trading lifestyle (the good and the bad) and ability for working class kids to make something of themselves based on street smarts and hustle, not an Ivy league degree – will forever change. How that changes the rest of the industry, if at all, remains to be seen.

Here’s some of the best articles we’ve found about the glory days of the trading pits. Enjoy the read over the holiday weekend.

  • Interactive: Closing Time: Stories from Chicago’s Famed Trading Floors – (Crains Chicago)
  • Closing time for Chicago’s trading pits – (WBEZ)
  • What Chicago Loses by Closing the CME’s Futures Pits – (Chicago Magazine)
  • CME Group’s decision heralds end of an era – (Futures Magazine)
  • As Silence Falls on Chicago Trading Pits, a Working-Class Portal Also Closes – (New York Times)
  • End of an Era as CME to Close Almost All Floor Trading for Futures – (Wall Street Journal)

MFA Recap: There’s no Crumpets at the Four Seasons

The life of a hedge fund manager can be so very tough at times…

Take the just concluded Managed Funds Association’s “Forum 2015”, where managers have to make it through the squalor, noise, and smells of (wait for it…) the Four Seasons Hotel, dressed in nothing but a suit (usually without a tie).  All sarcasm aside, many of the industry’s best and brightest were here in our home town swapping war stories and comparing track records at MFA’s flagship conference highlighting education on managed futures and macro strategies.

And as you can imagine – no self respecting managed futures focused firm would miss such an event, and multiple members of the RCM team were there rubbing elbows with managers, poring over fact sheets, and hearing about firm’s risk controls in between tea and crumpets (we made that last part up, there weren’t any crumpets, much to our surprise, at the Four Seasons).

So what was the buzz there on the ground:

From the investor side, we heard about sizable commitments to the space, about an increased interest in the ‘short term space’ (hey, didn’t we just talk about that); about the continued need for education about this particular brand of Alternatives (despite some of us doing that for more than a decade now), about trend following becoming popular again (albeit now talked about as beta more and more often), about big institutional investors still leaning on consultants for advice in this arena, and those same institutions still having an aversion/lack of full understanding of futures markets and derivatives.

From the manager side, we heard about a lack of investors at the event… although managers always say that unless it’s a 10 to 1 ratio; about regulations in Europe making it very difficult to cater to investors there – while more and more European managers seem to be catering to US investors, about newer innovative products launched during the dark times of 2012 now coming up on three year track records, and about everyone’s desire to be part of (or bigger part of) a 40 Act Mutual Fund product.

Of course, the current king of the Managed Futures Mutual Fund, Cliff Asness, was in attendance, giving a sit down talk while everyone ate lunch (do they get hungry talking while everyone is eating?)

We couldn’t help but press Mr. Asness on the size and capacity of his fund, and with the only question in the room – asked him about larger managers having declining performance and how much money they could manage in the managed futures fund. He said, “that’s a hard question”, and that they are aware of the research , yet haven’t yet been able to prove that it is true.  Saying the real challenge in modelling for capacity isn’t how much liquidity is out there to support your strategy in good times, but what happens when there is no liquidity or a big liquidity event in any one market, concluding with the sentiment that they think they can handle two times the assets . That would be Winton territory, and quite impressive from an asset raising standpoint… while a real time test of the bigger isn’t necessarily better thesis, so we’re all for seeing how that turns out. For those smaller managers out there, if $16 Billion in a managed futures mutual fund scares you, go read this.

As for comedian Jay Mohr at the Pinnacle awards… his best lines (beyond lamenting at going the wrong way in his career, starting on a Tom Cruise movie and ending up on AM radio) were in his bit on BarclayHedge’s Sol Waksman, telling everyone they were in Vietnam together, how good Sol smells, and that they went in to get glasses in tandem at Pearl Vision once.

Why your Best Long Term Strategy might be Short Term

Whenever there’s talk about Managed Futures in the Alternative Investment space, most of the talking is about traditional long term trend following strategies. After all, that’s mainly what drove the success of Winton, Man AHL, Transtrend, John Henry, and more. But as the old (southern Illinois) saying goes – there’s more than one way to shuck an ear of corn… Trend Following is only one of many styles of trading in the Managed Futures space. As noted in our annual review of Managed Futures strategies, there’s also Global Macro, Short Term, Multi-Strategy, Specialty, Ag Traders, Spread, and Options trading.

The ‘short term’ bucket is perhaps the most difficult to really put a label on. Some hear short term and think HFT, others imagine trades exited by the end of the day, while still others consider most anything that isn’t long term trend following ‘short term’.  From our standpoint, the managers which fall into short term trading include those who are mainly momentum, directional based, multi-market strategies whose average trades last from a few hours  to a few weeks. We don’t consider high frequency trading as ‘short term’(we might call it shortest term), nor strategies which hold options for a week at a time, or do delta neutral spread strategies which hold trades for less time than most. For us, short term strategies are pretty much like trend followers and other systematic multi-market programs – just on a much shorter time frame, trying to catch a trend which lasts a few days versus a few months.

But all of this begs the question – how can a managers whose strategy is based in capitalizing on moves that happen in hours to days be a long term investment strategy?

One Man’s Noise, is Another’s Treasure

The idea of Short Term trading is surprisingly similar to traditional trend following strategies, except short term strategies definition of a “trend” can be drastically different. As we noted briefly, short term managers see trends that last a couple of hours as a huge possibility of gains, whereas most traditional trend following strategies see this as pure noise – choppy markets waiting for some sort of confirmation (i.e. moving below a 50 day moving average) on a direction.  This shortened view allows short term traders to zero in on bursts of movement within a choppy move. As an example, take a look at a hypothetical two week span of prices in Crude Oil futures:

Two Week Move Crude Oil

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

Crude only moved up 28 basis points over the two week span, but that end result was made up of a run up near 4%, and pull back of about -5% before arriving at the mostly boring 0.28%. This is very reason that Short Term Managed Futures Strategies exist. They’re after that 4% up move over 3 days and 5% down move over the next 4 days, not really caring where the market ‘ended up’ for the week or month. They’re not content to just chalk those moves up to noise, and attempt to capture them with momentum and counter-trend strategies.

Of course, there’s always a trade off, and with this increased granularity and desire to catch such moves comes the need for increased accuracy from the model due to the increased market risk and transaction costs. Where a long term trend follower is looking to have winning trades maybe 45% of the time, and win about 3 times as much when winning as when they lose – a short term trader may look to only win about 2 times as much when win as when lose, requiring the trade accuracy to be around 60% to maintain the same expected value per trade.

The ‘Winding River’ versus ‘As the Crow Flies’

One of the best ways we’ve heard the ‘short term’ strategy discussed is putting it into some good old American idioms. Ask someone over 70 in the middle of the US how far it is from such and such town to the next such and such town, and they’re likely to say something like… “oh, about 80 miles as the crow flies”, meaning it’s about 80 miles in a straight line, but likely much longer when having to drive down county road 17 over to the highway to the old exit at the mill.

Bringing it back to our world of markets and market noise. Long term traders mostly consider price action in ‘as the crow flies’ terms. They see the market as moving from x to y over a certain period of time, and while they may consider the volatility of the days in such period when looking at risk, the move itself is usually judged just at the end of that period (usually daily, but also weekly or monthly).

Long Term As The Crow Flies(Disclaimer: Past performance is not necessarily indicative of future results)

In contrast – Short Term traders are more of ‘Winding River’ type of people, who view all the bends and curves, inlets and sandbars along the river, not just the total distance covered.  If we look inside of that week over week move and instead consider it on a daily basis – we can see two months of basically no movement suddenly comes to life.

Short Term The Winding Road(Disclaimer: Past performance is not necessarily indicative of future results)

To compare the two in terms of potential market ‘opportunity’, which it should be noted is also the opportunity for loss, the granular view gives many times the level of observed opportunity. Now of course, the short term managers are not able to perfectly capture every market move. The increase in opportunity doesn’t make them better, it just makes them different.

Observed Opportunity Short Term(Disclaimer: Past performance is not necessarily indicative of future results)

Performance Profile:

So how do these short term programs do?  Does the shorter time frame really cause a different return profile?

Well, if we look at the Newedge Short Term Index versus their Trend Following Index going back to 2008, we can see a correlation of 0.51 with the trend following index; with the short term index outperforming its longer term cousins in 2011 and 2013 when long term trend following struggled (past performance is not necessarily indicative of future results).  So, yeah, I guess we can say the time frame difference is causing a different return profile.

What’s more, we’re also able to see a short term program in action day in and day out by viewing the performance of the Short Term Alpha Fund – which is working on its third 4th straight profitable year, and is one of the Attain Portfolio Advisors family of funds (the images above are actually a part of the Short Term Alpha Fund investor presentation).  The Short Term fund’s double digit performance in 2012 and 2013 as traditional long term trend followers struggled shows just how beneficial some time frame diversification can be to those with a managed futures portfolio heavy on trend following (Past performance is not necessarily indicative of future results). Click here for more information on performance data, strategy due diligence, and how the fund does against other short term managers.

Short Term Comparison Last 5 YearsSource: Newedge Short Term Index & Newedge Trend Index

Futures trading is complex, and presents the risk of substantial losses. As such, this may not be suitable for all investors.
The Fund traded a different strategy prior to March 2012, and as such the performance tables and charts herein reflect a hypothetical track record through March 2012 which takes the reported performance of the program now used exclusively by the Fund, the eco Capital Management Global Opportunities Program, multiplies it by 1.5 to reflect the Fund’s trading level, and adjusts it by applicable fees and expenses. March of 2012 to date returns represent actual fund returns, net of applicable fees and expenses. 
While  based on actual performance, investors are cautioned to not place undue reliance on hypothetical pro forma performance.  In addition, regulations require any performance adjusted by a factor other than fees be labeled as hypothetical and the following hypothetical disclaimer displayed: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
The brief description of risks herein cannot adequately describe all of the risks associated with an investment in the Attain Short Term Alpha Fund. The fund trades in a variety of futures markets which are highly leveraged, and as a result, returns may be volatile.  In addition, both transparency and liquidity are limited. Before deciding to invest, you should carefully read the entire offering memorandum and consult with your own advisers.
The Fund’s pool operator is Attain Portfolio Advisors, LLC, a wholly owned subsidiary of Reliance Capital Management II, which operates as the introducing broker of the fund. A portion of the fees charged to the Fund by the Trading Advisor are shared with Attain Portfolio Advisors, and a portion of brokerage commissions paid by the Fund to the clearing broker are retained by RCM as the fund’s introducing broker.
Some of the statistics herein refer to indices, which do not represent the entire universe of possible investments within that asset class; and may suffer from limitations and biases such as survivorship, self reporting, and instant history biases.