Pursuing Portfolio Perfection

It’s 5 years into the one of the biggest stock market bull runs of all time, and all looks fine for the aging bull even after this brief downturn in October.  For many, this has been a great run and they’ve been doing quite well during it. For many others, it’s been rather annoying, as their “smart” choice of diversification has under performed recently.

But here’s the deal – it’s not about beating the S&P 500. You’re on the quest to find a portfolio that best matches your needs before retirement. For some, that’s so far in the future, you’re not worrying about volatility. For some, it’s within reach, and you want to protect what you have before something bad happens. For some, you’re looking for something in between the two. So what’s your “Perfect Portfolio?” It’s not an easy question to answer, and many pros have tried (check out Meb Faber’s impressive list of asset allocation strategies and stats here). The basic portfolios to consider in our mind are the following:

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How a Futures Trader Looks at Markets

If you’re already a Futures market guru, enjoy the rest of your day. Nothing to see here. But for those who might not consider themselves experts, here’s some insight into how a futures market trader, or really anyone who knows 1. There’s more than one “market” and 2. There’s more than one side to the “markets”;  looks at the markets.

First, we’ll go backwards a little bit and show you how professional traders don’t look at the market. Here’s how you’ll usually see a list of markets or other investments listed in the Wall street Journal or whatever financial source you’re used to…

Futures Market “Winners and “Losers” of 2014 YTD
(All data taken from Finviz. Performance as of 10/22/2014)

Futures Winners + LosersFutures Losers

At first glance, it appears that over half (62%) of the futures markets have negative performance on the year. Alternative investments operating in the futures markets must be getting crushed, or at least struggling, right?  Would it surprise you to know that Managed Futures is coming off of its best quarter since 2008. How can that be? Here’s one more look at the futures market performance numbers in chart format.

Up and Down Futures Charts

To a pro – this is a really weird way to look at the markets, even though they’ve trained their brains over the years to read these charts in their own manner. They understand that the majority of investors out there are likely long stocks, bonds and mutual funds; and in that world – if the price moves up, your investment in that item is making money, and if down, you’re losing money.  But for a professional trader – the concept of winning when the market rises and losing when it falls is an odd one. That happens from time to time, but they also know the feeling of winning when the market falls and losing when it rises.

So when a pro looks at how markets have done that day, or that year, or what have you – it’s completely dependent on whether they are holding that market long or short, and over what time frame. For a short term strategy, they may make or lose 15% in a year on a market that ends up the year up 0.50%.  For a longer term strategy doing typical trend following type stuff, it isn’t so much whether the market is up or down – but how much it is up or down.

For those in longer term systematic programs, like these, the YTD market chart looks something more like this:

What Market Performance Should Look Like(Disclaimer: Past performance is not necessarily indicative of future results)

.

For them – it’s about the absolute value of the move, not the direction of the move. Systematic guys are directionally agnostic (hey, that would be a great boat name). Their not betting on prices rising or falling, nor rising or falling a certain amount. They are betting on being able to ride a rise or a fall for a long enough time to offset (and some) any losses seen getting into false moves up and down.

Best Managed Futures Programs – September

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 (updated July 2014).

 (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 September
September ROR
Max DD
Min. Invst.
Purple Valley Capital - Diversified30.68%-49.34%1,000,000
Paramount Capital (QEP)28.14%-57.77%100,000
Hawksbill Capital - Global Diversified (QEP)20.81%-62.98%5,000,000
Southwest - Global Diversified 20.12%-32.79%200,000
Mulvaney Capital - Global Markets (QEP)17.69%-45.02%10,000,000
Westphal Trading - Diversified 16.53%-26.10%500,000
Tactical Investment Management -- Instl. Comm. (QEP)16.30%-41.51%10,000,000
Revolution Capital - Mosaic (QEP)16.05%-53.34%10,000,000
Covenant Capital - Aggressive 15.59%-20.41%50,000
Kelly Angle - Genesis (QEP)14.49%-45.59%2,000,000

900% Increase in Oil Production, Gas Below $3, and Oil to Zero?

Crude Oil is once again making moves that could finally break out of it’s 80-120 range. Gas Prices are below 3 dollars a gallon on average in at least a dozen states.

Today's AverageChart Courtesy: Triple AAA

Crude Oil Futures are down more than 21% since July, now hovering around the 80 point mark {past performance is not necessarily indicative of futures results).

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Weekend Reads, That was Ugly (for Stocks) Edition

Get your rest this weekend…. it’s bound to be exciting next week. Will the August lows hold in the Dow, Nasdaq, and S&P?  Can Crude Oil print a 7 handle?  Will US interest rates go negative?  Stay tuned…

In case you were sleeping: There was a big Stock Market Sell Off this week:

Did the VIX just Flash a Major Fear Signal? (Ryan Detrick)

Carl Icahn shorts S&P 500, sees stock market correction coming (Globe and Mail)

Market chop puts alternative strategies front and center – (Investments News)

Stocks, We Hope They Go to Zero – (Attain Alternatives) & The Best Images from “StockToberPocalypse” – (Attain Alternatives) & a Refresher on how your alternatives probably aren’t (Attain Alternatives)

5 Thinsg to Ponder: Through the Looking Glass (streettalk)

 

Plus some sort of related items

Fed minutes: Staff cuts growth outlook due to higher dollar – (CNBC)

Nassim Taleb: Why You Should Embrace Uncertainty – (The James Altucher Show)

ETF Scoreboard October Edition – (ETF Database)

 

It’s Not All Stocks:

Oil to drop to $75 a barrel? (CNBC)

Railroad demands are tying up Minnesota farmers – (SC Times)

Colleges’ Wider Search for Applicants Crowds Out Local Students – (Wall Street Journal)

 

And, just for Fun:

Interactive: Quarterbacks Pay vs Play – (AP)

If You Bought A Red Bull In The Last 12 Years They Owe You Money — Here’s The Easy Way To Get It – (Buzzfeed)

Did you know police can just take your stuff if they suspect it’s involved in a crime? They can! – (John Oliver)

Winton down in September? What %^#$

Winton Logo

We’re probably at risk of not getting that David Harding interview next time he’s in town… but we just can’t help but wonder aloud what happened with Winton in September. The estimate we’re seeing for their September performance is a negative -0.72% (and that would be their program performance, not the performance of the super high fee product you’re accessing them through).

While that’s hardly reason to sound the alarm, and Winton remains up +1.83% on the year; we’re talking the biggest player in the managed futures space being down in one of the biggest up months for managed futures in a few years (Q3 was the best quarter for managed futures since the hey days in 2008). What happened?

Well, we’re not privy to the investor letters or sector breakdown of performance just yet… (we’re not investors), but we believe it highlights an important issue for investors to consider when considering Winton. And that is the little issue with trying to access finite commodity markets with a very, very large amount of assets. Winton and Mr. Harding had $24.5 Billion under their control. And the math on that just simply makes it hard to have any meaningful exposure in markets like Lean Hogs or Corn or Palladium, where there are position limits. We covered it in this post “Can CTA’s with $1 Billion AUM Trade Grains?” and again in this newsletter “Second Guessing the Winton’s of the World.”

Harding was quoted as saying ‘don’t call us a F***ing ‘managed futures’ firm’, and he may be getting his wish if he doesn’t keep pace with those who are wanting to be known as managed futures. I’m sure he’s smarter than us and will likely get exactly what he is after in adding stock investments and other asset classes as they move away from a managed futures firm to a full on hedge fund behemoth in the Renaissance or Bridgewater mold. But for those wanting managed futures exposure – it will pay to watch just how correlated Winton will be moving forward to something like Newedge’s Trend Indicator. (it wont’ help to compare to the managed futures indices, as Winton is IN all of them… making them auto-correlate quite nicely).

Attain Funds – September Performance

We launched a family of alternative investment funds earlier this year, and just can’t help but share the September performance (below). To get the full platform report emailed monthly with commentary on how each fund made/lost money, full track records, and all the relevant stats – register here.

FundMonthYTD
Attain Trend Following Fund+12.81%+9.55%
Attain Short Term Alpha Fund+10.88%+7.29%
Attain Global Macro Fund+1.88%+3.96%
Attain Relative Value Fund-0.40%-0.83%
Attain Ag Fund^(hypothetical)+6.57%+5.29%
Average+6.35%+5.05%
Liquid Alternative Comparisons
AQR Managed Futures Strategy I Mutual Fund (AQMIX)+3.42%-0.09%
361 Managed Futures Strategy A Mutual Fund (AMFQX)-1.34%+1.57%
Morningstar Managed Futures Mutual Fund Category(through Oct 3)+1.68%+3.29%

Disclaimer:  The return numbers herein include estimates of the full month performance for the previous month, and include assumptions for accrued fees, the effect of additions and redemptions, and other factors which may cause the final numbers compiled by the fund administrator to differ slightly. ^The Attain Ag Fund is awaiting seeding, and performance reflects the M6 Capital Mgmt. trading program performance multiplied by 1.5x and reduced by 1% annually for expected periodic expenses from fund operations. Regulations require performance adjusted for a leverage factor to be considered hypothetical performance and a hypothetical performance disclaimer to accompany such performance.

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.

Please refer to each fund’s disclosure documents for more information. Past performance is not necessarily indicative of future results. Futures trading is complex and presents the risk of substantial losses. As such, it may not be suitable for all investors. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses.