Weekend Reads

Feel Economy











High-frequency trading firm Virtu postpones IPO – (CNBC)

The Flash Boys review nobody wants to read – (Alpine Advisor)

Want Meb Faber’s new book for free? – (Amazon)

Greece Debt Woes are Easing – (The Economist)

If the subject matter wasn’t so… unsettling we wouldn’t stop looking at these charts – How Americans Die – (Bloomberg)

The sticker shock of Cocoa – (Bloomberg)

John Barleycorn bar in Lincoln Park shutting down after 50 years – (Crains Chicago)

12 killed, 3 missing in Mt. Everest avalanche – (LA Times)


Managed Futures Linkfest

  • Quarterly Hedge Fund Update Q1 2014, including CTAs — (Preqin)
  • Are Managed Futures ETF’s the best Commodity Play  – (Nasdaq) Our Answer – No!
  • The Case For Managed Futures In A Bull Market – (Seeking Alpha)
  • Manning & Napier acquiring managed futures specialist 2100 Xenon Group – (Pensions & Investments)
  • Human Floor Traders Step Up When CME’s Electronic Trading Fails – (ValueWalk)

Futures Trading on Tax Day

Today is tax day… and if you haven’t filled your federal and state taxes yet, do so now, or have the IRS knocking at your door. April is the time of year you’re forced to review your stock market gains and losses, compiling statements to find your cost basis and take a look at the taxes you owe. But for those of you who traded futures markets, this is one hurdle you don’t have to jump over.

Futures trading actually falls under a different part of the tax code than stock trading, with exchange traded futures and futures options trades being considered ‘Section 1256 Contracts’ come tax time. These 1256 Contracts have some distinct tax treatment, including:

Futures Tax Advantages

Unlike stocks, futures based investments are based on their marked to market value at the end of the year, so any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. This is generally good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains – even though the trade was anything but long term.

In addition, futures based investments do not require the accounting of individual trades. This is a godsend for any of you who have spent hours searching through old brokerage statements from 4 years prior trying to find the cost basis for a certain stock. There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments.

Happy Tax Day everyone!

P.S. — Futures gains and losses should be reported on Form 6781 (http://www.irs.gov/pub/irs-pdf/f6781.pdf) for US citizens, which comes over onto Schedule D of Form 1040 on lines 4 and 11. Schedule D: http://www.irs.gov/pub/irs-pdf/f1040sd.pdf

Commodity ETF Breakdown

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.  C’mon futures…

Commodity ETF Over/Under Performance 2014

Crude Oil$CL_F
Brent Oil$NBZ_F
Natural Gas$NG_F
Live Cattle$LE_F
Lean Hogs$LH_F
Commodity Index $DBC1.87%
Long/Short Ag Trader CTAs-0.90%

(Disclaimer: past performance is not necessarily indicative of future results).
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index




YTD Asset Class Scoreboard

No matter which asset class you track on a regular basis, March was a month of little activity around the board, with none of the asset classes we track posting a return above 1% or below -1% {Past performance is not necessarily indicative of future results}. At of the end of March, Managed Futures was the only asset class in the red… which reminds us all why “Value Investing” is so hard.

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

Asset Class Scorboard Chart(Disclaimer: past performance is not necessarily indicative of future results.)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy Tracker ETF (QAI)
Commodities = iShares GSCI ETF (GSG); Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Why Value Investing is so Hard (Managed Futures Style)

Recently, we came across Meb Faber’s blog post “Why Value Investing is so Hard,” and every word we read seemed to resonate a little too much for us on the Managed Futures side of things.

“ … I mean it goes against everything your behavioral instincts tell you to do.  Buying a stock at all time highs is hard to do, and one reason momentum and trend work.  Buying a value investment is hard for many reasons, a few of which I outline below with a very relevant current example, Russian stocks.”

Meb chose to focus his efforts on Value Investing –  Russian Edition, listing specific examples of why value investing is so difficult.

“1.  All of the headlines are negative.

2.  The investment has declined, usually by A LOT.

3.  All of the trailing fundamentals are really bad.

4.  People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

5.  There is a non-zero risk of the investment going to zero.

6.  It is not popular (or patriotic) to own the investment.

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

8.  The banking consensus is all sell rated.

9.  Flows are out.”

Is it just us, or are these some of the same reasons investors aren’t even considering an alternative investment, Managed Futures, or something similar? Let’s go back through the list and see if the reasons match.

1. All of the headlines are negative.

If you’ve been following our blog at all, you’d know this to be true. Ever since Bloomberg opened the floodgates back in September, we couldn’t look at any financial publication without seeing some bad press about Managed Futures. See our Rebuttal.

2.  The investment has declined, usually by A LOT.

There’s no doubt Managed Futures performance has struggled the past couple of years since the 2008-2009 financial meltdown.  Volatility has been contracting ever since then, and it hasn’t found a way to uncoiling yet. Not to mention, as a whole the asset class is in a generational drawdown.

4. People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

Stocks are coming off their all time highs, everyone else’s 401k Stock fund allocation is well above 50%, and in the word’s of the Reformed Broker, “Everything is Awesome.” But it makes us question, “Does the market have a Phil Mickelson Mentality?

6.  It is not popular (or patriotic) to own the investment.

There’s no better way of proving this then our most recent article, “What a Hedge Fund Failure Looks Like.” Paul Tudor Jones made the decision this past month to close its Managed Futures Fund, not because performance was all that bad, but because of the game of growing assets. 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.

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

Yes, buying anything with the fear of it going down further is a risk. Managed Futures is already at a generational drawdown. There’s truly nothing saying it won’t get worse before it gets better, or that it is in the process of turning around, but committing to an asset class that has struggled recently is a difficult task.

9.  Flows are out.

It all depends on how you look at AUM, but if you choose to not include Bridgewater & Winton in the discussion AUM growth has been struggling since 2009.

The point is, we see that managed futures is “that” value investment right now. However, that doesn’t mean things are going to stay the same. In fact, that’s the whole point of value investments, and the point Meb is trying to make. You know that it’s not going to stay this way forever, so why ignore it?

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 CPOandCTAfeedback@nfa.futures.org 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?