Off Topic

Weekend Reads: RIP CME Pits

New Picture


CME sees $10 mln savings per year from closing futures pits – (Reuters)

The End of The Pits – (Points and Figures)

CME to close most futures pits in Chicago – (Crain’s Chicago)


US endowments pare bets on alternatives – (FT)

Robo-Advisors don’t like Alternatives – (Wealthfront)

Managed Futures January Performance — (Attain Alternatives Blog)


Lifting the ban on crude-oil exports should be next – (The Economist)

7 Technical Indicators to Tell When the Crude Sell Off is Over – (Attain Alternatives Blog)

Jobs Report:

Revisions Made This A Blockbuster Jobs Report – (Five Thirty Eight)

Financial Tech:

5 things I learned by leaving Wall Street to run a startup – (Business Insider)

Just for Fun:

First stars appeared 100m years later than thought, research finds – (The Guardian)

Twitter Reaches Deal to Show Tweets in Google Search Results – (Bloomberg)

Madam President, Role Model In Chief – (Medium)

Outrage Over Government’s Animal Experiments Leads To USDA Review – (NPR)

Counties where German-Americans are the largest ethnic group – (The Economist)

Mila Kunis and Ashton Kutcher want their daughter to be the first Female NFL Coach and with the Chicago Bears – (CSN Chicago)

This Year’s Santa Claus Rally

It’s the most wonderful time of year for those heavily weighted in the stock index ETFs… At least if you’re a believer of the famous “Santa Claus Rally,” which simply means that in the past, December has been historically kind to stock market returns. You know how we feel about past performance… it is not indicative to future results.

Santa Claus Rally

But we can’t deny if said past performance has been good for stocks. We talked about the Santa Claus Rally last year, and there is a lot of debate of whether the Santa Claus rally is a myth, or if there is some basis in fact.

Here’s this year’s observation from Stock Trader’s Almanac:

“According to the 2015 Stock Trader’s Almanac, since 1969 the Santa Claus rally has yielded positive returns in 34 of the past 44 holiday seasons—the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.6%, and returns are positive in each of the nine days of the rally, on average. Nevertheless, each year there is at least one day of declines.

Alternative research over a longer period confirms the persistence of these trends: According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7% during this seven-day trading period, rising 77% of the time.”

No one can really pinpoint the cause of such a rally, but this year’s run can be attributed to better than expected economic growth, via NBC news:

“The wind in the stock market’s sails lately has been the pledge by the Federal Reserve last week to be cautious about raising borrowing costs amid signs that the economy is picking up steam. Investors got another signal of the economy’s emerging strength on Tuesday when the government revised upward its final estimate of third quarter economic growth to the fastest pace in 11 years — 5.0 percent from 3.9 percent reported last month.”

Just today, stocks reached new all time highs off of this news but it hasn’t been slow small gains. Just days ago (5 trading days), the Dow Jones Industrial Average was down -4.3% on the month, and is now past 18,000. By our estimation, historically, there’s only been a 17% chance that the index finishes the month positive after a down move like that, let alone only 5 days {past performance is not necessarily indicative of future results).

But it hasn’t just been this rebound, or the last rebound. It’s that it only took the DJIA six months to go from 17,000 to 18,000. Before that, it only took seven months to go from 16,000 to 17,000 {past performance is not necessarily indicative of future results}. Will it take six months to reach 19,000? A year from now, will it be at 20,000? We’ll let others do the speculating.  Enjoy the ride while it lasts, and happy holidays.

P.S – Stocks aren’t the only thing at new all time highs. Managed Futures hit new all time highs in November {Past performance is not necessarily indicative of future results}.

Alternative Links: All about that Crude


Oil holds below $60 as OPEC, Russia keep pumping – (Reuters)

The United States has an effective potential countermove: Congress should lift the 40-year ban on exporting crude oil and keep U.S. producers in the game. – (LA Times)

Crude Crash Set To Continue After Arab Emirates Hint $40 Oil Coming Next – (Zerohedge)

Oil is not the first commodity to crash in the post-crisis period – (Reformed Broker)

11 Things You Should Know About the Crude Oil Drop – (Attain’s Alternatives Blog)

The Best Tweets on Crude Oil’s Crash – (Attain’s Alternatives Blog)


Commodities Go From Hoard to Floored – (Wall Street Journal)

Commodities Trend Better than Stocks – (Adam H Grimes)


This Signal Has Perfect Record Of Forecasting Year-End Gains – (Dana Lyons)

VIX Futures extends trading hours – (Hedge Week)

Liquid Alts:

Goldman Sachs details plans for liquid alts, ‘smart beta’ ETFs – (Investment News)

Checking in on Liquid Alternatives – (Attain Alternatives Blog)

BMO Global Unveils Liquid Alternatives Fund – (FIN Alternatives)


CFTC Bans Credit Card Use by Retail Foreign Exchange Investors – (Bloomberg)


AlphaMetrix settles with feds over misuse of client funds – (Crains Chicago)

MF Global Holdings nears settlement with CFTC – (Reuters)

Option Trading is For (Thanksgiving) Turkeys

It’s that time of year. The Christkindlmarket is open on the Daley Plaza, there’s ice skating in Millennium Park, and we’re preparing ourselves for the savoring smells and tastes of Thanksgiving dinner, where no platter of food is more important than that of the turkey. The relative that might disagree is your vegetarian cousin (Tofu turkey for you), and the guy who makes the ultimate sacrifice in the name of giving thanks…. the turkey.

Don’t feel too sorry for the turkey though… it had a great life, and died at the peak of its existence (being fed everyday), but the only issue is it had no idea, the “turkey surprise,” was coming. If fact, there’s a lovely chart of the turkey life, courtesy of Nassim Taleb’s wonderful book The Black Swan. Taleb’s depicts “the good life” of a turkey, including round the clock care, all the food it can muster, developing a life of self-satisfaction, just so us humans can prepare the unfortunate creature for the not so pleasant surprise ending.

The Turkey Surprise


Now we’re not trying to lend advice on your eating habits, but can’t help but use this example in the investment realm. While it seems impossible to imagine this chart could be a stock market index tomorrow, next week, or next month – this chart is to remind those caught in stock market dream that anything could happen, at any moment, without notice; especially those selling volatility for a living.

Which brings us back to Mr. Turkey. The turkey sees 1000 days of small gains followed by one day of large losses, and we can’t help but think of that as a lot like the performance profile of option sellers. The reason is option sellers are technically short volatility programs which on the whole make a living by risking a large amount to make a small amount. There’s an old saying about option sellers ‘picking up pennies in front of a freight train’. They can get away with this (in theory), because they have a large winning percentage where the large losses are very rare.

But no matter the math and no matter how good your option selling manager is, or has been to date, there is no denying that they have a greater than zero chance of a large negative surprise akin to the turkey’s 1001st day at some point in the future.  Indeed, just this year (last month to be exact), a spike in volatility in October sent some option sellers to the dinner table, as they didn’t see the turkey’s day of demise coming.

Now, professional option selling managers design their programs not to lose everything on a single day like the turkey; but they are betting against the occurrence of such a day, being set up to realize frequent but small gains in exchange for the risk of infrequent but very large losses (making them perhaps a distant cousin to the turkey).

In the meantime, Happy Thanksgiving to you and yours from the Attain team!

The Success Equation, Untangling Skill and Luck

The Success EquationWe like to read around here – and just recently got done with one that has been on the wishlist (it’s more like a… when the kids are quiet for 10 minutes and there’s not a client dinner or conference in town or presentation for a business deal – as time permits list, but I digress) for quite some time: Michael Mauboussin’s, “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.”

The title caught our eye right away, being in the business of untangling luck and skill to a certain extent in helping clients identify and invest in alternative investment managers. The question at the end of the day is whether the impressive track record a client is considering investing in is the result of skill, or whether it is luck. If you’re a chess player – or even tennis, it’s nearly all skill. If you’re a hockey player… it’s way more luck than your agent would care to admit.


And what about an investment manager?  How much of that track record is skill versus luck. The manager themselves usually portrays it as skillful, and charges as if it were entirely skill – but even the most successful of managers have to admit there is some skill in there. How much, and what questions should you be asking to determine the role of skill and luck are the parts of Mauboussin’s book we’re most interested in.

Here’s his handy graphic breaking down the major sports, slot machines, roulette, and trading in the stock market on a pure luck to pure skill continuum.

New Picture

Mauboussin tells us that where skill is the dominant factor, history is a useful teacher, but where luck is the dominant force, history is a poor teacher. And that the type of feedback you get is a good tool to measure how much luck there is in your endeavor. On skill side, there is a very close relationship between cause and effect; but feedback on the luck side is often misleading – where good decisions can lead to failure and poor decisions lead to success in the short run (due to luck).  For more on the latter – read anything by Nassim Taleb, who’s made a career pointing out that a lot of the skill you see in the world (the banker, insurance company, option trader, etc) is nothing more than the result of 1 out of a million people destined to be quite lucky.

Essentially – what worked in the past may not work in the future on a heavy luck endeavor (such as investments), which I guess the regulators knew long ago when they made it a requirement to put the ‘past performance is not necessarily indicative of future results’ disclaimer on investment documents.

To measure the effect of luck, he introduces us to the James Stein estimator and the ‘shrinkage factor’ (straight out of Seinfeld), shows us how reversion to the mean is highly dependent on how much luck is involved, and discusses how even when you know how much skill there is – you’re in trouble because skills deteriorate (he quotes a source as saying the peak age for matters of finance is 53, and after that our skills start to deteriorate).

We enjoyed two parts in particular.

One, the discussion of ‘the paradox of skill’, which he explains: as skill improves, performance becomes more consistent, and therefore luck becomes more important. Mathematically, if the variance in skill becomes smaller than the variance in luck – luck becomes the dominant factor. In his own words:

“When everyone in business, sports, and investing copies the best practices of others, luck plays a greater role in how well they do.”

He shows stats supporting this from baseball, where all of the hitters have gotten better, but the rough averages have remained the same. Why? Becasue the pitchers have gotten better too!  But the interesting part of this to us is in the investment realm, and more importantly – the alternative investment realm. The discussion sure gets you thinking about our modern world of global markets, derivatives, and mangers earning billions; and whether the world has become so skilled in analyzing and trading them – that any performance is due mainly to luck, and due for a healthy reversion to the mean?  It makes us think of all the money in systematic trend following, and whether there is a real world experiment in the ‘paradox of skill’ happening there before our very eyes. Are any variations in the performance of trend follower A versus Trend Follower Z due to luck? Are they outperforming due to luck in including Coffee in their list of markets – luck in risking 0.25% per trade and getting an extra Hog trade versus the guy who’s model was risking just 0.20%? And so on.  Are those differences skill, or luck?

We also enjoyed Mauboussin’s discussion of the ‘dumb money effect’, which we know as emotional investing, or getting in at the highs, and out at the lows (see our discussions on it here, here, here). He shows some stats calculating it costs investors 1% in returns each year, and that institutional investors  have foregone $170 Billion in value over a couple decades because of this dumb money effect.

Why do we do it?  We’re hardwired that way, with Mauboussin showing a survey where 2/3rds of respondents admitted they tend to rely more on judgement when analysis becomes more complex, and how we tend to give disproportionate weight to whatever has happened most recently, buying when at all time highs and getting out when at lows, causing some specific losses:

“Individual investors consistently earn results that are 50-75 percent those of market itself due to bad timing.”

And if this dumb money effect is so prevalent among individual investors and institutional alike – should we really expect our managers to be immune from it? It’s not too hard to imagine an investment manager doing their own version of the dumb money effect – changing a model around after a streak of losses, adding more markets on a model which is doing well to expand its exposure, and so forth. This is the danger to perceived skill – where changes meant to help actually result in pushing the inevitable reversion to the mean back further.

You can’t help but feel a little hopeless upon finishing the book – and realizing just how much of investing (and life) is due to luck instead of skill. But the lesson to be learned shouldn’t be to pack it in and put your money under the mattress. The lesson for us is to realize luck’s part, to realize that impressive winning streaks are just that – streaks. That depressing losing streaks are just that – streaks. And that some luck (or lack thereof) means reversions to the mean, so avoid getting in at the tops and out at the bottoms.. avoid the dumb money effect. The lesson for us is that process matters a lot more than outcome in the short run, and that the more you base your investment decisions on the recent past, the more likely you are to be disappointed.


Weekend Reads: That was Unexpected

The Bank of Japan decided to play a little trick or treat (depending on your positions) on the world this Halloween. They announced more QE, which sent Nikkei futures ‘Limit Up’ to new 7 years highs, US stocks to all time highs, Metals down a couple percent, and foreign currencies all lower against the US Dollar. A treat for trend followers, to be sure. Have a fun and safe Halloween:

Bank of Japan QE:

Japan Just Boosted QE And The Nikkei Exploded To A 7-Year High – (Business Insider)

When One Door Closes — (Reformed Broker)

Bank of Japan Unexpectedly Eases Policy – (The Wall Street Journal)


GLD’s Fall From Grace – (A Wealth of Common Sense)

The worst possible case for the worst possible idea, the gold standard – (The Washington Post)


The Scariest Halloween Costume Is A Cockroach That Performs Root Canals – (Five Thirty Eight)

The Scary Commodities This Halloween – (Attain’s Alternatives Blog)

Why We Like Being Scared – (The Economist)


Before you complain about the CTA again, read this – (Crains Chicago)

College: The Great Unleveler – (Ritholtz)


Senate Update: With 4 Days Left, Here’s The State Of The Races – (Five Thirty Eight)

Guns, Pot and Taxes: A 2014 State Ballot Guide – (Bloomberg)

The Scary Commodities this Halloween

Halloween is here once more, and everyone around the office is gearing up: carving pumpkins, buying candy for trick or treat-ers, and last minute runs to the store for costumes. To get everyone else in the mood, we found some Halloween like similarities in the futures markets we couldn’t help but share.


Last year, it was the US Dollar/Euro Currency Battle Signal that got us excited for Halloween (Who doesn’t love bat man?)… and now that Bat Signal has transformed into one of the most feared villains in the galaxy… Jabba the Hutt, of course.

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


A couple weeks ago we went in depth about the US Dollar having its best quarter in years , and how Managed Futures has historically benefited from it (past performance is not necessarily indicative of future results), but what else is out there on Halloween Eve?

Scary Vs:

We’re talking a shock to the system…. That Damned V Reversal. Here’s Why you should be Afraid of the V-Shaped Reversal

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

V for Vendetta


Everyone needs their fill of snickers, Milky Way, 3 musketeers on Halloween. But where that chocolate comes from has but the market in limbo the past couple of weeks. It appears, the Cocoa market decided to get nice and scary (volatile) just in time for the ghosts and goblins to come out. That’s just your basic up move of around 12% and -13.5% fall in about a month and a half… nothing to see here, move along.

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

Sugar: Super Scary

For those that don’t like Chocolate (see here), there’s the laffy taffies, the warheads, the sour patch kids… basically… Sugar…. And lots of it. The market jumped out it’s mountain trend to start the year and has been choppy ever since.

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

We don’t expect sugar prices to go up anytime soon just because of Halloween, but recent studies show that the brain has the same reaction of cocaine as to sugar, suggesting that there might never be low demand.

Sugar Cocaine


That’s enough to maybe sway one of two people to be long sugar for the couple of the next couple years (or maybe short depending if the government calls for harsher restrictions).

We’ll leave that explanation to the journalists who make you really step back and think about it.  Here’s John Oliver from  Last Week Tonight doing his best to explain Sugar.  Have a happy Halloween, and don’t have too much sugar.