CNBC didn’t screw up their interview with Winton’s David Harding

If you haven’t noticed… Winton Capital’s CEO David Harding is taking the press by storm this summer. We’d like to think that our interview with Harding a little over a month ago was the start of it all. Or perhaps it was Harding receiving the Managed Futures Pinnacle Achievement Award. Or the simple fact that Winton is big for a hedge fund, and absolutely enormous for a managed futures manager (even though they technically don’t classify themselves as a CTA). Either way, since our interview, they’ve been featured in a Pensions & Investments article, and now… Mr. Harding’s in the one-on-one interview on CNBC found below. (Unfortunately, this isn’t CNBC’s first attempt at interviewing Harding…the first one was a train wreck).

This time around, we must say, CNBC chose the right person to interview Harding as Julia Chatterley came prepared to ask the right questions.

Here’s our takeaways:

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Even Bad Diversification Works

Last week, Business Insider unveiled the “Most Important Charts in the World.” If ever there was an outfit with a flair for the dramatic headline, that would be them…but there was one chart that caught our attention entitled, “Diversification Works.” It was from none other than Josh Brown at Ritholtz Wealth Management.

Diversification Works

(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: The Reformed Broker

Now if you asked a roomful of random investors what diversification in their portfolio meant to them, chances are all of them would have a slightly different answer. In this particular instance, Brown defines diversification as a portfolio including a 30% allocation to the S&P 500, 30% to foreign stocks, and 40% to bonds. We’ll give you the bonds, but pairing foreign stocks with US stocks doesn’t strike us as all that diversified.  Foreign stocks (MSCI ex US) have a correlation of 0.89 with US stocks over the past 10 years, for example.

And being managed futures folks, we couldn’t help but look at their chart and wonder… what if you had managed futures in the foreign stocks slot instead? Would diversification have “worked” then?

Here’s our chart swapping the 30% foreign stocks allocation with 30% managed futures, per the Newedge CTA Index.

Diversified with Managed Futures

(Disclaimer: Past performance is not necessarily indicative of future results)
(Diversified = 40% Barclays Bond Aggregate Index, 30%  Newedge CTA Index, and 30% SPY)

While Brown was bragging of the diversified portfolio regaining its peak 14 months before a stock-only portfolio, the portfolio containing managed futures regained its peak 35 months prior, or more than twice as fast!  How? Because 30% of the portfolio was positive during the 2008 crisis as managed futures became negatively correlated to stocks during the crisis.  Now that’s some diversification.

Some may concentrate on the far right hand side of both of these charts, where the stock-only portfolio has, after 7 years, eclipsed the total return of the diversified portfolio (whether diversified in other stocks or managed futures), and discount diversification as unimportant or even costly. You would have made more money not being diversified, but that’s not the point for those who want some protection.

The point, as Josh Brown points out, is to have shorter drawdowns. The point is to be able to regain a peak sooner. The point is to be able to not panic at the bottom.  And, of course, the point (for us) is that diversification can “work” even better when you aren’t diversifying with another form of stock market investment (foreign stocks), and instead gaining true diversification with different return drivers.

P.S. – Past Performance is Not Necessarily Indicative of Future Results. The chart should probably be titled – Diversification Worked (past tense), not works (present tense). We noticed a comment summing that up rather nicely, and ask the simple question: Will Simple Beat Complex in the Next 5 Years?

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Attain Launches Family of Alternative Funds (

We’re happy to announce a new website over at in conjunction with the launch of our new family of alternative investment funds. The new family of Attain Funds contains five single manager funds across different alternative investment strategies: Trend Following, Short Term Trading, Relative Value, Agriculture, and Global Macro; while containing several “platform” features such as the ability to switch between funds and transparency through the daily reporting of positions.

APA Device

We designed things so that registered investment advisors and their clients can see the investments on their statements through custodians such as Fidelity, Schwab, TD Ameritrade, and more; while also making the funds available to individual investors through direct investment. Attain CEO Jeff Malec has this to say about the effort in a recent press release:

“The world of accessing privately offered alternative investment funds is pretty backwards. Most platforms have a supermarket-like selection of big brand name funds, but nobody in the store to help you browse the aisles.  Attain wants to flip that on its head and offer a smaller selection of high quality, ‘right-sized’ programs we believe will have long term success; with focused education and research to help advisors avoid spending 90% of their time on a space that’s 10% of their assets.”

Who are the managers? Attain Portfolio Advisors, a registered Commodity Pool Operator and wholly owned subsidiary of Attain Capital Management is the manager of each of the funds, with separate commodity trading advisors performing the trading advisor role to direct the actual buys and sells for the fund’s account. The selection of the sub advisors was focused on small to midsize managers with a healthy dose of commodity exposure, based on our belief that the largest managed futures managers have underperformed of late based in part on their overexposure to financial markets. And focused on managers the team at Attain has watched for years, tracking the day by day trading for individual clients of the managers in what we call our ‘real-time due diligence’ process.

Finally – all of the funds are JOBS Act registered, in a move partly so we can “advertise” them, and partly so we could see what that experience will be like and report back to readers of the blog.  The JOBS Act registration means they’re available to accredited investors only.

Click here to get monthly performance and research updates on the family of funds, and thanks to all those who have supported our efforts to launch this new side of Attain’s business.

Alternative Links: Survey Time


The Wall Street Journal explains the rolling of a contract – (Wall Street Journal)

Trend Following Strategies In Today’s Markets – (The Independent Singapore)

A Lesson in Commodities: Backwardation & Contango – (Bluenose Capital)

Mike Harris Interview with Michael Covel on Trend Following Radio – (Michael Covel)


Red Rocks Private Equity (GLPE) Index 5 year performance – (Hispanic Business)


Preqin Q2 Update – (Preqin)

3 Surprising Findings from Morningstar’s Alternatives Survey – (MorningStar)

Majority of alt investment managers unprepared for AIFMD, says Alceda – (HedgeWeek)

Futures and Miscellaneous:

CME/Thomson Reuters to Run Replacement for Silver Fixing – (Bloomberg)

Rise of the Robo Advisors?

The Economist CoverForgive us for stealing from the cover of the Economist, but given the topic it seems fitting. Ever since the major technological advancements of the 20th century, there’s been a growing fear that soon enough robots will control the world (cue the Terminator franchise). Fast forward to today, and this fear has creeped into the financial advisor space of all places, with articles using  words and phrases like “afraid” & “risk irrelevancy” to display the attitudes and dangers all advisors face if they don’t adapt to the shifting mentality when it comes to investing. What are we talking about? And what is a robo-advisor anyway?  Why are people supposedly fearing it?

Who are the Robo-Advisors?

Just like Amazon ($AMZN) ruined Borders and the local bookstores, Netflix ($NFLX) killed Blockbuster, Facebook ($FB)  killed talking to your friends, and Tesla ($TSLA) is trying to disrupt the big auto-makers; the whole idea behind Robo-Advisors is to disrupt the financial advisor space with new technology and lower costs:  mainly algorithms instead of advisors; websites instead of branch offices, and automated text messages instead of hour long meetings. A few leaders have emerged so far in the space, with names like Betterment, Wealthfront, and FutureAdvisor, and a quick view of their websites will show essentially the same message:  ditch your father’s golfing buddy and invest like it’s the 21st century, with easy, intuitive tools to set things up and automated processes after that so you don’t have to worry about it. 

Why is Everyone Talking about them Now?

It’s the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel. And it’s gone beyond the idea stage to real money. Wealthfront launched in December of 2011 and in those 30 months, they have since grown to $1 Billion in AUM, which is roughly an average growth of 33.3m a month. Betterment is doing well too, with $502 mm in assets under management. As for FutureAdvisor, they now have over $118mm AUM, with only 18 employees.  And the Venture Capital folks are falling all over each other to get in on the game wondering if this is the next Twitter or Facebook or whatever, pumping over a quarter of a billion into the space, and $95 million in just a few weeks earlier this year.

Bo Lu, the CEO of Future Advisor had this to say about the size of the opportunity

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Why do Investors Love Large Hedge Funds?

It’s the always present question mid-size and start-up funds ask themselves day in and day out. Why do investors keep plowing money into the largest of the large hedge funds when the statistics have shown time and again that those large hedge funds tend to underperform their smaller counterparts. Alternatives research and analysis firm Preqin tackles the question with some hard data in their most recent piece: “What are Investors Looking For?”, showing that the small and mid-size hedge funds outperformed the largest funds by about 1.7% in 2013:

Preqin 2013 AUM performance(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Preqin

One answer to the large versus medium/small debate given by some institutional investors we’ve talked to, highlights the deviation in returns, not the returns themselves,  as the reason to choose a ‘brand name’ Billion Dollar+ hedge fund over a smaller upstart which may provide better performance. The logic is that while they may perform a little worse in terms of return – their worst case scenario is a lot less when choosing Goliath over David.  This is the same reason we reach for the Kraft Macaroni and Cheese versus the generic brand, why all else being equal we go with American Airlines instead of Spirit, and so forth. It’s not all about saving money (or making more of it in case of hedge funds), it’s about having a sense of comfort as well.

But how much of this type of “comfort” are the biggest hedge funds really delivering?  To dive deeper, we took a look at Preqin’s details on how the hedge fund performance in these different size groups was dispersed.

“Fig. 2 shows performance over 2013 according to the 25th percentile, median and 75th percentile values among each of the fund size categories, and the data shows that the top three-quarters of all fund groups achieved positive returns in 2013.”

Performance by Percentile(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Preqin

The invest with a behemoth logic would have us believe the dispersion of the small and medium size funds would be many times that of the large funds in order to make up for the underperformance of the behemoths, and that the so-called worst case scenario of the small and medium size funds would be much worse than the billion dollar big boys. But the stats show quite a different story (at least in 2013…), with the 25th percentile return for the big boys (the worst case) actually less than the 25th percentile average return for the small and medium-sized funds (the startup funds came in a distant fourth).

And what about that comfort level, the dispersion in the large hedge funds returns was indeed less, but not drastically so. Consider medium ($500-999mm) versus large funds ($1b+), where the medium had returns 1.13 times the large, yet a deviation less than that (just 1.06 times as large as the large), and a worst case scenario 1.38 times better. Now, one year doesn’t tell the whole story, and the data for the smallest hedge funds (under $100mm) support the comfort argument with higher deviation and a worse worst case scenario – but don’t throw the proverbial baby out with the bath water by lumping in small and medium-sized hedge funds with the startups. The small and medium-sized provided better returns, with similar comfort in 2013.

Hudge Fund AUM Deviation(Disclaimer: Past performance is not necessarily indicative of future results)

PS – Preqin’s numbers got us thinking… and we’re working on a similar performance/deviation report for just the managed futures portion of the hedge fund space, look for it next week.


Is it time to Google “Alternative Investments?”

We’re not big into analyzing the stock market. It’s not our thing, and there’s little evidence the people whose thing it actually  is are any good at it. However,  a +30% return by the S&P 500 last year is hard to ignore, and there’s been a collective focus among investors and those in the financial industry alike to answer the question most all of us are unable to accurately predict: Where will the stock market go from here? Is a market correction in the works, or are we going to be seeing “All Time Highs” on CNBC each week for the coming months?

Enter the week after MLK weekend (which has a history for falls in the markets), and the question has never been more relevant, with sell offs in emerging markets spilling over into the US Stock rally machine – with the S&P 500 dropping 2.6% percent (hardly a crash, but after the near perfect up trend in 2013, enough to scare quite a few people) while the Dow dropped an even worse 3.5% last week (and more losses today in a back and forth session). So are the bears right? Is this the start of a new down turn in the markets like we saw in 2009? Or is this just a normal pullback… the market taking a proverbial ‘breather’.

Which leads us to our title question…is it time to start thinking about protecting your portfolio a bit? Is it time to scale back some on stocks and consider some alternatives? Is it time to Google ‘Alternative Investments’ ?

There were likely more than a few people searching Google for “Alternative Investment Opportunities”  with the Dow down over 600 points in a few days.

But just what are they looking for, exactly?  Something which isn’t going down..that day?  Something which can make money if there is an extended down move? Something which has different return drivers than the stock market – thus don’t rely on stocks going up or down for their own performance? Hedge Funds? Commodities? Real Estate? Put option protection? Inverse ETFs? Gold coins? Diamonds? Art? Classic Cars? Wine?

Turns out the term ‘alternative investments’ is rather broad, with many so called alternatives (gold coins, wine) not things you’re going to see covered on the Chartered Alternative Investment Analyst Curriculum  or in the lineup of Alternative ETFs at a shop like ProShares.  Indeed, a Russel Investments survey found there are really just four types of ‘alternative investments’ as considered by institutional investors (source: CAIA).

What is an Alternative Investment

Now, these four types of investment may be considered “alternative” by many, but it seems they are labeled as such not because they zig when the stock markets zag; but more so because they just aren’t all that common in the typical investor portfolio. The numbers show us many hedge fund strategies and private equity, in particular, have a lot more stock market exposure than one would think with the moniker ‘alternative investment’.

Real Assets:

Now, real assets include mostly real estate, plus some land and infrastructure plays like timber or farmland. And real estate is definitely different than the stock market and squarely in the alternative investment camp – but unlike some other types of alternatives, real estate is pretty closely tied to how the global economy is performing (turns out people need money to buy houses and keep paying their mortgages and stuff, and that the money comes from their jobs, which are sort of tied to how well companies are doing, which is sort of tied to how company’s future prospects are, which is what their stock price is based on.. in part). Yep – real estate is alternative right up until it isn’t – at which point it is highly correlated with the stock market (see 2008).


Commodity markets sure seem like a slam dunk, no brainer alternative investment. After all, what does Soybean Oil have to do with Microsoft’s earnings and stock price? And most of the time, commodities are definitely an alternative investment doing things much differently than the stock and bond markets. Corn, Cattle, Natural Gas and Crude Oil all respond to price drivers such as: crop reports, weather (winter storms), international relations with the Middle East, and the basic economics of supply and demand.  But upon closer inspection – the stock market is somewhat infested with commodity based companies: the ExxonMobils,  Alcoas, ADMs, Monsantos of the world, and slew of other companies dependent on the farming and mining of commodities (Caterpillar, John Deere, etc). This blurring of lines between commodities and commodity companies causes some higher than normal correlation between commodities and traditional investments – especially if you are overweight in the energy or mining sector; but the real danger is something much simpler. The real danger to commodities as an alternative investment is the simple fact that we use more of these commodities in the boom times than we do in recessions. This became known as the risk on/risk off trade in 2008 and 2009 – when Crude Oil, Copper, Corn, and other commodities sold off right along with stocks; and then started to rise right along with them when the global economy saw signs of life. Commodities were decidedly not an alternative investment during the last crisis because of their tie in with the global economy.

Private Equity:

Private Equity is a bit of a hybrid. On the one hand, it is a bit of an odd investment to call ‘alternative’ – with equity right there in the name (semi joking). It’s investment strategy is to gain shares (equity) in privately held companies via outright purchases, debt deals, financing, and more; looking to off-load those shares to someone at a higher price at a later time, which sure sounds like the same model as the stock market. On the other hand, private equity is usually investing in private companies, not publicly traded – and may be in at the very beginning and able to capitalize on the rapid growth of a company in its early stages (which can decidedly be outside of whatever the general market is doing). The excellent book ‘The Invisible Hands’ by Steven Drobney does a good job of explaining the return driver for Private Equity – which he believes is an illiquidity premium, but we’ll sum up private equity with the words of tweeter extraordinaire Josh Brown:

Josh Brown Twitter

Hedge Funds:

And then there are the many layers of hedge fund categories which are marketed as alternative investments but which in actuality are just more sophisticated (or complex, or both) ways to access the return stream of private and public companies around the world (i.e. the same thing which drives the stock market).  In addition, many hedge funds rely on access to the credit markets to amplify their returns or even as part of their overall investment strategy, meaning any stock market decline caused by tightening credit markets is going to cause problems at the hedge funds as well.  All of these factors combined to leave nearly all hedge fund strategies, be it long/short equity or merger arbitrage or event driven, down in 2008 when the stock market crashed. Now, they still did better than the equity markets themselves… which makes them a better investment for your stock market exposure in our opinion – but nonetheless still gives you stock market exposure, the good and the bad.

Hedge Funds Table(Disclaimer: Past performance is not necessarily indicative of future results)
Source:  Market Folly

Managed Futures:

Which leads us to our favorite alternative investment,  an investment that wasn’t part of the “Major Alternative Asset Categories” per the Russel Investments survey mentioned earlier, as it is often considered at different times part of the commodities and/or hedge fund category. (which coincidentally are currently out of favor after the big 5 year up move in stocks).  We’re talking Managed Futures and their hedge fund cousin global macro hedge funds, of course.  These types of alternative investments actually do what one would expect out of an alternative – something different. You can see the 2008 performance in the table above and performance in many different crisis periods in the chart below.

But more important to us than how they have done in past market crisis periods, is why they did so – and that why comes back to a) What they Trade, b) How they Trade it, and c) When they Trade it.

For a) ‘What they Trade’:  managed futures trade futures markets on essentially all major market sectors – including commodities (grains, energy, metals, meats, softs), currencies, stock indices, and bonds – meaning they are not reliant on any one of those sectors (or a single company or sector within those sectors) to move a certain direction for their returns.

For b) ‘How they Trade it’: managed futures have the ability to go both long and short; meaning they can make just as much money from Crude Oil going from $120 to $90, as they can from Crude Oil going from $70 to $100.

And finally, for c) ‘When they Trade’: the majority of managed futures is systematic (a big different from Global Macro), meaning you aren’t relying on a single person or team of traders to identify a new trend up or down, the investment program is continuously analyzing the full portfolio of markets and entering into the trades automatically – insuring a lot of losses (such as current period) when the trends don’t materialize; but also insuring that the program is involved in the outlier trade when it does happen.

Crisis Period Performance(Disclaimer: past performance is not necessarily indicative of future results)
Managed Futures = DJCS Managed Futures Index
U.S. Stocks = S&P 500 Total Return *from Jun 1994 to June 2013

Absolute Return or Diversifier or Hedge

In the end, what type of alternative investment you’re looking for really depends on what you want it for. If you’re looking for returns, period – and not so concerned with how correlated it is to the stock market – the equity like returns of private equity or a market neutral or long/short equity hedge fund may be appealing.  If you want the returns, with no correlation to the stock market – a specialty managed futures program such as a short term program or Ag Trader or option trader may fit the bill.

But if you are looking for a portfolio diversifier or even outright hedge against your stock market exposure – then the grand majority of so called alternative investments just aren’t going to fit the bill. The grand majority, including private equity, hedge funds (most), real estate and commodities (in extreme examples) will show equity like returns during a crisis – because they are reliant on global demand, which can quickly go on strike as we saw in 2008.

You can buy put options on your stock portfolio, or exit your stock portfolio altogether to hedge against a stock decline – but those come with real costs such as premiums and more nuanced opportunity costs, the timing of selling out of stocks. And you can be in cash or bonds… but that is hardly alternative, that should already be part of a diversified portfolio.

Or you can look at managed futures as your diversifier, attempting to find a program which has the characteristics to allow for it to provide the crisis period performance when it is needed – while also having the ability to perform some in a rallying stock market in sort of a best of both worlds. An imperfect option on a market crash, but one which also allows for the ability to get paid on the hedge before it is needed – a sort of insurance policy that can pay for itself. Of course, the insurance policy could also lose before its needed and cost more than the simple put buying strategy – nobody said this was easy. It’s a tough task to be sure, but to the victors go the spoils… And you don’t have to go it alone, that’s why we’re here to help.

So as you head down whatever path Google leads you down after your fateful search on ‘Alternative Investments’, make sure you check the signposts to make sure you know what path you’re headed down. It may be marketed as an alternative path, but in fact a parallel path to the stock market journey you’re already on. And maybe you’re fine with that… Maybe that works for you. But if you’re after something truly different, something truly alternative; make sure you’re getting what your after with your ‘alternative investment’.