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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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

Under the Hood: Wisdom Tree’s Managed Futures ETF

You got to hand it to the marketing folks over at Wisdom Tree…. No sooner had the ink dried on Managed Futures good 3rd quarter and the Dow hit new 8 month lows this week than we started to see Wisdom Tree advertising their Managed Futures ETF ($WDTI) on CNBC. Marketing 101 = strike while the iron’s hot.

But how much “managed futures” exposure are you really getting with this product. We’ve looked under the hood of WDTI before, back when it launched in 2011, and thought it was high time to meet their managed futures marketing blitzkrieg during this stock market correction with some data and information on how well this product does what it purports to do (track managed futures).

 

  1. WDTI is a replication strategy

WDTI doesn’t track a managed futures index made up for actual managed futures managers providing alpha for their clients and managing real money. WDTI tracks something called the Diversified Trend Indicator (DTI), created by Victor Sperandeo, aka “Trader Vic”. The DTI tracks 24 markets (50% financials, 50% commodities) on a monthly basis and is designed to reflect rising and falling price trends in those markets. That is somewhat similar to the models used by systematic multi-market managed futures programs, but not completely similar. It is an attempt to capture the bulk of what they do at a lower price point, without the sophistication around the edges.

 

  1.  WDTI hasn’t replicated Managed Futures very well

So how has the WDTI done in replicating managed futures exposure… not great. Since its launch, it’s trailed the managed futures index (which we would think should be its benchmark) by 1,117 basis points (11.17%).  And what about a real program, not just the index. It’s trailed Covenant Capital’s Aggressive program, the same model used by our Trend Following Fund by 2,588 basis points (25.88%) since it was launched. And that’s after Covenant’s 2 & 20 fees. Past Performance is not necessarily indicative of future results.

1 3 Total Chart

Table of Comparisons
(Disclaimer: past performance is not necessarily indicative of future results)
Data points: 1/11 – 9/14

  1. DTI underperforms Managed Futures in market crisis periods

While the ETF itself only goes back to 2007, the DTI goes back quite a bit further, allowing us to be able to see just how the indicator has done in past crisis periods. You can see it has underperformed the managed futures index in past crisis periods.

DTI vs Managed Futures Crisis Period(Disclaimer: past performance is not necessarily indicative of future results)

  1.  DTI is becoming less and less correlated with Managed Futures

Notice the interesting pattern below, where the DTI has become less and less correlated with the managed futures index over the years. Why?  Because one of them (managed futures) is the results of actual managers continuously doing research and improving their models. And one is a single indicator designed years ago.

34 month correlation(Disclaimer: past performance is not necessarily indicative of future results)

  1. 25% of the portfolio is in just 2 markets 

With 13% of the portfolio tracking Euro currency futures and 12% tracking Japanese Yen futures, a full quarter of the portfolio is in just two markets. Watch out if those two are in an extended sideways period without trends.

 

  1.  WDTI doesn’t go short energy…

We just don’t get this one. Why the arbitrary rule just for one sector of the portfolio. They say it is to protect against the risk of ruin, as energy markets can spike on geo political events. But at the same time they allow short trades in Natural Gas &*^%.  And have you seen the volatility in Cocoa, or Copper, or Coffee – talk about price spikes.

 

  1.  There are no intra-month position adjustments

We don’t quite get this one either. What if a trend starts, or ends, during the middle of a month? Guess you get in or out late. This surely cuts down on Transactional costs and keeps things simple, but we’re sure it cuts down on performance also.

 

  1.  WDTI is Average, by design

At the end of the day, Wisdom Tree looks to have decided to try and replicate the beta of managed futures via an imperfect proxy, the DTI. What will that look like moving forward? The “average” performance of the managed futures index? Something less? Something more?  ‘Average’ looks less and less likely as the indicator continues to diverge from the live managers doing trend following strategies, with ‘less’ possible if there are no trends in the euro and yen while a short trend in energy, and a ‘more’ scenario dependent on trends in that concentrated currency exposure and hopes of an uptrend in energy.

A Big List of Alternative Investment Folks on Twitter

Looks like this is sort of a thing now… saying here’s a list of 10, 50, 106 “must follows” on twitter, just as we’ve seen with Business Insider’s “106 Finance People You Have to Follow on Twitter”, BrightScope’s “25 Most Socially Influential Advisors”, and so forth.

twitter-logo (1)But there doesn’t seem to be a list we could find of alternative investment folks, and specifically those focused on commodities, managed futures, and global macro strategies. The more we dug into why that is… the more we found a big hole where all of the people in the alternative investment space should be… There just aren’t that many of the 1000s of commodity trading advisors out there sharing their views on twitter.

 

Come on guys… it’s 2014!!  Time to join the party and show the world just how smart, funny, sarcastic, and charismatic us futures folk can be.  Twitter isn’t about telling the world what you had for lunch like we all feared back in 2010. It’s the modern day business card. It’s a 24/7 virtual conference where you’re simultaneously talking with hundreds if not thousands of people – it’s the new frontier where wit wins! So go on over and sign up and start making us smarter… or at least making us laugh.

In the meantime, here’s our compilation of people and firms currently out there on twitter (in no particular order, despite the numbering)  providing the latest insight, humor, debate, and news on investments – especially the alternative kind:

  1. @AttainCapital – of course… it’s our list!

Managers

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Managed Futures February Performance: Some Programs Shine, Indices Stagnant

February was a bit of an odd month, as several of the programs we track at Attain saw pretty good months, while the main benchmark indices were roughly flat – perhaps showing the small managers doing better than the big ones included in the indices? The benchmarks looked like this:

Updated feb managed futures(Disclaimer: Past performance is not necessarily indicative of future results)

Even though the Newedge CTA Index had the highest performance of the four at 0.61% in February, the index only reported one daily performance above/below 1%. For the month, the average of the four ended with a +0.11%, but it wasn’t enough to pull the indices performance out of the red YTD {Past performance is not necessarily indicative of future results}.

New trends developed towards the end of January, but quickly reversed to begin February, making some markets look like the damned V-shape reversal we love to hate. But not all trends experienced a quick reversal… Coffee continues to be the roasting commodity of the year thus far, up 71% already this year (our commentary here, and here), while Oats, and Lean Hogs are both at all time highs.

It’s trends like these that caused a wide dispersion in results in February – with some of the programs we track with less than $1B AUM seeing much better results than the indices show:  with our internal estimates for February showing Brandywine Symphony +5.70%, Clarke Worldwide +5.50%, Quantum Leap Capital +4.90%, Covenant Capital 4.50%, Neural Capital Sentinel +3.72%, Tanyard Creek +3.50% and Sona Trading +2.70% all putting together impressive months {past performance is not necessarily indicative of future results, above are estimates}. It should be noted that five of these programs are still battling to recover from drawdowns and we typically don’t like cherry picking one good month out of 3 years of struggles for managed futures, but it is still nice to see at least one month of good performance.

Of course, it wasn’t all roses – with a little less than half of the programs we track showing losses per our internal estimates in February.  Discretionary agriculture traders were amongst the hardest hit, with our internal estimates showing Typhon Plutus Grain -4.30%, Rosetta Capital Rosetta Program -6.00%, and Typhon Tauros Livestock -8.35% finishing in the red.

DISCLAIMER: The specific program estimates mentioned above are calculated using the liquidating value of a single client at Attain trading the listed program, and are believed to be representative of all similar clients invested in the program.  A 20% incentive fee and 2% annual management fee are deducted from all profitable months, regardless of whether the program is at a new equity high.  These numbers may vary from the actual performance numbers presented by the CTA upon completing their accounting for the month gone by, and should not be considered apart from the performance numbers listed in the disclosure document for the program listed.

 

Chart of the Week: Coffee Cuing Up an Up Trend?

Move over Natural Gas… the latest commodity that is perking up (pun intended) is everyone’s favorite morning nectar, Coffee.  The $7 Billion dollar market is up almost 30% YTD, and was up 8 consecutive days before some profit taking today {past performance is not necessarily indicative of future results}.

Coffee one(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz

First in understanding the Coffee market, there are two important distinctions… Robusta Coffee (the dominant market traded at the NYSE Euronext) and Arabica Coffee (traded at ICE). [the finviz chart above shows the Robusta futures]. But it’s not just where they are traded, there’s also a difference of where they’re grown. Robusta Coffee is grown at low altitudes (mainly Asia), while Arabica typically comes from South American countries and is grown at higher altitudes (Colombia, Brazil), laid out nicely in this handy infographic:

Coffee infographicInfographic Courtesy: The Pilot’s Blog

And for you coffee snobs out there, there’s a difference between the taste, at least according to The Pilot’s Blog:

“Robusta has a neutral to harsh taste range and is often likened to having an “oatmeal-like” taste. When unroasted, the smell of Robusta beans is described as raw-peanutty.

Arabicas, on the other hand, have a very wide taste range (depending on its varietal). The range differs from sweet-soft to sharp-tangy. When unroasted, Arabica beans smell like blueberries. Their roasted smell is described as perfumey with notes of fruit and sugar tones.”

Both contracts are up big this year, but for different reasons. Bloomberg states that in Vietnam (the leading Robusta producer), farmers have stopped trading to celebrate their new year. Arabica coffee is a different story. Central and South America have been struggling with a crop disease called, “leaf rust,” while Brazil deals with a drought that is hurting supply, via the Wall Street Journal.

Wall Street Journal CoffeeGraphic Courtesy: The Wall Street Journal

“It was the hottest January on record for parts of southern and southeastern Brazil, Somar Meteorologia in São Paulo said. Rain isn’t likely to fall in Minas Gerais state, which produced about 72% of Brazil’s coffee last year, until mid-February, said Patricia Vieira, a meteorological technician at Somar Meteorologia. The arabica-coffee harvest will begin in late April or early May.

Conab, the government crop agency, expects this year’s coffee crop to range between 46.5 million and 50.2 million bags, based on estimates released in early January. Others have given different estimates, and some analysts say it is too soon to known by how much the lack of rain will reduce the size of the crop.

Some forecasters had predicted Brazil’s harvest would be as high as 60 million bags. Bags are the standard measure of volume and on average weigh about 60 kilograms each. One bag of coffee yields 7,500 shots of espresso. “This changes the bag-count idea,” said Sterling Smith, a futures specialist at Citigroup in Chicago. “If the dryness persists, the 60 [million-bag estimate] is obviously off the table.”

Whatever the reason, this move higher might be little more than a dead cat bounce with coffee coming off a huge down trend over the past year, especially if prices are rising only because of the Vietnamese New Year (does anyone really believe that??). A few CTAs we monitor (Covenant Aggressive, Brandywine Symphony, and Sona Trading)  have nibbled at this trade, however, hoping all that space to the upside becomes a nice ‘robust’ (pun intended) up trend.

Big Picture Coffee

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

P.S. – If you’re looking to play an uptrend in Coffee like StockTwits founder Howard Lindzon, beware the ETF cleverly named JO. These futures tracking ETFs have to pay what’s called a roll yield, which has caused them to severely underperform the markets they are designed to follow.

Chart of the Week: Sugar’s Textbook Downtrend

With metals, energies, stock indices, and grains representing the majority of the trading in the futures space, sometimes the Soft markets get, well…  ignored. Our last look at the softs markets was when sugar was showing a certain mountain type shape, not knowing where it would go from there.

But since then, Sugar has continued its slope, down 24% since October with 50 out of the past 70 days down, and now at its lowest point since 2010 (although up a little today) {disclaimer: past performance is not necessarily indicative of future results}.

Sugar(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Source: Finviz.com

The reasons for the down move aren’t that people are no longer asking for sugar in their coffee or switching to Splenda (what happened to the War on Sugar), but that the big three sugar producers: Brazil, Thailand, and India are expected to outpace demand by 4.7 metric tons come September. That’s led to a lot of people piling in on the short side of this trade, as evidenced by the CFTC commitment of traders data via the Wall Street Journal.

“Money managers have been increasing their bets that raw-sugar prices would continue to fall. In the week ended Jan. 21, those bets outweighed wagers that prices would rise by the largest margin since July, according to the latest data from the Commodity Futures Trading Commission.”

But is there more than just supply and demand at work here? After all, back in October, one of Brazil’s largest sugar companies lost 180,000 tons of sugar in a fire (10% of Brazil’s export in a month), and the markets didn’t even flinch. So, how is it that a majority of traders in the sugar market are short positions? Yes, 4.7 tons is quite a bit more sugar than expected, but is there another factor at play?

Well, it just so happens that Brazil produces 25% of global production and 50 percent of world exports, and their economy (currency) is in a bit of a tight spot, after the fed’s decision to taper.

“Weakening currencies in Brazil and other large sugar producers also are expected to encourage exports, which could add to already robust supplies, said Michael McDougall, a senior vice president at brokerage Newedge.

When currencies in sugar-exporting countries weaken against the U.S. dollar, producers there often choose to export their crop because they would receive more of their local currency back for product sold abroad in dollars.”

A quick peek at the MSCI Emerging markets currency index shows a pretty similar down trend to Sugar, making the Sugar trade a sort of synthetic emerging markets short trade for all those who were complaining their managers weren’t short the Turkish Lira or Argentine Peso (those are so thinly traded, not many managers play in that space).

MSCI Emerging Currency Index(Disclaimer: past performance is not necessarily indicative of future results)
Source: MSCI

So, combine a lot of global supply with Brazilian Sugar farmers more willing to sell their Sugar for Dollars than their falling currency, and you have a classic down trend of your hands. Whatever the reason, it’s just the sort of trend most managed futures programs like to identify and ride out as long as they can.  And many futures traders and CTA’s alike have caught on: including Covenant Aggressive, Brandywine Symphony, Sona Trading, Auctos Global Diversified, Integrated Managed Futures, and Clarke Worldwide.

How do they do it?  Magic? Nope. Boots on the ground in Brazil analyzing the crop? No sir. They do it by tracking markets like sugar and entering into a short trade when the market breaks below its 20 day low, 200 day moving average, lower Bollinger band, and so forth. They do it by being wrong a lot when the market has a false breakout, in order to be right when the market keeps going that direction.