108 Tools to Grow your CTA Business

It’s that time of year again for Alternative Investment folks to storm Chicago for two different conferences, NIBA and the CTA Expo, with emerging and seasoned managers alike speaking, networking, and cocktailing in between sessions on Liquid Alts, compliance, and history lessons from CME founder Leo Melamed.

A little over a year ago, we came out with a piece entitled, “So You want to be a CTA?” explaining the ins and outs, and steps needed before making a real go at it. But where’s the list of software, lawyers, accountants, and what not – that CTAs use and rely on to make their business go?

Without further ado – our list of 108 or so commodity trading advisor resources:

(Note, firms are listed alphabetically in each category, and we’ve used their own descriptions, edited to remove the ‘we’re the best’ language… and – we can’t take full credit for aggregating all of these, The CTA Expo service provider directory gave us a great start).

 

 

Kick Ass consultant, broker, marketer, lead source, pool operator, AUM Grower

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Alternative Links: Podcast Edition

We’ve now made it a little easier for anyone who ever wanted a pocket sized Jeff Eizenberg (one of the partners at Attain), who sat down to do one of the CME’s Managed Futures Podcasts (which is a great resource by the way). The topic was “Strategy and Market Diversity in the Managed Futures Industry.” If you don’t want to listen to the 15 minute podcast right now, you can download it for free on iTunes and listen to it later. Without further ado…

Strategy:

“I think Managed Futures is truly one of the more unique asset classes out there.”
– Jeff Eizenberg

Strategy and Market Diversity in the Managed Futures Industry – (CME Managed Futures Podcast)

2 Great Ways to Invest in Commodities (Doesn’t like or dislike managed futures) – (Eric Mancini)

Alternative Investments: A 2-minute Introduction Video – (William Blair)

Performance:

CTAs bounce back to positive performance in August – (Monovisione)

Regulation:

CFTC Said to Alert Justice Department of Criminal Rate Rigging – (Bloomberg)

Industry:

Why CME, CBOE are on a weight-loss plan – (Crains Chicago)

Weekend Reads

Just for Fun:

  • Can This Clever Statistical Model Predict Olympic Medal Winners? —  (Fast Co. Design)
  • Photographic Proof That Sochi Is A Godforsaken Hellscape Right Now – (Buzzfeed)
  • Hijacker Tried to Divert Plane to Sochi – (NBC News)
  • Tennessee Governor Urges 2 Free Years of Community College and Technical School – (NYT)
  • Half of the nation’s uninsured live in just 116 counties – (The Big Picture)

 

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.

Futures Market Winners/Losers of 2013

With a scant few hours until the ball drops in Times Square – the quote machines have gone silent, meaning we can wrap a nice bow on 2013 market performance and see where the chips fell. All those who had the 3x Long Nikkei, 3x Short Corn trade on in 2013 raise your hands, you’re on your way to induction in the trading hall of fame (or running the next hot ETF). Per our preferred quote site, Finviz.com, we find the following 2013 performance stats for futures markets

[Please note – Finviz does some weird things around contract rolls, which can make their percentage gains over longer periods different than what would be found using a continuous contract or the cash/spot market, nonetheless, we feel it is representative of each market’s 2013 movements]:

Finviz Commodity ExposureChart Courtesy: Finviz.com
(Disclaimer: Past performance is not necessarily indicative of future results)

Some of the highlights as we see them:

  • It was a roughly 50/50 split between up and down markets this year (20 of 39 [51%] up), compared with 80% in 2012, 40% in 2011 and 85% in 2010
  • The top 5 spots were all held by stock index futures, with the DJIA, S&P, Nasdaq, and Nikkei all posting over 26% gains.
  • Corn was slaughtered, down nearly -40% to capture the worst performer title
  • Supposed safe havens Gold and Silver were both down more than 28%, finishing the year near 3 year lows
  • Only 3 non stock index markets were up more than 15% (Orange Juice, Cocoa, and Natural Gas)
  • 8 markets were down more than -15% (Sugar, Yen, Soy Oil, Wheat, Coffee, Gold, Silver, and Corn)
  • Gold, Silver, Platinum, Corn, Soy Oil, Wheat, Yen, 30yr Bonds, 10yr Notes, and the Canadian and Aussie Dollars all finished the year near their lows
  • Stock Indices, Cattle, Euro, Swiss, and British Pound finished the year near their highs
  • For all the Taper, QE, money printing, rising interest rates, etc. talk, the US Dollar was essentially flat for the year

What will 2014 bring?  A crash in the US Dollar as the US fails to get its financial house in order?  A sharp rebound in grain prices?  Another losing year for gold? The much expected sell off in US treasuries? None of the above?

Luckily, managed futures investors don’t need to know the answers to those questions in order to have a successful 2014. The managers don’t even need to know the answers, they just need to be able to identify and capture any such moves when they happen (no small task, to be sure; as we’ve seen in recent years….but more than a few will be up to the task).

 

Managed Futures 2013 Strategy Review

 

Happy New Year to all of you from Attain. Like most, the end of the year allows us to reflect on the events and experiences that took place. There’s no denying it was, shall we say, a unique year for Managed Futures. After 3 out 4 years of negative returns coming into 2013, it appeared as though change was in the air early in the year as CTA’s collectively recorded four straight months of positive performance. Managed Futures was flexing that non-correlated muscle, as stocks continued to climb. Then it was as if something just stopped. The Managed Futures Indices and many of the individual programs we track followed the good start to the year with five months of choppy, inconsistent, and a negative performance.

 

Tack a particular media outlet’s war against the asset class and the end of a 30 year tail wind in interest rates onto the choppy conditions in the last half of the year and it felt like a terrible year for managed futures. But even after the streaky performance and negative press, Managed Futures as an asset class was sitting up 0.53% for the year coming into the last two days of trading according to Newedge. {Disclaimer: Past performance is not necessarily indicative of future results}.  Not a banner year, but not exactly the death knell many would have you believe.

 

In our annual end of year tradition, we take a moment to dig a little deeper into the overall asset class performance number and give some color on the different types of strategies which make up the managed futures asset class (no… it isn’t all trend following), and what caused the strategies to perform the way they did. Without further ado, our 2013 Managed Futures Strategy Reviews.

 

 

Question: Can CTA’s with $1 Billion AUM Trade Grains?

One of the many exhilarating experiences about our daily blog writing is the ability to receive feedback from our dedicated readers, which in turn prompts more discussions and questions about the managed futures industry. The latest question asked is, “Do CTA’s with AUM’s over $1 Billion have the ability to trade grain markets?” The simple answer is yes, but the long answer; most of them don’t.

First, on an elementary level, you won’t find anything on the CME website detailing a restriction on managers exceeding an arbitrary assets under management, from entering into a position into any market, nevertheless any of the grain markets. That’s not to say the question is entirely off; the root of the question, and in our opinion, the far more intriguing factor is not that they can’t but that they mostly don’t.

1. Sheer Size

The answer as to why a billion dollar manager doesn’t invest in grains are three and one in the same. From a macro level, it’s simply that CTA’s are charged with generating the best possible risk adjusted returns as possible for clients; in other words they go where they can get the most bang for the buck. We love soybeans, Corn, and Wheat just as much as the next futures enthusiast, but with the massive amount of funds flowing into various futures markets, the grains probably wouldn’t make enough impact on their strategy compared to say a stock futures market or interest rate market. But how can that be? Can’t you enter as many trades as you want, as long you have the money to back it up? Not quite.

2. Position Limits

Position limits stop this from happening. The idea is so no one person has too much control over one individual market. Take corn for instance, the CME (formerly CBOT) dictates that no person shall have more than 600 corn positions (or 33,000 futures-equivalent contracts) at any given time. If you’re doing the math at home, yes that in fact does equate to 3 million bushels of Corn (5,000 bushels per contract). This means managers can have  12.54 Million in exposure ($50 per point * 418 = 20,900 * 600 contracts).  How can that not be enough? Let’s compare to the S&P 500.. Just a couple months ago, the CME ruled to expand and raise the position limits on both the E-mini and full S&P 500 futures contracts. Say the manager maxes out their position with 140,000 E-Minis * $50 per point *1806 = 12 Billion in exposure. At an average move of 9.63 points per day in the S&P 500 futures prices over the past 50 days, a maxed out position limit trader would stand to make/lose around 67.4 million per day.

3. Volume / Liquidity

Now we return to not controlling too much of one market. These positions reduce the possibility of liquidity size, and therefore reduce managers of that stature from investing in such a market, because it might not be advantageous to hold such a large investment in an illiquid market. It’s not so much that Corn is an illiquid market; it’s that it appears to be less liquid when comparing it to the E-mini-S&P 500. For instance, the Volume of Dec Corn today is 107,000 contracts, compared to the Emini, where we’ll typically see volumes between 2 and 3 million contracts a day.

This is where “slippage” becomes a concern. In trading vernacular slippage is the difference between the traders (or system’s) desired market entry/exit price and where the trade was actually successfully executed.  Slippage is a cost of trading (along with commissions and fees) that ultimately detracts from a strategies profit potential..and as a program grows it can become much more difficult to execute effectively in commodity markets. This is why large CTA’s tend to overweight their portfolio exposure to stock index, fixed income, and currency sectors where the equivalent of billions to trillions of dollars exchange hands each day and slippage can be kept to a minimum.

Now we can hear the cries, what about diversification?  Aren’t CTA’s supposed to be trading hundreds of markets worldwide?  This is where the largest CTAs have become a victim of their own success so to speak.. as assets roll in the door it becomes much harder to trade in the same manner that one would have with $10 million, 100 million, $500 million, etc. In other words if you’re seeking true managed futures exposure, the biggest program might not necessarily be the best.