Is Managed Futures Secret Weapon Coming Back?

A long time ago, in a galaxy not so far away – where China was preparing for the Summer Olympics, Kosovo declared independence from Serbia, and Crude Oil was hitting levels at $140; a small band of rebels called short term interest rates were actually whole numbers (like 1%, 2%, and 3%).  That may sound like science fiction to some, but it was real. People could purchase a 1 year T-Bill for say, $97,000, and have $100,000 returned to them 12 months later; compared with the ability to purchase a 1 year T-Bill in 2014 for say, $99,875 ; and get back that $100,000 12 months later.

Fast forward to today – and something exciting is happening in short term rates. We’re not talking science fiction exciting just yet, but there’s significant movement for the first time in years… in short term rates as the world prepares for Ms. Yellen to finally announce an increase in interest rates. Via Zerohedge, we see that the One Year T-Bill has reached rates it hasn’t seen since 2010:

“The US Treasury sold $25 billion of one-year T-bills at an interest rate of 33bps yesterday, the highest since June 2010. It appears the short-end of the yield curve is increasingly pricing in ‘liftoff’ sooner rather than later (and the long-end is responding by rallying – lower in yield – as medium term growth expectations fade) but it raises significant questions about the economic trajectory after the hike (and the ebbing confidence in The Fed).”

Chart 1 Year T Bill(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Zerohedge

Now, trying to 1/3rd of one percent in interest surely isn’t the type of return anyone outside of the money market or commercial paper industry is likely to get excited about. But what if instead of the option of earning 1/3 of 1% (33 basis points as they say in the biz) OR 7.5% on xyz investment, the choice was to earn 1/3 of 1%  AND the 7.5%. AND is certainly more enticing than OR in that scenario.

Managed futures secret weapon, so to speak; is its ability to harness the power of US Treasury Bills at the same time it is putting trades on with commodity futures. In short, the secret weapon is the ability to earn both interest and trading returns on the same money.

What? How can you have two investments at once?  You can’t buy a house for $500,000 and earn interest on that $500K for example; nor can you purchase $100,000 worth of stock, and at the same time earn interest on that $100K.  Turns out managed futures playground of exchange traded futures allows for investors to invest cash into a futures account to invest in a managed futures program, and at the same time earn interest on the majority of that cash.  This works because the futures exchanges and FCMs clearing the trades there allow for T-Bills to be used to cover margin requirements. Bear in mind, futures account margin is not the same thing as stock account margin. Futures account margin is essentially just needing to have a certain amount of money in an account for them to allow you to enter into trades, versus stock account margin where you borrow money to purchase shares.

At the end of the day, the exchanges and FCMs want you to have collateral to act as a buffer against any moves against your positions in the future. So they can take money from those who lose money on a trade to pay those who made money on it. That’s what the exchanges do. The good news – they view T-Bills and cash essentially the same. So you don’t need to have $100,000 in cash to act as collateral; and another $100,000 to put into T-Bills. You can use the same $100,000 to both buy T-Bills and cover margin for your investment in a futures program. That’s right, the T-Bill does double duty – with the clearing firm posting the T-Bill to the exchange on your behalf to cover margin and you earning the interest on it while it sits with the exchange.

Now, the clearing firms do build in a little buffer for themselves as a risk precaution, and usually only allow around 90% of the T-Bill’s face value to be used as margin, and those fees and haircuts made it a breakeven (to losing) proposition when 1 year interest rates were at 0.10%. But with the potential gain 3 times that now… it’s starting to make sense again. And should we get back to the 1% to 3% environment, it’s a must have for any serious investors. Who doesn’t want an extra 100 to 300 basis points per year tailwind.

PS – For those investors having their accounts professionally managed. You don’t want to purchase a T-Bill in the account the advisor in managing. The interest earned will increase the value of that account, and you don’t need to be paying the advisor 20% of the profits due to interest, just pay him or her on the profits due to their trading.

PPS – The exchanges also allow certain stocks to be used as collateral. So if you loath to sell that Apple stock, but like the managed futures value proposition – there’s ways to use your stock as collateral in much the same way as T-Bills. Call us for more information on how that works (312-870-1500).

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 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?




Managed Futures Linkfest

Managed Futures and Manager Mentions:

Industry News/Regulation affecting Managed Futures:

  • Extreme Makeover: Gary DeWaal Says FCM Landscape has to Change – (John Lothian News)
  • Banking Under Dodd-Frank Takes Shape With Volcker-Rule Approval – (Bloomberg)
  • NIBA Reports on Meeting With CME Group – (Dan Collins Report)
  • CME data fee increase more onerous than originally thought – (Futures Magazine)

Market moves, stories, and other items of note to Managed Futures:

  • Speculators Hold Smallest Bullish Gold Positions Ever In One CFTC Report – (Forbes)

PFGBest Update: Speeding Up

As many have already heard, there have been some new developments in the PFGBest bankruptcy proceedings. Here’s what’s relevant:

  • Vision Financial filed the winning bid for reception of PFGBest accounts by way of bulk transfer, and will provide $325,000 to the Trustee. To read the full legal order, click here. Vision is one of the larger FCMs in the industry, primarily dealing with retail accounts. Information for former PFGBest brokers may be found here, while general reporting on the transfer may be viewed here. The target date for the move is October 19th, but as we’ve learned throughout this process, these sorts of targets are frequently moving. The amount to be moved will remain 30% of 4d (Segregated) balances and 40% of 30.7 (secured) balances.
  • At this point, we’re simply happy that the distribution is moving ahead, and are hopeful Vision acts in an honorable manner to provide the necessary assistance for these victims as they decide whether to send money home, transfer to a broker of their choice, or stay at Vision. Attain has a pre-established relationship with Vision, and will be working with their staff to help our clients through this process.
  • As a part of this agreement, the concept of a “first” or “second” wave of distributions is a thing of the past. The initial distribution to PFGBest clients will happen all at once, with the remaining funds distributed via a claims process, or, potentially, another bulk distribution.
  • There were, however, roughly 350 accounts which could not be initially verified, and will not be included in the initial distribution. Items that might have put an account into this category included accounts with a round number with no activity, accounts with no activity for 90 days prior to the bankruptcy, accounts where the SSN or corporate tax ID number could not be verified with the IRS. The list of these accounts has not yet been made public, and as of now, we’re unsure as to how the accounts will be handled. Our best guess? They’ll go straight to the claims process.
  • PFGBest victims will need to file a claim form by no later than November 16th. Attain is filling out all necessary paperwork on behalf of their clients, but for others, the information can be found here.

We’ll continue to follow the situation closely, but all in all, there’s really only one thing to say: it’s about time. The money of former PFG customers has been locked up too long.

PFGBest Update: How far did the apple fall from the tree?

Since the PFGBest scandal broke, investors have been calling for heads on a platter. They have wanted Wasendorf Sr. arrested (done), the NFA disbanded/sued/held liable (not yet), and pray for US Bank and their deep pockets to have some liability so they pay out investors (fingers crossed). Underneath all of that, however, has been the question of just how much others at PFGBest (and especially Wasendorf’s son – Russ Wasendorf Jr.) knew about the fraud.

Well, we may have a chance to find out.  Via the Chicago Tribune:

An Iowa grand jury is expected to hear testimony from Peregrine Financial Group’s president [Jr.] next week as it begins considering alleged wrongdoing at the failed futures brokerage. […] Wasendorf Jr., through his lawyer, has denied that he knew about wrongdoing at the company. Other top Peregrine executives, including the chief financial officer, also are expected to testify before the grand jury in Iowa, where the brokerage had its headquarters, lawyers have said.

Now, Wasendorf Jr. has steadfastly claimed he had no knowledge of the fraud, and his testimony, alongside the testimony of other executives, is not meant to be indicative of suspected guilt – just a part of prosecuting Wasendorf Sr. Indeed, Wasendorf Sr. has claimed from the start that he alone knew of the fraud. But as more and more details come out, we may have reason to pay close attention to the testimony and evidence in this trial. In fact, we’ve talked with more than a few PFGBest former employees who have serious doubts about the elder Wasendorf’s ability to operate a computer to the level needed to carry out the fraud. If what the NFA said about the deluge of forged documents is correct, it’s not that big of a leap to assume Wasendorf Sr. probably had help along the way.

However, Wasendorf Jr., in particular, has a bright light shining on him now. He was, after all, in charge of operations, and, by all accounts, the one actually running the firm the last few years; so the idea that he had no clue that nearly half of customer funds had been funneled away from the firm strikes most as ludicris. Add to this transfers of lucrative property from Wasendorf Sr. to Jr. back and last week’s report that Wasendorf Jr. was actually planning on leaving the firm… well, we wouldn’t be surprised to hear a lot of 5th amendment invocations during the testimony.

Of course, the prosecutors had Wasendorf Sr. handed to them on a silver platter via the confession in his suicide note – building the case against him wasn’t exactly a tough job. What comes next – ascertaining guilt outside of Wasendorf Sr. – could be a horse of a different color.