January 9, 2012

Since 2002, Attain has dedicated themselves to the cultivation of quality managed futures education and research putting out this Monday newsletter nearly every one of the 400+ Mondays since we opened our doors.

Believe it or not, this type of work every Monday hasnt left us tired or out of ideas but instead has resulted in even more topics than we can cover on a weekly basis. Enter the Attain Capital Managed Futures Blog. where we are able to share the extra topics we run into on a daily basis, ranging from responses to industry criticisms, information on managed futures investing opportunities, commentary on major market movements and more. We try and talk at least once a day during the week, and you can subscribe to the blog to receive the posts in your inbox.

Twice a year, we break down the most popular posts on the blog in one convenient newsletter. With the end of 2011 behind us, it’s time to take a look at the most widely read posts of the second half of the year. Be sure to subscribe to the blog to get these posts delivered to your inbox every day!

We are constantly monitoring market movements and the potential impact they could have on the CTAs we track. When things spiraled downward in November, it was hard not to take notice.

Ouch- rough day to be in a long-only commodities fund yesterday, wasnt it? While commodities across the board were mostly down (including Silvers ugly 6.64% plunge), the Grains sector took the most consistent beating. It was one week ago today that we crowned Cocoa the winner in the race to new 2011 lows after the nosedive taken by most in early October, and, apparently, Grains got jealous, because Soybean Meal, Rough Rice, Wheat, and Oats all dipped below their respective lows for the close yesterday, along with a tagalong from Softs- Sugar. Congrats, guys. Welcome to the losers circle.

We’re not big fans of retail forex trading- that’s far from a secret- but when a forex titan seemed to agree with us, surprise didn’t quite cover our reaction.

We think trading forex on ones own via the various retail platforms is a bad idea. Weve made that clear a million times over. Attains rules for forex are pretty simple (you can click here for a refresher). Basically- dont do it.

As time goes on, we find more and more in our industry jumping on the forex hater bandwagon, and with good cause. So when we first stumbled across a new article warning retail forex clients to get out while the getting was good, we merely nodded our heads in agreement. Then we realized exactly who was issuing the warning (emphasis ours).

MF Global coverage dominated much of the financial media world for the latter half of 2011, so it’s no surprise that MF Global related posts showed up in our top 15 posts for the second half of the year. Market reactions were just the tip of the iceberg.

How appropriate that, on Halloween, we have more tricks that treats coming our way. The blood red screen has most markets taking a dip, although the metals complex is well off its lows. Is this a risk off reaction to the MF Global bankruptcy. They are TSTS (too small to save) instead of Too Big to Fail, so perhaps people upset that the government wont be backstopping a purchase by pumping money into the system. Or is this just a normal pullback following the incredible October run up? Well see, but its likely too little too late to save managed futures (which generally speaking came into the month short all of these markets) from a down month.

As anyone following the blog can tell you, price movements are only a fraction of the news coming out of the markets. Volume can be just as significant.

The clichs youll hear a lot this week and come Christmas time goes something like this the slow holiday trading, a low volume week due to the holiday, or below average market participation due to the holiday. And while it has become part of the common market knowledge that volume and trading ranges are subdued during holiday periods because of traders being out of the office (off the trading floor/not logged in to the machines), weve always wondered if that is true we certainly dont pack up our offices and take this entire week off.

To see whether a slow holiday week is more than just a saying, we looked at the true range of the S&P 500 during Thanksgiving week over the past 11 years, and compared that to the true range of all the other weeks of the year. Our results are below, and show that despite a rather non slow holiday week in 2008 during the financial crisis this pattern indeed has held true every other year for the past 11, with the true range for the holiday week about 30% lower than a normal week on average.

More people found our blog last year by searching risk on risk off than anything else, and for good reason. The moody nature of the markets kept everyone- professional and not- on their toes, particularly in the second half of the year.

We recently did a post applauding the departure of commodities from the risk on/risk off trade that seems to have been dogging us since 2009. Looking at where were at today, we may have spoken too soon, with the blood red stocks trends spilling over into the world of commodities as well.

At first glance, it may look like were back to everything moving in tandem, but commodities being down on a day that stocks are down does not necessarily mean theres a return to the risk on/risk off mentality for commodities (or- in our best Yoda voice- one day does not a trend make ). We saw this in August in grains, in particular with them rallying while stocks were down. Even now, there are a few bright green spots in the sea of red although Orange Juice doesnt really count (very few managers we track touch that market).

The CME may be the exchange that everyone knows, but ICE is presenting a perpetual challenge to their dominance, particularly through their energy offerings.

It was back in July that we highlighted the growing competition between ICE and the CME. ICE had found a way to attract higher volume via their Brent Crude contracts, which provided an interesting spread opportunity for those already trading WTI futures at the CME and an alternative crude benchmark to the well-established WTI contract. While the profitability of the spread trade between the two contracts has since collapsed. the allure of Brent as a benchmark is not about to diminish. In recognition of this, the CME has decided they want in. Per Bloomberg :

In the wake of MF Global, everyone was (understandably) concerned about the security of their segregated funds held elsewhere. To help restore confidence, the President of PFGBest, an FCM Attain does a good amount of business with, issued a letter that is a must read for anyone questioning the behavior of other FCMs and the lasting legacy of MF Global.

We tend to pick a good amount of fights on the blog, particularly with unscrupulous journalists, genuine and not. In this post, we found ourselves not just responding to false statements made in an article, but to an author who was knowingly disseminating false information to the public.

We were really confused when we walked into the office this morning to a slew of emails asking us to refute the erroneous conclusions found in an article entitled Debunking Myths About Managed Futures by one Jason Whitby. The piece is, in our opinion, riddled with misinformation and inaccuracies. What confused us, though, was that we had already responded to this article.

The original article was published by Mr. Whitby in July on Morningstar.com. We addressed each inaccuracy explicitly, and then tried to comment on the article with a link to our analysis. The comment was not published (gee, we wonder why). Now, despite us making what we believed were valid and verifiable counterpoints, he hasreposted the same piece on Seeking Alpha. Weve left a comment there as well, but we wont hold our breath on it being set public.

The internet is a great source of news, but sometimes you have to look below the headline to understand the context of the story in question. This was one of those times.

If youre looking for another signal that were facing dire economic straits, just check out the news today. A GOLD EXCHANGE WENT OUT OF BUSINESS. Thats crazy. right? Between that, and learning that Goldman Sachs rules the world. its obvious that things are going downhill in a hurry. Totally insane.

And totally not what it sounds like.

As part of our ongoing education regarding how trend following trades are entered and exited, we took a look at the short side of the trading schema- the side that often gives managed futures the unique ability to maintain noncorrelation to traditional asset classes.

Weve talked a few times this week about how managed futures are long volatility investment which tends to do well in a crisis because they have a fixed risk, yet can make as much as the market offers up when volatility expands; but we havent touched on the seemingly simpler reason managed futures can do well in a crisis. And that is because they can go short.

We highlighted back in March what a classic trend following breakout looks like in Crude Oil as it broke out to the upside following the unrest in the Middle East, then updated you on that trade when it was stopped out in May. Well, here we are in August, just a little over 2.5 months later and many trend following models are back at it in the Crude, but this time on the short side providing a good example of how (and why) systematic managers engage the market on the short side [quick reminder going short is a bet on prices going lower, where you sell first, then buy back later].

As people searched for answers as the MF Global scandal unfolded, understanding the context of their evolution became increasingly important. The best way to gain insight? A survey of the headlines that had played a role in their ascent, and ultimate downfall.

When we commented on Tuesday about the major slide in the MF Global stock value. it seemed pretty reminiscent of a similar slide in 2008- a slide that MF Global survived. However, as the drama has unfolded, and with the stock being downgraded to an even junkier status by Fitch today, the gravity of the situation is increasing rapidly.

We used this cool website called Google to find some of the top MF Global headlines over the past 6 years.

While anger toward Corzine and his cronies was the first and most understandable reaction to missing client funds at MF Global, the anger eventually began to extend to those handling the bankruptcy affairs, especially as it became clear that they had little understanding of the industry they were operating in.

The big to-do today on the web has been the decision of MF Global bankruptcy judge, the Honorable Martin Glenn, to distribute 60% of the funds held by 22,000 accounts that held no open positions when the FCM filed for Chapter 11 on October 31st. The decision was the result of arguments made that the release of open positions and their corresponding margin from previously frozen MF Global client accounts was unfair to those who were cash-only when the walls came tumbling down.

The approval was surprising to us, and further confirmed what many of us believed: Glenn has no idea how the industry functions. While we are all for the release of the frozen funds, the current process is far from equitable- particularly to managed futures clients. Confused? Check out the results of Glenns actions below

Europe’s hellish impact on the markets was perhaps most pronounced in the risk on/risk off nature of the market movements, but government intervention to stop such behavior was even more poignant of a reminder of how out of hand things had become.

As the Euro Debt Crisis deepens, France, Belgium, Italy and Spain have all taken the seemingly last ditch effort of banning short sales of their stocks and other stock related items.

That last part is the kicker for those of us in the managed futures world. Would these bans impact futures contracts for the indices in the given countries? A partner in Spain has told us that it sure did, with Spains largest futures clearer- Interdin- banning short trades on the Spanish Index and Euro Stoxx 50 futures effective last Friday.

We’re fortunate to work in a space with so many great minds contributing to the general online dialogue, particularly as they inspire us to do further research. When we get a chance to answer a question specific to the futures industry, we jump on it.

We came across the following line from one of our favorite bloggers, Barry Ritholtz, last week :

Lately, it looks like the Equity Futures predict little more than the Open, he mused. Are they that easily pushed around? Do they contain less and less information? I would love to see a correlation study looking at their ability to forecast that days close.

Never ones to back down from a challenge, we looked to delve right into this project and calculate just such a correlation study. But on the mathematical journey to those results, we had a heck of an internal debate as to what exactly Barry meant by this line.

The number one casualty of the risk on/risk off atmosphere in 2011 was easily Dighton Capital. While past performance is not necessarily indicative of future results, the inevitable moral of the story for Dighton was that certain trades will define a CTA for as long as they exist.

There have been quite a few winners and losers in the immediate aftermath of the 2011 crash (does this move have a name yet?), and one of the biggest losers has been discretionary trader Dighton Capital. We posted their defense of their position two weeks ago, but things went terribly wrong since then, with a dramatic move higher in the Swiss Franc causing losses of more than -50% for Dighton in August (on top of -30% losses in July), putting the drawdown on their composite track record at a disturbing -76%.

What happened? Several clichs come to mind. Mess with the bull, get the horns; youll run out of money before the market returns to sanity; dont get married to a trade just to name a few. But this wasnt some novice trader throwing a trade against the wall to see if it would stick. Dighton had been here and done that before. Yes, they were a high risk/high reward type of strategy, but still were talking about professional traders with over $100 million in assets under management and 8 years of history.

After reading some of the posts above and visiting the blog please drop us a line and let us know how you like it. Too technical? Too argumentative? More manager specifics? Just right? Please send us an email at invest@attaincapital.com and let us know how were doing and what you would like to see more/less of. And, as always, if you have something you’d like to see us cover or data you’d like us to run, let us know!

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