for internal use only the resource group annual meeting for continuing education for cfp®, pace and...
TRANSCRIPT
For Internal Use Only
The Resource Group Annual Meeting
For Continuing Education for CFP®, PACE and CPE use. Broker/dealer use only. Not to be used with the public.
Lincoln Financial Network is the marketing name for Lincoln Financial Services Corporation and Lincoln Financial Advisors Corp., affiliates of Lincoln Financial Group. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. CRN200903-2027248
Understanding Managed FuturesA Former Institutional Investor's Perspective On Managed Futures
Thomas J. O’Donnell, IIIFirst Vice PresidentNewedge USA, LLC
Alternative Investments GroupPh. 312.762.1136
For Internal Use Only
Academic Resources
1983 Professor John K. Litner of Harvard University "The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,”
Professor Litner wrote: “The improvements from holding an efficiently-selected portfolio of managed accounts or funds are so large, and the correlation between returns on the futures portfolios and those on the stock and bond portfolios are so low (sometimes even negative), that the return/risk tradeoffs provided by augmented portfolios…clearly dominate the tradeoffs available from portfolio of stocks alone or from a portfolios of stocks and bonds."
1991Everett, McLaren, and O’Donnell“Virginia Retirement System Managed Futures White Paper”
1999Thomas Schneeweis, Professor of Finance CISDM/SOM, University of Massachusetts“The Benefits of Managed Futures”
2000Mark S. Rzepczynski“Market Vision and Managed Futures: Convergent Versus Divergent Trading Styles”
For Internal Use Only
Academic Resources
2002Harry M. Kat, Professor of Risk Management, Cass Business School, City University, London“Managed Futures and Hedge Funds: A Match Made in Heaven”
2002Gildo Lungarella“Managed Futures: A Real Alternative”
2004Steve Koomar“managed futures can save your tail”
2006Kip Thompson “A Case for Managed Futures - Portfolio Diversification Opportunities”
2006Gildo Lungarella“The Case for Managed Futures - Trading advisors are an attractive source of diversification”
For Internal Use Only
Commodity Trading Advisors (CTAs) Are Unique
97.3% of Magellan’s return can be explained by traditional assets.
Only 4.8% of this CTA’s return can be explained by traditional assets.
ASSET ALLOCATION: MANAGEMENT STYLE AND PERFORMANCE MEASUREMENT
An Asset class factor model can help make order out of chaos
William F. Sharpe*
Reprinted from the Journal of Portfolio Management, Winter 1992, pp. 7-19.
Virginia Retirement System, Managed Futures White Paper
John McLaren
Nancy C. Everett, CFA
Thomas J. O’Donnell, III
For Internal Use Only
Estimated Growth of Assets Managed Futures Industry and Hedge Fund Industry
1990 – 2008
$11 $15 $19 $26 $25 $23 $24 $33 $36 $41 $38 $41 $51$87
$132 $131$170
$205 $207
$39 $58$96
$168 $167 $186
$257
$368 $375
$456$491
$539
$626
$820
$973
$1,105
$1,427
$1,868
$1,407
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
$ B
illio
ns
Managed Futures (BarclayHedge) Hedge Fund Industry (HFR)
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.com.
Source: Barclay Hedge Ltd., www.barclayhedge.com
For Internal Use Only
Number of Programs in Barclay CTA Index
1980 – 2008
16 19 22 2332 38
4762
93
131143
164
197
230
268
308321 316
327 319
345
317326
359
386396
439428
491
0
50
100
150
200
250
300
350
400
450
500
550
To qualify for inclusion in the Barclay CTA Index, an advisor must have four years of prior performance history. Additional programs introduced by qualified advisors are not added to the Index until after their second year. These restrictions, which offset the high turnover rates of trading advisors as well as their artificially high short-term performance records, ensure the accuracy and reliability of the Barclay CTA Index.
Source: Barclay Hedge Ltd., www.barclayhedge.com
For Internal Use Only
Importance of Asset Allocation
The 1986 paper titled, “Determinants of Portfolio Performance,” by Brinson, Hood, and Beebower concluded that a portfolio’s asset allocation (i.e. the weightings assigned to the asset classes) is the primary determinant of portfolio return variability, with security selection and market timing
playing minor roles.
Equities
Fixed Income
Real Estate
Cash
%
%
%
%
This decision is most important. Examples of other Asset Allocation decisions:
Which asset classes? Active and passive? International mandates? Global mandates? Emerging market mandates? Currency hedging? Equity market capitalization mandates? Liquid vs. illiquid investments? Hedge Funds/Alternative Investments? Benchmarks? Rebalancing? Return objective: Relative or Absolute?
For Internal Use Only
Managed Futures Represents a Significant Portion of Hedge Fund Industry AUM(Est. Asset in $MM)
HFR data %Strategy Sub-Strategy 12/ 31/ 2008 of Total
1. Equity Hedge Fundamental Value 281,837$ 18.9%2. Relative Value Multi-Strat 230,858$ 15.5%3. Managed Futures CTA * 207,000$ 13.9%4. Event Driven Special Situations 198,335$ 13.3%5. Macro Discretionary Thematic 155,408$ 10.4%6. Event Driven Distressed/Restructuring 82,383$ 5.5%7. Equity Hedge Fundamental Growth 59,929$ 4.0%8. Relative Value FI-Corporate 57,226$ 3.8%9. Event Driven Activist 32,268$ 2.2%
10. Equity Hedge Equity Market Neutral 28,889$ 1.9%11. Equity Hedge Energy/Basic Materials 27,161$ 1.8%12. Equity Hedge Quantitative Directional 24,931$ 1.7%13. Relative Value FI-Asset Backed 23,153$ 1.6%14. Relative Value FI-Convertible Arb 22,197$ 1.5%15. Equity Hedge Technology/Healthcare 21,957$ 1.5%16. Event Driven Merger Arbitrage 15,246$ 1.0%17. Equity Hedge Short Bias 5,777$ 0.4%18. Relative Value Volatility 5,601$ 0.4%19. Event Driven Private Issue/Reg D 3,685$ 0.2%20. Relative Value Yield Alternatives 3,532$ 0.2%21. Event Driven Credit Arb 2,476$ 0.2%22. Event Driven Multi-Strat 692$ 0.0%23. Equity Hedge Multi-Strat 300$ 0.0%
TOTAL 1,490,841$ 100.0%
* Source: BarclayHedge
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.com
Source: Barclay Hedge Ltd., www.barclayhedge.com
For Internal Use Only
Which Hedge Funds Offer Asset Class Diversification?
Hedge Fund Asset Class Exposure
Equities
Convertible ArbitrageDistressed SecuritiesEquity HedgeEquity Market NeutralEquity Non-HedgeEvent-DrivenMacro Managed FuturesRelative Value Arbitrage
Fixed Income
Convertible ArbitrageDistressed SecuritiesEvent-DrivenFixed Income: ArbitrageFixed Income: Mortgage-BackedMacro Managed FuturesRelative Value Arbitrage
CurrenciesMacro Managed Futures
CommoditiesMacro Managed Futures
For Internal Use Only
My Suggestion: Investment Objectives for “Traditional” Hedge Funds versus Managed Futures
Investment Objectives For “Traditional” Hedge Funds
Should fulfill the following three investment objectives:
(1) Improve your source of Active Equity or Active Fixed Income management;
(2) Achieve satisfactory risk adjusted returns relative to other Equity or Fixed Income investments; and
(3) To the extent that the managers implementing these strategies have theability to short, then some level of diversification is possible.
Investment Objectives For Managed Futures Program
Should fulfill the following three investment objectives:
(1) Diversification of the total portfolio;
(2) Achieve satisfactory returns in both rising and falling markets; and
(3) Returns should be achieved at a reasonable level of risk.
%
%
%
%
Equities
Fixed Income
AlternativeInvestment
s
Equities
Fixed Income
AlternativeInvestment
s
For Internal Use Only
Global Futures Markets
Energy
Crude Oil
Gas Oil
Heating Oil
Natural Gas
Unleaded Gas
Stock Indices
DAX (Germany)
DJ Euro Stoxx 50 (Europe)
Hang Seng (Hong Kong)
MSCI EAFE (Europe)
NASDAQ 100 (USA)
Nikkei (Japan)S&P 500 (USA)
Metals
Aluminum
CopperGoldSilver
Nickel
Zinc
Interest Rates
JGB (Japan)
Notional
(France)
Treasury Bonds &
Notes (USA)
Bank Accepted
Bill (Australia
)Euribor
(Europe)Bankers Acceptance (Canada)
Currencies
Australian Dollar
British Pound
Canadian Dollar
Euro
Japanese Yen
Mexican Peso
New Zealand Dollar
South African Rand
Swiss Franc
US Dollar
Agricultural Commodities
SoybeansSoymeal
CornWheat
Cotton
CocoaCoffee
Sugar
For Internal Use Only
Traditional Markets vs. Non-Traditional Markets
QUIZ
Investing in a globally diversified portfolio of stocks, bonds, currencies, and commodities enables CTAs and Global Macro managers to participate, both long and short, in a variety of non-correlated market trends.
This quiz was designed to highlight the fact that markets move in two directions, and to dispel the myth that the appearance of a traditional market trend (e.g. stocks and bonds) is uniquely different from a non-traditional market trend (e.g. currencies and commodities). See if you can tell the difference.
For Internal Use Only
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Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-0760
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1750
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Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04
For Internal Use Only
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Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07250
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May-02 May-03 May-04 May-05 May-06 May-07 May-08
Interest Rate – 5 Yr US T-Note
Stock - Enron
Stock - Yahoo Currency – US Dollar
Equity Market – S&P500
Currency – Australian Dollar Commodity - Soybeans
Commodity – Gold
Commodity – Crude Oil
600
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May-02 May-03 May-04 May-05 May-06 May-07 May-08100
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May-02 May-03 May-04 May-05 May-06 May-07 May-08 150
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Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04
Source of price data: Bloomberg
For Internal Use Only
Source: Barclay Hedge Ltd., www.barclayhedge.com
14
Past performance is not necessarily indicative of future results.
Range of Best Performing to Worst Performing CTAs and L/S Equity Managers
For Internal Use Only
Professional money managers who manage the assets of their clients using derivative instruments (futures, forward contracts, and options) are known as Commodity Trading Advisors (CTAs). As an asset category in the alternative investment industry, they are classified as Managed Futures.
1. Trading Approach
Systematic DiscretionarySystematic/
Discretionary
2. Analysis Technical Fundamental Technical/
Fundamental
3. Trading Style Momentum
Countertrend Spreads/Others
4. Time Frame -1-5 days 6-20 days > 20 days
5. Markets TradedSingle sector
or market Broadly
diversified
SOURCE: swissHedge article by Gildo Lungarella, Harcourt AG (Nov. 2002)
The Various Investment Approaches of CTAs
Rational For Variance in CTA Returns
15
For Internal Use Only
Prospective investor says, “We don’t invest in black boxes.”
16
Scientists develop fastest computer
This undated handout photo provided by IBM and the Feature Photo Service shows lead engineer Don Grice of IBM inspecting the world's fastest computer, nicknamed "Roadrunner", in the company's Poughkeepsie, N.Y. plant. Scientists unveiled the world's fastest supercomputer on Monday, June 9, 2008, a $100 million machine that for the first time has performed 1,000 trillion calculations per second in a sustained exercise. The technology breakthrough was accomplished by engineers from the Los Alamos National Laboratory and the IBM Corp. on a computer to be used primarily on nuclear weapons work, including simulating nuclear explosions. To put the computer's speed in perspective, it has roughly the computing power of 100,000 of today's most powerful laptops stacked 1.5 miles high, according to IBM. Or, if each of the world's 6 billion people worked on hand-held computers for 24 hours a day, it would take them 46 years to do what the Roadrunner computer can do in a single day. (AP Photo/IBM, Feature Photo Service) By H. Josef Hebert Associated Press Writer / June 9, 2008
For Internal Use Only
Managed Futures and Traditional Assets (1980 – 2008)
Annualized Maximum
Standard Deviation Drawdown
Managed Futures
15.2% -20.4%
S&P500 15.3% -44.7%
EAFE 17.3% -49.2%
Bonds 5.9% -9.0%
NASDAQ 22.8% -75.0%
T-Bills 0.9% 0.0%
For Internal Use Only
Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008)
18
Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted IndexSource: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.comSource: Center for International Securities and Derivatives Markets CISDM, http://cisdm.som.umass.edu/resources/database.shtml
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Managed Futures 27.3%
Equity Hedge Quant
Directional 57.1%
Macro 27.2%
Emerging Markets 79.2%
Event-Driven 6.0%
Equity Hedge Quant
Directional 34.8%
Emerging Markets 27.1%
Equity Hedge 23.4%
Equity Hedge 16.0%
Emerging Markets 55.9%
Equity Market Neutral 14.6%
FI - Convertible Arb
13.4%
Managed Futures 11.9%
Emerging Markets 39.4%
Distressed / Restructuring
18.9%
Emerging Markets 21.0%
Emerging Markets 24.3%
Emerging Markets 24.9%
Managed Futures 17.9%
Equity Market Neutral 15.5%
Macro 46.7%
Distressed / Restructuring
25.2%
Macro 53.3%
Equity Hedge Quant
Directional 5.1%
Equity Hedge 31.0%
Equity Hedge Quant
Directional 25.5%
Event-Driven 21.2%
Equity Hedge Quant
Directional 9.8%
Equity Hedge 44.2%
FI - Convertible Arb
14.5%
Distressed / Restructuring
13.3%
FI - Convertible Arb
9.1%
Equity Hedge Quant
Directional 37.5%
Emerging Markets 18.4%
Equity Hedge 10.7%
Equity Hedge Quant
Directional 16.0%
Equity Hedge Quant
Directional 12.2%
Macro 5.0%
Equity Hedge 14.4%
Emerging Markets 45.4%
Emerging Markets 24.4%
Distressed / Restructuring
32.5%
Relative Value 4.0%
Macro 29.3%
Event-Driven 24.8%
Macro 18.8%
Managed Futures 9.4%
Equity Hedge Quant
Directional 41.8%
Relative Value 13.4%
Event-Driven 12.2%
Macro 7.4%
Distressed / Restructuring
29.6%
Event-Driven 15.0%
Equity Hedge Quant
Directional 10.3%
Distressed / Restructuring
15.9%
Macro 11.1%
Equity Market Neutral -6.1%
Relative Value 13.4%
FI - Corporate 41.8%
Equity Hedge Quant
Directional 22.8%
Event-Driven 28.2%
Distressed / Restructuring
3.8%
Event-Driven 25.1%
Equity Hedge 21.8%
Equity Hedge Quant
Directional 17.6%
Equity Market Neutral 8.3%
Event-Driven 24.3%
Equity Hedge 9.1%
Emerging Markets 10.4%
FI - Corporate 5.8%
Event-Driven 25.3%
Equity Hedge Quant
Directional 13.3%
Distressed / Restructuring
8.4%
Event-Driven 15.3%
Equity Hedge 10.5%
Relative Value -17.5%
Macro 12.6%
Equity Hedge 40.1%
Relative Value 22.3%
Equity Hedge 27.9%
Emerging Markets 3.4%
FI - Convertible Arb
19.9%
Distressed / Restructuring
20.8%
Emerging Markets 16.6%
FI - Convertible Arb
7.8%
Macro 17.6%
Event-Driven 6.7%
Relative Value 8.9%
Relative Value 5.4%
Macro 21.4%
FI - Corporate 10.5%
Event-Driven 7.1%
Relative Value 12.4%
Managed Futures 9.1%
Event-Driven -21.5%
Distressed / Restructuring
6.4%
Distressed / Restructuring
35.7%
Equity Hedge 21.3%
Equity Hedge Quant
Directional 27.4%
Equity Market Neutral 2.7%
Distressed / Restructuring
19.7%
FI - Corporate 16.2%
Relative Value 15.9%
Macro 6.2%
Distressed / Restructuring
16.9%
Managed Futures 6.2%
Macro 6.9%
Distressed / Restructuring
5.3%
FI - Corporate 21.3%
Equity Hedge 7.7%
Macro 6.9%
FI - Convertible Arb
12.2%
Relative Value 8.8%
Equity Hedge Quant
Directional -21.9%
FI - Convertible Arb
2.2%
Event-Driven 27.4%
Event-Driven 19.5%
Relative Value 27.1%
Equity Hedge 2.6%
Equity Market Neutral 16.3%
Managed Futures 14.6%
Distressed / Restructuring
15.4%
Relative Value 2.8%
Relative Value 14.7%
Distressed / Restructuring
2.8%
Equity Market Neutral 6.7%
Emerging Markets 3.7%
Equity Hedge 20.5%
Relative Value 5.6%
Equity Market Neutral 6.6%
Equity Hedge 11.7%
Event-Driven 6.7%
FI - Corporate -22.3%
Event-Driven -0.5%
FI - Convertible Arb
17.6%
FI - Corporate 18.5%
FI - Corporate 22.7%
FI - Corporate 1.5%
Relative Value 15.7%
FI - Convertible Arb
14.6%
Equity Market Neutral 13.6%
Event-Driven 1.7%
FI - Convertible Arb
14.4%
Macro 2.0%
FI - Corporate 5.4%
Equity Market Neutral 1.0%
Managed Futures 13.2%
Macro 4.6%
Relative Value 6.3%
FI - Corporate 10.8%
FI - Convertible Arb
5.3%
Distressed / Restructuring
-25.1%
Emerging Markets -3.4%
Managed Futures 16.8%
FI - Convertible Arb
16.3%
Managed Futures 19.9%
Managed Futures -0.7%
FI - Corporate 15.2%
Relative Value 14.5%
FI - Convertible Arb
12.7%
Distressed / Restructuring
-4.2%
FI - Corporate 7.3%
FI - Corporate -3.0%
Managed Futures 4.2%
Event-Driven -4.3%
FI - Convertible Arb
9.9%
Managed Futures 4.2%
FI - Corporate 5.3%
Macro 8.2%
Equity Market Neutral 5.3%
Equity Hedge -26.2%
Equity Hedge Quant
Directional -7.2%
Equity Market Neutral 15.6%
Managed Futures 9.9%
FI - Convertible Arb
15.2%
FI - Convertible Arb
-3.7%
Managed Futures 15.1%
Equity Market Neutral 14.2%
FI - Corporate 12.5%
FI - Corporate -5.3%
Equity Market Neutral 7.1%
Equity Hedge Quant
Directional -9.0%
Equity Hedge Quant
Directional 1.4%
Equity Hedge -4.7%
Relative Value 9.7%
Equity Market Neutral 4.2%
Managed Futures 5.0%
Equity Market Neutral 7.3%
Distressed / Restructuring
5.1%
FI - Convertible Arb
-34.4%
FI - Corporate -12.1%
Relative Value 14.1%
Equity Market Neutral 8.7%
Equity Market Neutral 11.1%
Macro -4.3%
Emerging Markets 0.7%
Macro 9.3%
Managed Futures 10.1%
Emerging Markets -33.0%
Managed Futures 3.8%
Emerging Markets -10.7%
Equity Hedge 0.4%
Equity Hedge Quant
Directional -8.5%
Equity Market Neutral 2.4%
FI - Convertible Arb
1.2%
FI - Convertible Arb
-1.9%
Managed Futures 6.2%
FI - Corporate -0.7%
Emerging Markets -36.7%
- Managed Futures - Emerging Markets - Equity Hedge Quant Directional
- Distressed/ Restructuring - Equity Hedge - Event Driven
- Relative Value - Macro - FI Corporate
- FI Convertible Arb - Equity Market Neutral
Past performance is not necessarily indicative of future performance.
For Internal Use Only19
Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008)
6.9%
7.1%
8.0%
10.0%
10.6%
11.9%
12.0%
13.0%
13.4%
13.7%
14.4%
0% 2% 4% 6% 8% 10% 12% 14%
FI - Convertible Arb
FI - Corporate
Equity Market Neutral
Relative Value
Managed Futures
Event-Driven
Distressed/ Restructuring
Emerging Markets
EH Quant Directional
Equity Hedge
Macro
Annualized Returns (1990 - 2008)
Annualized Maximum
Standard Deviation Drawdown
Macro 7.9% -10.7%
Equity Hedge 9.2% -28.2%
EH Quant Directional 13.8% -28.2%
Emerging Markets 14.7% -43.4%
Distressed/Restructuring 6.6% -26.9%
Event-Driven 7.0% -23.7%
Managed Futures 9.6% -10.7%
Relative Value 4.5% -17.5%
Equity Market Neutral 3.3% -8.4%
FI - Corporate 6.7% -26.3%
FI - Convertible Arb 6.2% -35.5%
Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted IndexSource: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.comSource: Center for International Securities and Derivatives Markets CISDM, http://cisdm.som.umass.edu/resources/database.shtml
Past performance is not necessarily indicative of future performance.
For Internal Use Only
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
BARS (LEFT SCALE): Annualized Rate of Return
RED LINE (RIGHT SCALE): Correlation to S&P500
Annualized Returns & Correlation to the S&P500Jan 1990 – Dec 2008
Alpha, Beta, Diversification?
Return Correlation
20
Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted IndexSource: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.comSource: Center for International Securities and Derivatives Markets CISDM, http://cisdm.som.umass.edu/resources/database.shtml
Past performance is not necessarily indicative of future performance.
For Internal Use Only
Negatively Correlated vs. Non-Correlated
• Same Risk, Same Return • Correlation = (1.00)
$900
$950
$1,000
$1,050
$1,100
$1,150
$1,200
Investment A Investment B Investment C
Investments A & B
• 50% of Investment A & 50% of Investment B • Same Return, No Risk (Standard Deviation = Zero)
Investment C
• Same Risk, Same Return • Correlation = (0.14)
Investments A & B
• 50% of Investment A & 50% of Investment B • Higher Return, Lower Risk (Standard Deviation)
Investment C
$850
$900
$950
$1,000
$1,050
$1,100
$1,150
$1,200
Investment A Investment B Investment C
21This is for illustrative purposes only. Investments A and B are not real investments.
For Internal Use Only
6 Largest Declines in U.S. Stocks Using monthly data
22
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Dec-80 to Jul-82
Sep-87 to Nov-87
Jun-90 to Oct-90
Jul-98 to Aug-98
Sep-00 to Sep-02
Nov-07 to Nov-08
Stocks Managed Futures
(Jan 1980 - Dec 2008)
Indices: U.S. Stocks – S&P500 Index , Managed Futures = CISDM CTA Asset Weighted Index
Past performance is not necessarily indicative of future performance.
For Internal Use Only
A Case for Managed Futures - Portfolio Diversification Opportunities(Kip Thompson, Rosenthal Collins Group LP)
(January, 1980 Through December, 2006)
Data: Managed Futures – CISDM Managed Futures Index , U.S. Stocks – S&P500 Index, Bonds – Lehman Brothers Aggregate Bond Index
9.50%
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
13.00%
8.25% 8.75% 9.25% 9.75%
The Effect of Diversifying a Traditional Portfolio into Managed Futures
0% Managed Futures | 40% Bonds | 60% Stocks
10% Managed Futures | 35% Bonds | 55% Stocks
20% Managed Futures | 30% Bonds | 50% Stocks
40% Managed Futures | 20% Bonds | 40% Stocks
30% Managed Futures | 25% Bonds | 45% Stocks
Com
pou
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An
nu
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etu
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Annualized Standard Deviation
Higher Returns Less Risk
23The information on this page was copied from the paper titled “A Case for Managed Futures.” Newedge USA, LLC is not recommending these allocations.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS SIMILAR TO THOSE SHOWN OR WILL NOT BE ABLE TO AVOID SUBSTANTIAL LOSSES. IN FACT, FREQUENTLY THERE ARE SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS; ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Past performance is not necessarily indicative of future performance.
For Internal Use Only
Risk vs. Volatility
Rolling 12-Month Returns
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12
16
26
30 30
5
34
1
4 4
21 1
01 1
0
10
5
9
65
39
18
13
7
3
1 1
15
30
15
33
25
18
11
0
5
10
15
20
25
30
35
40
45
<(20%) (15%)-(10%)
(5%)-(0%)
5%-10%
15%-20%
25%-30%
35%-40%
45%-50%
55%-60%
65%-70%
75%-80%
85%-90%
95%-100%
105%-110%
Fre
qu
en
cy
Managed Futures - Hypothetical CTA S&P 500
Managed Futures - S&P500
Hypothetical CTA Index
Annualized Compounded Return 15.5% 10.9%Annualized Standard Deviation 21.2% 14.0%Modified Sharpe Ratio (RF = 0% ) 0.73 0.78 Skewness 1.48 (0.40)
24Past performance is not necessarily indicative of future performance.
For Internal Use Only
One of the most cited reasons for investing in alternative investments (e.g. Hedge Funds) is DIVERSIFICATION.
– What actions have you taken to help your portfolio benefit from this?
Markets move in TWO directions.
– What actions have you taken to help your portfolio benefit from this?
The World’s Portfolio of exchange traded, liquid investments includes EQUITIES, FIXED INCOME, CURRENCIES, AND COMMODITIES
– What decisions have you made within your Asset Allocation Policy about these investment opportunities? (Doing nothing is a decision. Just make sure you have the evidence to back it up!)
A Few Observations
25
For Internal Use Only
Write the research report that proves why you should NOT invest in Managed Futures.
Email me a copy:
The Challenge
26
For Internal Use Only
Risk Disclaimer
27
Global Disclaimer Research Notes-(Last Updated 1 Feb. 2009)
The Alternative Investment Group of Newedge USA, LLC has distributed this research report. Newedge does and seeks to do business with companies that may be covered in its research reports. As a result, investors should be aware that Newedge might have a conflict of interest. For the avoidance of doubt, investors should note that this research report is not objective and is a marketing communication as defined by the Markets in Financial Derivatives Directive (“MiFID”) for more details see MiFID policies on our website at www.newedgegroup.com.
Newedge Group (UK Branch) is authorized by Commission Bancaire and Autorité des Marchés Financiers in France and subject to limited regulation by the Financial Services Authority for the conduct of its UK business. Details on the extent of our regulation by the Financial Services Authority are available from us on request. This research report may have been distributed simultaneously, in multiple formats, to Newedge's institutional customers. This information is not intended for distribution to “Retail Customers” (as defined under MiFID or as defined under other jurisdictions' regulations). This research report is initially written for European and United States of America investors and may not be fit for investors outside the EEA or the United States.
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Subject to the nature and contents of this research report, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Accordingly, investors should, before acting on advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. Newedge accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this research report or its content. Any forecasts are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. This report is for informational purposes only. Past performance is not a guarantee of future results. This research report is not to be construed as providing investment services in any jurisdiction where the provision of such services would be illegal. Not all services are available from all Newedge organizations or personnel.
The opinions, views and forecasts expressed in this research report reflect the personal views of the author(s) and do not necessarily reflect the views of Newedge or any other branch or subsidiary of Newedge. Newedge, its worldwide Affiliates or branches, any of its employees may, from time to time, have transactions and transactions and positions in, make a market in or effect transactions in any investment or related investment covered by the research. Newedge makes no representation or warranty regarding the correctness of any information contained herein, or the appropriateness of any transaction for any person. Nothing herein shall be construed as a recommendation to buy or sell any financial instrument or security. This communication is for information purposes only. Investors should also consider this research report as only a single factor in making their investment decision. This communication may contain privileged and/or confidential information and is intended only for the use of the individual or entity to which it is addressed. No waiver of confidentiality or privilege is made by mistransmission. If the reader of this message is not the intended recipient, you are hereby notified that any unauthorized dissemination, distribution, reading, printing, copying and/or use of this communication are strictly prohibited.
THE DISTRIBUTION OF THIS RESEARCH REPORT IN OTHER JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS RESEARCH REPORT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH PROHIBITION OR RESTRICTIONS. BY ACCEPTING THIS RESEARCH REPORT YOU AGREE TO BE BOUND BY THE FOREGOING.
For Internal Use Only
Appendix
For Internal Use Only
Commodity Exchange Act (CEA)The federal act that provides for federal regulation of futures trading.
Commodity Futures Trading Commission (CFTC)The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.
National Futures Association (NFA)Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered futures association,” NFA is the industry wide self-regulatory organization of the futures industry.
Commodity Trading Advisor (CTA)A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer’s account. A US-based CTA is generally required to be registered with the CFTC.
Futures ContractA legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.
SOURCE:Glossary of Futures Terms:An Introduction to the Languageof the Futures Industry©1998 National Futures Association
The CISDM CTA Asset Weighted Index reflects the dollar-weighted performance of commodity trading advisers (CTAs) reporting to the CISDM Hedge Fund/CTA Database. CTAs trade a wide variety of over the counter (OTC) and exchange traded forward, futures, and options markets (e.g., physicals, currency, financial) based on a variety of trading models. To be included in the asset weighted index universe, a CTA must have at least $500,000 under management and at least a twelve month track record. The index dates to January 1980. The weights are revised monthly. The weight of a fund each month is its assets under management at the end of the month divided by the total assets under management of all qualifying funds. http://cisdm.som.umass.edu/index.asp
Managed Futures Industry Terms & Index Definition
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