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Copyright 2009 Opalesque Ltd. All Rights Reserved.

SECTION NAME

Human Capital Advantage

One very noticeable thing about people in hedge funds and other

nancial businesses is how knowledgeable they are. I have to admit to

often being awed by the skills and intelligence one encounters in the

industry. But even by high standards, Roy Niederhoffer is exceptional.

Theres his early fascination with computers, resulting in his building

a computer game business while in high school. Then theres his

foray into computational neuroscience in college. These skills came

together in designing high-frequency trading programs. This issues

Founding Father contains his insights about this intriguing but not well

known strategy. In Futures Lab his colleague Susan Roberts another

person who makes one think of the amazing skill level in the industry

documents the distinctive features and advantages of short-term

trading.

When you say brain trust, Renaissance Technologies is the name that

probably rst pops to mind by free association. We have an interesting

bit about Renaissance in News Briefs.

Talking with people, it is clear that human capital has to be closely

allied with technology to succeed in something as complicated as

high-frequency trading. We were lucky to have an Insider Talk with

Trading Technologies Tom Haldes and Elise Fleischaker on the two-way

interaction between automated trading and investment strategies.

For Practitioner Viewpoint we drew on a lot of high-end human capitalto get a sense of where commodity markets are going and what it

means for investors. Who, by the way, have been moving to global

macro and managed futures strategiessee Index Tracker.

Chidem Kurdas

Editor

[email protected]

In This Issue

Founding Father Q&AThere are few managers in high-frequencytrading and even fewer with a long track

record. We are delighted to present insightsfrom Roy Niederhoffer, one of the rare long-time practitioners of this intriguing niche

strategy .................................................... 2

Futures LabSusan Roberts of R.G. Niederhoffer Capitalanalyses the distinctive features of short-

term trading compared to long-term trend

following. What effect do these have on aninvestors portfolio? .................. .............. 5

Insider TalkThe latest perspective on the two-way

street between automation and investmentstrategy, from Trading Technologiesexecutives ............. .............. .............. ..... 9

News BriefsRenaissance Technologies, Carbon permits

and more ...............................................13

Practitioner ViewpointSeveral views on the outlook for commodity

investing, including forecasts from a reportfrom Nouriel Roubinis RGE .................... 14

Index TrackerAsset flows and various indexes .............16

Top TenCTAs with the smallest drawdowns ..........17

ISSUE 8 May 19, 2009

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FOUNDING FATHER Q&A

The High-Frequency Artist

Short-term trading is not easy to understand and we can infer that it is

extremely hard to practice, because few people engage in it and even

fewer survive for a long time. We are delighted to present a practitioner

with one of the most distinguished and substantial track records in this

intriguing niche strategy.

R. G. Niederhoffer Capital Management offers hedging in the original

sense of protecting investor portfolios in downturns. One trading

program has the specic goal of hedging a portfolio against equity

market and fund of fund losses. That program returned 55% in 2008.

FounderRoy Niederhofferpossesses diverse skills that are seldom found

in one person. In his ofce there is a wall of computer screens with fast-

changing symbols and numbers, but also two surprising objects: a violin

and a piano. Hes been playing since childhood and is a serious enough

musician to play violin in the Park Avenue Chamber Symphony (www.chambersymphony.com).

But music was only one of his youthful interests. He encountered

computers as a teen when his brother Victor, whose ups and downs as

a fund manager are well known asked him to help unpack one of the

early microcomputers. Roy immediately took to the computer. Within a

year he wrote a video game, started a computer game business and had

his high school friends working for him, creating games.

It says something about short-term trading that the strategy brought

together Mr. Niederhoffers diverse skills. Below he tells us his story and

discusses the high-frequency approach. In the Futures Lab article that

follows, his colleague Susan Roberts compares high-frequency trading to

other strategies and presents evidence.

Roy Niederhoffer

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FOUNDING FATHER Q&A

Opalesque Futures Intelligence: How did you get

into short-term trading?

Roy Niederhoffer: I studied computational

neuroscience at Harvard and planned to go

into that eld. But in 1987, my brother Victorinvited me to join him, and from 1987 to 1992

I worked for his rm. He was an early innovator

in the high-frequency trading space and trained

a number of successful managers. While I was

there, I developed computer programs to

analyze high frequency price data and used

them to develop and test my trading ideas. In

1992, I left to start my own rm, with the goal

of building an institutional, highly-quantitative

asset management business. I had already

run a successful 30-person computer game

development business in high school, so I had

some useful experience being an entrepreneur.

OFI: Did your interest in the brain science have

any effect on your career?

RN: In time I realized that there is an overlap

between my interests in neuroscience and

in trading. The structure of the brain drives

behavior, including market behavior, in

predictable ways. Understanding that helped me

rene my trading approach.

OFI: Do those behavioral patterns show up in

futures trading?

RN: Denitely. My early forays into trading were

quite discretionary and not very successful. I fell

into many trapsholding losing trades too long,

being emotional about my decisions, letting

recent experience inuence me too much. Our

strategy now is based on the idea that because

of certain cognitive biases hard-wired into the

human brain, the behavior of market participants,

and therefore prices, can be predicted.

OFI: How can you predict what people will do?

RN: When people are emotional, they revert to

instinctive behavior patterns that result in non-random price movements. Our research attempts

to identify those situations and capitalize on

them.

OFI: For how long a period can you predict?

RN: It is much easier to forecast prices in the

short-term than, say, a year from now. We do

have some accuracy at predicting what will

happen in the next hour or day, perhaps out to

a week or two. We test rules with hundreds of

thousands of individual observations, so we have

a moderate-to-high degree of condence in the

rules that make it all the way through our trading

process.

OFI: How long do you hold positions?

RN: Our trades range from a few minutes to

a few weeks in duration, but our effective

duration is about one or two days. Economic

fundamentals tend to be swamped by

psychological factors in the short-termthere

are waves of exuberance or panic that drive

markets up or down, and we take advantage of

that. But psychology cant swamp fundamentals

indenitely and eventually prices reect

fundamentals relatively accurately.

OFI: Dont some trend followers look for similarpatterns?

RN: The rationale for our trade entries and exits

tend to be different from trend-following, so our

results are different. We are very comfortable

taking positions opposite the trend.

OFI: Do you trade the same instruments as

commodity trading advisors?

RN: We trade many of the same markets as trend

followers, but like many short-term traders we

are generally more focused on the equity sector.

Historically, trend-followers have had greater

allocations to xed income, foreign exchange

and commodities than most short-term traders,

who tend to trade a higher percentage of equity

index futures.

OFI: Why equities? Foreign exchange markets

must be liquid enough for short-term trading.

RN: Since our strategy attempts to capture the

effects of human emotion on price movements, it

stands to reason that it might be more successful

in a sector like equities where there is a higher

percentage of retail money, than, say, foreign

exchange. But we believe our models should besuccessful in that sector as well.

OFI: Why are there so few high-frequency

traders?

RN: It is a difcult strategy to get started in.

We have maybe a million lines of proprietary

computer code that weve developed over the

years. There are many dead ends and pitfalls

we managed to fall into them particularly in

our early years. After 16 years in the business,

There is a

high barrier

to entry, but

there is an

even higher

barrier to

long-term

survival in

the high-frequency

space.

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FOUNDING FATHER Q&A

weve learned many of the things to avoid! A newcomer

starting from scratch has a lot to learn. There is a high

barrier to entry, but there is an even higher barrier to

long-term survival in the high-frequency space.

OFI: If more money comes in, will short-term trading

become crowded?

RN: Capacity constraints are an issue in any strategy,

but obviously high-frequency managers are more

susceptible because of their higher volumes. Since our

strategy is more than 50% mean reversion, we end

up doing the opposite of the majority of managers,

so crowding is less of an issue. In addition, short-

term traders are much less similar to each other than

managers in other strategies, possibly because there

many ways to trade, not just a few trends to follow. But

it is still very important for a short-term manager not

to get too big. Thats probably the reason there are nogiant short-term funds. To go from, say, $2 billion to

$20 billion would be almost impossible with this kind

of trading. It is extremely important for a short-term

manager not to compete for assets by offering lower

feesthe greatest cost to a client of a short-term trader

is the other assets managed by that trader, not the

managers fee. Its not just benecial to the manager to

have higher fees and less assets under management; its

better for the clients too, because the market impact of

a smaller manager is so much less. A lot of people dont

realize that.

OFI: How do you control the risk?

RN: Everything we do can be calibrated to the volatility

of the market were trading and its relationship to

other markets. This is so for all CTAs but particularly

for short-term traders, who can keep their volatility

stable over time perhaps better than any other hedge

fund strategy. Because your trades last only a few

days and you have so many positions, you can adjust

to any change in volatility daily or even intra-day. Risk

management is not separate from our process, it is

integrated into our process. Our quantitative models

incorporate factors like historical and implied volatility,

correlation, and expected trade duration in determiningthe size and risk of our trades.

OFI: Isnt short-term trading volatile relative to other

strategies?

RN: You rarely see surprises from managers in high-

frequency trading. Many hedge fund styles have

low volatility most of the time, and then, as in 2008,

volatility suddenly explodes. While people may think of

managed futures as a relatively volatile strategy, actually

managed futures is merely a strategy with consistent

volatility. Almost every CTA, both short-term and long-

term, had about the same volatility in 2008 as they did

in 2007, 2006, and 2005. Moreover, when you have a

strategy like ours that is negatively correlated to most

portfolios in which it is included, the more volatility youhave, the less overall risk the portfolio can have.

OFI: What do you see for the future?

RN: You have to be constantly vigilant and constantly

develop your system, because markets evolve and

some trading strategies stop working. We have 21

people working on developing new models and trade

execution strategies. Including the technology people,

31 out of the 41 people at the rm work on investment

strategy. Im now more involved with the research than

the trading. On a daily basis, the strategy is run by my

head trader, who has been with me since 1993.

OFI: Is trade execution difcult with a high-frequency

strategy?

RN: Trade execution is done automatically, by

algorithms. Very little is done on a discretionary basis.

Nevertheless, it is important to have an experienced

person reviewing trades just in case there is an unusual

event, like a surprise event or a particularly illiquid

period. Because of this consideration we are about 5%

discretionary.

OFI: Why should an investor consider a high-frequency

strategy?

RN: Most hedge fund styles are highly correlated with

one another, and also to the portfolios in which they are

included. In contrast, high-frequency traders tend to

be different from each other have low inter-manager

correlation and also tend to have fairly consistent

negative correlation to investors portfolios. As a result,

they tend to t very well. We actively aim our strategy

to directly improve our clients portfolios by focusing

not only on making money but on when we make

money.

OFI: What should investors look for when evaluating

managers?RN: One way to assess managers is to look at their

performance during benign and difcult periods.

It was much easier to be up in 2005 and 2006 than in

2008. My view is that a hedge fund should be able to

provide a true diversication during difcult periods, so

I feel that if you have two funds with the same stand-

alone return and volatility, the fund that had its best

year in 2008 is far preferable than one that was down

in 08 and had its best year along with everyone else in

2005.

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FUTURES LAB

Short-term trading programs have distinctive qualities that are not well known. Yet these features can be

important for investment decisions.

Comparing short-term trading to long-term trend-following and other hedge fund styles is a good way

to demonstrate its distinct characteristics. We will start with a description of the strategy, then do a

comparative analysis of returns and discuss the implications for investors.

Traders are typically classified as short-term if they have an average holding period of less than ten

days. These trading programs are often systematic, developed using a broad range of quantitativemethodologies.

The instruments traded generally include a subset of the most liquid futures markets worldwide,

including equity indices, fixed income, currencies and commodities, and may also include individual

stocks, options and cash foreign exchange. Trade frequency can be quite high and many programs trade

more than 10,000 round turns per year per $1 million traded.

Because of the highly liquid nature of the strategy and the short average holding period, many managers

are able to offer attractive liquidity terms to investors, with some even providing daily liquidity.

The following analysis is by Susan Roberts, senior managing director

at R. G. Niederhoffer Capital Management Inc. Ms. Roberts joined

RGNCM in March 2008 and is responsible for interdisciplinary

initiatives involving investment, strategy and business development.She has an extensive background in hedge fund and private equity

fund of funds management, portfolio construction and manager

selection, and served most recently as deputy director of banking and

corporate fnance at the Hearst Corporation.

Ms. Roberts analyses the distinctive characteristics of high-frequency

trading compared to commodity trading advisors in general and

effect of these programs on an investors portfolio. The expression

high-frequency trading is used here interchangeably with short-term

trading.

Key Features of Short-Term Strategies

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A Small Universe

Short-term trading is an evolving hedge fund strategy. The number of active managers is quite small

and there are relatively few firms with long-term track records. We estimate that there are fewer than 50

firms with more than $50 million in assets. It is also a capacity-constrained strategy, with only one firm

(that we know of) managing more than $8 billion.

In January 2008 Newedge introduced the Alternative Edge Short-Term Trader Index, which tracks the

daily performance of a group of 27 high-frequency traders. The broader Newedge CTA index, which

includes 20 constituents, also contains a few (5) high-frequency managers.

Short-Term Trading vs. Trend-Following

Trend-following CTAs and short-term traders tend to thrive in different types of market volatility. The

ideal environment for trend-followers is a market moving smoothly in one direction, with relatively low

daily volatility. Put another way, trend-followers are long long-term volatility.

Short-term traders, by contrast, do not tend to take positions dependent on the long-term direction ofmarkets. The ideal environment for short-term traders is high intra-day and day-to-day volatility; they can

be thought of as long short-term volatility. Performance profiles reflect this fundamental difference.

To illustrate the difference between these two strategies, we compared the historical performance of

two hypothetical portfolios. The first portfolio includes the 20 core constituents in the AlternativeEdge

Short-Term Trader Index, and the second portfolio includes the constituents in the 2009 Newedge

CTA Index, excluding the five short-term traders. The manager returns in each portfolio were equally

weighted since 2000 or inception using monthly data (through April 2009).

As you can see below, the portfolio of short-term traders had higher annualized returns over this 9

year period. Much more interesting, however, is the enormous difference in annualized volatilitythe

portfolio of short-term traders was much less volatile:

The reason for this is the extremely low correlation among high-frequency managers. There is a huge

variation among strategies, For example, some managers trade only a single asset class, while others

trade many; some managers focus on intraday trading while others tend to hold trades for a week.

The chart below shows the distribution of correlations between managers in the short-term trader

portfolio (in blue) and the trend-follower portfolio (in red). You can see that trend-following CTAs tend to

FUTURES LAB

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FUTURES LAB

be highly correlated to each other (correlation more than 0.6%), while short-term traders are not. In fact,

many short-term traders are actually negatively correlated to each other. Because of the low correlation

among managers, it can be quite effective to invest in many different short-term traders, whereas with

trend-followers, investing in a small group of managers may provide adequate diversification.

One drawback to the enormous diversity among short-term traders is that it can make the due diligenceprocess more challenging for investors. Making side-by-side comparisons can be quite difficult.

Protective Effects of Short-Term Traders

Many short-term trading programs are negatively correlated to other hedge fund styles as well as to

major markets. Hence short-term trading provides protection during difficult times for other strategies.

We can see this by looking at the ten worst months for funds of hedge funds since 2004. During those

months, fund of funds lost 3.5% a month on average. Short-term traders (including all managers in the

AlternativeEdge STTI, equally weighted) were up in all ten of these months, with an average monthly

return of 1.4% (Table).

Data Source: HFR, Newedge

10 Worst Months for Fund of Funds, January 2004-January 2009

DATE FoF Global Hedge Fund Short-Term Traders

Oct. 08 -9.3% 2.4%

Sep. 08 -6.9% 1.2%

Nov. 08 -3.0% 0.9%

Jul. 08 -2.8% 0.1%

Aug 07 -2.5% 2.5%

Mar. 08 -2.5% 1.4%

Nov. 07 -2.4% 1.5%

Jan. 08 -2.1% 1.3%

Oct. 05 -1.9% 0.3%

Apr. 05 -1.8% 2.2%

Average -3.5% 1.4%

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FUTURES LAB

Many short-term trading programs are negatively correlated to other hedge fund styles as well as to

major markets. Hence short-term trading provides protection during difficult times for other strategies.

Adding several short-term traders to a portfolio of trend-following CTAs can also be a powerful

diversifier. The chart below shows the annualized return and volatility of an equally weighted portfolioof (i) alltwenty 2009 Newedge CTA constituents (left); (ii) the fifteen constituents that are notshort-

term traders (middle); and (iii) the five short-term traders in the index (right). Again, performance data

is monthly since 2000, through April, 2009. When the five short-term traders are removed from the

portfolio, you can see that the volatility jumps nearly 2%.

In summary, short-term traders tend to improve portfolios by providing diversification and reducing

volatility. Some short-term programs are designed to address specific risks. But investors should keep in

mind that many managers have not been tested in a variety of market conditions.

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INSIDER TALK

Opalesque Futures Intelligence: Whats next

for electronic trading?

Tom Haldes: Dramatic as the growth of

electronic trading has been in the past

few years, it shows no sign of letting up.

TT is developing next generation, best-of-

breed automated trading systems for high

performance execution. This is a very fast

changing area.

Elise Fleischaker: When TT was founded in

1994, electronic trading was in its infancy

and there were questions as to whether it

would catch on. In the past several years the

number of markets we connect to has more

than doubled. Initially we were known for

our point-and-click, manual trading interface

- which is still an important component

in our platform - but automated trading

A Two-Way Street

Futures Strategies and Automated Trading

Talking to high-frequency traders makes you more aware of the

central role of technology. Roy Niederhoffer says his shops trading is

95% automatedthe head trader watches whats going on and adds

a human touch when theres an unusual event. Some managers rely

100% on automated trading.

We wanted to understand how the ongoing development of

automation is affecting investment strategies and vice versa. Tom

HaldesandElise Fleischakerof Trading Technologies give us the

latest perspective on the interface between automation and strategy.

Mr. Haldes knows the issues from both the technology developer and

user sideshe headed global market data development at CitadelInvestment Group earlier in his career.

Electronic trading has opened up a host of possibilities. Modelers

can choose among different levels of automation. A black box a

fully automated program sends thousands of orders a day to

markets and implements the circuit breakers and failure detection

mechanisms indicated by the trading strategy without anyone lifting

a nger. A grey box is a hybrid that incorporates more user control.

Tom Haldes

Elise Fleischaker

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INSIDER TALK

technologies have become increasingly important for

our customers and as such, that is where much of our

new development resources are focused.

OFI: What kind of improvements do traders want?

TH: Probably the biggest factor is the speed oftrade execution. People create black boxes and use

grey box tools for automation. Thats all ne, but if

your trade order hits the market half a second after

someone elses order and they get the price you

wanted, the automation is not working for you.

OFI: Does automation create new strategies or are

the strategies pushing automation?

TH: Automation and trading strategies feed on each

other. For example, consider a black box application

developed for index arbitrage--a strategy to gain

from price anomalies between a basket of securities

that is a proxy for an index and the index itself asit trades in the futures market. A black box routes

an order to buy or sell, depending on whether the

price of the index is below or above the theoretical

price indicated by the model. This is a fairly common

strategy, so likely therell be another trader with a

similar model. When the price discrepancy shows up,

both traders submit orders for the index. The order

that hits rst gets lled before the price moves, while

the later order misses the price. So everybody wants

their automation to be as fast as possible. The big

trend in all the markets is reducing latency.

OFI: When you say fast, how fast do you mean?

TH: The standard used to be seconds, recently it

became milliseconds and now the game is being

played at the microseconds level. There are systems

that can respond to changes in the market and re-

submit an order within hundreds of microseconds.

Thats how latency-sensitive the business has

become.

OFI: Which strategies does the issue of latency

really matter for?TH: If you rely on automation either in part or totally

through a black box to execute your strategy,

reducing latency is important for you. There are

traders who might have a broker manually working

on their order and in that situation the milliseconds

dont count. Manual trading is a different story, but if

youve embraced automated trading, speed matters,

and even more so in arbitrage strategies.

OFI: How is latency reduced?

TH: Take the delay in getting connected to an

exchange because it is physically distant. In this

case, the latency exhibited by the trading system is

largely the result of the geographic separation of

the order routing logic and the matching engine.

Traders want to trade as quickly as they could if

they were in the same place as the exchange, even

if theyre in another continent! Were creating

server-based platforms that remove this type ofdelay. With high volatility in markets, milliseconds

can make the difference between a successful trade

and a failed one, and if youre executing a strategy

on a matching engine located somewhere across

the globe, you need a proximity-based solution to

eliminate the geographical latency.

OFI: Would you give an example?

TH: For instance, in calendar spread trading, where

you go long one futures contract and short another,

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INSIDER TALK

the system enters a quoting order for one leg while

leaning in the other market for the hedge leg. Asthe hedge market moves, the quoting order needs

to be re-quoted to preserve the target implied

spread price. If youre in London and the exchange

is in Chicago, the implied spread price may change

several times during the interval of time it takes to

receive your market data update and respond with

an updated re-quote. Thus geographical latency

can make your spread trading less effective. Our

popular spread trading application, Autospreader,

was initially developed for desktop computers.

Were developing new technology that will move the

execution logic very close to the matching engine,

eliminating geographical latency. This means thetrader in London trading on an exchange in Chicago

can see his quoting order update in less than a

millisecond after the lean market has moved, just as

if he were physically located in Chicago.

OFI: How does a researchers quantitative model

work with your trading software?

TH: Traders can execute their strategies using

applications like Autospreader. But very complex

quantitative models and algorithms may not t any

stand-alone tool. We have special applications for

writing programs and creating black boxes. These

are used in conjunction with our exchange gateways

to submit orders and receive prices. By combining

the tools, a sophisticated quant shop can build any

model they want and link it to our trading platform.

OFI: What else do traders need, besides speedy

order execution?TH: In the race for performance, huge amounts of

market data are being generated. Exchanges are

quoting prices thousands of times a second. How

will the ever-growing volume of data be managed?

Traders, exchanges and telecommunication providers

are all grappling with that question. If the data gets

queued in the pipeline, then your system will lag in

responding to market movements. So a corollary of

automated trading is how to accommodate whats

come to be known as the market data tsunami.

OFI: How would a shop that does not have a big IT

department manage the technology?TH: Hence there is a growing trend for hosting

services. Traders and brokers want access to dozens

of exchanges but dont necessarily want to manage

all the lines, circuits, gateways to the exchanges,

servers, etc. A hosting provider gives you high-

speed access for trading markets worldwide. That

way, you focus on your core business and not on the

technology.

EF: Customers that use our TTNET hosting service

outsource the management of their trading network

and telecommunications infrastructure. We deploy,

monitor and upgrade their network, including the

gateways. The trend towards outsourcing is not

focused on small rms--some of the largest global

banks use our service.

Automation and trading strategies feed on each other.

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Newedge refers to Newedge Group and all of its worldwide branches and subsidiaries. Only Newedge USA, LLC is a member of FINRA and SIPC (SIPC only pertains to securities-related transactions and positio

Not all products or services are available from all Newedge organizations or personnel and restrictions may apply. Consult your local oce for further details.

Dedicated services for hedge funds and CTAs. Multi-asset prime brokerage, cross margining

tools, cutting-edge risk calculation, start-up services and in-depth market intelligence.

We work with you to develop customized solutions that match your needs. To help power

your performance worldwide.

EXECUTION CLEARING PRIME BROKERAGE

We dont believein one-size-fts-all.

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NEWS BRIEFS

Renaissance Liked Goldman, AnnalyRenaissance Technologies held relatively big positions in certain nancial rms in the midst of the nancial sector meltdown in the

rst quarter of the year, according to the most recent holdings report. Financial stocks bounced back strongly in the rally since early

March.

Among Renaissances holdings were Annaly Capital Management Inc. an asset manager and Goldman Sachs. The hedge fund

also had positions in pharmaceutical companies Abbot Labs and Wyeth and tech companies Apple and Google. Energy giant

ConocoPhillips and tobacco biggie Lorillard Inc. were other stand-outs in the portfolio as of March 31st.

Renaissance, with around $20 billion in total assets, is possibly the largest quantitative shop with a short-term trading orientation.

US Carbon Permit Plan ProceedsA cap-and-trade bill that is the rst step in creating national carbon allowance trading and related futures markets is moving through

Congress. Last week President Barack Obama praised Representative Henry Waxman, chairman of the Energy and Commerce

Committee and sponsor of the bill, for having brought together stakeholders from all corners of the country and every sector of

our economy to reach an historic agreement on comprehensive energy legislation.

Controversy rages, however, as to whether the newly created emission permits should be given away free or auctioned.

Las Vegas Commodity Pool Operator Charged with Fraud

The US Commodity Futures Trading Commission got a court order freezing the assets of Gordon Driver and his Las Vegas-based

companies Axcess Automation and Axcess Fund Management. The regulator says Mr. Driver fraudulently solicited commodity pool

participants, misappropriated funds, and issued false statements in a $13.5 million fraud involving more than 100 participants in the

US and Canada.

MF Global Disagrees with VerdictFutures brokerage MF Global says it will appeal a UK judges decision with regard to Parabola Investments, even though insurance

will cover most of 20 million in damages the judge ordered the rm to pay a plaintiff. The case involves a broker who joined MF

Global through an acquisition in 2001 and that year misrepresented a clients account performance and balance.

The rm says it is a different company under a different management structure now and in the last year alone invested over $200

million to improve employee training, compliance and risk management.

ICE Futures Volume UpIntercontinentalExchange, an operator of futures exchanges and over-the-counter markets, reported that the April 2009 average daily

volume for all ICE futures contracts is up 14% to 983,928 from a year ago.

ICE Futures Europe, a London-based energy futures exchange, had a reduction in total contract volume compared to 2008 but open

interest was higher. Volume and open interest records were established for several coal and emissions contracts during April.

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OPALESQUE FUTURES

PRACTITIONER VIEWPOINT

Long-only investments in commodity futures could get hit by a one-two punch this year. With the

G10 in recession and many emerging economies slowing sharply, further demand destruction is

likely for most commodities in 2009 and may continue to outpace production cuts, says a report

from Nouriel Roubinis RGE.

Admittedly, Professor Roubini is on the gloomy end of the forecast spectrum. But price declinesare not the only risk. Those betting on rising oil prices face a contango futures marketthat is,

theyre losing money from selling expiring contracts and buying longer-dated contracts. The roll

yield, sometimes a source of positive return, is negative.

The contango (albeit narrowing) in the oil futures curve suggests further stockpiling of oil in

anticipation of higher prices in the future, is how RGE explains pattern of distant-dated contracts

being more expensive than near-dated contracts.

Demand for oil continues to fall in the OECD and even in emerging economies like China the

big source of added demand in recent years oil demand is likely to shrink in 2009 because of

economic weakness, the report points out. That picture certainly does not favor across-the-board

passive investing.

On the other hand, there may be upward pressure on the prices of some agricultural commodities

due to continuing supply shortage. RGE points to sugar and cocoa:

Despite a 27% rise in 2008, sugar prices will rise further in 2009 due to a widening globalsugar decit, notwithstanding slower ethanol production growth due to lower fossil fuel

prices. Similarly, a cocoa supply shortage due to poor weather may offset a retrenchment inchocolate demand due to consumers higher debt servicing costs, falling wealth and lousy

employment outlook.

But overall, RGEs outlook is negative: Across the commodities group, inventory buildup and

falling demand creates conditions ripe for extending the current bear market, despite the fact

that most commodities seem to have fallen below production costs for new supplies.

We asked people in managed futures what they see happening. The conditions that are a

disadvantage for commodity index investments can benet long/short managers. Davide

Accomazzo, managing director at Cervino Capital Management LLC, told us:

Ination or deation that is the looming question! Certainly these are complex timesand any kind of economic analysis, more than usual, is subject to revisions forced by

signicant policy or systemic changes.

It would seem like the cumulative effect of all the government programs and the extremely

Commodity Investing Outlook

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OPALESQUE FUTURES

PRACTITIONER VIEWPOINT

aggressive monetary policy implemented so far should seriously weaken the dollar. The US

dollar has a high inverse correlation to commodities and therefore we should eventually seecommodities rise.

In the shorter term, however, we are still dealing with a large gap between output anddemanda deationary dynamicwhich has been pressuring commodity prices to thedownside. In the nal analysis, this will be a traders market for quite sometime. Not a badplace to be for exible CTA programs.

Mack Frankfurter, chief investment strategist at Managed Account Research Inc., says

investors should ask where the return comes from in commodities:

Obviously commodities are going to rise and fall in line with dollar weakness and strength.What I think is more interesting is the behavioral dynamics set in play because of thespeculative boom-bust in commodity prices last year.

Any rise in price is going to cause a more sensitive reaction by long hedgers, the

consumers of commodities, to hedge their forward needs. At the same time, producersof commodities or short hedgers are going to be more inclined to lock in rising prices toensure positive operating margins. This is going to result in range-bound trading driven by

fundamental factors, which in fact is a sign of healthy commodity markets, unlike in 2008.

CTAs who know how to actually trade these markets are going to outperform passivecommodity exposure. Truth is, I believe managed futures did well last year exactly because

securitized commodity products were the dumb money from which CTAs ultimately tookexcess premia.

Futures is a zero-sum game and the source of return has to come from somewhere whenspeculating in commodities. Thats the question investors should be asking.

Long/short commodity managers are nding opportunities. Lars Steffensen, managing partner

at Ebullio Capital Management, describes the recent trades that made money for him:

Tin, nickel, crude and cocoa outright along with the lead/zinc relative value spread and tin

calendar spreads were the star performers. Copper was the only noticeable laggard due tous turning into non-believers of the rally too soon.

We believe that the grotesquely bad industrial production and GDP gures from the rest

of the world are right and that the gures from China are wrong; call us cynics, but we justdont believe that China can keep reporting electricity output down 25% or 30% with therest of the economy going ahead unchanged or even allegedly growing.

We will be short on the way down and remain vigilant for real signs of recovery or theprinting of money on a massive scale in order to get long for the long term. What is forcertain is that the markets will stay extremely volatile and changeable and therefore, in ourmind, very tradable.

Ebullio returned 4.5% April and 10.5% year to date. The rm invests in all commodity markets via

futures, options and some physical trading, using a discretionary approach along with technical

and fundamental signals.

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OPALESQUE FUTURES

INDEX TRACKER

This database breaks out commodity and currency CTAs separately

from managed futures. Australian commodity managers were about

at for the month while FX performed strongly.

When it came to new allocations, investors favored managed futures

and global macro. According to Barclay Hedge, $31.4 billion left

hedge funds in March, the fth largest outow on record, bringingrst quarter redemptions to $137 billion or 12.6% of industry assets.

But CTAs posted their rst inow in seven months, getting $695

million (0.4% of assets). Global macro was the only other sector that

had a positive asset inow.

Other databases point in the same direction, though the exact

numbers differ. A report from Credit Suisse /Tremont says that

overall assets under management by hedge funds declined to $1.3

trillion as of March 31st. While investors, in particular institutions, are

expected to return to hedge funds in time, Over the short term,

we anticipate increased attention will be focused on specic sectors

such as global macro, convertible arbitrage and managed futures.

Here is what Credit Suisse /Tremont says about investors

interest:

Despite nishing the rst quarter down 2.9%, funds in the managed

futures space, which represented the best performing hedge fundsector last year, continue to build on the interest they generated

in 2008. The liquid, trend-following nature of this strategy typicallyallows managers to react quickly to changing market conditions,which in turn has historically enabled managers to capitalize during

periods of increased market volatility.

April and Year-to-Date Returns, Various

Indexes

Apr YTD

Australian Fund Monitors:

Commodities/CTA 0.16% -0.20%

Currency/FX 1.68% 1.92%

Global Macro 0.17% -0.63%

Managed Futures -0.83% 1.35%

All Hedge Funds 3.09% 4.01%

Newedge CTA Index -1.96% -4.0%

Barclay CTA Index -0.51% -2.34%

Credit Suisse /Tremont

Managed Futures -3.24% -6.03%

Hedge Fund Index1.68% 2.55%

Managed futures as a whole continued to lose in April, as the Newedge, Barclay and Credit Suisse /

Tremont indexes indicate. To see whats happening at a more granular level, take a look at Australian

Fund Monitors indexes, which cover more than 200 absolute return and hedge funds managed in

Australia.

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OPALESQUE FUTURES

TOP TEN

We decided to do something different for this issues Top Ten. Instead of the programs with the highest returns,

ManagedFutures.eu picked the programs with smallest drawdowns.

These commodity trading advisors have track records of more than two years. The average rate of return refers to the track

record.

Ranking Based on Drawdown, from ManagedFutures.eu database and CTA Index.

CTA and program Drawdown Average RoR

QuantMetrics Capital Management LLP

QM Multi Strategy Fund (EUR)0.11 33.34%

Conservative Concept Portfolio Management AG

CC Athena OS Fund LTD (USD Instit.class)0.56 12.90%

QuantMetrics Capital Management LLP

QM Premier Strategy1.06 10.29%

Da Vinci Invest Ltd.

Da Vinci Arbitrage Fund1.27 46.38%

DynexCorp Ltd.

Dynamic Currency Alpha1.82 5.46%

Geo Economic Management System Ltd.

Low-Leveraged FX Model1.87 9.93%

Hyman Beck & Company

Volatility Analytics Portfolio *QEP only*1.90 8.54%

John Locke Investments S.A.

Cyril High Frequency Program2.84 5.49%

Quantam S.A.

Global Statistical Arbitrage 1x 2.84 5.00%

Quaesta Capital AG

Quaesta Capital FX-MMP2.94 3.05%

We feature top managers from a

different database every issue.

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accurateprofessional reporting serviceNo wonder that each week, Opalesque publications are read by more than 600,000 industryprofessionals in over 160 countries. Opalesque is the only daily hedge fund publisher which isactually read by the elite managers themselves

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PUBLISHERMatthias Knab - [email protected]

EDITOR

Chidem Kurdas - [email protected]

ADVERTISING DIRECTOR

Denice Galicia - [email protected]

EDITORIAL ADVISORTim Merryman - [email protected]

CONTRIBUTORSBucky Isaacson, Frank Pusateri, Pavel Topol, Ty Andros,

Walt Gallwas.

FOR REPRINTS OF ARTICLES, PLEASE CONTACT:Denice Galicia [email protected]

www.opalesque.com

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