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Opalesque Futures Intelligence
Opalesque Futures Intelligence

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Published by: Opalesque Publications on Mar 30, 2012
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Copyright 2009 © Opalesque Ltd. All Rights Reserved.
“In my 20 years in the business, this is a signicant change,says
Ernest Jaffarian,
Founding Father
of Efcient Capital. “People arenally starting to take notice of futures!” He was speaking mainly of large investors, but there is a related trend best summarized as themainstreaming of futures and other alternatives. You hear about it from industry people like Gabriel Burstein, who standsat the cross-roads of hedge funds and mutual funds as head of researchat Lipper. Managed futures are no longer only for alternatives investors,he says. Advisers to the mass afuent are recommending the strategy.Another part of the story: institutions want regulated and liquidinvestments. So managers on both sides of the Atlantic are launchingmutual funds and exchange-traded funds — see
Futures Lab
.Insider Talkfollows up the subject with a conversation about a globalmacro mutual fund, in the pipeline from Millennium. Clients asked forUCITS, says manager Arne Hassel. InPractitioner Viewpointspecialistsfrom Kinetic Partners discuss UCITS III, the European mutual fundframework that is a good t for futures-trading strategies.Top Ten, an amazing list from a long-term allocator, demonstrateswhy investors big and small should have such strategies in theirportfolio. Admittedly, elite managers like Tewksbury do not soundlike mainstreaming candidates. But some very successful funds arebecoming available in the wider market.We expect to report more on this trend. Meanwhile, have a pleasantsummer. I hope you will make time for OFI despite the call of the beach!Our next two issues are scheduled for July 14th and August 11th.In September we go back to our once-every-two-weeks publishingschedule. There is much going on and we will do our best to bring it toyou.
Chidem Kurdas
In This Issue
Founding Father Q&A
Investor perspective: Ernest Jaffarian ofEfficient Capital compares CTAs and hedgefunds ....................................................... 2
Futures Lab
Innovative mainstream products: ETFs andmutual funds may open market to futures ..4
Insider Talk 
Arne Hassel of Millennium Global says theUCITS mutual fund format fits a macrostrategy ................................................... 8
Practitioner Viewpoint
Why UCITS III, the European “passport”fund framework, favors managed futuresand macro ............................................. 10
Regulators & Courts
Contract question, climate futures,fraud .....................................................14
Top Ten
An extraordinary lineup put together by alarge investor ......................................... 16
June 16, 2009
Copyright 2009 © Opalesque Ltd. All Rights Reserved.
June 16, 2009
Opalesque Futures Intelligence: How manymanagers are you currently invested with?
Ernest Jaffarian: We have more than 40managers in the portfolio. Last year alonewe visited more than 200 commodity tradingadvisors.
OFI: What’s the advantage of a portfolio
of CTAs compared to a diversied fund of 
hedge funds?
EJ: CTAs have an entirely different risk/returnprole than hedge funds, as academic researchhas shown. The crucial difference is rooted inthe fact that CTAs do not try to make money bytaking credit risk or liquidity risk. And they don’ttake volatility risk in the sense of being shortvolatility. Those are primary sources of incomefor many hedge fund strategies.
OFI: What is the source of prot in managed
EJ: The asset class on the whole seeks tomake money by pure trader skill while beingagnostic about market direction. Because of that, CTAs have no correlation to major assetclasses or, even better, are negatively correlatedon the downside but positively correlated onthe upside to stocks. 2008 presented proof of the concept. Hedge fund strategies heavy onmarket direction beta or alternative beta – likecredit exposure – all got crushed. By contrast,CTAs saw opportunities as result of marketdislocation and had one of the best years intheir history.
OFI: Do you invest in new CTAs?
EJ: We do not seed CTAs. How long theyneed to be around for us to consider investingdepends on the trading style and theexperience of the manager. Trading experienceis one characteristic that’s pretty important inthis space. For us, 20 years of trading and twoyears in the CTA business is a more valuablecombination than someone who’s been a CTAfor four years and has no other experience.
OFI: Besides experience, what do you lookfor in a CTA?
EJ: To begin with, we think the person’scharacter is extremely important. We want
CTA vs. Hedge Fund Investing
Ernest Jaffarian
, founder and chief executive of Efcient Capital Management LLC, is a long-time investor who has allocated billions of dollars. He continues to make allocation decisions tocommodity trading advisors for a distinguished group of clients.Here he compares managed futures with hedge fund strategies and tells us what investors like and don’t like. He argues that a portfolio of commodity trading advisors is the better way to invest in aturbulent world and explains why he has condence in futures.Mr. Jaffarian has been in the trading and investment business for well over 20 years. He joined Chicago Research & Trading Inc. as a member of the proprietary trading group on the oor of theChicago Board Options Exchange in 1986. Later he worked for Hull Trading Company, a leadingelectronic trading business specialized in derivatives.He was responsible for allocating Hull’s own capital to commodity trading advisors. In a management buy-out, the Hull managed futures unit became Efcient Capital. Subsequently Goldman Sachs acquired Hull Trading.
Ernest Jaffarian
Copyright 2009 © Opalesque Ltd. All Rights Reserved.
June 16, 2009
a world class operation in everyrespect, whether in trade execution orinfrastructure, and an ongoing researcheffort to improve what they do. Also,we seek managers with trading stylesthat have some unique feature. It doesnot do us any good if a CTA has a 90%correlation to other CTAs. That adds novalue to our portfolio.
OFI: That must be difcult with trend
followers. Don’t they mostly follow thesame trends?
EJ: We do not rely on trend followersalone. We include as much diversity as wecan nd. There is a lot of diversity amongCTAs. Some traders hold positions forno more than a few minutes, others holdfor weeks. You have traders that focuson a single market, you have those thattrade every market around the world.There are traders that rely on patternsin the markets and traders that rely onmathematical analysis of economic turningpoints.
OFI: How come all these differentapproaches are practiced in futuresmarkets?
EJ: Futures markets are the canvas uponwhich the traders apply their skills. Theyuse futures because these have desirablecharacteristics. Futures markets are non-directional, extremely efcient and veryliquid. If you have a sense of how to pullreturn out of markets, you will gravitateto futures because the instruments allowsyou to express that skill.
OFI: Do global macro and managedfutures belong in the same assetbucket?
EJ: If you line up global macro managersthat trade exclusively in futures versusglobal macro managers that trade otherinstruments as well, you nd that theyare not very correlated. Global macroas expressed in the CTA world hassignicant differences from global macroas expressed in hedge funds. For instance,in the hedge fund version people usuallypick two to four macro themes that theyput into play using an array of instrumentsand hold for a long time. By contrast,CTAs with a global macro style tend tohave a larger range of themes and holdpositions with a much looser hand—theyrun very dynamic trade books comparedto macro hedge funds.
OFI: Is asset growth the enemy of return?
EJ: It is not necessarily the case thatsmaller funds do better. It depends onthe trading style. Yes, someone whotrades in a very short time frame can’tmanage as much as someone with alonger time frame. That said, two of thelargest futures managers, Transtrendand Winton, continue to perform well.It has more to do with the style andinfrastructure of the manager than theassets under management. We have nohard rules about the size of the assets aCTA manages.
OFI: What do you try to avoid?
EJ: We don’t want managers that takea lot of risk relative to their return, takevolatility risk or don’t show discipline.There are managers who make fabulousreturns by taking inappropriate risks.Frankly, that describes a signicant partof the hedge fund world. You’ll see hedgefunds that make money for 48 monthsrunning and then collapse because theytook too much credit risk. Our mandateis to avoid those risks and try to generatereturns in a different way.
OFI: What do investors want now?
EJ: Investor interest in CTAs waxed andwaned in the past. I think 2009 will bringa paradigm change, for two reasons. One,the diversication benet of CTAs, a pointmade repeatedly in academic studies,showed up in full force last year and isnow being accepted by people who usedto resist the idea. Two, people are startingto distinguish CTAs from hedge fundsand allocate separately. CTAs have alwaysbeen lumped together with hedge funds.Investors are now starting to say theywant so much exposure to the hedge fundspace and so much exposure to the CTAspace. In my 20 years in the business, thisis a signicant change. People are nallystarting to take notice of futures!
OFI: What keeps you up at night?
EJ: I sleep pretty soundly these days.In 2008 the volatility of our compositeportfolio was the lowest in our history.Frankly, I’m more concerned about eventsin places like Pakistan or North Koreathan I am about our portfolio. Can youimagine the impact of a nuclear explosionin Saudi Arabia? There are any number of possible events that would rock markets,including futures markets. Even withthose geopolitical risks, I would muchrather have a broadly diversied futuresportfolio than own stocks and bonds or belocked into one currency. Futures marketsas a system are more stable than stockmarkets, as we saw on Black Monday1987 and in the recent crisis. Now theUS government is trying to move moreinstruments to futures exchanges. I havecondence in the integrity of the futuresmarket.
“People are starting to distinguish CTAsfrom hedge funds and allocate separately.CTAs have always been lumped togetherwith hedge funds.”

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