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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.
Client Communications
In the past, soaring stock markets tended to take investors’ attentionaway from other strategies. This time it may be different. 2008 leftstrong impressions on people’s minds—such as the importance of liquidity, the advantages of separate accounts and the great returnsfrom managed futures at a time when almost all assets classes wentdown precipitously.“The best is in front of us,” says Adam Rochlin, who heads MF Global’snew asset management division. The futures brokerage built thisbusiness, focused on commodity trading advisors and global macroinvesting, in the past couple of years, as Adam explains in
Insider Talk
.Ken Steben, who has been investing with CTAs since the 1980s, has asimilar observation. “We’ve seen increased investor interest,” he saysin
Founding Father
. The catch is that people see managed futures asriskier than it really is.
Futures Lab
presents research from Steben & Co.showing that the risk is less than the stock market’s in the long term.
But it has been difcult to change perceptions. “The onus is on us and
other product providers to learn to communicate better,” Mr. Rochlinargues.One change that favors macro and managed futures is clients’ interest inseparate accounts—something that CTAs have offered for many years.In
Practitioner Viewpoint
, you’ll nd comments on separate accounts
from the executives of investment platforms including LighthousePartners.The pros and cons of investing via a separately managed account areamong the many issues to be discussed with clients. The private investorwho contributed this issue’s
Top Ten
says good communication is nowmore essential than ever.
Chidem Kurdas
In This Issue
Founding Father Q&A
Ken Steben of Steben & Co. describes arigorous CTA screening process .............. 2
Futures Lab
Comparing returns for long holding periodsreveals an interesting difference .................5
Insider Talk 
Adam Rochlin of MF Global talks about thebrokerage’s new investment platform for CTAs and global macro ............................ 7
Practitioner Viewpoint
Executives from Lyxor, Lighthouse Partnersand other firms discussed managedaccounts at an event. We bring you thehighlights .............................................. 11
News Briefs
Trend follower gains, CTA at SEC, highfrequency trading, new quantitative index and more ..............................................13
Top Ten
A global macro lineup that includesBridgewater .............................................14
September 29, 2009
Copyright 2009 © Opalesque Ltd. All Rights Reserved.
September 29, 2009
Opalesque Futures Intelligence: How did youget into this business?
Ken Steben: I started as a stockbroker in1981 and became a licensed commoditiesbroker in 1983, when I realized the value of adding managed futures to clients’ portfolios.I researched this area and began to place mycustomers’ money with commodity tradingadvisors. Then in 1989 I formed my owncompany and started a fund to invest in CTAs.
That rst fund is still operating.
OFI: Who are the clients?
KS: My rm introduced managed futures to
independent broker-dealers over the 1990sand into the 2000s. Today we do business withmore than 120 broker-dealers across the US as
well as hundreds of investment advisory rms.
We currently have over 12,000 investors in ourfunds.
OFI: Do you see yourself as a fund of fundsmanager?
KS: We are not a fund of funds in the sensethat we never invest in commingled pools, onlyin managed accounts. We are a manager of managers. Because we hire advisors to trademoney in our funds’ accounts, we see what theydo every day and can monitor them very closely.
OFI: How do you nd managers?
KS: We search repeatedly, every quarter. Wecomb through databases, look at the materialsadvisors send us and keep our ears to theground in the industry There are a couple othousand companies registered as commoditytrading advisors in the US alone. But even withall the searching, the list of advisors we considerdoing business with is always very short. For one
thing, rms must have at least a ve-year track
record so that there are enough data points for
our quantitative analysis, which is the rst step
in the screening.
OFI: How do you assess a CTA’s trackrecord?
KS: Our quantitative analysis is not aboutpicking the highest past returns. We have found
that annual prot has no statistical signicance
for predicting the future. However, there areelements within the track record that are
statistically signicant for future performance.
In the past several years we’ve isolated someratios that are very helpful for understanding
How to Choose CTAs
Trading advisors are not all the same. That’s what you hear again and againfrom long-time investors. Because there are big variations, good advisor selection is essential to the success of an investment. We’re asking industry veterans how they asses managers.Ken Steben, a pioneer in the commodity pool business, developed his approach starting in the 1980s. Here he discusses the extensive search and selection process his group uses and how it has changed over time.Mr. Steben is the founder and chief executive of Steben & Company Inc.
The rm oversees $1.1 billion in managed futures and additional assets in
other investments. It has a high-net-worth client base.
Ken Steben
Copyright 2009 © Opalesque Ltd. All Rights Reserved.
September 29, 2009
how a manager’s returns compare to therisks taken. We look deep into the track
record, not just at the prot numbers.
CTAs that are promising by our measuresare put through the qualitative review. Wemeet the principals, learn their history andunderstand how they make money. Welook at their operational capabilities andtalk with their customers.
OFI: How many managers havesurvived this screening process?
KS: We are currently using seven tradingadvisors, with whom we feel comfortable.A very large number of advisors arescreened out by our quantitativeanalysis of the track record. We look for
consistency in how much prot they can
produce relative to their ability to controlrisk. This is a very stringent screen. We likeour analytical approach because we havefound it to be a meaningful indicator of future success.
OFI: What other factors make youdecide not to proceed further with amanager?
KS: Many of those that get through ourquantitative screen don’t meet othercriteria. There are a whole range of issues. Key personnel may have left the
rm, which means that the track record
no longer indicates what the team cando. They may not have the operational
capability to handle an inux of additional
money. Some managers have compliance
or legal issues. Sometimes we nd they
use instruments we’re not comfortablewith. For instance, in early 2008 we founda CTA that otherwise looked very goodbut was trading swaps. We want tradinglimited to exchange traded futures andcurrency forwards, with no over-the-counter derivatives. Because of ourconcern with the swaps market, we didnot invest with that CTA. As it turned out,
the crisis that came later in 2008 justied
the concern.
OFI: How would you assess anemerging manager?
KS: We do not invest with emergingCTAs because you can’t measure theirprobability of success. We want a reliable,proven track record.
OFI: Are you still invested with someof the managers you found 20 yearsago?
KS: You can’t stay with same CTAs—theychange, markets evolve. We’ve changedour whole portfolio completely over theyears. Not that we invest short term.We’ve used some CTAs for 10 or 12
years, others for ve years. But we do
switch managers. Some of them do notkeep up with markets or lose personnel.Other managers come up with moresophisticated systems.
OFI: Has you screening processchanged over time?
KS: Our search became more global andour analysis of track records became moresophisticated. These days we search allover the world. Of the seven advisors
we’re using, ve are overseas, two are
in the US. By contrast, seven or eightyears ago we were investing with only UStrading advisors. We’ve done research toimprove our selection process and overallwe’ve done very well for our investorsover the years.
OFI: What styles do you prefer?
KS: We have used a wide range of CTAsover time but found that the most reliableare systematic trend followers. So the bulkof our money is with trend followers.
OFI: Managed futures don’t seem to bedoing well this year. Have many CTAslost their edge?
KS: It is very short sighted to say, they’renot doing well this year, they’ve lost theiredge. It is normal to have down years.As a professional investor, you think interms of the long-term horizon, don’t
allow short-term results to inuence your
view. Overwhelmingly, the data showsthat managed futures adds to portfolioperformance and is one of the best
OFI: Isn’t short selling a good
KS: Historically, over the long term equitymarkets go up, so short sellers losemoney. But CTAs can go long & short, not just in stock markets but many markets.They can make money in bear or bullmarkets, whereas short sellers lose in bullmarkets.
OFI: What about trend followers’drawdowns?
KS: In my opinion people need tounderstand that systematic modelswork in the long run because long-termtrends do appear, usually when you leastexpect them. Good managers keep theirpowder dry, attempt not to lose too much
during difcult periods, then try and take
advantage of trends. Managed futuresis misunderstood by a large percentage
of the nancial community. It is seen as
riskier than it really is. Although futurestrading is speculative and volatile – justlike stocks can be – and not suitablefor everyone, used properly it is a riskreduction technique. 2008 showed thatit complements stocks and bonds in aportfolio. We’ve seen increased investorinterest.
OFI: What mistakes do investors make when investing in managed futures?
KS: You need someone with experience toscreen managers and watch the trading.To get in with the largest CTAs, in manycases you have to be a large investor.For instance, some CTAs require a $100million investment for a separate account.An individual investor may not haveaccess—which we provide.
“We have found that annual profit has nostatistical significance for predicting the future.”

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