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“Let the Buyer Beware of Errors, Misleading Statements, and Out of Context Comparisons”
In a blog posted on March 3rd, 2011, Attain Capital criticizes a managed futures index that was developed by my firm. I would like to take the opportunity to clarify several errors and misconceptions that were portrayed in the deceptively titled “Why you aren’t getting managed futures exposure with Rydex and Wisdomtree’s managed futures products”. As some background, I developed the Diversified Trends Indicator™ as a way for investors to access the “core” returns embedded within trend-following in the futures markets. The index is comprised of 24 components – all futures contracts – that are positioned either long or short on a monthly basis (long or flat for the Energy sector) through a rules-based methodology. The DTI® provides access to a trend-following strategy with full transparency and daily liquidity of underlying components, without the use of leverage. Allow me to retort some of the most glaring errors made by Mr. Jeff Malec and the folks at Attain Capital: “The DTI® is not a Managed Futures Strategy” The DTI® is a widely recognized benchmark for replicating the “core” returns embedded within trend-following in the futures markets. Certainly a strategy or index that is comprised solely of futures contracts and uses a systematic process to take long and short positions has to be classified as “managed futures.” A high percentage of commodity trading advisors that comprise the “managed futures” industry utilize systematic, trend-following methodologies in preference to discretionary strategies. Unless Mr. Malec also intends to exclude systematic strategies from his personal definition of “managed futures” or he has petitioned the regulatory agencies to change their definitions governing the industry, perhaps he should reconsider his position. Unfortunately, Mr. Malec’s viewpoints could be more of an attempt to protect his firm’s business model as a commodity broker and portal for various individual CTA programs and trading systems rather than to provide a disinterested analysis of two products that are publicly available to a wide range of investors.
The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision. . Investment products, including hedge funds, futures funds and managed futures and commodities accounts, are speculative and involve a substantial degree of risk. No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events is provided. Past performance is not necessarily indicative of future results. Page 1 of 4 1139 South Main Street, Grapevine, Texas 76051
“The Wisdom Tree Managed Futures ETF and the Rydex Managed Futures Fund Track the Same Index” The Rydex product tracks the S&P DTI, while the new WisdomTree product tracks the DTI®. The two indexes are very similar, but have distinct differences. In certain months the returns will be quite close, while in others there could be a tremendous spread. “The DTI® Significantly Underperforms the NewEdge CTA Index” The DTI® was officially launched in 2004, with “live” daily values and a full methodology description available on our website (www.aftllc.com). If the author had made an index-to-index comparison (e.g. the DTI® index values to the Newedge CTA Index values) since the DTI’s launch, he’d clearly see that the DTI® not only outperformed the Newedge CTA Index,1 but it did so while providing lower correlation to the broader equity markets:
Annual ROR Correlation with S&P 500**
Source: International Traders Research *Data from Jan. 2004 – Feb. 2011 **Correlations based on monthly returns
DTI® Total Return 5.80% ‐0.2
NewEdge CTA Index 4.90% 0.02
By focusing on such a short time period, Mr. Malec creates the exact opposite impression. Almost any investment strategy can be made to appear better or worse if you cherry-pick your data base. It is more important to see how a strategy or index performs in a variety of market and economic conditions. Admittedly, a diversified portfolio of 20 or more trading programs with 100’s of strategies will often generate more favorable statistics than a single strategy, from the diversification aspect alone. But what good does that do an individual investor who has no practical way to replicate the NewEdge CTA Index? Furthermore, the 20 (current) funds comprising the NewEdge CTA Index are not all pure trendfollowing strategies. This gives the Newedge CTA Index a distinct advantage during the 2009 and early 2010 periods, where a lack of sustained trends across several key markets created a difficult environment for many trend-following strategies and indexes. The author also ignores the leveraged nature of the NewEdge constituents, which gives those strategies an advantage over the DTI® during periods of strong directional performance (e.g. stocks since the March ’09 lows) but greatly increases risk. Readers should also be wary of the survivorship and selection biases that are prevalent in virtually every hedge fund index comprised of multiple managers.
Unlike the DTI®, the NewEdge CTA Index is based on aggregated “net” performance reported by a number of CTAs.
The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision. . Investment products, including hedge funds, futures funds and managed futures and commodities accounts, are speculative and involve a substantial degree of risk. No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events is provided. Past performance is not necessarily indicative of future results. Page 2 of 4 1139 South Main Street, Grapevine, Texas 76051
It should also be noted that because of the leveraged structure of many CTA programs, and their inclusion of potentially illiquid contracts, there is a limit to how much money each of these CTA programs can absorb before a point of declining returns is reached. On the other hand, based on our historical estimates, the DTI® could trade an estimated $20 billion before any sectors would have to be adjusted. In addition, many of the funds in the NewEdge CTA Index trade equity futures, which the DTI® does not. Regarding the fact that the DTI® does not go short the Energy sector, this is a forward-looking rule which we implemented to avoid “risk of ruin.” A sudden terrorist or military strike in the Middle East region could send prices skyrocketing instantly, and because the Energy sector is largest sector in the DTI® (albeit a much smaller percentage that an index like the S&P GSCI uses) an event like that could cause devastating losses. As a matter of fact, the elimination of the ability to short energy in the DTI® has had little long-term effect, although in 2008 it did lower returns. As a trader with over 44 years of experience, I am the first to acknowledge that the managed futures universe is not only diverse, but that it includes talented managers who clearly have the ability to produce alpha. However, I find it impossible to see any level of truth in the author’s viewpoint. The S&P DTI and the DTI® are transparent managed futures indexes, and the Rydex and Wisdom Tree products provide investors with a simple means of accessing the managed futures strategy upon which each respective index is based. Comparing them to an un-investable CTA index over a short period of time serves no real purpose. We thank our clients for their vision, innovation, and continued support over the years and we look forward to another successful year together. Victor Sperandeo CEO, Alpha Financial Technologies LLC
The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision. . Investment products, including hedge funds, futures funds and managed futures and commodities accounts, are speculative and involve a substantial degree of risk. No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events is provided. Past performance is not necessarily indicative of future results. Page 3 of 4 1139 South Main Street, Grapevine, Texas 76051
CERTAIN RISK FACTORS & DISCLOSURES The communication is published by Alpha Financial Technologies, LLC (“AFT”). Copyright © 2011. The content in this communication is the property of AFT and is protected by copyright and other intellectual property laws. All trade names, service marks and other product and service names in this communication and within the content are proprietary to AFT and are protected by trademark and copyright laws. Any of the trademarks, service marks or logos (collectively, the “Marks”) in this communication may be registered or unregistered marks of AFT. Nothing contained in this communication should be construed as granting any license or right to use any of the Marks in this communication without the express written permission of AFT. Illegal or unauthorized use of the Marks or any other content included in this communication is strictly prohibited. This communication does not purport to provide complete details on the DTI®, S&P DTI or other financial product(s) (each, a “Product”) of AFT, is for information purposes only, and should not be construed as investment, legal or tax advice. Neither this communication nor any information contained herein constitutes an offer to sell (nor the solicitation of an offer to buy) any security. Any such offer may only be made by a prospectus or similar disclosure document prepared by the issuer of each such security, which contains important disclosures and risk factors. Investors in a product based on a Product shall solely rely upon such disclosure document in making an investment decision. AFT does not provide any form of investment advice and receives no compensation from any client or clients in such regard. Rather, AFT solely receives a license fee from licensees of its Products. In particular, AFT does not direct client accounts or provide commodity trading advice based on or tailored to the commodity interests or cash markets or other circumstances of a particular client. Victor Sperandeo, AFT and its and their affiliates do not sponsor, endorse, sell or promote any investment fund, managed account or other product that seeks to provide an investment return based on the returns of a Product that is offered by third parties. A decision to invest in any Product should not be made in reliance on any of the statements set forth in this communication. No portion of these materials may be reproduced without the prior written consent of AFT. In no event shall Victor Sperandeo, AFT or any affiliate have liability for losses, damages or expense of any nature whatsoever, which may be suffered as a result of or which may be attributable to, directly or indirectly, the use of or reliance upon, the data and information in this communication, including any errors or omission in the data or other information that is contained in this communication. All data and information provided herein is subject to change without notice. Investors can not invest directly in an index or an indicator such as the Product(s). An investment in a Product is speculative and involves a substantial degree of risk and should not constitute an investor’s entire portfolio. Investors could lose all or substantially all of their investment therein. No assurances can be made that the Product(s) will achieve their investment objectives or that losses will be avoided. The longer-term an investment the greater the likelihood that the performance potential suggested may be realized. Over the short-term, on the other hand, there is a much greater possibility that the Product(s) may decline substantially causing significant losses. Any factors which contribute to “sideways” or trendless markets (a lack of sustained, directional trends in many markets) or “whipsaw” markets (in which price movements reverse suddenly or repeatedly) are likely to be adverse to the Product(s). The Products are not a “proxy” for “all-long” commodity indexes. The Product(s) could decline in a wide range of different market scenarios, including ones in which other similar products (both all-long and long/short) rise substantially. The mechanical character of the rules of the financial Product(s) and the fact that the Product(s) are based on publicly available prices unaffected by trade executions (and the resulting slippage between market prices and the prices at which positions are actually acquired) makes it possible to derive the statistical information. Unless otherwise indicated, the information and performance of the Product(s) do not reflect the costs, fees and other expenses of an investment seeking to replicate the Product(s) or the effect of taxes on investors therein. The compounded effect of such costs, expenses and taxes would materially reduce cumulative net returns. “DTI®” - From January 2004 to November 14, 2009, the DTI® reflects the actual performance of the DTI®, calculated using a random computer selection of any one of five business days after the end of the month as the monthly roll date (the “Random Roll Date”), with positions being determined the trading day before the last trading day of the month, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology. From November 15, 2009 forward, the DTI® is calculated with the monthly roll date being the last trading day of the month (the “End of Month Roll Date”) and the positions being determined the prior trading day, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology. In addition, a slightly different contract schedule for Copper and Gold is used in the DTI® from November 15, 2009 forward than that used previously. “S&P DTI” - In 2002, AFT granted Standard & Poor’s (“S&P”) the exclusive right to sublicense the S&P DTI® to third parties, which terminated on November 14, 2009, however existing S&P licenses remain in effect. Whereas the S&P DTI is calculated using the Random Roll Date, with positions being determined the trading day before the last trading day of the month, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology, the DTI® is calculated from November 15, 2009 forward (i) using the End of Month Roll Date with the positions being determined the prior trading day, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology, and (ii) using a slightly different contract schedule for Copper and Gold (applicable to the DTI® and CTI® only). Other market indexes (each, a “Comparative Index”) are included in this communication for the sole purpose of providing a comparison of Product performance to general market results during the periods indicated, and their inclusion is not meant to suggest that the Product(s) are similar in either composition or element of risk. Furthermore, there is no necessary correlation or non-correlation between the Product(s) and the other market indexes presented. “S&P 500” is the S&P 500 Stock Index with dividends. It is an unmanaged market-capitalization weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. Data source: Bloomberg (TR ticker: SPTR). “NewEdge CTA Index” is the NewEdge CTA Index (a “Comparative Managed Futures Index”) which is equal-weighted and reconstituted annually and has become recognized as a key managed futures performance benchmark. The index calculates the daily rate of return for a pool of commodity trading advisors (CTAs) selected from the largest managers open to new investment. Data source: ITRNet. A Comparative Managed Futures Index does not represent an actual portfolio, which could be invested in, and therefore its performance results should be deemed to be hypothetical in nature and of comparative value only. Accordingly, the Comparative Managed Futures Index shown is not intended to imply that an investment seeking to replicate the DTI® is comparable to an investment in the securities or programs of CTAs represented by such index or that the DTI® seeks to replicate or correlate with such index. Unlike the DTI®, the Comparative Managed Futures Index is based upon the aggregate “net” performance reported by a number of CTAs. These CTAs often employ leverage and charge high fees (typically a 2% management fee and 20% performance fee annually) which are deducted, along with the trade execution costs, slippage and other expenses associated with implementing their respective strategies, prior to reporting their “net” performance. In contrast, DTI® returns shown do not represent the results of actual trading of investor assets. AFT maintains the DTI® and compiles the performance shown or discussed, but AFT does not manage actual assets. Indexes are statistical composites and their returns do not reflect payment of any sales charges or fees an investor would pay to purchase the underlying components they represent. The imposition of these fees and charges would cause actual and back-tested performance to be lower than the performance shown. For example, if an index returned 10% on a US$ 100,000 investment for a 12-month period (or US$ 10,000) and an annual asset-based fee of 2% were imposed at the end of the period (or US$ 2,000), the net return would be 7.8% (or US$ 7,800) for the year. Over 3 years, an annual 2% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.1%, a total fee of US$ 7,128, and a cumulative net return of 25.3% (or US$ 25,273). Furthermore, the CTA universe from which the components of the Comparative Managed Futures Index are selected is based on CTAs which have continued to report results for a minimum period of time. This prerequisite for CTA selection interjects a significant element of “survivor bias” into the reported levels of a Comparative Managed Futures Index, as generally only successful CTAs will continue to report for the required period, so that the CTAs from which the statistical analysis or performance of the Comparative Managed Futures Index to date is derived necessarily tend to have been successful. Total Return or “TR” includes interest on a theoretical US Treasury Bill position used to fully collateralize the futures positions of the Product(s).
Page 4 of 4 1139 South Main Street, Grapevine, Texas 76051
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