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ISSUE 4 • 24 MARCH, 2009

In This Issue
Founding Father Q&A
How does one invest for times when markets behave irrationally? Mark Rosenberg, founder of SSARIS, explains ...3

Futures Lab

The ATM Syndrome
There were more than 1.5 million Automated Teller Machines worldwide as of 2006, according to Wikipedia. Commodity trading advisors could be added to that number. As highly liquid money managers, they’ve been meeting investors’ need for cash amid the credit contraction. People are getting cash where they can while waiting for the hedge funds that froze withdrawals to reopen the gates. As a result, certain managed futures funds with extremely strong performance had big redemptions that dwarfed capital inflows. What’s going on with investors? I asked our editorial advisor Tim Merryman, who not only talks with people in the know but looks at a lot of data and is a CTA himself. Tim has a hypothesis. In recent years pensions and other investors tried to diversify their portfolios with long-only commodity allocations. But in the fourth quarter of 2008, commodities went down together with other markets. It happened in a few months, too fast for institutions to rethink the concept of long-only commodities as a hedge, consider long/short futures managers as an obvious alternative and change their allocations. In the extreme turmoil, investors no longer looked for a hedge, just for cash. Hence the ATM syndrome. “Markets went to hell in a hand basket so quickly that people did not get around to hedging,” Tim says. “Allocators don’t like the idea of catching a falling knife. Why hedge a position when you think it’s going down further? People prefer to go to cash and wait it out.” A rally in stocks could ease the strain on portfolios and change investors’ calculus. “Some allocators may feel slightly more comfortable hedging with managed futures at this point,” says Tim.

Certain strategies work well in stressed market environments, as demonstrated by the difference between convergent vs. divergent investment philosophies. ............5

Index Track

Energy rally hits short sellers; commentary from Credit Suisse......................................7

Insider Talk

Learn about turnkey managed account investing. Interview with Aleks Kins, chief executive of AlphaMetrix. ...........................8

News Briefs

Fortress finds investors want managed accounts .................................................10

Practitioner Viewpoint

What needs to be done to restore investor confidence? An administrator with 30 years of managed futures experience speaks his mind .......................................................12

Regulators & Courts

Suicide Reveals Long-Time Scheme .................................................13

Manager Profiles

Up-and-coming managers comment on their strategy and the markets .........................15

Continued on page 2

Top Ten

Here is a ranking is from a managed account platform .....................................16

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

EDITORIAL

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Besides cash, investors went to gold, the usual refuge in a panic. There’s the fear factor and predictions of Armageddon, but also other reasons to buy gold, such as an expected drop in the value of the US dollar. That would enhance the case for diversifying with futures. Cyclical diversification aside, the fundamental case for managed futures may rest on unchanging human nature. Mark Rosenberg, founder of SSARIS, explains the behavioral basis of his investment philosophy in this issue’s Founding Father Q&A. Our Futures Lab presents evidence for the argument. Meanwhile, investors don’t want to face suspended redemptions and search for an ATM again. They’re demanding separate accounts—see our news brief about Fortress. The issue’s Insider Talk is right on target: Aleks Kins, a veteran in this area, discusses managed accounts. As for the all-important need to restore investor confidence after the beating it took in 2008, veteran fund administrator Derek Adler offers a commonsense Viewpoint. Chidem Kurdas Editor kurdas@opalesque.com

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

FOUNDING FATHER Q&A

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How to Hedge Irrational Markets
Certain strategies work well at times of financial stress. Mark Rosenberg, chairman and chief investment officer of SSARIS Advisors LLC, explains why. Paul Lucek, the firm’s director of research and senior portfolio manager, adds his observations. The SSARIS Diversified Trading Program made about 52% in 2008 and has returned almost 18% annualized since inception. The firm manages several other strategies and runs a fund of funds business for State Street, the institutional asset manager and custodian. The fund of funds arm won two industry awards this month. State Street Global Advisors and ABP, a European pension fund, are majority owners of SSARIS. Mr. Rosenberg became aware of financial markets at age 14, when he asked his father whether there was a way to make money without working in a factory. He started trading futures in 1968 and founded a commodity trading advisor business in 1983—that was the inception of the Diversified Trading Program, which has been in operation continuously since then.
Opalesque Futures Intelligence: How did you develop an investment philosophy? Mark Rosenberg: I always thought markets run on fear and greed and go through booms and busts. Markets are mostly efficient but are at times irrational. You have to have ways to make money in both situations, be prepared for irrational markets as well as efficient markets. Convergent strategies are about prices converging in efficient markets. That’s the kind of bet Long-Term Capital Management made. In 1998 the Asian crisis frightened investors, who sold the under-priced assets LTCM had bought, causing the arbitrage strategy to collapse. But there are other strategies – like managed futures – that can make money in irrational markets. OFI: What does that mean in terms of returns? MR: During periods of relative calm, convergent strategies tend to make stable, attractive returns. In an extreme event, however, there is the tail-risk of a large loss. By contrast, divergent strategies perform best when volatility and uncertainty rise. I have not found many truisms in markets, but this is one of them. The convergent/divergent distinction is the real difference in investment strategies, as 2008 showed. If you take the worst months for stocks, you see our diversified trading program tends to move in the opposite direction at those times—it becomes negatively correlated to stocks. Ditto for the worst months for bonds. OFI: Are most investments convergent? Paul Lucek: Being long stocks and bonds is a convergent strategy, so vast pension assets are convergent. Most hedge fund strategies are relative value based, so they’re convergent. Managed futures is one of the few true diversifiers.

Mark Rosenberg

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

FOUNDING FATHER Q&A
OFI: Why does managed futures perform well at such times? PL: One, unlike equities we’re not limited to a single market. We can trade everything. If an event happens in the currency market, we have the currency program running, for instance. Another reason is that we follow the momentum, so when it over-shoots we make money. OFI: Does that mean investors should go for divergent strategies in turbulent markets? MR: It’s too late if they wait for the event to happen. Investors should always have divergent strategies like managed futures as well as convergent stock and bond strategies in their portfolio. We saw this in our funds of funds. The managers with divergent strategies came through. Managed futures is a powerful tool. It does not hurt a portfolio during stable markets, but its real contribution comes at critical times. OFI: Why do some people stay out of managed futures? MR: Managed futures are slightly more volatile than equities on a monthly basis, but they’re perceived to be very volatile. If you add a more volatile but non-correlated asset to a portfolio, you improve returns and reduce the overall volatility of the portfolio. That’s well established, but it may not be intuitively obvious. I think investors will change their view about this when they see the benefit of having managed futures in their portfolio. PL: Can anybody provide a good reason why managed futures should not be in a portfolio? OFI: Isn’t it a problem that many investors can’t understand the black box models used by CTAs? MR: There is a concern, but I don’t think it’s valid. We can describe our system, take you through what we do, how we select our markets and trades. We’ll tell you everything about our program, except the algorithms that make the decisions. Some fund of funds managers don’t like the idea of a systematic, computer modelbased strategy. In fact, the biggest black box is a discretionary manager—nobody knows what he’ll do! What is more, the odds of repeating a successful run is much less when there’s no systematic program. Computer models pick up changes quickly, whereas discretionary managers are easily whipsawed by market changes. If somebody in the market knows about an event and is trading on it, a good model picks that up. OFI: CTAs trade equities, bonds, commodities or currencies. Where do they fit in an institutional portfolio? MR: Managed futures goes into the alternatives bucket. For decades there was no such category, which was an institutional barrier to investing with CTAs. Many institutions are increasing their allotment to managed futures. OFI: Can futures absorb a lot more capital? So far it’s been a small niche. MR: Underlying futures are the world’s largest markets—currencies, equities, fixed income, commodities including metals. At some point potentially there’s a capacity constraint for any one individual style, but there are many different styles of managed futures. Some go long, others go short. Our CTA program could handle several billion dollars. PL: Last year, when many bonds and even some stocks became illiquid, futures markets stayed open to trading. Futures may be misunderstood by the public. Unlike over-the-counter derivatives, futures and options have traded in highly-rated exchanges for decades. If anything, futures markets are more highly regulated than equity markets. Anyone can trade stocks, but to trade futures you have to register and fulfill regulatory requirements.

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Paul Lucek

“Last year, when many bonds and even some stocks became illiquid, futures markets stayed open to trading.”

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

FUTURES LAB

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Convergent vs. Divergent Strategies
The discussion below develops the key points made by Mark Rosenberg and Paul Lucek in the previous pages. It draws on a paper by Sam Chung, Mark Rosenberg and James Tomeo, published in The Journal of Alternative Investments, Summer 2004, as well as other materials. The conclusion is that “Investors should always have divergent strategies like managed futures as well as convergent stock and bond strategies in their portfolio,” to quote Mr. Rosenberg.
Most hedge fund strategies may be grouped into two categories that represent different investment philosophies. Convergent strategies such as equity market neutral and event driven search for over- or under-valued securities. A convergent strategist believes that the intrinsic value of a security can be estimated and the price will converge to this value. By contrast, a divergent strategy is based on the premise that past patterns in security prices can reliably predict future patterns. A divergent strategist believes that these patterns reflect the changing attitudes of investors to a variety of economic, political and psychological factors. Managed futures and global macro are divergent strategies. In efficient markets, the market eventually prices in the information generated by fundamental analysis and convergent strategies work. But market inefficiencies exist due to imperfect or asymmetric information and emotions such as greed or fear. These inefficiencies cause speculative bubbles, price over-shooting and correlation across many markets. Divergent strategies perform better during periods of rising uncertainty and volatility, times when people ignore fundamental information and make decisions based on emotions such as fear. Behavioral finance argues that human psychology leads investors to make the same mistakes repeatedly, creating the possibility of recurrent and predictable patterns in security prices. Managed futures programs use models to detect the patterns and take advantage of them. This is a key advantage in times of market stress. For instance, prices often over-shoot on the downside due to panic, diverging further from intrinsic values. A trading program that incorporates this factor profits from the divergence. The table below shows returns from a managed futures program during the stock market’s ten worst months in the past 25 years. During these months of significant equity market loss, the managed futures program correlated negatively with the market. Taking all the months that the S&P 500 declined more than 5% since 1984, the index lost a total of 217.9%. In sharp contrast, the managed futures program gained a total of 93.4% during those months.

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

FUTURES LAB
Divergent Strategy in Periods of Stock Market Stress Since 1984
Period
Oct. 1987 Oct. 2008 Aug.1998 Sep. 2002 Feb. 2001 Aug. 1990 Sep. 2008 Jun. 2008 Sep. 1986 Nov. 1987 Sep. 2001 Nov. 2000 Jul. 2002 Nov. 2008 Jun. 2002

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S&P 500 Index
- 21.5% - 16.8% - 14.4% - 10.9% - 9.1% - 9% - 8.9% - 8.4% - 8.3% - 8.2% - 8% - 7.9% - 7.8% - 7.2% -7%

CTA Program
- 2% 19.7% 12.4% 4% - 2.5% - 1.8% 2.33% 3.8% - 14.4% 4% 5.1% 3.8% 5.6% 4.8% 6.5%

* The CTA program is SSARIS Diversified Trading Program. The returns are net of fees.

The same conclusion emerges from a study of times when there were heavy losses in the bond market, as measured by the Merrill Lynch 5-7 Year US Constant Maturity Index. The index lost a total of 62.7% during the months that it declined by more than 3% since 1990. In those same months, the managed futures program gained a total of 29.9%. Again, the correlation was negative. Because of these characteristics, adding divergent strategies enhances a portfolio’s return in economic environments where opportunities are limited for convergent strategies. Combining the two types of strategy in a portfolio reduces the negative outliers and shifts the skew to the positive side. Compared to either category of strategy on its own, the combination has higher risk-adjusted performance.

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

INDEX TRACKER

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Energy Rally Stumps Short Sellers
February was a tough month, to put it mildly. Signs of a worldwide economic contraction appeared almost everywhere. For managed futures, the results from different databases vary. Commodity trading advisors as a group had small losses according to most indexes, but one database actually shows a gain (table below). Hedge funds generally declined more significantly and of course stock market losses were in the double digits. Gold was a winner. A report from Credit Suisse says: In addition to global equity markets struggling, consumer sentiment, jobless claims and home sales all worsened in the first two months of 2009, with signals that the US economy could contract another 6% in the second quarter of 2009 before the government’s $787 billion stimulus package is felt. Faced with this difficult macro data, global macro and managed futures managers generally held their own, taking advantage of opportunities in currencies and exploiting divergences between governments’ monetary and fiscal policies globally via core fixed income trades. Oil was the joker in the pack, gaining 7.4%. Certain commodity prices tracked the economic downturn, rewarding short sellers. But many CTAs were short energy, so the unexpected rise in energy caused losses. The Credit Suisse report draws a mixed picture: Most medium and long-term trend followers posted positive returns. Most of the gains were from short positions on equities and grains, as markets sold off by 10% or more during the month due to the weakening global economy. Managers also profited from long US Dollar positions versus other currencies. The gains in equities, agriculture, and currencies were partially offset by losses in shorts in energy as major energy prices rallied during the last week of February. Managers seem to be reducing their long bond positions and adding to currencies and commodities.

February Returns, Selected Asset Classes and Indexes
Managed Futures: Autumn Gold CTA Index Credit Suisse/Tremont Managed Futures Barclay CTA Index HFRI Systematic Diversified Index Managed Futures Europe Hedge Funds: Credit Suisse/Tremont HF Index HFRI Weighted Composite Barclay HF Index Stocks: MSCI World S&P 500 Commodities: Crude Oil Gold DJ AIG Index 7.4% 1.6% - 4.4% - 10.5% - 10.7 - 0.88% - 1.13 - 1.45% 1.2% - 0.16 - 0.17% - 0.21 - 0.42%

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

INSIDER TALK

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Turnkey Managed Account Investing
Two issues have become paramount for investors. After the nasty surprise Bernard Madoff delivered to his clients, people want to know what’s happening to their money, i.e. transparency. And the gates put up by a large number of managers in the past year got investors worried about not being able to redeem. They want to be able to pull the money out when they need to, i.e. liquidity. A managed account satisfies both needs. The investor owns the account, can check it at any time and can liquidate the portfolio at any time. We asked Aleks Kins, chief executive of AlphaMetrix, to discuss managed account investing. The firm offers investors a ready-made version of a managed account for investing with commodity trading advisors. The CTAs on the AlphaMetrix platform have combined assets of $2 billion. Mr. Kins is a CTA investing specialist. Before founding AlphaMetrix, he was the president of Access Asset Management, where he built the Emerging CTA Index Fund and allocated several hundred million dollars to emerging advisors. Earlier in his career he was senior investment manager for Carr Global Advisors, a subsidiary of Crédit Agricole Indosuez. At Carr he made managed futures allocations and helped develop a daily CTA index.
Opalesque Futures Intelligence: What are the advantages of a managed account? Aleks Kins: I saw the merits of managed accounts when I worked at Carr Global Advisors. You have control and transparency. You need to monitor and control any leveraged investment closely because in theory you could have unlimited liability with leverage. OFI: What are the disadvantages? AK: It takes time and resources to set up a AK: It’s a turnkey approach to investing in managed futures. We do due diligence on both managed account. Also, investors complain about tracking error—a managed account can make significantly less than the same strategy does in the fund format. There are many reasons for tracking errors. For instance, a small account size or higher fees can cause a lower return for the managed account. We’ve designed our system to minimize tracking error. OFI: What exactly do you do?

Aleks Kins

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

INSIDER TALK
the traders and the money coming into the platform, so investors don’t need to devote a lot of time and money to investigating. We’ve vetted more than 150 managers and track some 1,000 programs. Currently 36 CTAs are trading on the platform and a total of 60 are approved. The money is held in accounts at banks or brokerage firms in the name of the pool, not transferred to the traders. Our people do legal, operations, back office, research and risk management work. OFI: Are you a fund of funds manager? OFI: How is the outlook for managed futures this year? AK: We are not a fund of funds manager. The investor picks the traders and allocates the money. Nor are we a counterparty. Large commercial banks are counterparties. We provide the platform, which comes with a whole system of checks and balances. A third-party administrator manages the inflow and outflow of assets and monitors the accounts. Investors can have 24-hour risk monitoring and see where every penny is in near real-time, through the use of our proprietary technology. In some ways it is like an exchange, with standard terms and posted prices. OFI: What do investors pay for your service? AK: Investors do not pay any additional fees to us. We charge managers and brokerages to participate. Investors are charged the manager’s standard fees, which are usually 2% and 20%. OFI: Are investors showing interest? AK: We see new investors making allocations. There is an influx of capital not just because of impressive performance by CTAs in 2008 but also because managed accounts is an established way of investing in futures and people now recognize the value of the transparency you get with a managed account. There’s been a change in the investor culture. We have about 500 investors using the platform and they’ve been talking to us about expanding the service to other liquid strategies. Funds of funds and institutional investors are the largest source of investment on the platform. OFI: Do you seed new CTAs? AK: Not currently, but we will start a CTA incubator later this year. Our platform is the right structure for this. When you work with emerging CTAs, you can’t take anything for granted, you even have to make sure they liquidate contracts before expiration. Implementing simple checks like that saves you trouble in the future and we have automated many such procedures, resulting in a very scalable solution. OFI: What is the index fund you recently introduced?

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AK: We’ve created an index fund of short-term CTAs, meaning programs that have an average holding period of less than ten days. It tracks Newedge’s Short-Term Traders Index. Shortterm strategies have little to no correlation to any traditional or alternative investments. Each program is highly liquid and transparent. Currently the index fund has 16 managers and approximately $90 million in assets.

AK: CTAs tend to do well in unstable and inefficient markets. Many Wall Street firms are no longer trading and a lot of capital has been pulled out of futures markets. That makes these markets less efficient and more volatile. That, along with the possibility of inflation in the economy, means opportunity for CTAs.

Strategies on AlphaMetrix Platform
Short-Term Pattern Recognition Mean-Reversion Momentum / Volatility Multi-Strategy Statistical/Quantitative Diversified Trend Followers Natural Resources Agriculture Diversified Energy Metals Global Macro

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

NEWS BRIEFS
Fortress Finds Investors Want Managed Accounts

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Fortress Investment Group, a large private equity and hedge fund company that is exchange listed, is responding to a demand for managed accounts, which give investors liquidity and transparency. During an earnings conference call last week, executives of the firm said that there is a focus on setting up separate accounts for investors and this requires significant administrative work. Fortress has managed accounts already for some of its investment strategies, such as Drawbridge Special Opportunities. In November of 2008 Fortress suspended redemptions in its Drawbridge Global Macro fund. At the time many hedge fund managers froze withdrawals, which forced investors in need of cash to sell off other, more liquid, assets. This is one issue that is fueling demand for managed accounts, where the investor owns the account and faces no gates to liquidating the assets. When Fortress reopened Drawbridge Global Macro at the end of January, there were $3.3 billion in redemptions. The fund paid out $2.1 billion cash, expects to pay another $0.3 billion this month and distributed $0.9 billion of shares in newly created special purpose vehicles that hold illiquid assets. Fortress also received $1.5 billion of redemption requests for its hybrid hedge funds. The money is to be paid out over time as the underlying investments are liquidated. Many commodity trading advisors offer managed accounts, but hedge funds have tended to set up such vehicles only for big investments.

CME Gets Green Light for Credit Swaps
The US Securities and Exchange Commission gave the go ahead to CME Group, the world’s largest derivatives exchange, to clear and trade credit default swaps. The competing IntercontinentalExchange has already started to process credit default swap indexes, becoming the first company to clear trades in the $28 trillion CDS market. ICE said it guaranteed 91 swaps transactions with a face value of $7.1 billion after launching in the second week of March. CME has formed a joint venture with hedge fund firm Citadel for CDS clearing, but when the operation will start is not clear. The use of CDS, a form of insurance against the default of debt, grew immensely during the credit boom and is blamed for large losses at financial companies, notably AIG, the insurance giant that has been bailed out repeatedly by the US government in recent months. Regulators have called for central clearing of CDS. CME executive chairman Terry Duffy says he is confident CME’s financial safeguards package and the proven counterparty risk management framework can bring stability to the CDS market.

SASA Adds CTA/CPO Compliance Guidelines
Specific requirements for commodity trading advisors and pool operators will become part of an online system for regulatory compliance and best practice implementation offered by Strategic Alternative Solutions Alliance. Many of the requirements for CTAs are similar to the US Securities and Exchange Commission’s rules for registered investment advisors but there are also specific requirements from the National Futures Association, said Kate Dressel, who developed the system together with Carol Kaufman. SASA incorporates best practice guidelines from the Managed Funds Association and other organizations.

Superfund Opens Sydney Center
Managed futures company Superfund has followed up its 2008 entry into the Australian market by setting up an investment centre in Sydney, according to the Australian Trade Commission. Superfund started to offer Super Alpha Fund 1 to Australian retail investors in November 2008. Superfund’s affiliated companies have offices in around 20 countries, including the US.

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Partnership
Hedge Funds and CTAs

In today’s volatile markets, you want to maximize your opportunities and minimize your exposure. We work with you to understand your strategies, anticipate your needs and optimize your resources through our ongoing investments in expertise and infrastructure. We offer prime brokerage services spanning all major asset classes, with cross-margining tools, cutting-edge risk calculation, start-up services and in-depth market intelligence – all geared to taking you where you want to go. Newedge – committed to helping you reach your goals.

www.newedgegroup.com

Global Asset Execution Ι Global Asset Clearing Ι Prime Brokerage
“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 positions). Newedge Group (UK, Frankfurt and Dubai) do not deal with, or for, Retail Clients (as defined by MiFID and Dubai Financial Services Authority). Only Newedge Canada Inc. is a member of the CIPF. Not all products or services are available from all Newedge organizations or personnel. Consult your local office for details.

OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

PRACTITIONER VIEWPOINT

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Independent 3rd Party Common Sense
Derek Adler of International Financial Administration Group
price provider. Whose bright idea was it to accept a market price from a source that is not independent or free of conflict? You might say that the horse has already bolted from the barn, but the truth is that hundreds, if not thousands, of funds are still engaging in questionable practices. We had funds for which we obtained valuations from independent sources, but after the investments went south, the managers requested that we either place a nil-value or in some cases a cost-value on the assets. Let me explain why this is not correct. The nil-value, whilst admirable, is strictly not correct since as an administrator we could be accused of undervaluing. The at-cost scenario is an absolute nono, because with certain assets today people don’t have a clue as to the value and the historical cost is misleading. We have firsthand experience of this type of request and have refused point blank and resigned where necessary. Then there’s the issue of fund of funds. We will not administer the top/master fund within a fund of funds unless we are the administrator throughout. We cannot rely on other valuations that generally are not produced in a timely manner, not to mention the fact that the submitted NAV could be wrong! We have been asked to carry out forensic valuations for fund of funds, going back 3 years. Due to a discovered error, the subscriptions and redemptions turned out to be incorrect. I believe there could be more of these errors coming to the surface. Here’s another small, yet crucial, issue: the control of money movements to and from a fund. At IFINA, we are a signatory on all money movements at the fund’s bank account and therefore control this aspect. Apart from the three obvious rules of transparency, control and independent valuation, there is the problem of incestuous relationships between the investment decision maker and the administrator. How many funds do you know that have an administrator closely linked to the investment manager? They can be one and the same firm. Oh, but aren’t investors safe because of Chinese walls or because the manager and administrator are part of a major bank or institution? Right! Wasn’t it the big names, the ones that couldn’t possibly do any wrong because they were so big, that are now gone or bailed out with our money? These practices may not change unless regulators step in. It would be easy to end potential conflicts of interest and make the world safer for investors. There is no need for over-regulation, just common sense. I was recently appointed to Team British Virgin Islands, which is a government sponsored board comprising regulators, accountants, lawyers, banks and administrators. I am pushing hard for the total independence of all fund valuations. I was asked in a recent interview whether I thought that banks and accountants should be able to value their own funds and my response was absolutely no! There should be no links or conflicts whatsoever.

If we are to be honest, virtually each and every one of us is to blame for the unnecessary mess we are now in. I am not at all surprised by some of the problems that some money managers, hedge funds and banks have to face. We all need to think of how to improve the way we do things. For money managers, that includes hiring a third-party administrator—to my mind, an essential and now obligatory service. Allow me to declare upfront my interest in a fund administration company. Yes, I have a vested interest, but nevertheless believe profoundly in the issues I bring to your attention. As administrators, my partner and I always had a mantra of transparency. The only possible reason why someone does not like transparency is that there must be something to hide. Therefore all of the funds that we administer have always had a daily NAV which includes and accrues for absolutely every fee and charge. No surprises at month end. We don’t like funds that you cannot value independently via an exchange or market

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

REGULATORS & COURTS

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Suicide Reveals Long-Time Scheme
Regulators continue to be unusually active in pursuing fraud complaints, some involving schemes that go back a number of years. In a pattern that resembles the Bernard Madoff case, the government is seeking the restitution of assets from the spouses of the accused in several instances. In the past two weeks or so, the US Commodity Futures Trading Commission took the following futuresrelated actions. • A fraud emerged around February 25th when Bruce Kramer of Midland, North Carolina, committed suicide. The CFTC says Barki LLC and Mr. Kramer fraudulently solicited at least $40 million to trade leveraged foreign currency contracts and misappropriated at least $30 million of the funds to pay supposed profits or for personal expenses. Trade losses of at least $10 million were concealed for more than five years with false account statements. Only $575,000 remains in trading accounts and what happened to much of the money is unknown. The personal expenses included the purchase of a horse farm for more than $1 million, a Maserati sports car and other luxury cars, artwork and extravagant parties. The government seeks to take the assets derived from the fraud from Mr. Kramer’s wife Rhonda Kramer and from Forest Glenn, the horse farm owned by the Kramers. • The federal district court in Knoxville, Tennessee, froze the assets of Dennis Bolze and his Las Vegasbased company, Centurion Asset Management, after the CFTC filed a complaint charging them with fraudulently soliciting commodity pool participants, misappropriating funds and issuing false statements. The $20 million, six-year-old scheme hit at least 100 victims in the United States and Europe. Potential clients were told that Mr. Bolze’s trading generated annual profits of 15% to 20% and received false statements giving credibility to these claims. According to the CFTC, despite taking in more than $20 million, the defendants’ actual commodity futures trading accounts never exceeded $250,000 in equity and the trading resulted in about $800,000 of losses. In addition, Mr. Bolze did not tell prospective customers that he pled guilty in 2001 to four counts of failing to file sales tax returns and failing to pay sales tax, resulting in a six-year prison sentence. That sentence was suspended and he was placed on probation and fined. • The CFTC charged John Donnelly of Charlottesville, Virginia, with operating a Ponzi scheme of more than $10 million involving three commodity futures pools. Mr. Donnelly allegedly operated three commodity pools for over seven years and solicited clients to invest in US Treasury Note futures and S&P 500 futures, but neither he nor his employees or the legal entities he created, Tower Analysis Inc., Nasco Tang Corp., and Nadia Capital Corp., really traded the pools’ funds. The CFTC found that Mr. Donnelly executed only seven trades over the course of seven years.

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

REGULATORS & COURTS

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Nevertheless the investors lost money because Mr. Donnelly misappropriated at least $1 million for himself and his wife and may have received another $1.7 million to which he was not entitled. The CFTC seeks to get money back not only from him but from Deborah Donnelly as well as two commodity pools, Blue Logic Operating Partners and Nadia Capital Operating Partners. • Ray White and CRW Management LP of Mansfield, Texas, were charged with operating a Ponzi scheme involving the solicitation of at least $10.9 million from more than 250 investors. Mr. White claimed to trade off-exchange forex contracts but the CFTC says he used investors’ money to fund a drag racing team and purchase real estate, cars and Dallas Stars hockey season tickets. He told customers that CRW would generate between five and eight percent weekly returns, corresponding to an annual return of between 260% and 416%. Of the $10.9 million raised, at most only $94,000 was used to trade and most of that was lost. The government seeks to take assets from Christopher White and Hurricane Motorsports because they allegedly received money as a result of the fraud. • The CFTC settled charges of failure to supervise the handling of customer accounts against Walsh Trading Inc., a Chicago-based introducing broker. The firm is required to pay $50,000 and strengthen its supervisory oversight of associated persons, employees, and agents. The regulator says Walsh failed to diligently supervise the handling of certain accounts managed by an unregistered commodity trading advisor and lacked procedures to detect unauthorized trading of these customer accounts. An associated person who managed Walsh’s Arkansas branch office solicited customers, primarily from the farming community, for an unregistered CTA, opening at least five customer accounts. None of these accounts contained a power of attorney or a letter of direction authorizing trading. The unauthorized trading by the unregistered CTA continued undetected for two years.

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

MANAGER PROFILES
Managers with diverse approaches describe their strategy and what they see happening in the markets. Their comments have been edited.

15

David Mather
Integrated Managed Futures Corp. David is executive vice-president of Integrated Asset Management Corp. since 2002 and vice-president of Integrated Managed Futures Corp. since 2003. Previously he was at SEI Investments and Fidelity Group Pensions. Comments: “The central investment tenet of the IMFC Global Investment Program is that markets exhibit persistent anomalies that cannot be explained by random behavior or the assumption of fully informed and rational market participants. Price trends, or serial correlation in market prices, may be the result of many factors, including the crowd behavior of market participants. We utilize proprietary systematic trading strategies to invest in longterm price trends in over 60 industrial, agricultural and financial futures markets. IMFC’s trading is based on an analysis of market statistics that is rooted in both probability theory and postmodern portfolio theory.”

2008 return: 47.6 %

Mark Helweg and Rob Hounshell
Lexington Asset Management Rob and Mark have been involved in systematic trading and managed futures markets for over 20 years. They combined two CTAs and formed Lexington in August of 2006.

2008 return: 55.3%

Comments: “We manage risk at both the system level and the portfolio level. At the system level, stop loss orders are entered in the markets for each open trade. A proprietary filter determines the strength of the trend and activates different trading systems. The stop levels are calculated by the system algorithm and are designed to exit losing trades as quickly as possible while providing flexibility to navigate market ‘noise’. Risk management at the portfolio level consists of diversification across markets, system styles, trading time frames and sizing of portfolio positions.”

Anderson Huber
Beardown Partners Andy has over twenty years of trading and investment industry experience. He began his Wall Street career in 1980 in the commodity futures markets at Shearson Hayden Stone, where he was first exposed to trend following systems, and has worked for Lehman Brothers, Deutsche Morgan Grenfel, Nationsbank, and Citicorp. Currently, he manages the loan credit default swap inter-dealer operation at Phoenix Partners Group.

2008 return: 2.4%

Comments: “Trading systems must have built-in flexibility and while being a rule-based process, must have the fewest filters and qualifiers to be consistently effective. This is an important aspect of our Vertical Equity Trading Program. While systematic at its most basic level, the program is neither a black box nor purely a trend following system. It is a dynamic investment activity, involving real time risk weightings, adaptation to rapidly changing conditions and superior execution. Most futures traders have expectations of a high return for risk taking in these highly levered, often volatile markets. I believe in the opposite. The goal being to generate consistent profitability over time, I’m more than satisfied to break even on a trade and take many small gains and losses, with the comfort that capital has been preserved for future opportunities.”

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OPALESQUE FUTURES

ISSUE 4 • 24 MARCH, 2009

TOP TEN

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We will feature top managers from a different database every month.
These managers are from a managed account investing service —the AlphaMetrix platform for managed futures, commodities and foreign exchange. An interview with AlphaMetrix chief executive Aleks Kins is in this issue’s Insider Talk section. AlphaMetrix does due diligence on managers. The platform lineup changes over time as managers are added or removed. The ranking shown below reflects information as of February 1st.

AlphaMetrix Top Ten Manager Returns.
Manager and Program Quantitative Investment Mgt. Quantitative Global Program Conquest Capital Group Macro Composite SandRidge Capital LP Sandridge Capital Management Dominion Capital Management Sapphire Program Crabel Capital Management Crabel Two Plus Quest Partners AlphaQuest Short Term Program Oppenheim KaG mbH Tactical Currency Program Cabana Capital Management Global Diversified Program GLC Ltd GLC Directional Program Fall River Capital Global Opportunities Program 2009 Year-to-Date 6.3% 6.2% 5% 4.9% 3.9% 3.9% 3.7% 3.6% 3.2% 3.1% Annualized since Start 20% 14.5% 17.5% 10.8% 14.5% 14.2% 11.7% 15% 11.8% 11.4%

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PUBLISHER Matthias Knab - knab@opalesque.com EDITOR Chidem Kurdas - kurdas@opalesque.com ADVERTISING DIRECTOR Denice Galicia - dgalicia@opalesque.com EDITORIAL ADVISOR Tim Merryman - tmerryman@opalesque.com CONTRIBUTORS Bucky Isaacson, Frank Pusateri, Pavel Topol, Ty Andros, Walt Gallwas.

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