World Research Group
Presents
The 4th Annual Emerging Managers Congress for Institutional Investors

This conference is geared toward providing solutions and answers for how and why pension plans, foundations and endowments should utilize emerging managers for their investments

The event delivers a balance of high quality content together with networking activities for the exchange of ideas and best practices. Networking activities take place during morning coffee, and lunch, as well as during key breaks throughout the agenda. There is also a cocktail reception created to facilitate relationship building.

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By Mark Shore

I was recently interviewed for a few articles and the topic of overlaying strategies was discussed as a potential component of a managed futures portfolio. Realizing this topic is not discussed as much as it should be; it opens the door to a more in-depth understanding of managed futures. It is a topic I cover in my managed futures course at DePaul University.

Discussing this topic of overlaying strategies really gets to the heart of one question that keeps reappearing, “why are CTAs non-correlated to equities?” This is a very simple question to ask and is asked with high frequency. But the answer includes many topics to properly answer it. As Matt Davio recently stated, it’s the “special sauce” in understanding managed futures. One of the topics of the special sauce is the utilization of overlaying strategies.

For example, let’s assume the following of a fictional CTA (Commodity Trading Advisor):

- The CTA trades a diversified systematic trend following model (Core model) in 20 markets in both financial and commodity futures.

- The model can be long, short or neutral in any of the 20 markets of its portfolio. (Neutral means the portfolio does not hold any positions in a particular market.)

- The size of each position is not static, but may be dynamic based on some formula built into the trading algorithm. For example: our fictional CTA may trade a 20 contract position in 30 year bond futures. On the next trade in that market, they may hold more or less contracts based on their trading strategy.

- Stops and other risk management tools may be used utilized for risk management purposes

The above assumptions imply the portfolio at any given time could hold positions in zero to 20 markets. And due to the dynamic nature of being long, short or neutral and the utilization of various risk management methods the portfolio may be very fluid causing changes in the portfolio due to the strategy components. Thus the equity curve of the portfolio creates a non-correlation potential to equities.

Now that we have conquered the understanding of the Core model, let’s move forward in time and assume the CTA now allocates within their fund to a few other trading systems that may involve longer or shorter time frames or some other variations.

Perhaps the CTA allocates 70%, 80% or 90% to the Core model and allocates (or overlays) the balance of the fund to the other systems. The logic of overlaying other systems is to smooth out the returns of the Core model.  By overlaying various systems into one fund, the CTA has in essence organically created a quasi Fund of Fund.

The investor as well as the CTA has to ask: Does the overlay smooth the returns? Does it reduce volatility? Or asked another way, does it reduce the negative volatility (tail risk)? Keep in mind there is a difference between positive and negative volatility. We will leave the discussion of parsing volatility for another time.

By allocating to multiple systems it potentially maintains a fluid and/ or dynamic portfolio, thus equating to potential tendencies for non-correlation to equities. From the CTAs perspective they are not only managing a portfolio of futures markets, but they are also managing a portfolio of portfolios. One may call it a second derivative of the portfolio.

In times of economic stress, nervous investors tend to run for the exit door simultaneously causing the correlations of many sectors and asset classes to increase. 2008 is great example of investors running for the exit door. If a manager is trading multiple markets from a long, short or neutral perspective and potentially overlaying strategies; could this investment be non-correlated to equities?

In summary, not all CTAs overlay trading systems into a fund or portfolio, thus one more reason why CTAs differ (see Decoding the Myths of Managed Futures). This is not a judgment call of a good or bad idea of risk management. But simply as part of the due diligence process, the investor should know if the CTA is overlaying systems, to understand the concepts of those systems and the source of returns of the fund and how the overlay may offer another potential method of non-correlation to equities. Understanding this topic gives an investor a deeper understanding of the managed futures industry.

Ultimately the investor has to determine if the investment adds value to their current portfolio.

Copyright ©2011 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com www.shorecapmgmt.com Mark Shore publishes research, consults on alternative investments and conducts educational workshops. Mark Shore is also an Adjunct Professor at DePaul University's Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.

Risk Disclosure:
Past performance is not necessarily indicative of future results.  There is risk of loss when investing in futures and options.  Always review a complete CTA disclosure document before investing in any Managed Futures program.  Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone.  The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

Friday Aug 19th, the Bureau of Labor Statistics (BLS) released their July 2011 regional and state unemployment rates. With a 0% month over month rate change at 8%, New York ranks 23rd place for state unemployment rates.

Wisconsin and Pennsylvania rank just above NY with 7.8% unemployment rates for both states. Delaware and W. Virginia ranked just below NY with 8.1% rates.  North Dakota and Nebraska are ranked number one and two with unemployment rates of 3.3% and 4.1% respectively.

At the bottom of the rankings are Nevada and California at 12.9% and 12% respectively.  The July national unemployment is 9.1%, down from 9.2% in June.

The seasonally adjusted month over month 0% change of unemployment rate ranks NY in a tied 10th place with 12 other states. Of those 12 other states, only Iowa, Massachusetts, and South Dakota have lower unemployment rates than NY.

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Friday Aug 19th, the Bureau of Labor Statistics (BLS) released their July 2011 regional and state unemployment rates.  Illinois is tied in ranking for 36th place at 9.5% for state unemployment rates along with Kentucky, New Jersey and Oregon. North Dakota and Nebraska are ranked number one and two with unemployment rates of 3.3% and 4.1% respectively.

At the bottom of the rankings are Nevada and California at 12.9% and 12% respectively.  The July national unemployment is 9.1%, down from 9.2% in June.

The seasonally adjusted month over month unemployment rate increase of 0.4% from 9.1% to 9.5%, ranked IL as one of the five states with the largest July increases.

On a historical basis (data beginning in 1976), the highest recorded rate for the IL unemployment rate is 12.9% from December 1982 to February 1983. The lowest recorded rate is 4.2% in February 1999. IL last reached 9.5% unemployment in October/ November 2010.

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Bloomberg presents:

Bloomberg Global Inflation

Inflation creates uncertainty. Crude oil is trading at highs, brought on by political developments in the mideast. Investors are carefully watching inflation in China as a measure of the country’s economic and political health. The United Nations food price index is at an all-time high. Across the globe, inflation is a risk that investors need to consider.

The Bloomberg Global Inflation conference will bring together leading minds to discuss strategies for Investing in an Inflationary World.

Some of the Topics include:
-U.S. Inflation & the Debt Ceiling

-Currency wars: the battle of the weakest

-Portugal: back from the brink?

Some of the Speakers include:
-Edward Yardeni, President and Chief Investment Strategist, Yardeni Research, Inc.

-James Grant, Editor and Founder, Grant's Interest Rate Observer

-Michael McKee, Co-Host, Bloomberg on the Economy, Bloomberg Radio; Economics Editor, Bloomberg Television

-Fernando Teixeira dos Santos, Minister of Finance, Portugual

-Jerry A. Webman, Senior Investment Officer and Chief Economist, OppenheimerFunds, Inc.

-David Blanchflower, Professor, Economics, Dartmouth College and the University of Stirling; Former Member, Bank of England’s Monetary Policy Committee

-Tom Keene, Editor-at-Large, Bloomberg News; Co-Host, Bloomberg Surveillance, Bloomberg Radio; Anchor, Surveillance Midday, Bloomberg Television

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The National Introducing Brokers Association (NIBA) presents:

Sales and Marketing Conference

NIBA was established as a not-for-profit association in 1991 dedicated to assisting Introducing Brokers and Commodity Trading Advisors. Now, through the efforts of dedicated members and volunteers, NIBA has continued to grow in both size and influence and is well respected throughout the markets.

As the only official association representing IBs and CTAs it is the purpose of the NIBA to ensure open channels of communication among individual members and between IBs, CTAs, FCMs and industry regulators.

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Chicago Third Thursday Hedge Fund Industry Social

Drawing almost exclusively hedge fund managers and institutional hedge fund investors, the Third Thursday Socials are informal industry networking events held on the third Thursday of each and every month.

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NYC Third Thursday Hedge Fund Industry Social

Drawing almost exclusively hedge fund managers and institutional hedge fund investors, the Third Thursday Socials are informal industry networking events held on the third Thursday of each and every month.

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