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For Internal Use Only The Resource Group Annual Meeting For Continuing Education for CFP®, PACE and CPE use. Broker/dealer use only. Not to be used with.

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Presentation on theme: "For Internal Use Only The Resource Group Annual Meeting For Continuing Education for CFP®, PACE and CPE use. Broker/dealer use only. Not to be used with."— Presentation transcript:

1 For Internal Use Only The Resource Group Annual Meeting For Continuing Education for CFP®, PACE and CPE use. Broker/dealer use only. Not to be used with the public. Lincoln Financial Network is the marketing name for Lincoln Financial Services Corporation and Lincoln Financial Advisors Corp., affiliates of Lincoln Financial Group. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. CRN Understanding Managed Futures A Former Institutional Investor's Perspective On Managed Futures Thomas J. ODonnell, III First Vice President Newedge USA, LLC Alternative Investments Group Ph

2 For Internal Use Only Academic Resources 1983 Professor John K. Litner of Harvard University "The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds, Professor Litner wrote: The improvements from holding an efficiently-selected portfolio of managed accounts or funds are so large, and the correlation between returns on the futures portfolios and those on the stock and bond portfolios are so low (sometimes even negative), that the return/risk tradeoffs provided by augmented portfolios…clearly dominate the tradeoffs available from portfolio of stocks alone or from a portfolios of stocks and bonds." 1991 Everett, McLaren, and ODonnell Virginia Retirement System Managed Futures White Paper 1999 Thomas Schneeweis, Professor of Finance CISDM/SOM, University of Massachusetts The Benefits of Managed Futures 2000 Mark S. Rzepczynski Market Vision and Managed Futures: Convergent Versus Divergent Trading Styles

3 For Internal Use Only Academic Resources 2002 Harry M. Kat, Professor of Risk Management, Cass Business School, City University, London Managed Futures and Hedge Funds: A Match Made in Heaven 2002 Gildo Lungarella Managed Futures: A Real Alternative 2004 Steve Koomar managed futures can save your tail 2006 Kip Thompson A Case for Managed Futures - Portfolio Diversification Opportunities 2006 Gildo Lungarella The Case for Managed Futures - Trading advisors are an attractive source of diversification

4 For Internal Use Only Commodity Trading Advisors (CTAs) Are Unique 97.3% of Magellans return can be explained by traditional assets. Only 4.8% of this CTAs return can be explained by traditional assets. ASSET ALLOCATION: MANAGEMENT STYLE AND PERFORMANCE MEASUREMENT An Asset class factor model can help make order out of chaos William F. Sharpe * Reprinted from the Journal of Portfolio Management, Winter 1992, pp Virginia Retirement System, Managed Futures White Paper John McLaren Nancy C. Everett, CFA Thomas J. ODonnell, III

5 For Internal Use Only Estimated Growth of Assets Managed Futures Industry and Hedge Fund Industry 1990 – 2008 Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, Source: Barclay Hedge Ltd.,

6 For Internal Use Only Number of Programs in Barclay CTA Index 1980 – 2008 To qualify for inclusion in the Barclay CTA Index, an advisor must have four years of prior performance history. Additional programs introduced by qualified advisors are not added to the Index until after their second year. These restrictions, which offset the high turnover rates of trading advisors as well as their artificially high short-term performance records, ensure the accuracy and reliability of the Barclay CTA Index. Source: Barclay Hedge Ltd.,

7 For Internal Use Only Importance of Asset Allocation The 1986 paper titled, Determinants of Portfolio Performance, by Brinson, Hood, and Beebower concluded that a portfolios asset allocation (i.e. the weightings assigned to the asset classes) is the primary determinant of portfolio return variability, with security selection and market timing playing minor roles. Equities Fixed Income Real Estate Cash % % % % This decision is most important. Examples of other Asset Allocation decisions: Which asset classes? Active and passive? International mandates? Global mandates? Emerging market mandates? Currency hedging? Equity market capitalization mandates? Liquid vs. illiquid investments? Hedge Funds/Alternative Investments? Benchmarks? Rebalancing? Return objective: Relative or Absolute?

8 For Internal Use Only Managed Futures Represents a Significant Portion of Hedge Fund Industry AUM (Est. Asset in $MM) Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, Source: Barclay Hedge Ltd.,

9 For Internal Use Only Which Hedge Funds Offer Asset Class Diversification? Hedge Fund Asset Class Exposure Equities Convertible Arbitrage Distressed Securities Equity Hedge Equity Market Neutral Equity Non-Hedge Event-Driven Macro Managed Futures Relative Value Arbitrage Fixed Income Convertible Arbitrage Distressed Securities Event-Driven Fixed Income: Arbitrage Fixed Income: Mortgage-Backed Macro Managed Futures Relative Value Arbitrage Currencies Macro Managed Futures Commodities Macro Managed Futures

10 For Internal Use Only My Suggestion: Investment Objectives for Traditional Hedge Funds versus Managed Futures Investment Objectives For Traditional Hedge Funds Should fulfill the following three investment objectives: (1) Improve your source of Active Equity or Active Fixed Income management; (2) Achieve satisfactory risk adjusted returns relative to other Equity or Fixed Income investments; and (3) To the extent that the managers implementing these strategies have the ability to short, then some level of diversification is possible. Investment Objectives For Managed Futures Program Should fulfill the following three investment objectives: (1) Diversification of the total portfolio; (2) Achieve satisfactory returns in both rising and falling markets; and (3) Returns should be achieved at a reasonable level of risk. % % % % Equities Fixed Income Alternative Investments Equities Fixed Income Alternative Investments

11 For Internal Use Only Global Futures Markets Energy Crude Oil Gas Oil Heating Oil Natural Gas Unleaded Gas Stock Indices DAX (Germany) DJ Euro Stoxx 50 (Europe) Hang Seng (Hong Kong) MSCI EAFE (Europe) NASDAQ 100 (USA) Nikkei (Japan) S&P 500 (USA) Metals Aluminum CopperGold Silver Nickel Zinc Interest Rates JGB (Japan) Notional (France) Treasury Bonds & Notes (USA) Bank Accepted Bill (Australia) Euribor (Europe) Bankers Acceptance (Canada) Currencies Australian Dollar British Pound Canadian Dollar Euro Japanese Yen Mexican Peso New Zealand Dollar South African Rand Swiss Franc US Dollar Agricultural Commodities Soybeans Soymeal Corn Wheat Cotton Cocoa Coffee Sugar

12 For Internal Use Only Traditional Markets vs. Non-Traditional Markets QUIZ Investing in a globally diversified portfolio of stocks, bonds, currencies, and commodities enables CTAs and Global Macro managers to participate, both long and short, in a variety of non-correlated market trends. This quiz was designed to highlight the fact that markets move in two directions, and to dispel the myth that the appearance of a traditional market trend (e.g. stocks and bonds) is uniquely different from a non-traditional market trend (e.g. currencies and commodities). See if you can tell the difference.

13 For Internal Use Only

14 Interest Rate – 5 Yr US T-Note Stock - Enron Stock - Yahoo Currency – US Dollar Equity Market – S&P500 Currency – Australian Dollar Commodity - Soybeans Commodity – Gold Commodity – Crude Oil Source of price data: Bloomberg

15 For Internal Use Only Source: Barclay Hedge Ltd., 14 Past performance is not necessarily indicative of future results. Range of Best Performing to Worst Performing CTAs and L/S Equity Managers

16 For Internal Use Only Professional money managers who manage the assets of their clients using derivative instruments (futures, forward contracts, and options) are known as Commodity Trading Advisors (CTAs). As an asset category in the alternative investment industry, they are classified as Managed Futures. 1. Trading Approach SystematicDiscretionary Systematic/ Discretionary 2. Analysis Technical Fundamental Technical/ Fundamental 3. Trading Style Momentum Countertrend Spreads/ Others 4. Time Frame days 6-20 days > 20 days 5. Markets Traded Single sector or market Broadly diversified SOURCE: swissHedge article by Gildo Lungarella, Harcourt AG (Nov. 2002) The Various Investment Approaches of CTAs Rational For Variance in CTA Returns 15

17 For Internal Use Only Prospective investor says, We dont invest in black boxes. 16 Scientists develop fastest computer

18 For Internal Use Only Managed Futures and Traditional Assets (1980 – 2008)

19 For Internal Use Only Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008) 18 Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted Index Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, Source: Center for International Securities and Derivatives Markets CISDM, Past performance is not necessarily indicative of future performance.

20 For Internal Use Only 19 Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008) Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted Index Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, Source: Center for International Securities and Derivatives Markets CISDM, Past performance is not necessarily indicative of future performance.

21 For Internal Use Only BARS (LEFT SCALE): Annualized Rate of Return RED LINE (RIGHT SCALE): Correlation to S&P500 Annualized Returns & Correlation to the S&P500 Jan 1990 – Dec 2008 Alpha, Beta, Diversification? Return Correlation 20 Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted Index Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, Source: Center for International Securities and Derivatives Markets CISDM, Past performance is not necessarily indicative of future performance.

22 For Internal Use Only Negatively Correlated vs. Non-Correlated Same Risk, Same Return Correlation = (1.00) Investments A & B 50% of Investment A & 50% of Investment B Same Return, No Risk (Standard Deviation = Zero) Investment C Same Risk, Same Return Correlation = (0.14) Investments A & B 50% of Investment A & 50% of Investment B Higher Return, Lower Risk (Standard Deviation) Investment C 21 This is for illustrative purposes only. Investments A and B are not real investments.

23 For Internal Use Only 6 Largest Declines in U.S. Stocks Using monthly data 22 (Jan Dec 2008) Indices: U.S. Stocks – S&P500 Index, Managed Futures = CISDM CTA Asset Weighted Index Past performance is not necessarily indicative of future performance.

24 For Internal Use Only A Case for Managed Futures - Portfolio Diversification Opportunities (Kip Thompson, Rosenthal Collins Group LP) (January, 1980 Through December, 2006) Data: Managed Futures – CISDM Managed Futures Index, U.S. Stocks – S&P500 Index, Bonds – Lehman Brothers Aggregate Bond Index The Effect of Diversifying a Traditional Portfolio into Managed Futures 0% Managed Futures | 40% Bonds | 60% Stocks 10% Managed Futures | 35% Bonds | 55% Stocks 20% Managed Futures | 30% Bonds | 50% Stocks 40% Managed Futures | 20% Bonds | 40% Stocks 30% Managed Futures | 25% Bonds | 45% Stocks Compounded Annual Return Annualized Standard Deviation Higher ReturnsLess Risk 23 The information on this page was copied from the paper titled A Case for Managed Futures. Newedge USA, LLC is not recommending these allocations. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS SIMILAR TO THOSE SHOWN OR WILL NOT BE ABLE TO AVOID SUBSTANTIAL LOSSES. IN FACT, FREQUENTLY THERE ARE SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS; ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Past performance is not necessarily indicative of future performance.

25 For Internal Use Only Risk vs. Volatility Rolling 12-Month Returns 24 Past performance is not necessarily indicative of future performance.

26 For Internal Use Only One of the most cited reasons for investing in alternative investments (e.g. Hedge Funds) is DIVERSIFICATION. – What actions have you taken to help your portfolio benefit from this? Markets move in TWO directions. – What actions have you taken to help your portfolio benefit from this? The Worlds Portfolio of exchange traded, liquid investments includes EQUITIES, FIXED INCOME, CURRENCIES, AND COMMODITIES – What decisions have you made within your Asset Allocation Policy about these investment opportunities? (Doing nothing is a decision. Just make sure you have the evidence to back it up!) A Few Observations 25

27 For Internal Use Only Write the research report that proves why you should NOT invest in Managed Futures. me a copy: The Challenge 26

28 For Internal Use Only Risk Disclaimer 27 Global Disclaimer Research Notes-(Last Updated 1 Feb. 2009) The Alternative Investment Group of Newedge USA, LLC has distributed this research report. Newedge does and seeks to do business with companies that may be covered in its research reports. As a result, investors should be aware that Newedge might have a conflict of interest. For the avoidance of doubt, investors should note that this research report is not objective and is a marketing communication as defined by the Markets in Financial Derivatives Directive (MiFID) for more details see MiFID policies on our website at Newedge Group (UK Branch) is authorized by Commission Bancaire and Autorité des Marchés Financiers in France and subject to limited regulation by the Financial Services Authority for the conduct of its UK business. Details on the extent of our regulation by the Financial Services Authority are available from us on request. This research report may have been distributed simultaneously, in multiple formats, to Newedge's institutional customers. This information is not intended for distribution to Retail Customers (as defined under MiFID or as defined under other jurisdictions' regulations). This research report is initially written for European and United States of America investors and may not be fit for investors outside the EEA or the United States. "Newedge refers to Newedge Group and all of its worldwide branches and subsidiaries. Only Newedge USA, LLC is a member of FINRA and SIPC (although SIPC only pertains to securities-related transactions and positions). Newedge USA, LLC is a US Broker-Dealer and FCM. Only Newedge Canada Inc. is a member of the CIPF. For further information about the Newedge Group and our services, please see our website at Subject to the nature and contents of this research report, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Accordingly, investors should, before acting on advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. Newedge accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this research report or its content. Any forecasts are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. This report is for informational purposes only. Past performance is not a guarantee of future results. This research report is not to be construed as providing investment services in any jurisdiction where the provision of such services would be illegal. Not all services are available from all Newedge organizations or personnel. The opinions, views and forecasts expressed in this research report reflect the personal views of the author(s) and do not necessarily reflect the views of Newedge or any other branch or subsidiary of Newedge. Newedge, its worldwide Affiliates or branches, any of its employees may, from time to time, have transactions and transactions and positions in, make a market in or effect transactions in any investment or related investment covered by the research. Newedge makes no representation or warranty regarding the correctness of any information contained herein, or the appropriateness of any transaction for any person. Nothing herein shall be construed as a recommendation to buy or sell any financial instrument or security. This communication is for information purposes only. Investors should also consider this research report as only a single factor in making their investment decision. This communication may contain privileged and/or confidential information and is intended only for the use of the individual or entity to which it is addressed. No waiver of confidentiality or privilege is made by mistransmission. If the reader of this message is not the intended recipient, you are hereby notified that any unauthorized dissemination, distribution, reading, printing, copying and/or use of this communication are strictly prohibited. THE DISTRIBUTION OF THIS RESEARCH REPORT IN OTHER JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS RESEARCH REPORT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH PROHIBITION OR RESTRICTIONS. BY ACCEPTING THIS RESEARCH REPORT YOU AGREE TO BE BOUND BY THE FOREGOING.

29 For Internal Use Only Appendix

30 For Internal Use Only Commodity Exchange Act (CEA) The federal act that provides for federal regulation of futures trading. Commodity Futures Trading Commission (CFTC) The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States. National Futures Association (NFA) Authorized by Congress in 1974 and designated by the CFTC in 1982 as a registered futures association, NFA is the industry wide self-regulatory organization of the futures industry. Commodity Trading Advisor (CTA) A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customers account. A US-based CTA is generally required to be registered with the CFTC. Futures Contract A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price. SOURCE: Glossary of Futures Terms: An Introduction to the Language of the Futures Industry ©1998 National Futures Association The CISDM CTA Asset Weighted Index reflects the dollar-weighted performance of commodity trading advisers (CTAs) reporting to the CISDM Hedge Fund/CTA Database. CTAs trade a wide variety of over the counter (OTC) and exchange traded forward, futures, and options markets (e.g., physicals, currency, financial) based on a variety of trading models. To be included in the asset weighted index universe, a CTA must have at least $500,000 under management and at least a twelve month track record. The index dates to January The weights are revised monthly. The weight of a fund each month is its assets under management at the end of the month divided by the total assets under management of all qualifying funds. Managed Futures Industry Terms & Index Definition 29


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