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Opportunities in the CTA Industry

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The CTA industry has faced prolonged periods of negative returns, ongoing redemptions, declining revenues and mounting expenses. Is the tide ever going to shift? What if it doesn't?

This presentation provides an overview of the Managed Futures sector past and present and explores several ways to unlock value in 2014.

Highlights:
• Larger firms continue to gather assets, yet smaller firms are seeing record outflows
• Do investors really understand the strategy?
• Do investors understand your capabilities?
• Importance of developing new products and distribution channels
• Positioning the firm for the future

These are just a few of the topics covered in our presentation. We would like to invite you to join the discussion and share your thoughts.

Published in: Economy & Finance, Business
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Opportunities in the CTA Industry

  1. 1. Opportunities in the CTA Industry MSF Enterprises LLC January 2014 Copyright © 2014 MSF Enterprises, LLC
  2. 2. CTA Manager Quiz • Is the velocity of your fund flows 2-3 times the volatility of your fund? • Do you have the same investors from 5 or 10 years ago? • Are you tired of watching money flows shift away from the CTA industry to the benefit of other investment strategies? • Do you have the staying power to withstand more than 24 months of flat-to-negative returns? • Is your performance negatively correlated to equities? How did you perform in 2001, 2008 and 2013? • How does your business perform when equities are posting doubledigit gains? 2 Copyright © 2014 MSF Enterprises, LLC
  3. 3. Self-Reflection • What steps can you take to make your strategies more profitable? • Have you asked your clients about other ways you can help their portfolios? • Do higher returns = increased profits? • How often do you evaluate your business model? • Where do you see yourself in five years? Where do you see your firm in five years? “Insanity: Doing the same thing over and over again and expecting different results.” - Albert Einstein 3 Copyright © 2014 MSF Enterprises, LLC
  4. 4. Asset Management Industry Trends Evolution of the Business Model Competition The asset management environment is rapidly evolving. Fund managers must quickly adapt to the shifting landscape to position their business for success. Scale Branding Marketing & Distribution •Performance is important, but it is not the only driver of firm value. •Managers must differentiate their business in terms of product diversification and edge. •The importance of scale has never been more apparent, as the major players in the industry attract the vast majority of asset flows. •Allocators view many strategies as similar, making it critical for managers to establish a reputation and increase visibility. •It takes more than outperformance to attract new capital, yet many asset managers overlook their firm’s marketing and distribution activities. Product Development •Growing the business into a major industry player requires offering more than just a single product, with diversification being key. Focus on the Client •Clients are no longer satisfied with being thrown into a bucket with other investors. Client relations and customization have become essential for fund managers. 4 Copyright © 2014 MSF Enterprises, LLC
  5. 5. State of the CTA Industry: Stagnant AUM Growth Many of the metrics used to evaluate the Managed Futures industry are skewed due to the inclusion of Bridgewater Associates, which is not generally considered a pure CTA. Furthermore, Winton Capital Management has an overwhelming influence on the industry’s capital flows and AUM trends . Without Bridgewater and Winton, growth in the CTA industry has been relatively flat over the past few years. Managed Futures AUM ($B) Growth of Managed Futures AUM ($B) Without Bridgewater and Winton, the Managed Futures space was actually down $24B in AUM from June 2012 to June 2013. Managed Futures Quarterly Flow ($B) Source: Attain Capital Management Copyright © 2014 MSF Enterprises, LLC • Removing Bridgewater and Winton from industry calculations, the Managed Futures space has barely grown since 2009. The rest of the industry only accounted for $23B of the $125B in new assets raised since that time. • Aside from Bridgewater and Winton, the Managed Futures industry averaged quarterly outflows of $5B from Q3 2012 to Q2 2013. 5
  6. 6. State of the CTA Industry: Performance Barclay CTA Index v. SP 500 (1980 – 2009) Over long periods of time, CTA’s have kept pace and even outperformed the S&P 500. During periods of market decline such as 2000-02 and 2008, CTA’s performed exceptionally well relative to other asset classes. The last 3 years have been challenging for most CTA’s in terms of performance. In turn, allocators have become more dynamic in attempting to time allocations to the CTA asset class, seeking to anticipate market cycles. Indexed Performance Comparison (Jan 2011 - Oct 2013) 150 140 130 120 110 100 90 80 Source: Managed Futures Today, Yahoo! Finance, Newedge Copyright © 2014 MSF Enterprises, LLC CTA *CTA performance calculated using Newedge CTA Index SP 500 AGG 6
  7. 7. Shifting Institutional Allocation Models Institutional Core Portfolio Shifting to Include Hedge Fund Strategies Rather than merely viewing hedge fund strategies as satellite allocations, institutional investors have been repositioning their core portfolios to include certain types of alternatives. This is a key development for the CTA industry, as it enables managers in the space to compete for a new pool of capital. Source: Citi Prime Finance Copyright © 2014 MSF Enterprises, LLC 7
  8. 8. Opportunities in Retail for CTA’s Liquidity of Alternative Strategies Managed futures strategies are naturally among the most liquid in the alternatives space. This provides CTA’s with an advantage over other alternative managers in terms of creating products for the retail market. Alternative retail products in the US are projected to increase by a CAGR of nearly 25% over the next five years. This trend could generate significant opportunities for CTA managers to boost AUM by targeting an expanding pool of capital. Source: Citi Prime Finance, Morningstar, ICI, Federal Reserve, Cerulli Associates, Deloitte Copyright © 2014 MSF Enterprises, LLC Publicly Offered US Alternative ‘40 Act Mutual Funds and ETFs 8
  9. 9. How the Market Views CTA’s Pros to Investing in CTA’s Systematic Trading Models • • Quant-based investment methods Proprietary algorithms remove emotion from trading decisions Risk-Adjusted Returns • • • Generally lower volatility than other asset classes Smaller drawdowns than equities and bonds on a historical basis Certain CTA strategies have the potential to generate returns in any market environment Transparency • • Separately Managed Accounts Trade activity can be tracked on a daily basis Reduce Overall Portfolio Risk • • • • Increased diversification when combined with traditional asset classes and other alternative investments Low-to-negative correlation with equities and bonds Downside protection Generally outperform during adverse market conditions for equities and bonds Tax Advantages • • Profits and losses from futures transactions are neither considered long-term nor short-term in regard to capital gains 60% of profits are taxed at long-term capital gains rate, 40% taxed at short-term rate Investor Concerns with CTA’s • • • • CTA’s are seen as a black box Difficult strategy in a zero interest rate environment Among the highest fees in the industry by strategy Require volatile or trending markets to produce returns 9 Copyright © 2014 MSF Enterprises, LLC
  10. 10. Opportunities for CTA’s Break Away from the CTA Label •Managers should seek to categorize themselves more broadly as quant-driven investment firms •Managed futures are able to play a key role in many portfolios •In the hedge fund world, CTA’s are seen as an orphan strategy Integrate New Strategies •Expand product offerings •Participate in markets with broader scope such as equities and ETFs •Establish product suite with comprehensive set of quant trading strategies Broaden Performance Cycle •Leverage systematic trading strategies in markets other than futures to create products that can perform in any environment •Dampen performance volatility between market cycles •Reduce the time from peak to trough in terms of overall performance Customized Trading Strategies •Create bespoke trading models to fit the specifications of individual clients •Utilize base systematic platform with adjustable triggers and parameters 10 Copyright © 2014 MSF Enterprises, LLC
  11. 11. Building Value CTA’S NEED TO FOCUS MORE ATTENTION ON FUNDAMENTAL BUSINESS PRACTICES Product Manufacturing • • • Provide strategies and structures to meet the needs of a wide range of investors Consider capacity constraints Separately managed accounts, pooled investment vehicles, ‘40 Act products Operations • • Efficiency of operational structure Leveragability of systems and personnel Distribution • • Investors by type and geography Scalability GOALS: Develop Tool Set, Expand Distribution Channels, Grow AUM, Improve EBITDA and Increase Valuation Multiples Manufacturing Distribution Fund Performance Copyright © 2014 MSF Enterprises, LLC Enterprise Value Operational Efficiency Firm Structure 11
  12. 12. Getting to the Next Level Finding a Strategic Partner •Seek strategic partner(s) with capital and capabilities to assist in expanding the business •Major institutions, distributors, fund platforms Expanding Team •Firms should add team members with product development and marketing expertise •Can outsource these roles to third-party advisors and marketers Publishing Research •Published research enables a firm to highlight its expertise while facilitating greater understanding of its capabilities •By producing client-facing research pieces, managers have the opportunity to create a dialogue with clients and potential investors Branding •Managers need to develop a strong reputation and brand to be competitive •Create a custom strategy for reaching targeted investors and accessing new markets •Seek to diversify investor base by type and geography 12 Copyright © 2014 MSF Enterprises, LLC
  13. 13. Appendix 13 Copyright © 2014 MSF Enterprises, LLC
  14. 14. CTA Fees Remain at the Top Strategy Management Fee Performance Fee CTA 2.17% 18.90% Event Driven 1.71% 20.00% Special Situations 1.71% 20.00% Distressed Securities 1.70% 19.30% Credit 1.69% 18.10% Relative Value 1.67% 16.70% Macro 1.67% 16.30% Other 1.63% 18.20% Multi-Strategy 1.55% 16.60% Market Neutral 1.53% 18.90% L/S Equity 1.53% 18.60% Fixed Income Arbitrage 1.44% 18.30% Fund of Funds 1.26% 10.60% Hedge fund fees have been pushed down across the board in recent years, yet the CTA space has generally maintained pricing power. Source: Preqin Copyright © 2014 MSF Enterprises, LLC 14
  15. 15. CTA Historical Performance CTA Index Performance Since 1980 Compound Annual Return 10.36% Sharpe Ratio 0.38 Worst Drawdown -15.66% Correlation vs S&P 500 The S&P 500 and BarclayHedge CTA Index both have a total of 7 down years since 1980 (including 2013). However, the average down year for the S&P 500 during this time was -14.69%, while the average CTA down year was only -1.29%. 0.01 Correlation vs US Bonds 0.13 Correlation vs World Bonds 0.00 BarclayHedge CTA Index Performance by Year 1990 21.02% 2000 7.86% 2010 7.05% 1981 23.90% 1991 3.73% 2001 0.84% 2011 -3.09% 1982 16.68% 1992 -0.91% 2002 12.36% 2012 -1.70% 1983 23.75% 1993 10.37% 2003 8.69% 2013 -1.41% 8.74% 1994 -0.65% 2004 3.30% 1985 25.50% 1995 13.64% 2005 1.71% 1986 3.82% 1996 9.12% 2006 3.54% 1987 57.27% 1997 10.89% 2007 7.64% 1988 21.76% 1998 7.01% 2008 14.09% 1989 1.80% 1999 -1.19% 2009 -0.10% CAGR Copyright © 2014 MSF Enterprises, LLC 63.69% 1984 Source: BarclayHedge 1980 23.25% CAGR 7.09% CAGR 5.89% CAGR 0.13% 15
  16. 16. CTA Drawdowns and Volatility Drawdowns: CTA’s v. S&P 500 While recent performance has been a struggle for CTAs, the asset class continues to compare favorably to equities from a risk perspective. Volatility in the managed futures space is significantly lower than the S&P 500, and drawdowns have been considerably less pronounced within CTA portfolios. Source: Preqin Hedge Fund Analyst Copyright © 2014 MSF Enterprises, LLC Rolling 3 Year Volatility: CTA’s v. S&P 500 16
  17. 17. Largest CTA Firms Rank Firm AUM ($MM) Inception 1 $12,500 1987 Transtrend BV $7,100 1991 Aspect Capital $5,737 1997 5 Lynx Asset Management $4,963 1999 6 Informed Portfolio Management (IPM) $4,558 1998 7 Two Sigma Investments $4,020 2001 8 Cantab Capital Partners $3,400 2006 9 P/E Investments $3,000 1995 10 Campbell & Co. $2,940 1972 11 Graham Capital Management $2,619 1994 12 Quantitative Investment Management $2,187 2003 13 FDO Partners $2,167 1997 14 H20 Asset Management $2,001 2010 15 Mesirow Financial $1,545 2005 16 Eagle Trading Systems $1,515 2002 17 SEB Asset Selection $1,394 2003 18 Ikos Asset Management $1,360 1992 19 Crabel Capital Management $1,352 1992 20 Millburn Ridgefield Corporation $1,165 1971 21 Harmonic Capital $1,112 2002 22 Armajaro Commodities Fund Ltd $958 1998 23 Ortus Capital Management $951 2003 24 Copyright © 2014 MSF Enterprises, LLC Man Investments - AHL 4 Source: BarclayHedge, Citi Prime Finance 1997 3 There are approximately 130 CTA funds above $200MM in AUM. $24,700 2 The largest CTA programs are relatively small from an AUM perspective when compared with top managers in other segments of the asset management industry. Winton Capital Management Amplitude Capital $927 2004 25 Boronia Capital $890 1993 17
  18. 18. Top 20 Hedge Fund Managers: Past and Present 2001 Rank Firm 2006 Rank AUM [$M] 1 Moore Capital Mgmt $8,000 2 Farallon Capital $7,794 3 Andor Capital Mgmt Maverick Capital $7,500 AUM [$M] 1 JPMorgan Asset Mgmt $33,087 2 Goldman Sachs Asset Mgmt $32,531 3 Bridgewater Associates 4 5 Citadel Investment Group $7,150 6 Angelo, Gordon & Co. $7,000 7 Soros Fund Mgmt $7,000 Rank Firm AUM [$M] 1 Bridgewater Associates $83,300 2 JPMorgan Asset Mgmt $54,800 3 Brevan Howard Asset Mgmt $40,000 $30,210 4 BlueCrest Capital Mgmt $35,300 D.E. Shaw Group $27,300 5 Och-Ziff Capital Mgmt $31,900 5 Farallon Capital $26,200 6 Man Group $29,600 6 Renaissance Technologies $26,000 7 Baupost Group $26,700 7 Och-Ziff Capital Mgmt $21,000 8 BlackRock $26,635 8 Barclays Global Investors $18,953 9 Winton Capital Mgmt $25,700 $7,500 4 Firm 2013 8 Pequot Capital Mgmt $6,500 9 Och-Ziff Capital Mgmt $6,050 9 Man Investments $18,800 10 D.E. Shaw & Co. $23,400 10 Renaissance Technologies $5,570 10 ESL Investments $17,500 11 Lone Pine Capital $22,000 11 Caxton Corp. $5,500 11 GLG Partners $15,833 11 Renaissance Technologies $22,000 12 Tudor Investment Corp. $14,850 13 Elliott Mgmt Corp $21,500 13 Citigroup Alternative Inv. $14,081 14 Lansdowne Partners $14,000 14 AQR Capital Mgmt $20,300 15 Campbell & Co. $13,600 15 Credit Suisse Hedging-Griffo $19,985 16 Atticus Capital $13,500 15 GAM $19,600 17 Viking Global Investors $19,400 18 Davidson Kempner Capital Mgmt $18,590 19 Farallon Capital Mgmt $18,400 20 Adage Capital Mgmt $18,360 12 HBK Investments $5,491 13 Chilton Investment Co. $5,000 14 Duquesne Capital Mgmt $5,000 15 ESL Investments $5,000 16 Highfields Capital Mgmt $5,000 17 Tudor Investment Corp. $4,946 18 Highbridge Capital Mgmt $4,200 19 Perry Capital $4,137 20 Man Investments $4,000 17 Caxton Associates $13,500 18 Citadel Investment Group $13,400 19 Cerebrus Capital Mgmt $12,800 20 Moore Capital Mgmt $12,500 Compare 2001 to 2013. What differences do you notice in the composition of top managers? Copyright 2011 MSF Enterprises, LLC Copyright © 2014 MSF Enterprises, LLC Answer: Single Product v. Diversified Managers Source: Institutional Investor, Bloomberg Markets 18
  19. 19. Case Study – AQR AQR’s Diversified Arbitrage Fund History US-based AQR Capital Management is a quant-driven firm, partly owned by Affiliated Managers Group, offering alternatives and traditional strategies. In January 2009, it became one of the first hedge fund managers in the U.S. to launch a retail mutual fund, introducing a ‘40 Act version of its diversified arbitrage strategy. AQR subsequently launched five other ‘40 Act mutual funds, one of which was alternatives-focused. By the end of 2009, the AQR Diversified Arbitrage Fund had drawn $236 million in net inflows, the 39th best launch among 510 new funds introduced in the U.S. during the year. Strategy AQR undertook this effort by hiring personnel with retail mutual fund experience to lead the sales effort, including a wholesale distribution force that had experience with both alternatives and mutual fund wholesaling. Importantly, the firm put compliance structures in place to eliminate potential conflicts arising from the same portfolio managers running the ‘40 Act and hedge fund versions of the arbitrage strategy. Of course, AQR already had the trading infrastructure used for managing a complex mix of arbitrage strategies, including convertible arb and merger arb, which can have 250+ long positions and 150+ short positions, and deploy leverage. The AQR Diversified Arbitrage Fund capped its fees at 1.5% for the retail share class, but the real key was educating advisors about the product. The firm targeted sophisticated RIAs, mutual fund wrap platforms, and broker-dealer due diligence/ gatekeeper departments that had familiarity with alternatives. AQR found a number of firms that already used alternatives in a limited partnership format and were looking to offer alternative strategies to a broader spectrum of investors via the ’40 Act structure. Lessons Education continues to be a priority, to both explain that the low-correlated strategy still carries risk and to help advisors understand how the Diversified Arbitrage Fund fits best into portfolios. The educational effort appears to be working. For example, Litman/Gregory Advisor Intelligence, an investment research and due diligence service for independent RIAs, added the AQR Diversified Arbitrage Fund to its Approved List. In January 2010, AQR launched its second retail alternative fund, the AQR Managed Futures Strategy Fund, which had $71 million in assets two months later. 19 Copyright © 2014 MSF Enterprises, LLC
  20. 20. MSF Firm Capabilities 20 Copyright © 2014 MSF Enterprises, LLC
  21. 21. Our Value “Creating a Strategic Plan” OUR GOAL 1. 2. 3. 4. 5. Increase Profitability Create Brand Strategy Product Development Raise AUM Maximize Firm Value WHAT WE DO 1. 2. 3. Create strategy to leverage existing resources and maximize profitability Align professional goals of the organization with personal aspirations of the business owners Provide a road map with clearly defined and measurable steps for execution 21 Copyright © 2014 MSF Enterprises, LLC
  22. 22. Our Services Mergers and Acquisitions: We advise domestic and international companies with individually tailored M&A advice and work to help them accomplish their goals. We structure, execute and evaluate mergers and acquisitions, joint ventures, strategic alliances and divestitures in various industries and countries. We have successful track records of managing all aspects of complex investment projects. Capital Raising: MSF bankers are experienced in all aspects of capital formation, including senior debt, subordinated debt, mezzanine capital, preferred stock and common stock. We maintain an ongoing dialogue with institutional sources of capital, including commercial banks, insurance companies, pension funds, finance companies, hedge funds, mezzanine funds, venture capital funds and private equity groups. Strategic Advisory: MSF’s strategic advisory practice focuses on identifying and executing strategies to maximize value and create aligned objectives. MSF bankers construct different transaction strategies – including acquisitions, divestitures, recapitalizations and outright sales – and evaluate how each strategy impacts shareholder interests. Our analysis is based on solid research, as well as first-hand experience with the current transactional environment. 22 Copyright © 2014 MSF Enterprises, LLC
  23. 23. MSF Team Michael Fields │ Founder & Managing Partner Michael has spent the past 25 years in the capital markets focusing on alternative investments as a banker, allocator, analyst and placement agent. During this time, he has raised more than $750MM for alternative investment managers including hedge funds, funds of funds, private equity groups and venture capital firms. Prior to founding MSF, Michael was Director of Research for European Markets at Lighthouse Partners, a $7.9B fund of funds. Before Lighthouse, Mr. Fields worked as a Portfolio Analyst in the risk arbitrage department at Tiedemann Investment Group, a $2B family of hedge fund strategies. Mr. Fields came to Tiedemann from Computer Trading Corporation LP, a commodity-trading advisor launched from the Tudor Investment Corp. At CTC, Mr. Fields was on the team in charge of Asian portfolio investments. Mr. Fields has a Bachelor of Arts degree from Hobart & Williams Smith Colleges and received his MBA in Finance & International Business from Fordham University. Michael holds Series 7 & 63 licenses. Dan Urmann│ Chief Operating Officer Dan brings more than 17 years of experience as an executive-level business leader, having worked with a diverse group of privately-held companies from industries such as information technology, consumer products, real estate and financial services. Prior to MSF, Dan served as an entrepreneur and marketing strategist for several start-ups and early stage growth companies. He also served as Director of Business Development for Streaming Media Corporation, an early-stage venture-funded technology firm that was sold in 2006 for $155MM. He began his career in finance with Century Capital Group, a middle-market investment bank focusing on technology, healthcare, retail, construction, ready-mix concrete and real estate. Dan holds a BSBA Management and MBA from the University of Denver. 23 Copyright © 2014 MSF Enterprises, LLC
  24. 24. Contact MSF ENTERPRISES, LLC 717 17th St., Suite 2160 Denver, CO 80202 MICHAEL FIELDS (303) 847-4649 mfields@msfenterprises.com DISCLAIMER: Securities are offered through Silver Leaf Partners, a member of FINRA, NFA, & SIPC. This communication is for informational purposes only. The information above is not guaranteed as to its accuracy or completeness. If such information is related to a security or product then you are further advised that we do not provide investment counsel thereon nor do we certify such information as complete or accurate. To determine suitability, you must secure, read & understood all relevant information related thereto, conduct a thorough due diligence & seek expert independent counsel, if necessary, prior to investing. We further caution that past performance is not indicative of future results. This communication is confidential & may not be disclosed without permission. If this email is not intended for you, then you have received it in error & you may not distribute or copy it; please let us know of our error by reply email & delete this message & all of its attachments. Every effort is made to keep our network virus free; we have no liability for any damage caused by this transmission. 24 Copyright © 2014 MSF Enterprises, LLC

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