Does this mean that investing in hedge funds was simply a fad? I don’t think so. What this means is that investors will now focus even more on multi-manager portfolios than single manager allocations. 

However, not all multi-manager portfolios are alike.  The manager selection should go beyond correlation and other statistical measures. While these quantitative measures are valid, it is clear that they become skewed during uncommon market conditions.

There will most likely be a greater focus on diversifying among managers that differ on trading strategies, trading time frames, markets traded, whether they are systematic or discretionary traders, risk taken per trade, and more.  You will also continue to see a greater focus on transparency and more frequent liquidity.

Balarie Capital Management realizes that institutions and individuals have different investment profiles, risk requirements, and investment policy mandates. As a result, we shy away from cookie-cutter investment recommendations and implement a more consultative approach. Our financial and operational integrity, combined with access to over 400 Commodity Trading Advisors, allow us to create and monitor custom portfolios that meet your investment needs.

Balarie Capital Management works with Pensions, Endowments, and Insitiutional Investors regarding their commodities and managed futures investments. Please contact us or access our managed futures database for more information.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

If you are a CTA that is looking at diversying your FCM exposure, we encourage you to contact Balarie Capital Management for for a custom proposal. Balarie Capital Management is a division of Archer Financial Services (AFS), a wholly owned subsidiary of ADM Investor Services, Inc. (ADMIS).

Consider, for instance, some of the biggest companies we have today. Microsoft was started during the recession of 1975, Hewlett-Packard was born during the Great Depression, Disney was founded during 1923, and GE started during the panic of 1873. The founders of these companies were all able to thrive during times of economic turmoil.

Not an entrepreneur?  No Problem. Recessionary environments also provide investors with investment opportunities. There will be opportunities to buy real-estate at undervalued prices, shares in companies at historically low P/E ratios, and perhaps even invest in start-up or emerging companies that might become the next Microsoft or GE.

But, before you start counting the wealth that you can possibly make during this recession, it is best to first start thinking about how you are going to protect it. Indeed, while a recession provides opportunities, it also creates an environment where many investors are often afraid to invest in value opportunities, or simply do not have the cash to participate.  This, of course, makes perfect sense. After losing money in the stock market, real-estate or other investments, not many people will have the “contrarian” courage to purchase value investments.  Additionally, many investors that have stubbornly held on to their present portfolio will simply not have the means to re-allocate their wealth.

As such, it is important to re-evaluate your financial situation and focus on protecting your wealth. While many pundits might still advocate buying into this market, I firmly believe that we are still in the early stages of a deep and long recession.  The first step is to focus on protecting your wealth. Once you protect your wealth, you allow yourself to invest in potential value opportunities that will inevitably arise.

Is Cash King?

So how exactly do you protect your wealth? Well, for many investors, the answer is simply to liquidate their positions and move everything into cash, money markets, or treasury bills.

The basic logic behind this move is simply that “cash is king”. In other words, while the stock market and real estate markets are declining substantially, keeping one’s money in cash will at least preserve what they currently have. It will also allow them to have money to invest in opportunities down the line.

While this logic makes sense in a non-inflationary environment, it fails to address the de-valuation of purchasing power that occurs during rising inflation. Simply put, rising inflation erodes at the purchasing power of cash or cash equivalent investments. In other words, while you might think you are preserving your wealth…you actually are not.

Not convinced? All you have to do is take a look at your current costs and compare them to your costs from 5 or 10 years ago.  You will quickly realize that you dollar does not buy what it used to buy. Consider, for instance, this hypothetical scenario.

Let’s assume that 10 years ago you retired from your job. For the previous 40 years, you worked hard to put enough money away so that you would enjoy a comfortable and relaxing retirement.  In preparation for your golden years, you put together a financial plan, calculated the potential costs of goods and services (using core CPI numbers), and decided that you had enough money to simply keep your wealth in a money market equivalent investment.

If you fast forward to today, you will quickly notice that the costs of goods and services are substantially higher that what you or your advisor had initially calculated. While you received some interest on your money, it by no means made up for the rising costs that have occurred around you.  In addition to record food and energy prices, you are now paying for your prescription medication, your cable bill, recreational activities, and travel costs.  You had even planned to help pay for your grandkid’s education, but are now noticing that tuition costs are also rising at quick pace.

If are your living this above scenario, you are quickly understanding that cash- or any type of fiat money- does not preserve your wealth.  Your wealth has eroded at a faster pace than you initially projected, and your purchasing power of your money has declined substantially over the past decade. Why is this? Well, a big reason has to do with the exponential growth rate of our money supply. While the Fed no longer reports the growth of the M3, the following chart can still give you an idea of the exponential increase of money that the fed has injected into our economy.

What is the result of an increase in the money supply? More money floating around. What is the impact of more dollars bills floating around?  It dilutes the purchasing power of the dollar that you have in your pocket. There is now too much money chasing too few goods.

The Fed has cranked up the printing press since the mid 90’s and the recent turmoil in the markets is forcing them to crank it up a notch higher. In fact, this is why I believe that the government’s current bailout package misses the point. Flooding the market with liquidity is simply robbing Peter and paying Paul. Investors who did not participate in the speculative investments of the last several years are now forced to pay for them, whilst inflation will continue to erode the purchasing power of their savings. You can read my comments here:

So how exactly do you preserve wealth? And how do you keep your wealth so that you can participate from these potential value investments? Here are some ideas:

•1)      Short- Term Treasury Bills

Even though I have cautioned against holding all of your wealth in cash- especially for the long-term- I still believe that it makes sense to hold some of your wealth in cash during these volatile markets.  In my opinion, you should not hold cash deposits that are higher than the FDIC insured levels. If you have additional money that you want to hold in cash, you should consider purchasing short-term treasury bills.

•2)      Gold

The price of gold has increased substantially over the past 7 years, but today might be one of the better times to allocate a portion of your portfolio towards gold.  In the first stage of this gold bull market, many investors were too focused on their profitable stock and real-estate investments to allocate towards this sector.  Today, it is becoming increasingly clear that gold’s tangible qualities go beyond capital appreciation.

Historically, Gold has served as a hedge against inflation, a hedge against a declining US dollar, and a hedge against times of economic and political crisis.  While many naysayers argue that gold is no longer money, but simply an archaic relic, gold’s actions over that past several years clearly prove otherwise.  Indeed, gold is the only currency in the world that has successfully preserved wealth for generations.

Consider allocating to gold bullion, gold coins, or gold futures.  If you are interested more about gold bullion or gold futures please info@balariecapital.com

•3)      Look For Trading Opportunities

I have long argued that buy and hold only makes sense if you buy when you are young and sell when you are old. First, many investors that subscribe to “buy and hold” will often not be able to stomach long periods of declines. In many cases, these investors will often exit their holdings right near the bottom. And even if investors were able to withstand the substantial decline, they will often miss out on better opportunities.  Don’t be afraid to sell your losing positions if you feel that there are better investments to make.  Also, consider trading for the short-term.   While the markets are volatile, they are also providing investors with trading opportunities.

•4)      Commodity Trading Advisors/ Managed Futures

If you are not a trader or familiar with commodities, consider allocating money with Commodity Trading Advisors. The term “Managed Futures” defines an industry that is made up of professional money managers- known as Commodity Trading Advisors- that trade client funds on a discretionary basis using a variety of alternative investment strategies. This is somewhat similar to investing with a mutual fund manager that ultimately decides what type of stocks to buy and when to buy or sell the stocks.

There are, however, a couple major differences. The first has to do with the fact that Commodity Trading Advisors strictly trade in the futures and foreign exchange markets. Hence, the term- managed futures. The other difference is that the manager can use a wide range of trading strategies that are not available to traditional managers.

Learn more about Managed Futures or request access our free CTA database where you can get performance reports on several hundred Commodity Trading Advisors.

If you would like to learn more about the above strategies, please do not hesitate to contact me.  This is not a time to be glued to the television- it’s a time to act.

Light At The End Of The Tunnel

While our economy first has to pay for the irresponsible lending practices, real-estate speculation, and wall-street greed that brought us into this situation, I fully believe that there is a light at the end of the tunnel. Unfortunately, this tunnel is much longer than most people will anticipate. Instead of focusing on what the government might or might not do, investors should focus on what they can do to protect themselves from this prolonged recession and rising inflation.  And perhaps, you might even be one of those investors who can profit from this tumultuous market environment.

Best,
Emanuel Balarie

Emanuel is Managing Director of Balarie Capital Management, the managed futures division of Archer Financial Services, Inc.  Emanuel works with institutional and high net worth investors regarding their managed futures investments. After graduating from the U.C. Berkeley, Emanuel started his career working for the San Francisco branch office of Merrill Lynch.  After working for several other firms, ranging from dealing with commodities, stocks, futures, and alternative investments, Emanuel decided to combine his expertise and industry experience with the financial integrity and resources of Archer Financial Services, Inc.

Throughout his career, Emanuel has been an advisor to clients and institutions on the commodity markets and managed futures. His research has been published in many parts of the world, and he often speaks at national and international investment conferences. Balarie has appeared numerous times on CNBC, and is frequently quoted in dozens of financial publications such as, The Wall Street Journal, Reuters, Marketwatch from Dow Jones, Barron’s, MSN Money, and Bloomberg.

Mr. Balarie is also the author of the book, Commodities for Every Portfolio and Editor of CommodityNewsCenter.Com

The risk of loss in trading futures and options contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you. Past performance is not necessarily indicative of future results.

One reason for why Harvard Endowment has been able to post positive gains in the midst of a declining stock market has to due with their steady decrease in allocation towards the equities sector and their increase in allocation towards the real assets, commodities, and absolute return sectors. (View the endowment’s investment policy)

From The New York Times:

“Harvard said that its domestic equity holdings, which account for 12 percent of the portfolio, lost money but outperformed its benchmark, while its foreign equity holdings also fell, declining 12.1 percent, a percentage point more than the benchmark.

Its emerging market holdings and private equities holdings exceeded their benchmarks by about 3 percent. Harvard also beat its benchmarks for domestic, foreign and inflation-indexed bonds. That sector accounted for 15 percent of the portfolio and in each case outperformed the indexes from 2.8 percent to 4 percent.

Its real assets – liquid commodities, timber and land and real estate – beat the benchmarks by nearly 3 percent.

The disappointments were absolute return funds, or hedge funds, which rose 0.1 percent (the benchmark was a 1.8 percent increase) and the high-yield sector, where Harvard’s holdings fell 8.3 percent while the index rose 0.7 percent. About 1 percent of Harvard’s total portfolio is allocated to high yield. ” Read Full Article

Balarie Capital Management works with Pensions, Endowments, and Insitiutional Investors regarding their commodities and managed futures investments. Please contact us or access our managed futures database for more information.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

 Among other things, the CFTC Study stated that many index funds decreased their oil positions this year. This revelation might surprise many investors who have blamed the rise of oil prices on the purchase of index funds by institutional investors.

The report also broke down the percentage of the type of investors who participate in the commodity index business in the U.S. markets:

“Of the $161 billion net notional value of commodity index business in U.S. markets on June 30, 2008, about 24 percent was held by -index funds, about 42 percent was held by -institutional investors, about 9 percent was held by -sovereign wealth funds, and about 25 percent was held by -other traders. The -other category is largely made up of retail investors holding ETFs, ETNs, and similar instruments that are publicly traded.”

You can read the CFTC Report here.

Balarie Capital Management works with Pensions, Endowments, and Insitiutional Investors regarding their commodities and managed futures investments. Please contact us or access our managed futures database for more information.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

According to the Wall Street Journal , several Washington lawmakers are going to reveal a report today(“The Accidental Hunt Brothers”) which claims that speculators were to blame for the run-up( and subsequent sell-off) in oil prices.

“In mid-July, pension funds and other big institutions “began a mass stampede for the exits” of a range of commodities, the report said, partly as a result of several bills that would force a cutback in these investments. In one commodities fund, investors sold futures contracts linked to about 127 million barrels of crude oil.”   Read Full Article

We shall see what the CFTC report coming out later today will say about this matter.

Balarie Capital Management works with Pensions, Endowments, and Insitiutional Investors regarding their commodities and managed futures investments. Please contact us or access our managed futures database for more information.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

“Winton’s strategy is essentially using price action and computers to identify clear trends and trading them for profit, regardless of the overall direction of markets. Winton trades more than 100 futures and forwards markets worldwide using its proprietary model, including shares, bonds, interest rates, currency and commodity futures markets. It has assets under management of more than $15 billion, making it the second-largest fund of its type — the commodity trading adviser (CTA) — in the world. “

You can read the full article on Winton Capital and his managed futures strategy here

If you are interested in recieving further information on Winton Capital Management, our list of systematic trendfollowers, or any other managed futures program, please contact us. You can also access our managed futures database.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

“In the search for diversification, appetite for this asset class has continued to grow, with schemes making increasingly meaningful allocations, particularly as equity markets have foundered: Switzerland’s CHF37bn AHV Ausgleichsfonds invested 5% of its assets (CHF1.85bn/$1.75bn) in commodities last year; Progress, Unilever’s €4bn Dutch pension fund, said it was on target to double its commodities allocation to 4% of assets, approximately €160m ($2.5m), by the end of 2008; and the UK’s Royal County of Berkshire Pension Fund recently said it was considering a £150m ($296m) investment, 10% of total assets.

“These kinds of inflation-linked assets are particularly useful to pension funds since obligations to our members can increase as inflation increases,” said Clark McKinley at CalPERS, which has allocated $1.4bn to commodities since March 2007. “This is a long term programme aimed at diversifying our portfolio and giving us a hedge against inflation that doesn’t move in tandem with the stock market.”

It’s not suprising that many pension funds have upped their commodities allocation over the last several years.  With the volatility that has occured in recent months, the question is… will they continue to do so? I believe that they will continue to do so. While the “bull market” returns have been a positive addition to their portfolios, many institutional investors are attracted to the diversification component. With inflation on the rise, a bear market in stocks, I expect the allocation to the commodities and managed futures sectors to increase.

Balarie Capital Management works with Pensions, Endowments, and Insitiutional Investors regarding their commodities and managed futures investments. Please contact us or access our managed futures database for more information.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

Since the beginning of July, there have been six days on which the S. & P. 500 has gone up or down by at least two per cent, and daily moves of more than one per cent-like the ones we saw at the start of last week-have come to seem practically routine. Precipitous falls in the market have frequently been followed immediately by sharp rallies, and vice versa. And, while some of these moves have been occasioned by real news, more often it’s been impossible to tell just what made investors so damn exuberant or so gloomy.

Not that long ago, stock-market volatility appeared to be a thing of the past; between the end of 2003 and the end of 2006 there were only two days with moves of two per cent. But, ever since the credit crisis began, big moves have become common. ( Read Full Article)

Given the fact that the market conditions have changed, it is not surprising that many Commodity Trading Advisors are posting numbers that are substantially different than their previous track record.  Some managers have thrived in this market environment (and have been able to post above average returns) and others have incurred a significant drawdown.

Due to the changing market conditions, it is important to re-evaluate the managers that you have in your portfolio.  How has the CTA performed over the last 1-2 years? Are you noticing a change in risk-adjusted returns? Has the Commodity Trading Advisor been able to adapt to the current market environment? How have they performed against their peers? These are just some of the questions that have to be asked as you re-evaluate your current allocation.

Contact Balarie Capital Management if you are interested in finding out more about our recommended managers.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.

A recent article highlights some of the benefits of small hedge funds.  According to a Pertrac Financial Solutions study, “smaller funds have historically been more profitable than big hedge funds.” The study went on to state that the average return for small funds was 11.74% through last December, while medium and large-sized funds posted 10.24% and 10.22% respectively.

You can read the full article here

Why these statistics highlight the benefits of allocating a portfolio of your managed futures portfolio to emerging CTAs, I must also point out that the attrition rate for smaller Commodity Trading Advisors is also higher. As such, due diligence and constant monitoring of smaller, start-up managers are extremely important.

BCM monitors several emerging managers. Contact us for more information.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.  THERE IS SIGNIFICANT RISK OF LOSS WHEN TRADING FUTURES AND OPTIONS. ALWAYS REVIEW A DISCLOSURE DOCUMENT BEFORE INVESTING IN ANY MANAGED FUTURES PROGRAM.