MANAGED FUTURES AND A BOND BUBBLE

September 13, 2010

We asked the question way back in June of 2008 of how the commodity bubble bursting would affect managed futures performance (not knowing in the least we
would be so prescient in calling the top in commodities), answering that managed futures should do well in an extended down move in commodity prices.

Whoever asked us to answer that question was right to doubt commodities could keep going up at that pace back in June of 2008, and we were luckily right in our
answer about managed futures doing well in an extended down period for commodities. Fast forward over two years to the present day, and we are faced with a
very similar question. But it isn’t commodities this time which are looking bubble-like, it is bonds. And more specifically, US and German government bonds.

Source: TradeStatio

Yes, despite record levels of debt in the United States and Europe – the one asset class that wasn’t fazed at all by the financial crisis, recession, and even
subsequent recovery was government bonds. The one asset that has kept chugging right along whether stocks went up or down, commodities advanced or
declined, or the US Dollar strengthened or weakened has been bonds.

Sure, it has made a few head fakes lower (rates higher) over the past year and a half, pushing everyone and their brother to jump on the short side in case the top
in, only to reverse direction and keep pushing higher (causing some losses for managed futures and those betting on a bubble burst).

But in general, bond prices have been moving higher ever since the financial crisis began, hitting all time highs as far as the US 30yr back adjusted futures are
concerned (above), and near all time lows as far as the US 30yr yield is concerned (below). In fact, US treasuries are in the midst of a 30 year bull market Check
out the 36 month moving average (in orange) of US 30yr yields on the chart below for one of the best looking trends you’ll ever see, with the moving average
sloping downwards for nearly all of the past 240 months.

Source: Yahoo Financ

Is there a bond bubble?

All of this begs the question of whether we are in a bond bubble. Many people much smarter than me have debated this back and forth, and I’ll provide some links
below to research the matter yourself.

Siegel & Schwartz in WSJ: http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html

Barry Ritholtz on Big Picture blog: http://www.ritholtz.com/blog/2010/08/do-us-bonds-resemble-dot-com-stocks/

But in common sense terms, it sure seems like a bubble just based on how far rates have dropped both over the long term (the aforementioned 30year bull market
in US bonds which has seen rates fall by 75%), and over the short term (with 30yr bonds losing a full percentage point from 4.53 to 3.53 over the last four months,
representing a 22% drop in yield).

But high prices and trends alone don’t make a bubble. Technically speaking, a bubble is present when there are unsustainable high prices due to speculative
investment which drives prices beyond the true economic value of the asset itself. The higher prices are unsustainable in a bubble, so the thinking goes, because
there are only so many suckers to go around; and eventually the world will run out of people willing to pay ever increasing prices. So, we not only need high prices
for there to be a bubble, we also need them to be unsustainable, and we need them to have been driven higher by speculative buying.

There sure seems to be an argument for high bond prices being unsustainable, with bonds having a defined upside (because rates can’t go below zero). But then
we can bring in Japan as a counter argument, pointing to the fact that Japan has essentially had their interest rates at zero for the past decade plus – yet their bond
bubble hasn’t burst with rates screaming higher.

The more interesting debate is whether the rally in bonds since the start of the financial crisis has been driven by speculative buying. It sure doesn’t seem like that
the case, as it was with dot.com stocks and tulips. In contrast, it seems as if the buying in US treasuries has been driven by fear, not greed; as investors perceive
them to be risk free (assuming the odds of the US Govt. defaulting to be essentially zero).

Looking at it from these angles, it appears more that bonds may be overpriced, or be more likely to go lower (rates higher) over the next several months/years, than
in full blown bubble mode. But – we still want to consider what the managed futures landscape would look like if there is indeed a bond bubble, and like all the
bubbles before – it bursts.

How should managed futures perform amidst a bond bubble bursting?

The quick answer is the same as it was when considering what would happen to managed futures should the commodity bubble burst back in the middle of 2008,
and that answer is that managed Futures as an asset class (read traditional long volatility programs) should struggle in the short term as the long trend in bonds
reverses, but benefit in the long term should an extended down move in bond prices take hold.

This has been borne out in the first few weeks of September, unfortunately; as bond prices have retreated off of their August highs. With new multi-week lows in
bonds being posted this morning as the stock market rallied, the following drops were logged in the main government bond futures from the 8/25 high to 9/13 lows.

US 30yr: -4.55%

US 10yr: -2.96%

EuroBund: -2.81% (8/31 high)

This reversal of the uptrend in bonds has caused some short term pain for many managed futures programs that were only too happy to cheer bond prices on to
new highs in August. Consider the popular Clarke Capital Management Worldwide program which made new equity highs last month on the back of the bond rally.
Clarke’s worldwide program had nearly $35K in profits from its long bond trades in August (about 12% on a base $250K minimum account), but is down
approximately -$18K on those same bond positions so far in September as the trends have rolled over somewhat (about 6% on the base $250K account). This is
the short term pain we’re talking about. [Past Performance is Not Necessarily Indicative of Future Results]

If this fall off in bond prices does turn out to be a true reversal of the trend and cause some short term pain for most managed futures programs, it will be a shame;
as Managed Futures as an asset class turned in one of their best month’s in quite some time in August, with the NewEdge CTA Index posting its best return in the
past 20 months, for example, up +3.49%. (See chart below). The nice August had some asking if this was finally where managed futures break out of their 1 ½ yea
doldrums and post a few months of the outsized returns they are known for (and capable of during market stress periods).

Past Performance is Not Necessarily Indicative of Future Results

We were sure hopeful that the strong August was the start of a nice run for managed futures, but with one of the main drivers of the August performance being a
rally in US and European government bond prices – I must admit that we had our doubts (wondering…how much higher they can go). On the flip side, it was nice t
see a further decoupling of the stock market and commodities in August – as grains and softs rallied in the face of stock market declines.
 Which leads us to the longer term picture for managed futures if 1. There is indeed a bond bubble, and 2. It bursts. Despite the short term pain, we believe manage
futures investors should welcome a bond bubble bursting with open arms.

This is because bond prices, and more specifically trends in bond futures, can be one of the main performance drivers for traditional multi-market, systematic
managed futures programs such as the aforementioned Clarke Capital.

Managed Futures Performance tied to Bond Trends

Consider the chart and tables below which look at managed futures performance as measured by the CSFB/Tremont Managed Futures Index in comparison with
various trending, sideways, and reversal periods in the bonds over the past two years (as viewed on the 30yr rate).

You will see managed futures performing quite well during the three trending periods, mixed during the sideways periods, and in some trouble during the reversal
periods. Is it a coincidence that the tough 2009 period for managed futures coincided with a large reversal period for bonds and then a flat sideways period? We
sure don’t see it that way, and in our opinion, no other market sector has such a high impact on traditional managed futures programs as the bonds do.

Past Performance is Not Necessarily Indicative of Future Results

While this was a bit of an abnormal period in terms of the big move down and equally big reversal from that low during the financial crisis, the pattern has hel
true for many years in our experience; with the performance of most classic trend following managed futures programs being closely tied to the length and
duration of trends in the bond markets. When bond markets are moving and keep moving, managed futures tend to do well. When they stop moving in a dire
and reverse course, it tends to hurt managed futures.

Why is this the case? Most investors new to managed futures may not even realize the managers are going long and short bond futures, thinking their accounts are
more commodity based than reliant on moves in interest rates. But interest rate futures in US, German, UK, Japanese, and Australian, are a large component of
most managed futures portfolios.

So why do managed futures like bonds so much? For one, they are amongst the most liquid markets in the world, making it easy to trade for large allocations.
Secondly, they are not overly volatile as some might associate with Coffee, Cocoa, or even S&P futures. Third, there are a ton of them – spread across different
durations and countries. But most importantly for most managers, they have historically been very good trending markets. Perhaps this is because rate decisions
don’t usually come out of nowhere and spike markets in one direction or the other. Perhaps it is because interest rates are so intertwined with every other market
that the other markets trade off of moves in interest rates, not vice versa. Or perhaps it is bonds perceived value as a safe haven during times of stress for markets
in which nice trends develop during a crisis (see first section of chart above).

And why is managed futures performance so tied to trends in bonds? In our opinion, this has a lot to do with correlation across the markets in the bond sector and
how many different bond markets there are available to managers. Unlike grain markets where Corn and Wheat may rally at the expense of Soybeans if famers
moved to planting beans instead of Corn and Wheat, or markets like Cotton and Sugar which can move on completely different factors – interest rate futures
generally all move in the same direction. They may start their trends a little earlier or end them a little later, but generally speaking if one bond market is in an
uptrend, so are the rest of them. This causes some managed futures portfolio to become highly correlated to the success of these bond trends.

We were hard at work trying to prove this correlation between the bond sector and managed futures today, but unfortunately could not come up with the proper
theory for testing that correlation. We tried testing the correlation between months in which the 100day ADX (an indicator which measures trendiness of a market)
for 30yr bonds was positive with positive months for the managed futures index. We tried the 20day ADX. We tried the absolute value of the ADX, and more; all to
no avail with a timeline to meet. If you have any other ideas, send them our way and we’ll try those out.
So, for now, we’ll have to go with the ‘evidence’ over the last two years laid out in the table above, and the collective experience at Attain which has seen bonds pla
as important a role in managed futures success as any other market. Ignoring for a minute what it may do to the economic recovery - we’re hopeful this trend
reversal thus far in September is the start of a sustained move lower in bond prices (rates higher). Seeing how well managed futures did in August when 30yr
bonds moved from just 3.98 to 3.53, a move in bonds up to 5% or higher could be a very good thing for managed futures as a whole.

Jeff Malec

DISCLAIMER

Past performance is not necessarily indicative of future results. The data and graphs above are intended to be mere examples and exhibits of the educational topic
discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect
investor returns.

Like One person likes this.

Was this article particularly interesting or helpful to you?

Forward this email to a friend who might find it useful.

Not on our mailing list? Enter your email to receive this weekly newsletter: SUBSCRIBE

Feature | Week in Review: |

Week in Review: : Sugar top performer in slow, holiday shortened week

Overall activity for the commodity and index marketplace during the past week featured a holiday shortened low volume choppy trade as most major market players
remained on the sidelines until after Labor Day week concluded. Most economic data was better than most analyst expectations giving market participants a sign
that better times are ahead luring money fearing a double dip recession back into some investments. M&A possibilities and news of better growth numbers abroad
also lent a spark to some sectors especially the food sector. Weather was the main market moving phenomena with Sugar +10.34%, OJ +6.41%, Cotton +2.06 and
Coffee +1.52% on news that several growing regions in the southern hemisphere are very dry for the end of the growing season. Cocoa -4.51% was pressured by
expectations of a bumper crop in the Ivory Coast. Grains were mixed as Corn +1.34% continued to attract investors on news of lower than expected yields with
Wheat -0.62% and Soybeans -0.39% finding overhead resistance from harvest and hedge pressure.

Energy sector price activity firmed during the last week on news of a major Canadian supply line to the U.S. being shutdown to clean up an oil leak which could tak
an extended period to fix. The pipeline issues are in the U.S. and need regulatory approval before operations can begin. RBOB Gasoline +2.79% led the way
followed by Crude Oil +2.48% and Heating Oil +2.29%. Natural Gas futures -1.44% continued to be hampered by heavy supply prospects.

Stock Index futures were mixed in a late summer low volume atmosphere, although some support was seen in the S&P and Dow with each finishing the week with
consecutive session positive closes. The news front made was fairly constructive with economic releases better than analyst expectations sparking investor
optimism which gave some sectors a bid. NASDAQ futures +1.34% led the way followed by S&P 500 futures +0.58% and Dow futures +0.21%. Russell 2000 future
-1.01% and Mid-Cap 400 futures -0.13% found slight pressure from asset reallocation to larger caps.

The tug of war between varying world economic conditions and prospects for better growth in the future led to a two-sided trade in Currency futures, albeit low
volume due to the holiday shortened week. Market participants drifted back into the U.S. Dollar Index +0.70% and continued to seek the stability in the Japanese
Yen +0.24%. Euro -1.66%, British Pound -0.70 % and Swiss Franc -0.30% found overhead disturbance from news of possible sovereign debt problems. Rate
futures continued to experience pressure from investors taking a breather from recent flight to quality buying with U.S. 30-Year Treasury bond futures off -0.85%
followed by U.S. 10-Year Note futures -0.71%.

Metals finished the week a touch lower as profit taking and low volume holiday trade dominated activity. Copper -2.67% led the way down followed by Palladium -
2.185, Platinum -1.19% Silver -0.50% and Gold -0.37%

Managed Futures

Multi-Market managers have come significantly off August highs as a deflating bond futures market had many managers giving back profits on long treasury trades
(see topic of the week above). The top performing manager thus far has been Robinson Langley at +2.91%. RL Capital has been able to stay above the bond fray
due to limited long exposure. Attain Portfolio Advisors Modified has also limited bond exposure and is up +2.65%, while the full size APA Strategic Diversification
Program checks in at +0.22% for the month. Finally, Futures Truth SAM 101 has also performed well at +0.88% for the month, with it having limited treasury
exposure as well.
Other multi-market programs that have held their own this month include GT Capital +0.02%, Auctos -0.05%, Mesirow Financial Commodities Absolute Return -
0.04%, Sequential Capital Management -0.06%, Dighton Capital USA Aggressive Futures Trading -0.08%, Mesirow Financial Commodities Low Volatility -0.09%,
Covenant Capital Aggressive -0.15%, and DMH -0.17%.

Managers that are deeper in the red include Hoffman Asset -0.77%, Futures Truth MS4 -1.14%, Dominion Capital Management -2.18%, Accela Capital
Management Global Diversified -3.23%, Applied Capital Systems -3.40%, 2100 Xenon Managed Futures (2X) -3.48%, Quantum Leap Capital -4.43%, Integrated
Managed Futures Global Concentrated -5.45%, Clarke Capital Worldwide -6.36%, and Clarke Capital Global Magnum -11.05%.

Short term index trader Roe Capital Management has had a strong start to September with the Roe Capital Jefferson program up +5.07% and Roe Capital
Management Monticello Spread program at +1.18%. The Paskewitz Asset Management Contrarian 3X Stock Index program is down -2.31%.

Following a quick turnaround in equity markets and the continued run up in soft markets like Sugar and Cotton, Option Trading managers are off to a sluggish start
to September. Managers currently in the black include Clarity Capital +0.85%, FCI OSS +0.23%, and Crescent Bay PSI. Others that are currently negative include
ACE DCP -0.10%, Cervino Diversified Options -0.21%, Cervino Diversified 2x -0.25%, ACE SIPC -0.34%, Liberty Funds Group -0.71%, Kingsview Management -
0.96%, FCI CPP -1.63%, HB Capital -3.36%, and Crescent Bay BVP -4.31%.

One big positive for the month and YTD has been the specialty market managers. In particular, Rosetta Capital Management is currently ahead an estimated
+7.79% for September and was +6.56% YTD through August brining their 2010 total up near +14%. Other specialty managers currently ahead for the month
include; Oak Investments Group +5.26% and Emil Van Essen +0.64%. Agriculture specialist NDX Abednego and Shadrach are down -0.17% each and fixed
income specialist 2100 Xenon Fixed Income program is down -1.62%.

Trading Systems

The first week in September produced mostly mixed results for trading systems. Swing trading systems handled the market conditions well while many of the day
trading systems struggled.

On the swing trading side, Strategic ES had a solid week. Strategic ES entered the week short and exited its position on the open Tuesday morning. Strategic ES
stayed flat the rest of the day and then made its best trade of the week when it got long on Wednesday and rode the 1.65% overnight rally in the eMini S&P 500
market for a 12 point winner. For the week, Strategic ES was up $276.72. Other positive results were August TD DX at $10.00, AG Mechwarrior ES at $190.00,
Strategic ERL at $409.09, Waugh CTO ERL at $650.00, Strategic SP at $1,507.70, August TD AD at $1,620.00, and Waugh Swing ES at $2,952.50.

There were some swing systems that finished in the red last week. Moneymaker ES had a tough go of it last week, it entered the week short from last week and
remained short till Wednesday where it covered its position for a $130.00 loss. MoneyMaker ES got short again on Thursday and stayed short till Friday where it
once again exited a position for a loss of $92.50. For the week MoneyMaker ES lost $222.50. Other negative results included Bam 90 Single Contract ES at -
$30.00, Bam 90 ES at -$35.00, and Moneybeans S at -$907.08.

The day trading systems didn’t fare that well last week. NPI Traders was all by itself in the green last week. NPI Traders ES was at $420.00, NPI Traders GC was a
$497.50, and NPI Traders S at $635.00.

Unfortunately, most of the day trading systems struggled last week. Among them was Compass SP, it had two trades last week, both were short and both times the
market came back and took profit away from Compass SP near the close. For the week Compass SP ended at -$375.00. Other results included UpperHand ES at
$5.00, Compass ES -$97.50, Clipper ERL at -$114.57, Balance Point ES at -$176.80, PSI ERL at -$250.00, and Waugh ERL at -$480.00.

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect
investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex
programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance
based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the
individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes
proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client
accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The
actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market
behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques.
Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this
website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

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 OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE
FREQUENTLY 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 OF 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 AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
Feature | Week in Review: |

Copyright © 2010 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved.
(312) 604-0926 | Legal & Disclaimers | Privacy Policy