AFT Response to Attain Capital March 7th 2011

8/7/2019 AFT Response to Attain Capital March 7th 2011

1/4

The statements in this communication are the opinions of its author, Victor Sperandeo, and are

not to be relied upon by anyone as the basis for an investment decision. . Investment products,

including hedge funds, futures funds and managed futures and commodities accounts, are

speculative and involve a substantial degree of risk. No guarantee of any kind is implied or

possible where opinions as to past or future market conditions/events is provided. Past

performance is not necessarily indicative of future results.

Page1 of 4

1139 South Main Street, Grapevine, Texas 76051

Retort to Attain Capital March 7th

, 2011

Let the Buyer Beware of Errors, Misleading Statements, and Out of Context Comparisons

In a blog posted on March 3rd, 2011, Attain Capital criticizes a managed futures index that wasdeveloped by my firm. I would like to take the opportunity to clarify several errors andmisconceptions that were portrayed in the deceptively titled Why you arent getting managedfutures exposure with Rydex and Wisdomtrees managed futures products.

As some background, I developed the Diversified Trends Indicator as a way for investors toaccess the core returns embedded within trend-following in the futures markets. The index iscomprised of 24 components all futures contracts that are positioned either long or short ona monthly basis (long or flat for the Energy sector) through a rules-based methodology. TheDTI provides access to a trend-following strategy with full transparency and daily liquidity ofunderlying components, without the use of leverage.

Allow me to retort some of the most glaring errors made by Mr. Jeff Malec and the folks atAttain Capital:

The DTI is not a Managed Futures Strategy

The DTI is a widely recognized benchmark for replicating the core returns embedded withintrend-following in the futures markets. Certainly a strategy or index that is comprised solely offutures contracts and uses a systematic process to take long and short positions has to beclassified as managed futures. A high percentage of commodity trading advisors that comprisethe managed futures industry utilize systematic, trend-following methodologies in preference

to discretionary strategies. Unless Mr. Malec also intends to exclude systematic strategies fromhis personal definition of managed futures or he has petitioned the regulatory agencies tochange their definitions governing the industry, perhaps he should reconsider his position.

Unfortunately, Mr. Malecs viewpoints could be more of an attempt to protect his firms businessmodel as a commodity broker and portal for various individual CTA programs and tradingsystems rather than to provide a disinterested analysis of two products that are publicly availableto a wide range of investors.


2/4







Page2 of 4


The Wisdom Tree Managed Futures ETF and the Rydex Managed Futures Fund Track

the Same Index

The Rydex product tracks the S&P DTI, while the new WisdomTree product tracks the DTI.The two indexes are very similar, but have distinct differences. In certain months the returns willbe quite close, while in others there could be a tremendous spread.

The DTI Significantly Underperforms the NewEdge CTA Index

The DTI was officially launched in 2004, with live daily values and a full methodologydescription available on our website (www.aftllc.com). If the author had made an index-to-indexcomparison (e.g. the DTI index values to the Newedge CTA Index values) since the DTIslaunch, hed clearly see that the DTI not only outperformed the Newedge CTA Index,1 but itdid so while providing lower correlation to the broader equity markets:

DTITotalReturn NewEdgeCTAIndexAnnualROR 5.80% 4.90%

CorrelationwithS&P500** 0.2 0.02

Source: International Traders Research*Data from Jan. 2004 Feb. 2011

**Correlations based on monthly returns

By focusing on such a short time period, Mr. Malec creates the exact opposite impression.Almost any investment strategy can be made to appear better or worse if you cherry-pick yourdata base. It is more important to see how a strategy or index performs in a variety of marketand economic conditions.Admittedly, a diversified portfolio of 20 or more trading programs with 100s of strategies willoften generate more favorable statistics than a single strategy, from the diversification aspectalone. But what good does that do an individual investor who has no practical way to replicatethe NewEdge CTA Index?

Furthermore, the 20 (current) funds comprising the NewEdge CTA Index are not all pure trend-following strategies. This gives the Newedge CTA Index a distinct advantage during the 2009and early 2010 periods, where a lack of sustained trends across several key markets created adifficult environment for many trend-following strategies and indexes. The author also ignoresthe leveraged nature of the NewEdge constituents, which gives those strategies an advantageover the DTI during periods of strong directional performance (e.g. stocks since the March 09lows) but greatly increases risk. Readers should also be wary of the survivorship and selectionbiases that are prevalent in virtually every hedge fund index comprised of multiple managers.

1 Unlike the DTI, the NewEdge CTA Index is based on aggregated net performance reported by a number of

CTAs.


3/4







Page3 of 4


It should also be noted that because of the leveraged structure of many CTA programs, and theirinclusion of potentially illiquid contracts, there is a limit to how much money each of these CTAprograms can absorb before a point of declining returns is reached. On the other hand, based onour historical estimates, the DTI could trade an estimated $20 billion before any sectors wouldhave to be adjusted. In addition, many of the funds in the NewEdge CTA Index trade equityfutures, which the DTI does not.

Regarding the fact that the DTI does not go short the Energy sector, this is a forward-lookingrule which we implemented to avoid risk of ruin. A sudden terrorist or military strike in theMiddle East region could send prices skyrocketing instantly, and because the Energy sector islargest sector in the DTI (albeit a much smaller percentage that an index like the S&P GSCIuses) an event like that could cause devastating losses. As a matter of fact, the elimination of theability to short energy in the DTI has had little long-term effect, although in 2008 it did lowerreturns.

As a trader with over 44 years of experience, I am the first to acknowledge that the managedfutures universe is not only diverse, but that it includes talented managers who clearly have the

ability to produce alpha. However, I find it impossible to see any level of truth in the authorsviewpoint. The S&P DTI and the DTI are transparent managed futures indexes, and the Rydexand Wisdom Tree products provide investors with a simple means of accessing the managedfutures strategy upon which each respective index is based. Comparing them to an un-investableCTA index over a short period of time serves no real purpose.

We thank our clients for their vision, innovation, and continued support over the years and welook forward to another successful year together.

Victor SperandeoCEO, Alpha Financial Technologies LLC


4/4

Page4 of 4


CERTAIN RISK FACTORS & DISCLOSURES

The communication is published by Alpha Financial Technologies, LLC (AFT). Copyright 2011. The content in this communication is the property of AFT and isprotected by copyright and other intellectual property laws. All trade names, service marks and other product and service names in this communication and within thecontent are proprietary to AFT and are protected by trademark and copyright laws. Any of the trademarks, service marks or logos (collectively, the Marks) in thiscommunication may be registered or unregistered marks of AFT. Nothing contained in this communication should be construed as granting any license or right to useany of the Marks in this communication without the express written permission of AFT. Illegal or unauthorized use of the Marks or any other content included in thiscommunication is strictly prohibited.

This communication does not purport to provide complete details on the DTI, S&P DTI or other financial product(s) (each, a Product) of AFT, is for informationpurposes only, and should not be construed as investment, legal or tax advice. Neither this communication nor any information contained herein constitutes an offer to

sell (nor the solicitation of an offer to buy) any security. Any such offer may only be made by a prospectus or similar disclosure document prepared by the issuer oeach such security, which contains important disclosures and risk factors. Investors in a product based on a Product shall solely rely upon such disclosure document inmaking an investment decision. AFT does not provide any form of investment advice and receives no compensation from any client or clients in such regard. RatherAFT solely receives a license fee from licensees of its Products. In particular, AFT does not direct client accounts or provide commodity trading advice based on ortailored to the commodity interests or cash markets or other circumstances of a particular client. Victor Sperandeo, AFT and its and their affiliates do not sponsor,endorse, sell or promote any investment fund, managed account or other product that seeks to provide an investment return based on the returns of a Product that isoffered by third parties. A decision to invest in any Product should not be made in reliance on any of the statements set forth in this communication. No portion of thesematerials may be reproduced without the prior written consent of AFT.

In no event shall Victor Sperandeo, AFT or any affiliate have liability for losses, damages or expense of any nature whatsoever, which may be suffered as a result of orwhich may be attributable to, directly or indirectly, the use of or reliance upon, the data and information in this communication, including any errors or omission in thedata or other information that is contained in this communication. All data and information provided herein is subject to change without notice.

Investors can not invest directly in an index or an indicator such as the Product(s). An investment in a Product is speculative and involves a substantial degree of riskand should not constitute an investors entire portfolio. Investors could lose all or substantially all of their investment therein. No assurances can be made that theProduct(s) will achieve their investment objectives or that losses will be avoided. The longer-term an investment the greater the likelihood that the performancepotential suggested may be realized. Over the short-term, on the other hand, there is a much greater possibility that the Product(s) may decline substantially causing

significant losses. Any factors which contribute to sideways or trendless markets (a lack of sustained, directional trends in many markets) or whipsaw markets (inwhich price movements reverse suddenly or repeatedly) are likely to be adverse to the Product(s). The Products are not a proxy for all-long commodity indexesThe Product(s) could decline in a wide range of different market scenarios, including ones in which other similar products (both all-long and long/short) risesubstantially.

The mechanical character of the rules of the financial Product(s) and the fact that the Product(s) are based on publicly available prices unaffected by trade executions(and the resulting slippage between market prices and the prices at which positions are actually acquired) makes it possible to derive the statistical information. Unlesotherwise indicated, the information and performance of the Product(s) do not reflect the costs, fees and other expenses of an investment seeking to replicate theProduct(s) or the effect of taxes on investors therein. The compounded effect of such costs, expenses and taxes would materially reduce cumulative net returns.DTI - From January 2004 to November 14, 2009, the DTI reflects the actual performance of the DTI, calculated using a random computer selection of any oneof five business days after the end of the month as the monthly roll date (the Random Roll Date), with positions being determined the trading day before the lasttrading day of the month, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology. From November 15, 2009forward, the DTI is calculated with the monthly roll date being the last trading day of the month (the End of Month Roll Date) and the positions being determinedthe prior trading day, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology. In addition, a slightlydifferent contract schedule for Copper and Gold is used in the DTI from November 15, 2009 forward than that used previously. S&P DTI - In 2002, AFT grantedStandard & Poors (S&P) the exclusive right to sublicense the S&P DTI to third parties, which terminated on November 14, 2009, however existing S&P licensesremain in effect. Whereas the S&P DTI is calculated using the Random Roll Date, with positions being determined the trading day before the last trading day of th

month, based in each case on the daily settlement prices of the respective futures contracts represented in the methodology, the DTI is calculated from November 15,2009 forward (i) using the End of Month Roll Date with the positions being determined the prior trading day, based in each case on the daily settlement prices of therespective futures contracts represented in the methodology, and (ii) using a slightly different contract schedule for Copper and Gold (applicable to the DTI and CTIonly). Other market indexes (each, a Comparative Index) are included in this communication for the sole purpose of providing a comparison of Product performanceto general market results during the periods indicated, and their inclusion is not meant to suggest that the Product(s) are similar in either composition or element of riskFurthermore, there is no necessary correlation or non-correlation between the Product(s) and the other market indexes presented. S&P 500 is the S&P 500 StockIndex with dividends. It is an unmanaged market-capitalization weighted index of 500 common stocks chosen for market size, liquidity, and industry grouprepresentation to represent U.S. equity performance. Data source: Bloomberg (TR ticker: SPTR). NewEdge CTA Index is the NewEdge CTA Index (aComparative Managed Futures Index) which is equal-weighted and reconstituted annually and has become recognized as a key managed futures performancebenchmark. The index calculates the daily rate of return for a pool of commodity trading advisors (CTAs) selected from the largest managers open to new investmentData source: ITRNet. A Comparative Managed Futures Index does not represent an actual portfolio, which could be invested in, and therefore its performance resultsshould be deemed to be hypothetical in nature and of comparative value only. Accordingly, the Comparative Managed Futures Index shown is not intended to implythat an investment seeking to replicate the DTI is comparable to an investment in the securities or programs of CTAs represented by such index or that the DTIseeks to replicate or correlate with such index. Unlike the DTI, the Comparative Managed Futures Index is based upon the aggregate net performance reported by anumber of CTAs. These CTAs often employ leverage and charge high fees (typically a 2% management fee and 20% performance fee annually) which are deducted,along with the trade execution costs, slippage and other expenses associated with implementing their respective strategies, prior to reporting their net performance. Incontrast, DTI returns shown do not represent the results of actual trading of investor assets. AFT maintains the DTI and compiles the performance shown or

discussed, but AFT does not manage actual assets. Indexes are statistical composites and their returns do not reflect payment of any sales charges or fees an investorwould pay to purchase the underlying components they represent. The imposition of these fees and charges would cause actual and back-tested performance to be lowethan the performance shown. For example, if an index returned 10% on a US$ 100,000 investment for a 12-month period (or US$ 10,000) and an annual asset-based feeof 2% were imposed at the end of the period (or US$ 2,000), the net return would be 7.8% (or US$ 7,800) for the year. Over 3 years, an annual 2% fee taken at year endwith an assumed 10% return per year would result in a cumulative gross return of 33.1%, a total fee of US$ 7,128, and a cumulative net return of 25.3% (or US$25,273). Furthermore, the CTA universe from which the components of the Comparative Managed Futures Index are selected is based on CTAs which have continuedto report results for a minimum period of time. This prerequisite for CTA selection interjects a significant element of survivor bias into the reported levels of Comparative Managed Futures Index, as generally only successful CTAs will continue to report for the required period, so that the CTAs from which the statisticalanalysis or performance of the Comparative Managed Futures Index to date is derived necessarily tend to have been successful. Total Return or TR includes intereson a theoretical US Treasury Bill position used to fully collateralize the futures positions of the Product(s).

AFT Response to Attain Capital March 7th 2011

Documents

Transcript of AFT Response to Attain Capital March 7th 2011