Tag Archives: allocation

In June of 2012, a proposal by the National Futures Association requiring stricter regulation of PAMM accounts went into effect, sending many money managers and CTAs scrambling for PAMM account alternatives.

A PAMM account, or Percentage Allocation Management Module, is simply a way for investment management firms and CTAs to manage individual investor accounts more efficiently. Multiple individual accounts are aggregated into one “Master Account,” which is traded by the money manager or CTA. It is operated as one pooled account and the P&L is divided equally among the investors based on their equity in in it.

In April of 2012, James Bibbings, a former NFA supervising auditor, wrote a very informative post discussing the implications of the pending proposal. Appearing on SeekingAlpha.com, the post explained how the NFA felt PAMM accounts too closely resembled Commodity Pools, without being registered as such.

The points they brought up described multiple instances of structural problems. Issues with liquidity and margin were posing risks to investors and contributing to questions about the fairness of the division of P&L among sub-accounts. In the proposal, the NFA recommended the restructuring of PAMM accounts as a means of eradicating any dangers they could cause participating investors.
Bibbings also notes that PAMM scrutiny has reached the state level. Pennsylvania state security regulators saw the PAMM allocation system as a mechanism that was generating a “synthetic securities product.” This view made PAMM accounts subject to many additional securities laws and regulations in Pennsylvania, and could do so in other states, too.

At the time of Bibbings post, things weren’t looking good for PAMM accounts as they fell under intense regulatory scrutiny. Two months later, after the proposal took effect, “traditional” PAMM accounts began disappearing to make their necessary compliance changes. Some companies have seized the opportunity to create PAMM alternatives and others offer consulting services to help existing PAMMs comply with the new rules.   These instruments play an integral role in providing CTA’s and Money Managers with the key benefit of PAMM accounts: centralized management.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Modern Portfolio Theory remains a major part of many investment portfolio allocation processes. Basically, the idea of MPT is that one can combine a collection of securities into a portfolio which offers comparable return prospects with reduced risk. This is done by mixing together stocks and other assets which are not well correlated, or perhaps are negatively correlated.

Sounds good, right?

The problem is, as has been discussed, that individual stocks have become extremely highly correlated to the market in recent years. This, by definition, means they have become increasingly correlated to each other as well, reducing the opportunity for diversification in portfolios using the old methods.

Another issue with MPT-based portfolio development is the fact that correlations change over time and in different time frames. The chart below from Oanda shows a recent set of correlations between EUR/USD and other currency pairs (as well as gold and silver).

Notice in the AUD/USD column how the correlations to EUR/USD are strongly positive (darkest red) in the hour, day, and week time frames, but then are uncorrelated in the longer time frames, and even negatively correlated at 3 months. In the case of USD/JPY we can see the correlations are very time frame depended, running the full spectrum over the time frames. Even with silver and gold (XAG/USD and XAU/USD) the correlations aren’t consistently strongly positive.

All this correlation variation creates considerable challenges to standard asset allocation and portfolio development methods and approaches. Imagine creating a portfolio of stocks that have been properly minimally correlated only to have them all become highly correlated? It would totally change the portfolio’s risk dynamics, and likely at the worst possible time.

This is where the importance of considering diversification not just in terms of markets and securities, but also in terms of trading/investing approach becomes clear. This is the approach of fund-of-fund investors. They seek out uncorrelated money managers, exactly the same sort of thing you can do by taking part in the Trade Leaders program.

It’s always reassuring when an industry leader releases information shedding positive light on the future of an alternative investment. Today, it was derivatives marketplace Chicago Mercantile Exchange, or CME Group, discussing the promising outlook of foreign currency futures.

Since the CME is arguably the biggest futures exchange out there, is it any surprise they’re touting FX futures contracts? No, not really, but the whole concept of currency futures is still pretty interesting nonetheless. I decided this fit as a nice follow-up to a post I wrote the other day on managed futures and risk mitigation in general, since these particular investments can get a little complex.

For anyone who’s unfamiliar with them, currency futures allow investors to exchange one currency for another on a future date at a specified price that is set at the time of the agreement.  This allows investors the ability to make a purchase that will be executed sometime in the future for the price it would cost them today. In turn, they’re granted protection against exchange rate fluctuations, which could end up working for or against them depending on where the currency pair moves.

Derek Sammann, global head of foreign exchange and interest rates at CME Group, explains how, due to rapid economic globalization, cross-boarder asset flows show no sign of slowing down anytime soon. This provides both a growing opportunity for potential prosperity, as well as risk, for investors interested in tapping the $4 trillion a day foreign currency market.

As Forex continues to become a more mainstream alternative investment option, the need for a supplementary vehicle for hedging risk will inevitably rise. Currency futures are just one avenue investors can take to fill that need. Others come in the form of continuously developing advanced software controls within the realm of spot Forex trading. As various up and coming forms of alternative investments popularize, it is interesting to note what types of risk controls they will inspire and bring with them.

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

US stock prices have made little headway in more than thirteen years, and the cumulative real returns generated by the major market averages have lagged Treasury bonds by a substantial margin over the period.  The uber-bulls are confident however, that the more than decade-long stagnation has led to attractive valuations that should pave the way for strong returns in the years ahead, and some investment practitioners have gone as far as to predict a doubling in equity values by 2022.  Is the optimism justified?

It is important to appreciate the sources of historical real stock market returns, which can be decomposed into three building blocks – the dividend yield, real growth in earnings-per-share, and changes in valuation.  Since 1871, US stocks have delivered annualised real returns of 6.5 per cent, of which more than seventy per cent is attributable to the dividend yield, roughly one quarter to real growth in earnings-per-share, and the remainder to an increase in the valuation multiple attached to current per share profits.

Looking forward, future returns seem virtually certain to fall short of the historical experience, simply because the dividend yield is little more than two per cent today or less than half its long-term mean.  The uber-bulls will undoubtedly argue that the dividend yield understates the total payout to shareholders, due to sizable increase in share repurchase activity in recent decades.

However, share buybacks are already included in per share numbers, and adjusting the payout ratio upwards would be double-counting.  In other words, an existing shareholder can either participate in the buyback and miss out on the earnings-per-share accretion, or forego the cash distribution and benefit from the capital gain.  Thus, forecasting future returns on a per-share requires no adjustment to the dividend yield.

The second building block in estimating future returns is the real growth in earnings-per-share, which is linked to the economy’s long-term growth rate.  However, existing shareholders have a claim on publicly-quoted per share earnings and not economy-wide profits.

Initial public offerings and secondary issues account for a considerable portion of the growth in aggregate earnings through time, and as a result, the growth in per share numbers falls well short of the cumulative increase in total profits.  Indeed, real earnings-per-share have increased at an annual rate of just 1.7 per cent since 1871, or roughly half the pace of economic growth.

The optimists put forward a variety of reasons as to why earnings-per-share growth will be higher in the future, but none stands up to serious scrutiny.  It is argued that share repurchases will provide a boost to earnings, which conveniently ignores the fact that the reduction in share count through time is largely a myth.  Indeed, new share issuance in excess of buybacks has averaged 1.25 per cent a year over the past half century, and repurchases have exceeded new issuance in just eight years.

The second argument relates to the growing share of profits generated overseas in high-growth markets.  The share of revenues sourced in foreign markets has increased from about thirty per cent more than a decade ago to almost fifty per cent today.  However, roughly sixty per cent of overseas revenues come from mature European economies, with a further ten per cent coming from Canada.  All told, just one in every eight sales dollars is generated in high-growth economies, which is simply not large enough to provide a meaningful boost to earnings growth.

The bulls also fail to appreciate that globalisation is a two-way process, and just as American multinationals have made impressive share gains in overseas markets, the same is true of foreign companies in the US.  Indeed, foreign subsidiaries have captured an increasing slice of economy-wide profits over the past two decades, with the share rising from just five per cent in the early-1990s to about fifteen per cent today.

Finally, the global financial crisis and the calamitous drop in economic activity have had a lasting impact on corporate sector behaviour with elevated unemployment levels and a relatively low business investment rate threatening to lower potential future growth rates in the developed world.  All told, there is no reason to believe that long-term growth in real earnings-per-share will stray too far from its historical trend.

The final input to the return estimation process is valuation change.  The market looks reasonable value on current earnings, but the greater than twenty multiple on cycle-adjusted profits is closer to previous secular bull market peaks than bargain basement levels seen in the past.

The bulls argue that the multiple is inflated due to the collapse in corporate profitability during the crisis, but using median earnings over the past decade or a denominator based on twenty-year average earnings to correct for the recession does not paint a different picture; the stock market is expensive.

The best the bulls can really hope for is no change in valuation multiples, which could prevail if macroeconomic volatility drops from its currently elevated levels.  However, should macroeconomic volatility remain high, it is far more likely that valuation multiples will contract, and at the very least, return to their historical mean.

Careful analysis suggests that equity investors can reasonably expect annual real stock market returns of 3.5 to 4 per cent at best in the decade ahead – well below the historical experience, and could deliver far worse should valuation multiples contract.  The bullish optimism is unfounded.

 

www.charliefell.com

 

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The recent discovery of an interesting article on portfolio diversification got me thinking about this commonly accepted strategy amongst investors.  Walter Upgrave, senior editor for Money Magazine and “Ask the Expert” financial columnist, was the composer of the piece and in it, he addressed the question “I have about $1 million spread into 33 funds. Is that too many?”

Though having so much capital to invest that this even becomes a concern at all isn’t a ‘problem’ everyone shares, the question can still pervade portfolio inquiries of investors of any kind. In short, the answer was yes; with the premise of the article being “diversifying your portfolio is a good thing, but is it possible to have too much of a good thing?”

In this case, it is.

One of the reasons for this is that having too many mutual funds or ETFs within a portfolio exposes the investor to more company or sector risks. This, in turn, can negate the returns they were hoping for in the first place.

Though Upgrave can’t provide a finite number of funds that will best suit any investor, a good rule-of-thumb he offers is that anywhere between five and 10 should do the trick. Go beyond this and you’re likely to see things get a bit sticky. Something else to consider when seeking a diversification equilibrium is that it isn’t so much the number of funds you have, but rather, that your portfolio is meeting your financial needs. Depending on your age, will your portfolio be generating enough income without risking complete decimation should the financial markets take another dive?

When building a portfolio with diversification in mind, it is possible to achieve it with fewer funds spanning a wider variety of investments. Different advisers will provide varying allocation percentages, but most remain congruent with a roughly balanced mix of stocks (both US and foreign), bonds, mutual funds, and alternative investments.

Though still experiencing a relatively new serge in popularity (think post financial crisis), alternative investments are establishing a more permanent spot in an increasing number of investor portfolios. Hedge funds, managed futures (metals, foreign currencies, etc.), real estate, commodities, and derivatives contracts are some examples of popular alternative investments. In terms of diversification, the most alluring aspect of allocating a portion of your capital into investments of this kind is their obvious non-correlation to the stock market (i.e. the stock market crashes, this component of your portfolio won’t always go down simultaneously).

We all know that too much of a good thing can often mitigate desired results, and the same idea seems to apply to portfolio diversification. I think Warren Buffett says it best: “wide diversification is only required when investors do not understand what they are doing.”

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

If you’re anything like me, you like to be in control. Maybe it’s my type A personality. Maybe it’s because I'm a middle child. Maybe it's my background in finance. But, I like to be in control – especially when it comes to my investments. The challenge with many of the financial instruments we invest in, such as mutual funds, ETFs, managed accounts and hedge funds, is that we have to hand over complete control to someone else – a money manager, a portfolio manager – someone else calls all the shots.

Well, I’m happy to tell you about a pretty cool new feature set that we’re releasing to investors in the Trade Leaders program. As you probably know, the Trade Leaders program is different because it’s built to help investors achieve success and profitability in the foreign exchange market – all while giving them complete transparency and control. Here’s the scoop on the new feature set we call “Advanced Controls.”

Today, investors in the program have the ability to control their Trade Leaders portfolio by easily changing, deleting and modifying allocations by Trade Leader. So, at any time if an investor decides they don’t want to follow a particular Trade Leader, they can end the relationship and we automatically close any positions that Trade Leader had open for the investor. Likewise, if an investor wanted to change an allocation in a particular Trade Leader, say, from 30% to 50%, they can do that as well in the click of a button.

The Advanced Controls features take allocation to another level and give the investor the ability to control leverage and drawdown. Don’t want to bother with adjusting these levers? No worries. You don’t have to make any changes. These controls are for those active investors looking for more of a hands-on experience and for fund managers and asset managers who have specific drawdown limitations and leverage caps in their strategy or investment policy guidelines.

What can you do with the new Advanced Controls features?  So glad you asked.

  • Think a Trade Leader has tight risk controls and want to set your Drawdown Protection to something other than 30%? You will now have the ability to set Drawdown Protection by Trade Leader. Now you can decide how much risk you are willing to tolerate and can set this control anywhere between a 1% and 90% limit on draw downs.
  • Concerned about the maximum level of drawdown that can happen across your entire account? You can see the Account Level Drawdown Protection, calculated based on Leader by Leader Protection and unallocated capital.  This feature shows the maximum drawdown that the account could realize. It takes into account any unallocated capital and is based on the overall account balance.
  • Decided that you would like to invest in a Trade Leader but want to scale down on risk? You will be able to set a Leverage Multiplier on a Trade Leader, which allows Investors to reduce the amount of risk on an individual investment.  The Leverage Multiplier may be set to take any level between 10% and 100% of the Trade Leader’s leverage; a 50% multiplier will give you half of the Trade Leader's leverage level on each trade.
  • Worried about over-leveraging and want to limit the leverage that may be taken by your account at any given time? You will have the ability to set a Leverage Cap on the account of up to 5000% (50:1 leverage).  Trades which would put you over this leverage amount will not be taken, but you will start trading again once your leverage is reduced beneath this level.

Many of these controls are customizable per Trade Leader you follow. So, for each Trade Leader in your portfolio, you can set a variety of leverage and drawdown controls based on your appetite for risk. Once again, if you don’t want to set them, you can simply use the pre-set values we’ve determined for you based on the Trade Leader’s strategy and risk management profile.

We’d love to hear from you as you start to use some of these nifty new controls. How is it improving your Trade Leaders experience?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

While the Currensee Trade Leaders™ Investment Program may be the right investment choice for you, not every Trade Leader is right for each investor. I’ve put together some tips to help you get the most out of the Trade Leaders program:

  • Assess each Trade Leader. Look closely at each Trade Leaders’ performance and risk to help ensure you’re choosing Leaders who most closely match your investment style and needs.
  • Zoom in on performance. When viewing the Profile Performance graphs for each Trade Leader, you’ll notice that, above the graph, you can view the actual change in equity over the time period being shown. The number is above the graph next to the ticker being tracked.
  • View trade frequency. To see how often a Trade Leader typically trades, view their profile and change the view. The default view is 3 months, but zoom in to view ten days, thirty days or specify a custom time period.
  • Diversify, diversify, diversify! Take steps to build a well-balanced, diverse portfolio of Trade Leaders including a variety of strategies, risk and trading styles.
  • Think longer-term. Try not to think in terms of buying high and selling low. Plan to follow a Trade Leader for some time before making changes. Remember, on average even the most successful Trade Leaders lose some of the time.
  • Allocation is key. Lastly, make sure you’re making the most of your money – as your account grows be sure to re-allocate your funds. Funds that are not allocated are a missed opportunity as when your funds are not invested in a Trade Leader, you miss the chance to see returns.

Remember, the team and I are here to help you, so if you have questions, feel free to reach out to us at team@currensee.com and we’ll do our best to answer any specific questions you have about the Currensee Trade Leaders™ Investment Program.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.