by Daniel Collins, Futures Magazine, March 2010

It is no surprise that Financial Commodity Investments’ (FCI) Credit Premium Program (CPP) did well in 2009 — most option writing programs had a good year — but it was also up in 2008, making it quite unique. FCI President Craig Kendall is a certified public accountant and longtime investor with a pretty good sense of timing. He exited real estate in 2006 and took profits in equities before the dotcom bubble burst. As an accountant who had helped take a couple of companies public, he was amazed at the valuations he was seeing in the late 1990s and knew he needed to diversify his holdings. In the early 2000s, he opened an account with famed option writer Max Ansbacher and became a protégé of his. What struck Kendall about the strategy after a conversation with Ansbacher was its simplicity, so he went about creating his own advisory. “First of all, in futures you have increased leverage and if you take some risk, the returns can be commendable but managing the risk is ever so important, especially in options writing. I don’t need to tell you that a lot of the competition is not around today,” Kendall says. So in 2003 he became a registered CTA and investment advisor. He launched his Options Selling Strategy (OSS) in 2004 and the CPP in 2006. What distinguishes both of his programs is that they trade a diversified group of markets instead of concentrating on equity indexes as most options writers do. Each program has roughly $10 million under management. “There were a lot of options writers out there and I thought why not take the same strategy and diversify it across different commodities,” Kendall says. “With this strategy we are really a short volatility play and there are times when the volatility on the S&P doesn’t warrant doing credit premium selling because the risk/return just isn’t worth it. But by doing the extra research and finding the volatility opportunities amongst various commodities [we find opportunities] to make good trades that can be a lot less risky than doing the S&P.” FCI trades energies, currencies, bonds and grains; all the major liquid markets. The downside to the diversified approach is that he is researching two dozen or so markets instead of one or two indexes. “You really have to monitor a lot more markets. [But] if we monitor all these markets and take only the safest volatility trades, we should have better returns for the clients with reduced risk.” Both programs are discretionary and look at both technical and fundamental inputs. The OSS sells mostly naked options two standard deviations out-of-the money. The CPP gets in on credit spreads and is always hedged. “Prior to putting on any trade we have a predefined stop loss. If stuff moves against us we are pretty consistent with getting out,” Kendall says. “What is discretionary is whether we roll up or whether we roll forward or roll out and we take that on a case by case basis although historically, nine times out of 10, we roll out and look for other opportunities.” Being hedged and diversified allowed the CPP to earn positive returns the last two years: 29.04% in 2009 and 6.94% in 2009. The OSS returned 38.91% in 2009 and lost 23.02% in 2008, still outperforming most programs in that space. OSS got caught in the extreme volatility in 2008, says Kendall. “We went back and looked at the volatility. We are not poker players and in 2008 it became a poker game. Right now when volatility explodes to those levels we just sit on the sidelines. We let all those opportunities pass.” The upside to writing options across a diversified group of markets is that you can afford to be choosy. “Volatility shifts from time to time,” Kendall says. “Last year we did a lot of energies, this year it has been currencies and Treasuries. We follow the volatility opportunities.” FCI will have about eight positions on at a time, in markets with the best risk/reward profile. “Our best success is when we wait for the opportunities to come to us,” Kendall says. “The best trades are when we wait and catch extreme volatility.” That happened in sugar in 2009. “Volatility really exploded. We were selling calls but we waited until we got to high prices.” Kendall says his programs are well suited for current uncommon market conditions; based on his timing and track record he may be right.

Past Performance is not Indicative of Future Results. The writer, or seller of options, takes on unlimited risk. There is no limit on how large the loss can be. Losses can and will be the amount that the option is “in-the-money” at the time of expiration, should the option actually expire in the money.

For a full performance report for FCI please send an email to courtney@colonialcapitaladvisors.com .

Managed Futures offer an attractive way to further diversify your entire investment portfolio. By adding managed futures to your investment portfolio, you will lower the overall risk to your portfolio and often increase the overall returns.

Managed futures are professionally managed investments that concentrate on the futures and commodity markets. The fund managers often take a trend following approach to their trading philosophy. This strategy often results in excellent profits when commodities are trending higher or lower. The bigger the trends, the better.

You can either invest your money a commodity pool or have it individually managed by a Commodity Trading Advisor (CTA). A Commodity Pool (CPO) is similar to a mutual fund, where the fund manager(s) invest the pool of money the exact same way. A CTA can manage individual accounts according to their risk tolerances, etc.

Many studies have been done on the benefits of adding a managed futures account to investment portfolios. Managed futures will often do well during times when other investment classes are doing poorly. Many funds have track records where they achieve above average returns almost every year.

By diversifying your portfolio with managed futures, I do not mean opening an account with a commodity broker and buying all gold call options. You want someone with experience, a proven track record and a sound trading plan to manage your commodity and futures money. Otherwise, it is pure speculation and maybe even gambling.

While U.S. stocks opened higher, they later turned negative. However, the big swings that characterized trading for many sessions over the past two weeks were absent. The Dow Jones Industrial Average was steady at around 10,622.

“With the euro holding on and stocks trading higher, you’re seeing a little bit more appetite for risk,” said Charles Nedoss, senior market strategist with Olympus Futures in Chicago.

Commodities such as oil, copper and sugar were big beneficiaries of this renewed appetite. Gold, which hit record highs amid the recent market turmoil, was 0.8% lower at $1217.90 an ounce.

The calmer mood in currency markets also initially took some wind out of the Treasury market, with yields on shorter-dated maturities initially rising and prices slipping, although that move was reversing by midday as the euro resumed its downtrend.

With little in the way of fresh news on cash-strapped Greece, Spain and Portugal, investors had the opportunity to re-evaluate what the potential fallout of the $1 trillion bailout, announced more than a week ago, would be.

“Given the relatively small size of the Greek market and the amount of Greek debt outstanding, people are realizing there’s a way to work through it,” said Frank Germack, director of the investment department at Rehmann Financial. “There are resolutions, and the whole region will not go down as result of the changes.”

The euro’s plunge has been the driving force behind declines in commodities markets but price movements reversed Tuesday.

Oil has bounced from its $70-a-barrel support level and was recently off the day’s highs, up 1.6% at $71.18 a barrel. Copper crossed back above the $3 level and was recently up 3.9%, but also off highs. These industrial commodities — used up and down the world’s manufacturing and distribution chain — have slid sharply from multi-month highs reached before the crisis in Europe reached fever pitch. Investors worried that the debt woes would sharply curtail economic growth, not only on the Continent but elsewhere.

China’s attempts to rein in its economy by tightening credit available to the construction and real estate sectors have also served as a drag.

Richard Matthews JR.

This gentleman founded the White Pines Trust Corporation in San Diego, California in July 2000. Talkative and persuasive, Mr. Matthews was an able marketer in spite of his lack of understanding in the currency trading business. Through various schemes, promises and profit pledges, he was able to pool more than $30 million of client deposits into his pockets, which he then used to acquire a 12-acre island off the coast of Belize.

During the most active period of the White Pines Trust Corporation and its associated Pinnacle Capital Fund, Mr. Matthews claimed an eight-year cumulative return of 591%, while guaranteeing that 75% of customer deposits are protected from loss each month by the use of various complicated but false methods, as eventually confessed by Mr. Matthews himself. Eventually, when he was deprived of his island and other luxurious possessions in order to repay his defrauded customers some $14.8 million, much of which was of course unreachable, having been spent squandered during the heyday of his once great career.

Russell Cline

In proof that a successful life in forex fraud doesn’t require any stellar diploma from a university or years of proven experience. Russell Cline began his meteoric career as a house painter in Baker City, Oregon. Through a dashing, confident attitude to life in general and the audacity provided by his utter lack of knowledge or understanding of the forex market, he was able to lie persuasively by offering his clients risk-free managed accounts facilitated by his sophisticated trading techniques.

After netting around $27 million from 600 clients between 1998 and 2002, Mr. Cline declared that he had lost 97% of the funds, blaming his failure on faulty but honest trading errors. He requested additional funds to continue his rising career as a forex fund manager.

To cut a long story short, it was eventually discovered that he had spent all the client funds on private jets, real estate, boats, luxury cars and pornography. He was sentenced to 8 years and 1 month in prison and was ordered to pay $14.9 million in restitution to clients.

Joel N. Ward

We have discussed the interesting career of Joel N. Ward in the section on Forex HYIP, but to prove how worthless the words and the assumed character of these fraudsters can be, we will just repeat here that this convicted fraudster would sometimes appear on the most reputable financial news channels and newspapers to discuss the ethics of retail forex brokerage and how irrational the expectations of trades were.

So how do you avoid these scams? Make sure you invest using an NFA registered managed program traded by a professional CTA (Commodity trading Advisor). For a full list of managed forex and managed futures programs that are registered with the NFA contact a Summit FX representative at summitfx.courtney@gmail.com or 609-335-7257.

In today’s investment arena, with an ever-increasing need for diversification, transparency, and liquidity, investors continue to look beyond traditional investments. Many investors, ranging from large institutional firms to individuals, are discovering that these needs can be satisfied without compromising performance by investing in managed futures and managed forex.

Managed futures and managed forex offer a number of key benefits, most notably:

Absolute Return—Alpha Generation
Diversification
Transparency and Liquidity

Absolute return – Alpha Generation

CTAs may be commonly associated with “absolute return strategies,” as returns generated can be independent of financial markets. Absolute return strategies enable CTAs to produce returns regardless of market direction. While traditional strategies implement long-only techniques to drive client return, absolute return strategies employ a broader toolkit of investment instruments. These instruments may include short selling, futures, options, derivatives, and use of leverage. It is this versatility of absolute return strategies that drives alpha generation, or risk-adjusted outperformance relative to a benchmark. We can compare risk-adjusted performance between benchmarks using Sharpe ratios, where a higher ratio represents better risk-adjusted returns.

Diversification

Managed futures are investment vehicles that, when blended into a traditional portfolio, can achieve diversification, reduce portfolio volatility, enhance overall return potential, and provide protection during extreme or down equity market cycles. This historically based model demonstrates that adding managed futures to a blended portfolio of stocks and bonds offers benefits in performance and a reduction in volatility.

Transparency and Liquidity

A significant benefit of a managed account with a CTA is its increased transparency and liquidity compared to investment products like hedge funds. These attributes are especially desirable to investors in the current climate.
How do managed futures increase transparency and liquidity over a traditional investment?
With a managed account, investor money is deposited with the investor’s brokerage firm and maintained in a customer segregated funds account. While the trading advisor directs trading for the account, the investor has a full view of all trades, positions, and balances, ensuring complete transparency.
Managed futures primarily deal in listed markets, meaning that orders are entered on an exchange where counterparties are abundant and orders are settled daily by the clearing houses. This provides liquidity and limits the potential risk of counter- parties defaulting. In addition, managed accounts and managed futures funds generally do not have a “lock up” period as is commonly found with hedge funds. This means that clients may request to redeem their capital at any time.

In August 2003 NFA issued an Investor Alert discussing the risks of trading in the retail off-exchange foreign currency (forex) market. Since that time, participation in forex trading by retail investors has increased dramatically. There are current 37 active Forex Dealer Members registered with NFA. These 37 firms hold over $800 million in customer funds.

Unfortunately, the amount of forex fraud has also increased dramatically. Since 2001, the Commodity Futures Trading Commission (CFTC) has filed 93 enforcement actions in federal court against hundreds of firms, owners and employees for defrauding over 25,000 customers who lost over $395 million in forex schemes. In addition, NFA has taken enforcement actions against a number of its Forex Dealer Members.

It is critical, therefore, that individuals who are considering participating in the forex market understand the risks associated with this product and conduct due diligence before making any investment decisions.

• Although forex dealers must be regulated, firms and individuals can solicit retail accounts for forex dealers and manage those accounts without being subject to any regulatory requirements. There are currently more than 2,000 such firms and individuals. If you are contacted by one of them, either through a telephone call, an e-mail message or a Web site, find out if they are regulated. If they are not, you may be exposed to additional risks.
• Be aware of investment schemes that promise significant returns with little risk. Be very cautious and closely monitor any investment you do make.
• Because the forex market is volatile, fluctuations in the foreign exchange rate between the time you place the trade and the time you attempt to liquidate it will affect the price of your forex contract and the potential profit and losses relating to it.
• Only a relatively small amount of money can enable you to hold a forex position for much more than the account value. This is referred to as leverage or gearing. If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire initial deposit and the liability for additional losses.
• Forex transactions are not traded on an exchange. Therefore, under the U.S. Bankruptcy Code, your funds may not receive the same protections as funds used to margin or guarantee exchange-traded futures and options contracts, which receive a priority in bankruptcy.

For additional information on retail forex trading, you should consult NFA’s brochure, “Trading in the Retail Off-Exchange Foreign Currency Market: What Investors Need to Know.” NFA has also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public in the Investor Learning Center section of NFA’s Web site (http://www.nfa.futures.org).

As mentioned above, retail off-exchange forex trading carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose all of your initial investment and be liable for additional losses. Therefore, you should not invest money that you cannot afford to lose. Be aware of all the risks associated with forex trading and make an informed decision after consulting with your financial advisor and considering your own financial situation and objectives.

NFA and the CFTC encourage members of the public to bring to our attention any suspicious activities involving foreign currency investments or suspicious Internet Web sites. Contact NFA’s Information Center at 1-800-621-3570 or file a complaint through NFA’s Web site (http://www.nfa.futures.org/basicnet/Complaint.aspx). Contact the CFTC at 1-866-366-2382, visit the CFTC’s Customer Protection Web page (www.cftc.gov/cftc/cftccustomer.htm) or fill out the CFTC’s Internet Report Form (www.cftc.gov/enf/enfform.htm).

NFA is a self-regulatory organization subject to oversight by the CFTC. NFA’s primary mission is to protect investors and maintain market integrity.

Summit FX is a member of the National Futures Association (# 401022) . All the managed programs offered by Summit FX are traded by an NFA registered CTA (Commodity Trading Advisor). Summit FX can be reached by calling 609-335-7257 or emailing summitfx.courtney@gmail.com .

Most correlations seen during this credit crisis have been right on spot, but now in reverse. As the equity markets rallied, currency pairs followed suit, and the USD lost a significant amount of ground to most majors.

One chart to print out and pin to the wall should be the USD/CAD performing a leap only seen at the circus. For the time being any shorts (long dollars) will be pushed aside to give room for the strength of this trend.

Traders will favor longs at key level on EUR/USD and GBP/USD as well as most USD majors, and playing a pullback should not be hard to recognize. Keep in mind that rate cuts on GBP and EUR will produce movement but not the same impact as seen on the USD. It now becomes a race to see if these countries can keep up to speed with the US.  

GBP continue to get heavily weighted by noise of recession and expected rate cuts. EUR hit a new low again last night, but GBPis still consolidated above its 1.5300 level. In the case of both, we see optimistic signs of hope during the day (rises in spot value) as selling opportunities at later times. There was reluctance to sell last tonight based on Japanese market data and severe movements in volatility to the upside yesterday and on Friday, but fundamentally, little has changed.
 

GBPhas levels of volatility simply no one is used to. We have been joking around that every 5 minutes, another 100 pips come and go. Fading the pair has been rather erratic though playing breakouts to the downside and upside have been working out quite well. Anytime a new base is formed, breakouts have been strong and forceful, something we wish was more frequent than not.
  

 This week will be a stage setter with rate cut decisions being tossed around and the close of the month around the corner. There is certainly a lot of money sitting on the sidelines and for the major fund managers, time is running out. The market needs a sign that money is flowing back in and that this is money that will remain permanent for the market to settle down to normal daily movements with less volatility.

We can all do without the excitement we’ve seen over the past month.