Flow Traders. LBMA/LPPM Precious Metals Conference Session 2 - Sabato 1. LBMA/LPPM Precious Metals Conference 2013

Transcription

1 Flow Traders LBMA/LPPM Precious Metals 2013 Rome, 29 September 1 October 2013 Flow Traders an introduction Founded January 2004 by 4 professionals; today offices in: Amsterdam (Head Quarters); 110 professionals Singapore (July 2007); 32 professionals New York (September 2009); 21 professionals Core business of Flow Traders is market making of ETFs, ETCs and ETNs (ETPs) 40+ market makers are focused to provide continuous ETP liquidity on all major Asian-Pacific, European & US exchanges 11 Sales Traders (Amsterdam: 9, Singapore: 2) provide institutional investors with OTC trading facilities for all world-wide listed ETPs Flow Traders is privately owned and is not linked to any issuer or bank Flow Traders quote continuously more than 1500 ETPs on all major exchanges world-wide 2 Session 2 - Sabato 1

2 How to Trade ETPs / Cost efficiency The trend / market changes Small trading volume Institutional Investor Institutional Investor Broker Stock Exchanges (e.g. SGX, HKEX, TSE, LSE) Continuous Market Making Market Markers / Authorised Participants Institutional Investor Broker OTC Institutional Investor Large trading volume direct contact to an ETP Market Maker 1) Information on how to execute 2) Best price 3) Lower/no transaction costs 4) Influence on your performance 3 Periodic Table of Returns Past performance is no guarantee of future results, and diversification/asset allocation doesn t ensure a profit or guarantee against a loss. Asset class represented: Large Caps (S&P500 Index), Small Caps (Russell 2000 Index), Growth (Russell 3000 Growth Index), Value (Russell 3000 Value Index), Developed Countries (MSCI EAFE Index), Emerging Markets (MSCI Emerging Markets Index), High Yield (Bank of America Merrill Lynch US High Yield Index), Investment Grade Bonds (Barclays US Aggregate Bond Index), Real Estate (NAREIT Equity-Only Index), Commodities (DJ-UBS Commodity Index). Source: Ibbotson Associate, Standard & Poor s, Bloomberg as of 6/30/ Session 2 - Sabato 2

3 Investing in commodities WHY? It brings diversification benefits to a portfolio: over long time commodities bear very little, or even negative, correlation with other asset classes It provides protection against inflation: investors care about real purchasing power of their portfolios. Commodities are directly linked to the components of inflation, as they are important part of the production process of many goods Energy-intensive indices work best when equities fall sharply. Annualized monthly return of commodities indices during months in which equities had negative returns are not very different from their long-term averages. Incorporating commodities indices into a portfolio may work as a hedge mechanism against sharp fall in the equity market HOW? Clearly direct physical investment is impractical for most investors due to the complications of physical deliver and owning - Commodity futures - Commodity indices, baskets of short maturity commodity indices - Total return commodity indices: Passive investment strategy in commodity futures contracts where the amount invested in futures has been set aside as collateral, thus making commodity returns comparable to stock or bond market returns. Investing in a basket of commodity stocks is a sub-optimal alternative, in our view 5 Tops and Bottoms - Gold ETPs see record outflows - Price decline key driver of AuM drop - Rising real interest rate hit gold - Platinum was the one bright spot - Rising supply hits agriculture ETPs Source: ETFs Securities Q Session 2 - Sabato 3

4 Commodities pricing The essence of it comes down to the fundamentals of backwardation and contango and the theory of storage. Normal backwardation exists when the price of futures contracts is below the expected delivery date spot price. Prices for contracts with nearer maturity dates are higher than those with later maturities. Contango exists when the price of futures contracts is higher than the expected spot price on the delivery date, and the price of futures contracts with later delivery dates are higher than those with sooner delivery dates. 7 Commodities pricing Source: Bloomberg as of 4/9/ Session 2 - Sabato 4

5 Commodities Indices First generation Long-only indices without paying much attention to the fundamentals of backwardation and contango - They rebalance infrequently - They are fully collateralized, their total return depends on both futures returns and collateral yields - They hold liquid contracts at the front end of the term structure - They tend to be heavily weighted towards energy - Number of constituents vary widely, and with it so the diversification benefits, liquidity and tracking errors - Negative ann return due to financial and sovereign debt crises - Negative Skewness = high prob of negative return, they suffer the hipo backwardation - High std dev due to exposure to the front end of the future curve Source: EDHEC November Commodities Indices Comparing 10 Session 2 - Sabato 5

6 Commodities Indices Comparing The DJUBS will tend to outperform other indices when agriculture and metal prices rise more than energy. This index will also do better when agriculture and metals are more in backwardation than energy The SPGSCI is expected to do well in times of rising energy prices. This index will also perform quite well when commodity markets are in backwardation The RICI will perform better than the other indices when the agriculture sector performs better than energy and metals sectors. The RICI is one of the few commodities indices with direct exposure to exchange rate fluctuations: decline in the value of the USD relative to Japanese Yen, Canadian Dollar, and Australian Dollar may boost the performance of the index 11 Commodities Indices Second generation Long-only indices but there is an attempt to lessen the negative blow on performance of contango while exploiting backwardation. Several rolling techniques: - Enhanced roll: it chooses a liquid contract located in the mid to far end of the futures curve (less trading activities..) - Constant maturity: it invests in a number of contracts months across the futures curve maintaining a target maturity - Implied roll yield: dynamic approach choosing the contract with the highest implied roll yield - Better performance and less volatile - Not a lot better skewness It is decreased the risk of potential losses in contangoed markets, but it is mitigated the potential gains that come from rolling in backwardated markets (curves are usually less steeped in the mid to far end in both states of nature. Source: EDHEC November Session 2 - Sabato 6

7 Commodities Indices Third generation Long-short indices, they try to capitalize on both the price appreciation associated with backwardation and the price depreciation related to contango. Several strategies: - Momentum: it is used price continuation to determine long and short positions - Term structure: it is considered the shape of the curve, taking position in backwardated commodities - Market Neutral - Fundamental/Rule based: combination of fundamental forecasts and technical signals Less risky, less volatile indices Higher Skewness and less Kurtosis it means that rusk adverse investors will like this indices Source: EDHEC November Commodities Indices Comparing generations 14 Session 2 - Sabato 7

8 Commodities Indices third generation 15 Thanks Daniele Sabato (Italy) ETF Sales Trading T: (ETF Trading Hotline) M: E: daniele.sabato@flowtraders.com Contacts Daniele Sabato T: M: daniele.sabato@flowtraders.com Jacob Bontiusplaats LL Amsterdam (The Netherlands) 16 Session 2 - Sabato 8