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"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

- Warren Buffett
 In this Edition
 Direxion in Focus
The Direxion Indexed Managed Futures Strategy Fund

Web Event Replay: The "Next Generation" in Managed Futures Investing

QQQE: New Equal Weighted Index ETF by Direxion

Web Event Replay: Volatility, Strategies for Diversification and Risk Management


Managed Futures: Tearing Down the Wall

Since the bear markets of 2000–2003 and 2008, managed futures have been increasingly brandished as a weapon in the battle to find strategies with low to no correlation to traditional investments, liquidity and transparency. Their ability to trade both long and short, and their ability to diversify asset classes like currencies, global interest rates, metals, energy fuels, stock indices and commodities.

But what have been the traditional barriers that are keeping investors from participating in these strategies? And how do managed futures mutual funds structured under the Investment Company Act of 1940 (40-Act) differ?

First, typical “private placement” managed futures funds are managed by one or more Commodity Trading Advisors (CTAs) that receive compensation for giving people advice on options, futures and trading of managed futures accounts. Registration for CTAs is done through the National Futures Association (NFA), a self-regulated organization responsible for reviewing and accepting registrations. Public mutual funds also use CTAs. There’s where the similarities start to diverge.

Structure
Many private funds are structured as limited partnerships (LPs) and regulated as commodity pools under the Commodity Exchange Act by the Commodity Futures Trading Commission. In the past few years, the advent of managed futures strategy in 40-Act publicly structured mutual funds has given seed to funds with significantly advantages over LPs, including lower required fees and minimum investments, greater liquidity, transparency and simplified tax accounting.

Minimums, Limits, and Lock-Ups, Oh My!
Minimum account sizes for private funds can range dramatically across CTAs, from as low as $25,000 to as high as $5,000,000 for some very successful CTAs. Some CTAs require a minimum of $50,000 to $250,000. Others have an asset limit and are closed to new investors. They also may have “lock-up” periods that may be anywhere from three months to one year. 40-Act mutual funds are open-ended, have daily liquidity, and typically have low minimums as low as $2,500.


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(Dis?) Incentive Fees
In the typical private fund arrangement, the CTA may have incentive fees of 20–25%! This means they share in your profits. Some have management fees of about 2 percent and charge a brokerage commission on each trade. In comparison, 40-Act mutual funds offer more limited fees. Depending on the strategy, fees in mutual funds still vary greatly. Expense ratios range from anywhere between 1.45% to 3.9%, depending on how the fund is managed and how many managers are drawing fees from the fund. So it’s important to ask questions about fees as part of your initial inquiry into any managed futures fund. 

Buy The Manager or The Strategy
How do investors determine which private fund to invest with?  Most likely they rely on recommendations of friends or financial professionals to help select a CTA. But many competent financial professionals may just have cursory knowledge of the world of CTAs. In all likelihood the credential that most likely reflects some degree of competency in this realm would be registration with the National Futures Association (NFA). In any case, one way or other, you have to identify and make contact with prospective managers and sift through their disclosure documents.  

The reality is that it’s impossible to separate skill from luck. Even the use of large databases of CTAs and a the resources to run a sophisticated analysis of past returns and volatility can’t guarantee success in finding the right manager. If trading styles are adapted to changing market conditions over time;  it may be difficult to judge the consistency or discipline of the manager(s).  Many funds have limited histories. Therefore, the validity of statistical results is questionable at best.

Several mutual fund firms, including Direxion now follow quantitative strategic indexes.  Rather than relying on an active manager’s judgement call, this type of fund may provide the peace of mind that is the result of a disciplined, repeatable and transparent strategy. Please see disclosure below for risks associated with the strategy.

Access Granted
Access to managed futures is no longer reserved for the elite investor. Direxion’s Indexed Managed Futures Strategy Fund offers an easy and cost-efficient way of gaining long/short exposure to 21 specific futures markets through an index –based strategy. Each position is individually maintained and able to change within the month, depending on volatility and risk trends. MOREDiversification does not ensure a profit or protect against a loss.

An investor should consider the investment objectives, risks, charges, and expenses of the Direxion funds carefully before investing. The prospectus contains this and other information about Direxion Funds. To obtain a prospectus, please visit www.direxionfunds.com or contact Direxion Funds at 800.851.0511. The prospectus should be read carefully before investing. Investing in funds that invest in specific industries or geographic regions may be more volatile than investing in broadly diversified funds.

The principal risks of investing in the Direxion Indexed Managed Futures Strategy Fund are Active and Frequent Trading Risk, Adverse Market Conditions Risk, Agriculture Investment Risk, Commodity Linked Derivatives Risk, Counterparty Risk, Credit Risk, Currency Exchange Rate Risk, Currency Investment Risk, Debt Instrument Risk, Derivatives Risk, Emerging Markets Risk, Energy Investment Risk, Foreign Securities Risk, Futures Contracts Risk, Interest Rate Risk, Leverage Risk, Market Risk, Non-Diversification Risk, Other Investment Companies (including Exchange-Traded Funds) Risk, Precious Metals Investment Risk, Regulatory Risk, Sector Risk, Shorting Securities Risk, Subsidiary Investment Risk, Tax Risk, Tracking Error Risk, and Volatility Risk. Auspice Capital Advisors Ltd. is a registered Portfolio Manager/Investment Fund Manager in Canada and a registered Commodity Trading Advisor (CTA/CPO) and National Futures Association (NFA) member in the US.

Date of First Use: March 30, 2012. Distributed by: Rafferty Capital Markets, LLC.