In hindsight, Peter Madsen wishes his team had advised
clients to include managed futures in their portfolios. These
funds, which generally employ trend-following strategies to
trade derivatives tied to a wide range of markets including
commodities and currencies, performed extraordinarily well
during the global financial crisis of 2008. That year,
managed-futures funds returned 14 percent, while the Standard
& Poors 500 index fell about 37 percent and the
average hedge fund lost nearly 20 percent. For investors who
always carry an umbrella because they dont know exactly
when it will rain, managed-futures funds proved to be a savvy
Madsen, then an investment consultant and now the chief
investment officer of the Utah School & Institutional Trust
Funds Office (SITFO), says hes now implementing a
downside protection strategy on SITFOs $2 billion
portfolio that includes managed futures sometimes known
as commodity trading advisers, or CTAs. I learned a lot
from the crisis, and since then Ive gotten more
comfortable with CTAs and similar strategies, he says.
SITFO was established from scratch two years ago to
professionally manage an existing portfolio that is used for
education in the state and that had previously been overseen by
another government agency.
SITFO is among a growing number of institutional investors,
including the State of Hawaii Employees Retirement
System, that are getting defensive in the face of a
long-running bull market in stocks, bonds, and other assets.
With yields at historic lows and interest rates on the rise,
pensions and other institutions are looking to dial up their
use of other diversification strategies, often by creating a
subportfolio of CTAs, alternative risk premia strategies
(mimicking hedge fund returns), and long-duration Treasuries to
create a so-called offset when equity markets get rocky.
Man FRM, a division of U.K.based fund management
conglomerate Man Group, is providing SITFO with an actively
managed portfolio comprising both internal and external
investment managers through its managed-account program.
Institutional investors have been increasingly interested in
defensive strategies for about a year, says Michelle McCloskey,
president of Man Americas and Man FRM. Investors have had
a long run of good performance in equity markets, but we feel
markets are at a point of extended valuations, she says.
Given elections around the world, and events like Brexit,
investors are asking what they need to do to be prepared and
how they get to an appropriate level of
Hawaiis retirement system worked with the Pension
Consulting Alliance to implement what it calls a crisis
risk offset program. Man FRM was hired to implement it
and carry out risk oversight and rebalancing through its
managed-account platform. Vijoy Chattergy, chief investment
officer of the states retirement system, says Hawaii uses
a mix of long-duration Treasuries to take the first blow in a
crisis, when there is a flight to quality. If the crisis is
sustained, the systematic trend-following strategies will kick
in. The alternative risk premia strategy produces positive
performance over the long run, although returns may not be
positive in a crisis situation. Sometimes people confuse
this with hedging; this is an offset, he says. If
our portfolio has a drawdown less than the market, then
well consider this successful.
Utahs Madsen says he established an allocation in
SITFOs portfolio specifically to play defense.
Its anti-risk, he says. SITFO is using a mix
that contains, among others, alternative beta investments and
trend-following CTAs, including strategies from Man AHL. Man
can customize programs for investors that simplify reporting
and operations and mix internal and external managers for
pensions, endowments, and other institutions.
Investors are doing a lot of work on managed futures,
which performed quite well in 08, says McCloskey.
These strategies could move relatively quickly if markets
start to go into an extended downturn and may act as a
counterpoint to assets that are taking a hit.
Other managers are getting creative as well. Milliman
Financial Risk Management, an institutional risk management
firm, will subadvise exchange-traded funds for insurance
company and asset manager Transamerica Corp.
Transamericas DeltaShares series has incorporated
Millimans institutional risk management into rules-based
passive funds. The planned ETFs, which aim to stabilize
volatility and manage the downside risk of equities during long
declines in markets and periods of heightened volatility, will
include U.S. large-cap, mid-cap, and small-cap funds;
international developed-markets funds; and emerging-markets
funds. Some may hope that by owning DeltaShares, the first ETFs
to offer crisis-protection strategies, they can stave off the
next bout of rain.