As a Chicago-based firm, we never thought to celebrate the first Cubs World Series win in over 100 years in Austin, TX – but there we were nonetheless, with our sponsorship of the welcome reception for the “Managed Futures & Global Macro: Strategies to Optimize Institutional Portfolios” conference by TalkingHedge butting up against the start of the World Series game 7 last Wednesday night.
So, just like an adaptive trading strategy evolving to address a new market environment, we made the best of it – porting over a good portion of the welcome reception to an Austin dive/sports bar full of Cubs fans. The rest, as they say, is history, with the Cubs winning an epic game and causing us to forget about volatility and due diligence for just a few hours.
But these are pros, and everyone was back at it early Thursday getting into the nitty gritty of Managed Futures & Global Macro. Here are some of the highlights from the likes of Panayiotis Lambropoulos of Employees Retirement System of Texas, Amy Elefante Bedi of Washington University , Steven Wilson of Teacher Retirement System of Texas, Michael Harris of Campbell & CO., Salem Abraham of Abraham Trading, Chris Solarz of Cliffwater, as well as RCM’s very own Jeff Malec.
[drizzle]On Macro & Managed Futures Returns and the Current Opportunity
- The industry is retrenching, there’s a bit of a shakeout with lack of market movement and mf/macro needing more market dispersion. Managers must adapt or will get exposed as this tide goes out
- Managers evolving include those offering solutions – working with investors to customize exposure, strip out beta, etc. It’s not good enough to just offer a “program” anymore.
- No excuse to have a few large platform trend followers all trading mostly rates in the portfolio…investors need to dig deeper, need to find unique return drivers
- Major differentiation in current environment has been portfolio construction
- Large managers returns can be problematic as they go into asset gathering mode
- More macro discretionary managers are moving into quant systematic approach. Paul Tudor Jones laying off traders, hiring quants; but when adding quant to discretionary – but with a all of changed profile, it can be problematic from a review/analysis standpoint
- Managers need technology throughout organization – not just in trading, they need it in back and middle office as well
- No use trying to adjust exposure because of current low vol environment, we’re not trying to predict the future and predict markets. We fall back on core building blocks of portfolio, process, and spreading between systematic/discretionary to pre-emptively adapt to conditions such as these
- The beauty of CTAs is how cash efficient they are – and this allows for investors to change the return profile on demand, levering up/down, adding non correlated diversifiers to the diversifier.
- Investors/allocators are getting into the details more, which has been a healthy part of this environment. Investors are stripping out components, allocating to niche strategies which fit to wanted exposure – and which investor understands will/won’t do well in certain environments
- Some good hearted ribbing at investors who just want non-correlation…. You want noncorrelation AND expect positive return, right? Just noncorrelated won’t be enough, you need it to make money too.
- Global easing/central bank intervention causing macro/managed futures recent struggles is a bit of an industry cop out – the rally was real off bottom in 09, as a space, macro missed it…
- Vol is incredibly cheap in many spaces right now. There are lots of yield enhancement strategies are short vol, and artificially depressing vol pricing
- Everyone is using algos for execution, hfts are figuring out how to algo the algos, technology is real, advancement is real – if you’re not exposing yourself to firms using tech to extract alpha, you risk missing this “trade.”
On Fees and Active vs Passive
- Big picture (incl equities/bonds), active has massively underperformed – there’s some performance chasing here, but not all structural shift away from active
- Part of the problem with active is their risk control methods lead to delivering and reducing exposure at first sign of trouble, which has led to this underperformance
- But becoming positive on active and especially CTA space, for looming opportunity in fixed income with rate rise regime…Active uniquely suited to capitalize on that move
- 2/20 is mostly dead at the institutional level… however – as an organization, we believe hedge funds absolutely critical to providing the risk/return profile we’ve targeted, so no desire at the institutional level to leave hedge funds en masse as we see in the press
- But… low single digit returns @2/20 is not acceptable, institutional investors have fiduciary duty to re-align fees, make sure more is retained by investor in such an environment…
- New model being talked about is 1 or 30… investor pays max of 1% ann mgmt. or 30% of profits, happy to pay on upside, and realize need to keep manager business healthy for reinvestment in research and infrastructure, etc.
- Another rough level being looked at – investor retain 30% of alpha generated
- You don’t really want management fee of 0%, because you need manager to have stable business.
- Investors looking for managers to help get creative with fee models – using benchmarks, lookbacks, crystallization schedules, bifurcating alpha.beta, etc.
On alpha v beta, separating and analyzing the two in manager performance and process
- Look back, where did the returns come from? How much can be attributed to beta?
- For looking forward, find the nerdiest guy in your office, send him in to speak with manager about model settings, parameters, etc. – to uncover deeper insight into how things are actually working, to uncover whether lucky or good, and whether there is a process there for repeating if good
- Invest in a process. Pay for a process of researching and modeling approaches to the market. If they’re not updating/advancing – you’re paying 2016 prices for a 2006 model. You wouldn’t buy a 2006 car at 2016 prices.
Other notable comments
- Are the institutions to blame for lower hedge fund returns, by demanding lower risk and lower volatility? Have they created the (lower return) monster that they’re complaining about?
- And the hit of the conference, was this story by long time manager Salem Abraham: “…article in Austin papers a few years back, a boat tour on Lake Austin goes by a nudist colony…. Well on a particular day with a full tour, the guide points out the colony as they pass by and all the tourists rushed to that side to check it out – tipping over the boat…. Those tourists are market participants, reacting emotionally and rushing to one side of the boat or the other…. Mf/macro uniquely positioned to capture those types of emotional, boat tipping swings.”