By Niki Natarajan
Sprains, strains, damaged muscles and torn ligaments are some
of the symptoms that over enthusiastic novice yogis attempting
complex gravity-defying yoga positions – often at
heightened temperatures – might incur.
I don’t like to peddle fear, but one does not
need siddhis, or psychic powers, to divine the outcome of a
similar fervour when it comes to the latest UK pension fund fad
of eschewing balanced global multi-strategy portfolios of hedge
funds for a commodity trading adviser or two.
The last few issues of InvestHedge have been full of UK
pension funds taking such a step. Most recently,
Aspect Diversified replaced Fauchier Partners at
Leicestershire’s County Council Pension Fund,
while Winton Capital Management and BlueCrest Capital
Management have both won money from the Suffolk Pension
Who knows with what the
Brent Pension Fund will replace Fauchier with, but my money
is on a commodity trading adviser. Like headstands, side crows
and peacocks, CTAs are not always appropriate all the time
– or indeed, for everyone.
It is not that the names that are being selected are not
good enough; far from it, but CTAs more than most strategies
are highly cyclical and investors seem to have an unerring
knack of entering managers when all the steam in the strategy
has run out.
CTAs are known to perform when nothing else seems to work,
and looking back over the last three years, one can see why
they look attractive to battered and bruised UK pension funds.
But as CTAs are cyclical in nature, the question is what else
do pension funds have in their portfolios to take advantage if
the world has a performance uptick?
It would seem the CTA downturn has already started. The
composite CTA performance is the only hedge fund strategy that
is negative for the year to date, down 3.68%; October alone saw
the CTA average brought down by average global managed futures
returns of -2.6%, according to the HedgeFund Intelligence
Having CTAs in a portfolio has certainly been a smart bet if
one looks through the rear view mirror but if one only ever did
backbends and forward bends in yoga, the pressure could in
theory cause the spine to snap like a twig. Similarly if all of
this institutional money is flowing into CTAs, surely
performance will continue to be affected negatively?
Investors can learn a lot from the well rounded sequencing
that a yoga teacher tailors to an individual
yogi’s level, as they put together their
portfolios. Like plank pose, which strengthens the core,
investors need to create a solid core of positions (with or
without hedge funds) that can hold their own whatever the
financial weather dictates.
Jane Buchan’s team at PAAMCO is wary of global
macro and tactical asset allocation on the grounds that few
managers consistently make the right calls. And when it comes
to CTAs "in general [they] are on the 'avoid’ list
because of volatility and doubts about their ability to add
value over time". But in a world where FoHFs need to complement
what investors have already, an investment with PAAMCO at least
means there would be no overlap.
The next few sequences vary from day to day, month to month
and year to year building up strength in areas of weakness. In
portfolio terms this is determined by the prevailing economic
climate and likely to change regularly but often unexpectedly.
Enter the role of the CTA.
The aim in yoga –whose meaning is to yoke, join,
unite or attach – is ultimately about achieving
balance. Like a good yoga workout that strengthens, tones,
reinvigorates and relaxes all in one class, the art of
constructing a pension portfolio that can cover the future
liabilities whatever the financial weather about balancing the
right strategies in the right proportions at the right
And as enlightened investors like Martin Källström
of AP1 highlighted at the recent InvestHedge Forum, CTAs are as
essential to a balanced portfolio, as the tree or Natarajasana
balance poses are to a well rounded yoga sequence. But
replacing FoHFs with just a CTA or two is like trying to
achieve the pose in the photo without first training the core
muscles. Try it to see what happens.