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 Fund.
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 time.
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.