of "We have something that as a group that's fundamentally different than everything else and provides either excess return as a group or diversification as a group."
The problem I see, getting back to Charles' point as to why it's never going to be a significant player, is that if you look at adding value by providing liquidity into that marketplace, that value has diminishing marginal returns. So as we start seeing more managed futures enter the marketplace, you're not going to get that same return going forward because of that diminished value.
So I see it always having some degree of ceiling on it, perhaps a little greater than it is now, but not tremendously.
Mr. Nederlof: You would find most academics would be concerned over the definition of managed futures as an asset class because commodity assets very often don't have an inherent rate of return outside of perhaps their inflationary increase in value.
Investments that don't have an inherent risk premium built in or some kind of appreciation capability, like the participation in the performance of a company or being paid interest for lending somebody money, I would argue that's not a real asset class, and so you've really got to be very careful about the definition of a managed futures player.
Ms. Beder: One of the great advantges of managed futures as a category is the type of exposure and duration that you can get relative to cash securities markets in general. As more funds learn about and accept theis value, then perhaps it will become something more than parsley on the plate, a real side dish.
Mr. Baker: The danger here is to categorize institutional investments, as always only in an economic function, providing capital formation. Managed futures provides a completely independent economic function, which is risk transfer. It's not going to serve the interests of investors to say all your investments must be channeled into capital formation as opposed to providing other things, such as this risk transfer.
P&I: How widely do pension funds use derivatives, and in what strategies?
Mr. Service: It's my perception that the most widely used strategies are those that involve exchange-traded derivatives, and those that involve either hedging strategies or substitution strategies, as opposed to return enhancement strategies.
Mr. Shultz: Equitizing cash is a major one; also tactical asset allocation, hedging. I don't think there is any pension fund whose managers are not using financial futures in their fixed income portfolios.
P&I: How widely used are swaps?
Mr. Nederlof: On the corporate side, where hedging is the dominant activity. That involves a lot of swap activity for the simple reason that the two risks people hedge the most are interest-rate and currency risks. Corporations understand it better than pension funds simply because they have naturally needed to control their interest-rate and currency risks.
Ms. Polsky: I agree with all the answers in terms of the way derivatives are being used by pension funds. If you take a forward-looking view and say what changes can we expect over time, I think you'll see an increase in use of the information in the derivatives market because there is more understanding (continued)
