Global macro, managed futures heating up

U.S. institutional investors have global macro and managed futures managers firmly in their sights as they hunt for non-correlated investment strategies to add to their hedge fund portfolios.

A surge of institutional investment into global macro managers and managed futures strategies began last year and continues this year, as North American institutions play catch-up to their European counterparts by making new and additional allocations.

Among investors in these tactical trading strategies are the $48.1 billion Massachusetts Pension Reserves Investment Management board, Boston; the $18 billion Texas County & District Retirement System, Austin; the $144.8 billion California State Teachers' Retirement System, West Sacramento; the New Jersey Division of Investment, Trenton, which oversees the state's $67.2 billion in pension assets; the $6.5 billion Wyoming Retirement System, Cheyenne; and the $36 billion Illinois Teachers' Retirement System, Springfield.

Big winners of new and additional allocations from U.S. investors include global macro managers Brevan Howard Asset Management LLP, Bridgewater Associates LP and Caxton Associates LP.

Among managed futures firms, also known as commodity trading advisers, gaining favor are Winton Capital Management Ltd., BlueCrest Capital Management LLP and Graham Capital Management LP.

The popularity of tactical trading firms like those above stems from their ability to generate uncorrelated returns, a characteristic many institutional investors seek to add to their portfolios, money managers and consultants said.

“There have been strong correlations across asset classes and across hedge fund strategies in the last year. Opportunities for finding return through security selection are diminished when correlations are so high,” said Michael Bernstein, director and head of U.S. pensions and consultants at Lyxor Asset Management Inc., New York.

“The attraction of global macro managers is that they are less concerned with individual securities and instead are focused on getting the macro decision right. When nothing else is working, investors are willing to try something new that seems to work. They're trying to get more balance in their portfolios and global macro can add that,” Mr. Bernstein added.

Lyxor Asset Management oversees $22 billion, mostly from institutional investors, in hedge funds of funds, managed accounts and advisory relationships. Of the total, $11 billion is invested through a managed account platform that features about 100 hedge funds. Mr. Bernstein said that global macro funds on Lyxor's platform “took the lion's share” of inflows in the latter half of 2011, followed by CTA funds.

One way to achieve a more balanced hedge fund portfolio is to “create a barbell structure within a hedge fund portfolio with a significant weighting to truly non-correlated tactical trading strategies like managed futures and global macro at one end and a significant weighting to more correlated, return-seeking strategies at the other end,” said Jim Vos, CEO, head of research and principal at hedge fund consultant Aksia LLC, New York.

As U.S. and Canadian investors move to direct investments in hedge funds from funds of funds, many are actively seeking to build up their weightings to global macro, CTAs and other non-correlated approaches, said managers and consultants.

One such fund is the Massachusetts Pension Reserves Investment Management board, which is moving about $1.5 billion of its $4 billion hedge funds-of-funds portfolio into direct investment in hedge funds. The fund has selected 21 managers so far; among them were global macro manager Brevan Howard and managed futures managers Winton and BlueCrest, which each received a $25 million allocation.

For other investors that are building direct investment portfolios, rather than winding down funds of funds, global macro and CTA strategies are critical to reducing volatility across the entire portfolio.

The Texas County & District Retirement System, for example, has given global macro and managed futures strategies a fairly big weighting — 16% — within its $4.55 billion hedge fund portfolio, said Paul J. Williams, investment officer of the fund.

He said TCDRS began its direct investment hedge fund program in 2006 with the goal of providing the retirement plan with an equity substitute that offered half the volatility.

Global macro and managed futures strategies should over longer time frames help “dampen the volatility” of the overall TCDRS portfolio and including a significant weighting to these uncorrelated strategies within the hedge fund portfolio “will help us to cut the tops and the bottoms off the return stream,” Mr. Williams said.

Last year, TCDRS invested for the first time in global macro managers Brevan Howard, which now manages $165 million for the Austin-based system, and Caxton, which now manages $208 million. The global macro/CTA portfolio was completed recently with investments of $175 million each to Graham Global Investment Fund and Winton Futures Fund.

CalSTRS' innovation and risk unit also was tasked with finding investment strategies that would not only diversify, but also improve the return and risk characteristics of the total portfolio and control volatility, said Steven Tong, director of the unit.

The result of that review was that “global macro strategies really bubbled to the surface” in CalSTRS' strategy review because they offer positive asymmetric risk to the portfolio and performed fairly well in extreme markets when equities did not, said Carrie Lo, a portfolio manager in the innovation unit.

CalSTRS' board approved a $200 million global macro allocation in March 2009. In December 2011, Lyxor Asset Management was hired as an adviser to provide due diligence and advice to innovation unit staff on manager selection.

Mr. Tong said five managers are being sought to manage the global macro allocation. One manager, which Mr. Tong said he could not identify, was hired in December, and the next four are expected to be added before the end of the year.

Ms. Lo said she and Mr. Tong visited 30 global macro managers over the last year and while she has seen some narrowing of capacity among desired managers, CalSTRS' small allocation of about $40 million per manager likely will make the system a desirable investor.

Peter Hill, head of liquid alternatives research at consultant Hewitt EnnisKnupp, Chicago, agreed that “capacity for some managers and strategies is a problem.” But he added that even global macro and CTA managers that are officially “closed” to new investors are likely to take desirable institutional investors, especially if their allocations are not too large.

“We like to see managers being defensive about their capacity and only opening their strategy selectively to long-term institutional investors,” Mr. Hill said.

“Institutional investors need to carefully size their allocations. While every investor has unique needs that might require larger investments, generally, allocations of not more than 1% of total assets to systematic managers are appropriate,” Mr. Hill said.