Investors flock to specialty investments

Asset owners increasingly are turning to global macro and managed futures strategies in their efforts to diversify their portfolios.

Institutional investors have invested at least $2.6 billion in 2015 in the two approaches, with global macro bringing in $1.5 billion and managed futures, $1.1 billion, according to Pensions & Investments' reporting.

Actual investment totals likely are higher because many institutions don't release information about their investment changes. Indeed, one manager reported $3 billion of inflows to its global macro strategies alone so far this year.

The resurgence of institutional investor interest in these subsets of the hedge fund industry this year is all about the lack of return correlation they have with traditional asset classes, said Arvin Soh, portfolio manager in GAM Group AG's alternative investment solutions unit in New York.

Both strategies are popular as portfolio diversifiers because some asset owners with a tolerance for choppy — but profitable returns — want to capture “crisis alpha” during short or prolonged market downturns.

Systematic, trend-following managed futures traders are best-suited to corral this form of alpha, albeit with a high probability for volatility, Mr. Soh said.

By contrast, global macro strategies, which take a top-down approach to interpreting broad market trends, are better suited for investors with weaker stomachs when it comes to volatility.

GAM runs a dedicated portfolio of managed futures and global macro funds with assets currently split evenly between the two, Mr. Soh said. GAM manages a total of $122.3 billion.

Institutional marketers of both strategies report healthy inflows so far this year and full pipelines of new investors as well as additional allocations from existing clients.

Investments in global macro and managed futures funds in 2015 have been sizable, including:

nNew Jersey Division of Investment, Trenton, which invests the $79 billion New Jersey Pension Fund, invested an additional $150 million in Winton Capital Management Ltd.'s managed futures fund raising the allocation to $400 million. Existing managed futures specialist, Lynx Asset Management AB, received an additional $100 million to bring its allocation to $200 million. The division also invested an additional $110 million in MKP Capital Management LLC's global macro fund for a total allocation of $343 million. Stone Milliner Asset Management AG's global macro strategy received a first-time investment of $250 million. Another new manager, Laurion Capital Management LP, received a $100 million investment in its global macro/relative value strategy.

nFlorida State Board of Administration, Tallahassee, which oversees $174.2 billion, invested $200 million in AQR Capital Management LLC's managed futures strategy, and $150 million in MKP Capital Management's global macro strategy.

n Texas County & District Retirement System, Austin, invested $250 million of its $25.2 billion in Stone Milliner Asset Management's global macro strategy.

nMunicipal Employees' Retirement System of Michigan, Lansing, invested $300 million of its $9.4 billion in William Blair Investment Management LLC's global macro strategy.

nMaryland State Retirement & Pension System, Baltimore, with assets of $45.8 billion, invested $250 million in Graham Capital Management LP's managed futures strategy.

But those institutions are only a part of the story.

Kenneth G. Tropin, chairman of Graham Capital Management, Rowayton, Conn., said his firm has seen $3 billion flow into its now $7.4 billion managed futures strategy so far this year.

“Finding diversification for an institutional portfolio is getting increasingly difficult,” Mr. Tropin said, noting that managed futures' positive performance 80% of the time and very good performance when equities are down is a “potent combination” that “truly is uncorrelated to equities and other asset classes.”

Man Group's systematic managed futures business, AHL Partners LLP, also has experienced strong growth, with assets up $4.6 billion or 34.6% to $17.9 billion for the year ended June 30.

AHL's asset surge came after a difficult period for managed futures funds between 2009 and 2013 because “government intervention and the fear of government intervention” played havoc with the price momentum signals that systematic trading programs use to buy and sell futures contracts, said Eric Burl, head of Man Group Americas in New York and co-head of global sales.

Teachers' Retirement System of the State of Illinois, Springfield, has invested a total of $588 million in global macro and managed futures strategies so far this year, said Kenneth L. Musick, investment officer-diversifying strategies.

The fund's $3.5 billion hedge fund portfolio is split into a $2.2 billion convergent portfolio that includes managers that are focused on idiosyncratic alpha sources and the $1.3 billion convex portfolio that seeks uncorrelated returns.

Most of the assets invested in 2015 have been to the system's first managed futures managers as part of the build out of the convex portfolio: Brevan Howard Asset Management LLP ($148 million); Transtrend B.V. ($140 million); and ISAM (USA) LLC ($100 million). Global macro manager Quadratic Capital Management LLC received $50 million this year, as well. The pension fund also invested $150 million in PDT Partners' Mosaic equity-neutral strategy from the convergent hedge fund portfolio.

Previously, the teachers' fund invested a total of $648 million in two global macro managers.

Illinois Teachers' investment officials were “looking for the most diversification for the overall portfolio from the hedge fund portfolio,” Mr. Musick said, adding that the goal was to find the purest possible trend-following strategy from medium-sized firms, following medium-term trends and with the most efficient trade execution possible.

The convex portfolio has done such a good job of diversification that Mr. Musick and his team have been able to allow the risk for individual hedge funds in the convergent portfolio to rise, and has lowered the overall portfolio's equity correlation.

The $181.3 billion California State Teachers' Retirement System, West Sacramento, also made its first managed futures investments within the past year, placing $230 million with Graham Capital and $144 million with AQR.

The managed futures investments, as well as the five global macro investments totaling $874 million that CalSTRS' investment staff placed between 2011 and 2014, are in the fund's $2.5 billion innovation and risk portfolio.

The global macro and managed futures investments are “both experimental strategies, which the investment staff will study for a period of not less than three years, after which time the investment committee will review their performance and behavior to determine if they are right for the permanent portfolio. Those determinations have not yet been made,” said Ricardo Duran, a CalSTRS spokesman, in an e-mail.

MKP Capital Management, New York, has found that institutional investors are more sophisticated and “understand much better what a diverse group global macro managers are,” ranging from entirely systematic to entirely discretionary approaches, said Anoop Dhakad, partner and head of client solutions.

Global markets now are providing “a better environment for (global macro) managers than it was two years ago. There is real volatility, trends to follow and reversals that macro managers can play to their advantage,” said Samuel E. “Q” Belk IV, head of diversifying strategies at investment consultant Cambridge Associates LLC, Boston. n