Tax-exempt investors in the United States and Canada continue to put money into futures-based strategies, with more expected to do so in coming months.
Institutions are investing passively and actively in both long-only commodities investments, as well as strategies that go long and short futures contracts. Executives for the institutions investing with futures cite diversification benefits as a reason for doing so.
Among the institutions that have made recent initial allocations or put more money into futures strategies are: the Ontario Teachers' Pension Plan Board, North York; the San Diego County Employees' Retirement Association, San Diego; and the Detroit General Retirement System.
Funds that continue to examine possible allocations include: DTE Energy, Detroit; VIA Rail Canada Inc., Montreal; the Chicago Municipal Employee's Retirement System; and the Chicago Laborers Annuity & Benefit Fund.
Futures managers and consultants say recent allocations come after much effort to build awareness of futures.
"A lot of the important work for the last year and a half is starting to pay off," said Richard Pike, president of RP Consulting Group Inc., St. Petersburg, Fla.
Now that institutions are making a commitment, other investors "need to know why they are doing it at the very least," Mr. Pike said. RP assists San Diego with oversight of its managed futures and currency overlay accounts.
Mount Lucas Management Corp.. which lost an estimated $300 million managed futures account with Eastman Kodak Co., Rochester, N.Y., has been hired or funded for four portfolios totaling almost $50 million this year, said Ray Ix, vice president. He said two more institutional investors he declined to identify are close to hiring the firm as well.
Trilogy Capital Management L.L.C., Princeton, N.J., is growing quickly, adding $240 million this year. Much of that has come through either Canadian fund separate accounts or through two Canadian managed futures structured notes it manages for Toronto Dominion Bank, Toronto. Trilogy is working on another such structured note.
The structured notes have proved to be popular in Canada for institutions and individuals said Tony Baker, principal and executive vice president. While structures vary, one typically offers a principal guarantee with a coupon based on active futures returns. Some pay a small regular coupon as well, but then the investor gives up added futures management return, he said.
The managed futures industry got a boost in Canada from a tax rule limiting foreign investment, he said. The rule doesn't apply to derivatives positions collateralized with Canadian securities.
* The Ontario Teachers' Pension Plan Board created a C$140 million (U.S.$101 million) allocation to a passive investment tied to the Goldman, Sachs Commodity Index, said Robert Bertram, senior vice president, investments for the C$54 billion fund.
The move, which he said was a toe in the water given the size of the allocation, was done to improve the asset mix, as fund officials seek ways to diversify assets.
The index fund will be run internally, primarily using the GSCI futures contracts traded on the Chicago Mercantile Exchange, although swaps might be used on occasion, he said.
* The $3.3 billion San Diego County pension fund increased its $140 million allocation to managed futures, hiring Mount Lucas Management Corp., Princeton, N.J., to run $20 million in passive managed futures based on the Mount Lucas Management Index.
The index uses a computer program that seeks to model the trend-following patterns of active managed futures. The strategy will be leveraged on a 2.5-to-1 basis, said departing Chief Investment Officer Richard N. Rose.
As with its existing allocation, the Mount Lucas allocation is structured as an overlay; no cash is set aside to collateralize the investment, other than for futures margin.
A loss taken by San Diego on a futures fund run by Walter Niederhoffer through one of its manager of managers, Hart-Bornhoft Group, Chicago, was not expected to affect the program futures, said Robert Snigaroff, investment officer.
* DTE Energy was to conclude a managed futures search Nov. 10. Officials at the $1.4 billion fund were undecided on whether it should go active or passive, and whether to use a long-only index like the GSCI or a long and short index like the MLM, said Allen Anning, director of trust fund management. The portfolio will be as big as $35 million.
Susan Naese contributed to this story.
