Archives

The Funded Status Volatility index (PSRX) from NISA is a useful tool for understanding pension risk exposures. It is an aggregate of the risks for pension based on the combination of assets and liabilities associated average allocations for the 100 largest pension funds as measured through public information and 10-k filings. The index, which represents $1 trillion in AUM, will move up and down with the volatility of all asset classes. Hence, falling equity and bond volatility as well as changes in the discount rates will translate into a falling PSRX index.

Managed futures research is hard. This is especially the case in the quantitative area. There always are new models being tested by almost all managers, but finding a truly new model or process that adds value is truly difficult. Data mining is an issue.

The Fed and other central banks are not that important in the current thinking of investors. The focus is not on the policy musings of bankers but the real economic data. All that matters is whether growth has a strong chance to be above trend and whether global DM inflation has a chance of reaching and sustaining 2%. We are skeptics of both occurring.

The Tax Foundation map of state funding ratios for public pensions is very sobering. The amount of state under-funding is significant. These numbers are determined by the discounted expected liabilities relative to the assets held. To stay even with these ratios and assuming there is no surprise increase in liabilities, the states have to return the discount rate. These discount rates or expected returns seem unrealistically high.

Going into the month, there are good up trends in place with global equities and down trends in oil, precious metals, and selected commodities. What is interesting is the inconsistency across some markets sectors. The reflation risk-on trade is still apparent in the global equity indices, but we are not seeing strong evidence of bond sell-off or rally. Oil prices suggest both supply strength and demand weakness. Gold and precious metals are out of favor with long-only investors. The idea that we will have a dollar rally on Fed hikes seems misplaced and there is less risk-on demand for the US relative to the rest of the world.

No hedge fund strategy will make money all of the time. As the market and economic environment changes, the performance of different strategies will also change. Hedge fund factor exposures will be different based on the strategy employed by the manager. If you cannot predict the environment factor exposures, there is value with holding a diversified portfolio of hedge funds. April performance clearly shows the difference in strategy behavior.

The SocGen CTA index was essentially flat for the month which is not surprising given three major factors. One, we are in a global risk-on environment which generally is not attractive for trend-followers. It is not that there are no trends, but there were limited gains from diversification across asset classes relative to a risk-on portfolio. Two, there were few strong trends going into the beginning of the month. Given the usual time-frame for effective trend-following which is weeks not days, there has to be continuity of trends to have a good performance month. The strong gains in foreign markets may not have been given enough exposure to generate good portfolio returns. Three, the focus on financials especially fixed income and currencies by large managers was a drag on performance relative to equities and short commodities trends. Four, volatility is at extreme lows. We have looked at market volatility through the VIX index and current levels are above the 98th percentile for the lowest since 1990. Divergent strategies based on taking advantage of the spread in prices through time will be limited in their return potential in this type of environment.