Endowments and foundations are starting to take more notice of commodity trading advisors. A recent study by Barclays Capital’s prime brokerage group found that 35% of endowments and foundations it queried invested in CTAs or managed futures, and 19% of respondents indicated they would increase the allocation this year. "CTAs have been an increasing area of interest, especially since 2008, when they were up nicely when everything else was falling apart. Plus, they are comparatively liquid," said Mike Hennessy, managing director at Morgan Creek Capital Management.
Among those currently scouting the market is Texas Christian University. TCU, which is keen on adding a discretionary trading CTA and a systematic firm, is planning to invest $10-20 million per manager. TCU is not alone in viewing the asset class as a better alternative to fixed income at a time when yields are painfully low. The Horned Frogs are interested in the asset class because are uncorrelated to most asset classes and have bond-like volatility, said CIO Jim Hille. "We see them as a fixed income proxy," explained Hille.
Also on the hunt is Norwegian church endowment Opplysningsvesenets Fond (OVF). The church is planning to allocate NOK160 million ($26.6 million) to managed futures and global macro hedge funds.
"Interest is not surprising given that overall returns for risk assets are very weak, but endowments and foundations still need return from some source, and fixed income is not a viableoption," said Ron Klotter, head of Midwest consulting for R.V. Kuhns & Associates.
Another appeal of the strategies is their inflation-hedging properties. "Just as a general impression…in this environment of currency risk and volatility corresponding inflation/deflation concerns, managed futures have the right tools to manage in this environment," said Tom Heck, cio at Ball State University Foundation. "That is an area we have invested in the past, and I have had some conversations recently," he added.
WINDOW SHOPPERS?
Although there is no shortage of CTA rhetoric in the endowment and foundation space, others see a lack of actual investments. "I understand the curiosity by E&Fs in the space, given the potential for inflation and rising interest rates globally and the contango in many futures curves, but am not aware of much actual activity," said David Center, a consultant at Cardinal Investment Advisors. "The trading and technical nature of many CTA strategies often makes them difficult for committees to get comfortable with," Center added.
One investment official at a large hospital put his disdain for CTAs quite bluntly: "I like fundamental strats because there is a story to tell and portfolio positions can be explained in a manner I can get my arms around. I like to allocate money to investors, not necessarily to traders or quantitative formulas."
For those endowments and foundations that do invest in the asset class, the key is diversification. "We are active, believing that you need four or five different types of CTAs aggregating a certain percentage…to have a good program," said Hennessy. "We often see clients more comfortable with CTAs as part of a broader real asset/inflation hedge portfolio," added Klotter.