Monday, June 03, 2013

Valued Advice


To:         Bea Wethervane, Senior Consultant, Coxbridge Associates

From:     Hugh G. Shortphall, Florida University & College Teachers Pension Fund (FUCT)

Date:      31st May, 2013

Subject:  Hedge Fund Allocations


I've appreciated your valuable advice to our plan over the years. As you know, the path to changes in orthodox investment policy in a plan such as ours is often long and arduous, particularly when trustees and oversight committees are involved. Witness our struggle to add mortgage derivatives, or expand our equity allocations with a dedicated BRIC component which we finally received approval for, and implemented in 2007. Our campaign to add a GSCI Commodity Index component, as per your recommendation, was not easier, though with your help, we finally gained approval for and deployed it in mid-2008.  Your 2009 advice to implement a dedicated equity tail-risk program - one that we finally allocated to in Sep 2011 - was a big-step forward towards insuring our Board, Trustees (and plan members) could worry less about funding levels in the event of a market crash. 

Over the past few years, you've been tireless supporters of substantially increasing our hedge fund allocations, and, as you know, last year, we recently ramped up these allocations (taking funds from our long equity exposure).  I want to say, we trust your advice implicitly in this regard. However, we on the investment committee have been taking a lot of heat lately on this last decision - both at the tactical and the strategic levels. Not a day goes by without our Board and Trustees reading about overly-generous fee structures, poor manager and strategy performance, and asymmetrical division of the resulting aggregate investment return. As the chief internal supporter, I would be grateful if you could "do the rounds" with the Board and Trustees in order to reconfirm the thesis for this last decision in detail - something that would take the heat off me, and to the greatest extent possible, help you when Coxbridge's consulting contract comes up for renewal. In particular, they keep asking me "where are the scheme members' yachts (or Gulfstream IV's)", quoting figures that over the past decade, in aggregate, managers have pocketed $700 billion in gains whilst fund investors have gained a mere $12 billion net of fees. These concerns need to be addressed, and fears assuaged.

On a more positive note, I am pleased to say that as of the beginning of this year, we've finally completed the implementation of your advice to take replace more of our long-only equity with an allocation to several risk-parity managers. Indeed, as of January, levered bonds and reduced equity appear set to make a meaningful contribution to meeting the Plan's actuarial targets.   


Anonymous said...

Former consultant here, laughing through tears.

In defense of my former profession, it's pretty hard to get the institutional investors to do anything different unless the reminder of the reason for doing it is staring them right in the face (hence all the talk of tail risk management post-crisis, to which I publicly contributed). And then there's the institutional lag effect, to which you are alluding.

Case in point, we told people to short credit in '06 as a tail hedge. Barely anyone listened (because what do you mean junk spreads can't stay at 200 forever??). We went back in late 09 and early 10 to tell people to at least start thinking about putting on a hedge of some sort at some point down the road because this is not the last crisis they'll go through. We also mentioned that there's, um, a possibility of a tail event in something other than equities (*cough* Treasuries *cough*) but somehow that last part always gets lost.

We also pounded the table in early 09, telling people to BUY EVERYTHING BECAUSE OMG BANK DEBT AT 60c YOU CAN'T LOSE MONEY. No one did, because they had more important things to deal with (OMG MY COMPANY'S BANK DEBT AT 60c ARE WE GOING BANKRUPT?!!). So instead of helping people scoop things up at fire-sale prices, we had to do a lot of hand-holding. By the time the shell-shock finally wore off, it was mid-2011...

On a different note, you forgot to mention that people are now stampeding into long bonds in droves because of LDI. Talk about buying high...

Anonymous said...


lore927 said...

genius :-)

A Fund Manager said...

Dear Hugh and all at FUCT,

I'm sure you will realise that whilst some of advice has not worked out as well as we could all have hoped, our advice is meant at giving you LONG TERM outperformance.

Our decisions are based on hard numerical analysis and we stand by it. For example, we suggested the GSCU Commodity Index because it was had been in the top quartile of performance for 3 of the last for quarters and it has had a low correlation to your other investment strategies over 7 years (excluding the period of the financial crisis which is clearly a one in a hundred year event).

We therefore feel confident that, by following our advice, you should, over time, eventually get outperformance over a suitably designed benchmark, even net of our fees.


Bea Wethervane, Senior Consultant, Coxbridge Associates