San Diego to Pursue Managed Futures Strategies in Diversification Quest

The pension is now studying the impact of a 2% to 4% allocation to managed futures on the total fund.

The San Diego County Employees’ Retirement System (SDCERS) and its consultant, Aon, have decided to pursue a new managed futures strategy, concluding its investigation over how to best diversify its $8.3 billion portfolio.

During its past several meetings, the retirement system explored managed futures and alternative risk premia strategies for their mutual attributes inclusive of low correlations to traditional asset classes, downside protection, attractive risk/return profiles, and appealing terms relative to other liquid alternative investments.

After hosting a number of interviews, SDCERS and Aon decided to only pursue managed futures strategies, citing that alternative risk premia strategies may add unnecessary complexity and have limited track records with no history of performance during a major market downturn. Additionally, alternative risk premia strategies were predicted to expose the institutional investor to higher manager risk, since those managers interviewed had large dispersions regarding performance and returns.

As a result, the pension is now studying the impact of a 2% to 4% allocation to managed futures on the total fund.

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Aon provided SDCERS with a report on the potential implications and benefits of a managed futures strategy, highlighting its low long-term correlation and beta to global equities as a primary benefit, historically performing as a strong diversifier during stressful economic conditions. Such periods include the 2008 crash, the World Trade Center attacks, and Black Monday, where managed futures performed exceptionally well compared to other asset classes.

According to Aon, managed futures are expected to generate returns between 6-12% through their strategy of predominantly exploiting momentum in prices, implemented primarily through futures and forward contracts.

The consultant also warned that managed futures, due to their trend-following strategy, may suffer at market inflection points or in “choppy” markets, and typically have reduced return expectations in sideways markets.

SDCERS will now work cementing either a 2% or 4% allocation before bringing forth specific manager recommendations to carry out the new strategy. The pension was 71.2% funded as of June 30, 2017, according to its most recently issued comprehensive annual financial report.

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BlackRock Laying Off 3% of Staff Amid Market Concerns

The asset management titan plans to make ‘additional changes’ in the coming weeks.

BlackRock, the world’s largest asset manager, is cutting 500 staff members, citing market worries as the long bull run began settling down last year.

Considering that BlackRock employs more than 14,000 people, the cuts are about 3% of the firm’s team, but the reasoning behind it could forecast coming moves from other financial institutions.

“Market uncertainty is growing, investor preferences are evolving, and the ecosystem in which we operate is becoming increasingly complex,” according to a Thursday internal memo obtained by The Wall Street Journal. “The changes we are making now will help us continue to invest in our most important strategic growth opportunities for the future.”

The last time the company did something like that was in 2016, also a 3% cut. This time around, many institutions are getting rid of their money managers due to fees, and last year’s market slide didn’t do the asset management world any favors.

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In the memo, the company said it will be making some “additional changes to simplify and enhance our organization in the weeks ahead.”

In last year’s third quarter, BlackRock investors withdrew a net $3.1 billion, the first outflow in three years. The firm’s stock has fallen more than one-third since last January’s high.

The company has more than $6 trillion in assets under management. BlackRock could not be reached for comment.

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