Study: Institutional Investors Allocate to CTAs

Agecroft Partners is seeing widespread demand from institutional investors for Commodity Trading Advisors (CTAs) -- a sign that asset owners have overcome their historical reluctance.

Institutional investors are increasingly flocking to commodity trading advisers (CTAs), according to Don Steinbrugge of Agecroft Partners.

The number of pension plans allocating to hedge funds has increased over the past decade, along with the percent of their average portfolio allocation. However, CTAs – which commonly advice investors on the use of future contracts — have only recently been accepted as a core hedge fund allocation among schemes to lower volatility, according to Agecroft. “Investment committees were shocked when they received their 2008 year end performance report which showed correlations of performance between their managers had risen significantly,” the company said in a release.

The California Public Employees’ Retirement System (CalPERS) along with the Fairfax Country Retirement System, City of Fort Worth Employees’ Retirement Fund, State of Wyoming Retirement System, San Diego County Employees Retirement Association, Texas Teachers Retirement System, New Jersey Public Employees’ Retirement System, and Eastman Kodak Co. have embraced this strategy, actively investing in CTA managers, an industry source told aiCIO.

One reason for the possible uptick in CTA adoption: Following the Bernie Madoff fraud and other scandals that pushed investors to enhance their due diligence processes across all types of asset classes and sub-classes. Also, according to Steinbrugge, after the fourth quarter of 2008, pension funds realized that their portfolios were not as diversified as they previously believed. As a result, they have placed higher importance on liquidity, transparency and risk management, making CTAs more popular, according to the firm.

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The rationale for institutional investors historically avoiding CTAs, according to Agecroft, was due to a lack of understanding of how systematic models worked. “CTAs have come a long way over the past two years in gaining credibility with institutional investors. These investors have been drawn to their historically uncorrelated return streams with long-only benchmarks, the institutional structure of the leading firms in the strategy, the high level of liquidity in the underlining investments, fund terms, ease of creating a separate account, and, most importantly, strong historical performance,” said Steinbrugge.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

By haggling with the fund companies they invest with, institutional investors can negotiate hefty percentage discounts on fund management fees, a study by bfinance shows.

(June 7, 2011) — Research by consultant firm bfinance has shown that hard bargaining has given institutional investors the power to negotiate double-digit percentage discounts on fund management fees.

The firm said savings of more than 26% were possible among institutional investors hiring managers, on average, based on the rates that managers were first quoted. According to the research, a typical institutional investor in the United Kingdom allocating £1 billion could also cut fees by about 5% by limiting the number of mandates it has.

The study is a reflection of the heightened pressure on managers since the financial crisis to pay closer attention to their fees in terms of level and structure. As investors suffered huge losses during the financial crisis, management and performance fees and alignment of interest between investors and fund managers have become a greater concern.

The average management fee levels quoted, before negotiation, in bfinance-aided searches over the past 12 months were the following: For actively managed equities across market caps, the fixed fees quoted went down from Latin America at 0.92%; to emerging markets (0.89%); Asia ex Japan (0.7%); global (0.6%); Eurozone/Europe (0.54%); and EAFE and US (each 0.52%). Furthermore, for active small and mid-cap equity funds, the management charges first quoted ranged from 0.85% for Europe/Eurozone to 0.68% for Japan.

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“The same investor who chooses to use several active fund managers for diversification purposes could achieve far greater cost reductions by placing investment managers in an open and transparent selection process that encourages negotiation,” bfinance said.

Olivier Cassin, managing director, head of research and development at bfinance, added: “Performance-related fee structures are by their nature interesting, as they align the interests of investors and managers, but investors, with the help of their consultants, must systematically seek to rebalance the structure offered by the fund manager in their favor.”

The study encompassed 50 mandates relating to typical investments in international institutional portfolios with findings based on almost 1,200 price quotes from 350 fund management companies.

A previous analysis over fees has claimed a lack of alignment over active management fees. A report out of London, released in February by consultant Lane Clark & Peacock (LCP), asserted that active fund managers are receiving more credit than deserved as markets rebound. Last year, UK fund managers charged their pension clients an additional $485.1 million, or an increase of 11%, in fees for returns that were largely fueled by strong markets as opposed to superior skills, according to the report.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742