Читать книгу Alternative Investments - Black Keith H. - Страница 80

Among large endowments, the growth rate of allocations to alternative investments may be approaching the largest possible level. Other institutional investors continue to increase allocations to alternative investments in hopes of catching up with the top universities in terms of both returns and the size of the assets allocated to alternative investments. In addition to a large allocation to alternative investments, emulating the largest endowments also requires aggressive rebalancing, careful sourcing of top-performing managers, and embracing liquidity risk. This is easier said than done, however, as inevitable market crises will test the patience and liquidity structures of investors with large holdings in alternative investments.

Another reason to maintain liquidity in an endowment or a foundation portfolio is to facilitate rebalancing activity. Swensen (2009) believes strongly in keeping portfolio weights close to the long-term strategic weights, a practice that requires regular rebalancing. Without rebalancing, the asset allocation of the portfolio will drift, with the asset classes earning the highest returns rising in weight relative to the rest of the portfolio. Assuming that the highest-performing asset class is also more volatile and increasingly overvalued, the risk of the portfolio rises significantly when rebalancing activity is delayed. Market price action makes it relatively easy to rebalance publicly traded securities, as the investor is buying as prices fall and selling as prices rise. Investors who rebalance are providing liquidity to the market, and liquidity providers often get paid for providing that service to other investors. This is the time when value is created, as many times purchases made during a time of price weakness can create significant value. It can take courage, though, to buy an underweighted asset class when prices are falling and most other investors are selling. To the extent that bonds increase in value as a flight-to-quality asset when equities decline, investors may need to move quickly to rebalance before returns start to move in the opposite direction.

Rebalancing, however, can be regularly undertaken only in liquid asset classes. Within alternatives, hedge funds may have quarterly redemption windows and lockup periods of one to three years. Private equity and real estate funds must typically be held until assets are fully distributed, a process that can take 10 to 12 years. Funding capital calls to private equity and real estate funds can change the asset mix, as traditional investments are typically sold to fund the increasing allocation to the less liquid alternative investments. To the extent that alternative investments have net asset values that are smoothed or reported with a time lag, publicly traded investments will decline in allocation rapidly during times of crisis. It is important to understand the role of pricing in these less liquid asset classes, as the net asset value adjusts slowly to changes in public market valuation. Investors may react by rebalancing only within the liquid alternatives and traditional assets, while slowly changing allocations to less liquid alternative investments by modifying the size of future commitments.

There are a number of approaches to rebalancing, such as those discussed by Kochard and Rittereiser (2008). Some investors will rebalance on a calendar basis, for example, after discussions at a quarterly meeting of the investment committee. Other investors will tie the rebalancing activity to the actual asset allocation when compared to the long-term policy asset allocation. While some investors have exact targets for the domestic equity allocation, such as 30 %, others might have ranges of 25 % to 30 %. Those with an exact target may establish a rebalancing deviation, such as a decision to rebalance when the equity allocation has strayed 2 % from its target weight. Investors with asset allocation ranges may wait to rebalance until the allocation has moved outside the range. When range-based investors rebalance, they must also decide whether to rebalance to the closest edge of the range or to the center of the range.

For liquid investments, rebalancing can be accomplished through the use of securities or derivatives. Investors seeking to rebalance during late 2008 or early 2009 needed to sell fixed income and buy equity securities in order to restore the liquid portion of the portfolio back to the strategic asset allocation weights. While the crisis led to both declines in equity prices and increases in yields on risky fixed-income securities, the drawdown in the equity portfolio was much larger. As spreads on investment-grade and high-yield corporate bonds widened significantly, sovereign bond yields declined due to the flight-to-quality response. Even though investors desired to rebalance, many managers of fixed-income funds, especially in convertible bonds or mortgage-backed securities, had restricted liquidity by suspending redemptions or implementing gates. Experienced investors noticed a tremendous opportunity to rebalance using the derivatives markets. When the S&P 500 Index traded above 1,400 in May 2008, the 10-year Treasury yielded 3.8 %. At the market low in March 2009, Treasury notes had rallied to a yield of 2.8 %, while the S&P 500 traded below 700. There was quite a window for rebalancing, as the S&P 500 was valued at below 900 from the end of November 2008 to the end of April 2009. Investors who sold 10-year Treasury note futures and bought futures on the S&P 500 at any time during late 2008 or early 2009 had a tremendous profit from the rebalancing trade. This was because by the end of 2009, Treasury yields had returned to 3.8 % while the S&P 500 had moved above 1,100, producing a profit of at least 24 % on the equity trade alone. Investors who kept their fixed-income funds intact while hedging the change in Treasury yields multiplied their profits as yield spreads declined from record levels in the spring to more normal levels by year-end.

Those schooled in options theory may notice that rebalancing activity is simply a short strangle trade, where both out-of-the-money calls and puts are sold. If the investor is committed to reducing the equity allocation after prices have risen 10 %, it can make sense to sell index call options 10 % above the market. This brings discipline to the rebalancing process and allows the fund to earn income through the sale of options premium. This income can be either spent by the sponsor of the endowment or foundation fund or used to reduce the risk of the investment portfolio. Similarly, committing to buy equities after a 10 % decline could be implemented through the sale of equity index put options with a strike price 10 % below the current market level. The simultaneous sale of calls and puts at the same strike price is termed selling straddles, while selling out-of-the-money calls and puts at different strike prices is termed selling strangles. While this approach can earn significant options premium and bring discipline to the rebalancing process, it is not without risk. The greatest risk is when the market makes a move larger than 10 % in either direction. The sale of options guarantees that rebalancing will occur at the level of the strike price, while those without options hedges may be able to rebalance after the market has moved by 20 % to 30 %. Investors can reduce the risk of using options to rebalance by selling call spreads and put spreads rather than selling strangles. While the purchase of further out-of-the-money options reduces risk and opportunity costs, the net premium earned from the sale of spreads will be less than that earned for selling strangles. Of course, there can be significant fear or euphoria after such a move, and some managers may hesitate to rebalance due to the foibles understood by students of behavioral finance.

Some endowments may employ internal tactical asset allocation (TAA) models or external asset managers offering TAA strategies. As opposed to strategic asset allocation, which regularly rebalances back to the long-term target weights, tactical asset allocation intentionally deviates from target weights in an attempt to earn excess returns or reduce portfolio risk. TAA models take a shorter-term view on asset classes, overweighting undervalued assets and underweighting overvalued assets. While the risk and return estimates underlying the strategic asset allocation are typically calculated for a 10- to 20-year period, the risk and return estimates used by tactical asset allocation are typically much shorter, often between one quarter and one year. Tactical models are most useful when markets are far from equilibrium, such as when stocks are expensive at 40 times earnings or when high-yield bond spreads are cheap at 8 % over sovereign debt. TAA models can employ valuation data, fundamental and macroeconomic data, price momentum data, or any combination of the three.

A number of alternative investment styles employ TAA analysis. Managed futures funds focus on price momentum, while global macro funds more commonly analyze governmental actions to predict moves in fixed-income and currency markets. TAA funds may employ both methodologies but are different from managed futures and macro funds. First, managed futures and macro funds take both long and short positions and often employ leverage; TAA funds are typically long-only, unlevered funds. Second, TAA funds may reallocate assets across a small number of macro markets, whereas managed futures and global macro funds may have a much larger universe of potential investments.