It has been a strange environment for investing since the markets imploded in 2008. That was the year the credit crisis came to a head, tanking equity markets, and managed futures proved their worth as a diversified investment. Since then equities have embarked on one of the greatest bull moves in history despite the lack of a genuine sustained recovery, and alternatives have struggled. Not all investors took advantage, as many were overinvested in equities and lacked non-correlated investments going into the crash and were underinvested in equities at the trough.
Are investors repeating the same mistake? That could be the case. Futures talks to Salient Partners Chief Investment Officer Lee Partridge about portfolio construction and the state of alternative investments. Partridge founded Integrity Capital LLC, which spanned traditional and alternative investment strategies, and was deputy chief investment officer of the Teacher Retirement System of Texas that was at the forefront of using alternative products to diverisify pension investments. At Salient, which managed roughly $19 billion, Partridge spearheaded the development of Salient’s asset allocation funds, actually creating investment products as well as selecting managers to allocate to as part of an overall portofolio selection.
Futures Magazine: Lee, when we spoke a couple of years ago you were on the forefront of pushing for a greater allocation to alternatives in portfolios. Since then alternatives, managed futures in particular, have underperformed equities. Have you had some pushback?
Lee Partridge: The one thing that I would set the stage with is equities have had a great five-year run. This has been the most impressive bull market in quite some time, since maybe the 1960s. Alternatives, particularly managed futures strategies, are not there to protect you when equity markets are performing so exceptionally well; they’re there to provide diversification for periods when equities aren’t performing as well and you need something else in your portfolio. Investors inevitably have the lowest allocation to alternatives and diversifiers at the top of the equity market. It is a little counterintuitive but it is [the way] we are wired to think.
FM: Has it been hard to convince people to maintain an allocation to alternatives?
LP: Yeah. People have gotten a little disenchanted with alternatives generally and managed futures strategies in particular have come under fire for a couple of reasons. Definitely there has been some pushback.
FM: What do you attribute the poor performance in managed futures to? Is it all because of risk on/risk off or is there something else at play?
LP: That has exacerbated it. [Also], so many trend followers have tried to diversify the returns that are being generated in their portfolio so that [they] got away from pure long-term trend following and taken on short-term trend indicators and even doing some counter trend strategies. The reality is when I look at the markets and look at stock and commodities there have been some incredible trends that have been established over the last 36 months so these diversifying signals that a lot of managed futures guys have added to their portfolios has caused their overall Sharpe ratios to breakdown.