Thursday, July 20, 2017

HOOPP Warns of the Next Crisis?

At the end of June, The Healthcare of Ontario Pension Plan (HOOPP) put out an article, Senior Poverty: The Next Crisis?:
HOOPP is launching a series of articles to deepen the conversation around retirement security and to bring awareness around the benefits of defined benefit (DB) pension plans.

In the first article, we discuss how an increasing number of Canadians are heading into their senior years financially ill-equipped to adequately support themselves when their working lives end. A stark illustration of this has been set out in a slew of new statistics and studies that show poverty among seniors is on the rise once again after nearly two decades of decline.

Two key shifts have contributed to the rise of senior poverty in Canada:
  • Canadians are living longer than ever before
  • The number of seniors is growing at a faster rate than any other segment of the population, with those over 85 leading the way
In our first paper, we provide highlights from a growing body of statistics and research on senior poverty in Canada and explain why workplace savings plans must play a role in generating a healthy and stable income in retirement.
You should all take the time to read this report here. It is excellent and I applaud HOOPP for having the foresight for launching a series of articles to deepen the conversation around retirement security and to bring awareness around the benefits of defined benefit (DB) pension plans.

When it comes to communication, I give HOOPP an A++ and they deserve it. Not only are they the best pension plan in the world along with Ontario Teachers' and a handful of others, but they are taking the looming retirement crisis very seriously and by writing these articles, they are enhancing the policy discussion around retirement and rising senior poverty.

This report focuses on Canada, which arguably has the best defined-benefit plans in the world. The situation in other countries including the United States is far worse, all part of the $400 trillion pension time bomb.

I'm very conservative in my economic views but I fundamentally believe that a well-functioning democracy has three main pillars:
  1. Universal healthcare which provides access to great healthcare for every citizen, rich or poor
  2. Great public education for everyone, especially the poor who need it
  3. A solid retirement system that ensures hard-working people can retire in dignity and security no matter what happens in the bloody stock market
I've said this plenty of times on my blog, good pension policy is good economic policy over the long run.

Again, take the time to read HOOPP's short report here, it is superb. A few things that I will bring to your attention. First, CPP is not a pension plan (click on image):


Here, I agree, CPP is not the solution to Canada's retirement crisis, at least not yet. However, if it were up to me, I would significantly enhance CPP far more than what the federal and provincial governments did to make sure every Canadian can retire in dignity and security.

The truth is Canadians are poor savers, many are buying houses they can't afford and will regret it big time down the road, and they are financially illiterate. Even smart Canadians who save their money don't really know what to do with their money, and others are taking out huge mortgages to buy a nice house because "house prices never go down" (yeah, right).

There is a nice man is Vancouver, a retired securities lawyer who is quite astute and reads my blog religiously. Unlike others, he has significant savings and understands options strategies and markets.

He asked me for advice and what I trade. I showed him how to go on stockcharts.com to make daily and weekly charts of various stocks and how I get ideas of which stocks are worth looking at using information from what top funds are buying and selling and what are the top gainers in the market.

But I told him, I start out with my macro views to guide my trading and they haven't changed in a long time. I still fear global deflation lies straight ahead (the global retirement crisis and rising senior poverty will only exacerbate it).

And I didn't sugarcoat it. I told him I track and trade many biotech stocks, take huge risks and have endured 80%++ drawdown in my personal account, made it all back and more. I told him flat out, trading stocks is a full-time job and it's extremely stressful but if you want, follow my ideas on Stocktwits and roll the dice if you like any of them:

https://stocktwits.com/PensionPulse

In fact, here is my latest Stocktwits post on biotechs (click on image):


But I also told him if I was retired and had substantial savings, half my money would be in US long bonds (TLT) and the other half in dividend paying stocks like Bell (BCE.TO), Enbridge (ENB.TO) and Bank of Nova Scotia (BNS.TO), which is the only Canadian bank that actively manages its mortgage risk.

In other words, if you already have a nice retirement nest egg, it's not about capital expansion, it's about capital preservation and being able to sleep well at night.

Now, this individual is savvy about options and he wanted to know more about my friends at OpenMind Capital, so I put him in touch with them as they can explain their options strategies far better than I can.

Most retired Canadians are not in his position and don't have his knowledge of markets and options. We cannot expect people to manage their own money in these brutal markets where even macro gods are struggling.

These markets are brutal, I know, I trade them and often see big quantitative sharks raping clueless retail investors. I don't like using the word "rape" but that is what it is. I would love to take you into the real stock trading world where ruthless market makers and quants take out all the stops so they can load up on shares and make off like bandits.

It's brutal, trust me, and unless you've traded, you just don't know how brutal it really is.

And this leads me to my other point, we can't expect Joe and Jane Smith to trade these markets or even to retire by picking "safe" ETFs and dividend stocks. We need to provide them with a defined-benefit pension, something they can count on for the rest of their lives.

I firmly believe in large, well-governed public defined-benefit plans that pool investment and longevity risks, lower costs by managing the bulk of assets internally and invest all over the world across public and private markets and invest with the top hedge funds and private equity funds all over the world.

Period. This is my gold standard but as I also stated in my comment on the pension prescription, large public pensions need to adopt a shared-risk model:
The biggest problem with pensions these days are stakeholders with inflexible views. Unions that don't want to share the risk of their plan, governments that shirk their responsibility in topping out these public pensions and making the required contributions, pension funds with poor governance and unrealistic investment targets, and powerful private equity and hedge funds that refuse to cut their fees in order to contribute to solving this crisis.

From a social and moral view, I truly believe that a case can be made to a group of elite private equity and hedge fund managers that they need to cut their fees in half and be part of the pension solution. In return, public pensions can perhaps allocate more assets to them over a longer period, provided alignment of interests and performance are maintained.

I don't know, I've been thinking long and hard of a pension prescription which will go a long way into solving a looming crisis that is only going to get worse. There are no easy solutions but in my mind, we absolutely need to bolster defined-benefit plans and avoid defined-contribution plans, and make sure we get the governance and risk-sharing right. And to do this, everyone needs to be committed to the best interests of the plan, including unions, governments and alternative investment managers.
Interestingly, in its report, HOOPP recommends five best practices from the DB space that policymakers can look to for making progress in pension coverage right now (click on image):


Take the time to read the entire report here, it is brief and to the point and these recommendations can be used everywhere, not just in Canada.

Below, HOOPP's President & CEO Jim Keohane discusses Healthcare of Ontario Pension Plan’s overall pension plan performance and explains how the Plan’s funded status, which stands at 122%, acts as a cushion for the Fund.

If only all Canadians had access to this plan, there would be no looming retirement crisis.

Wednesday, July 19, 2017

bcIMC Gains 12.4% in Fiscal 2017

Canada News Wire reports, bcIMC Reports 12.4% Annual Return For Fiscal 2017:
The British Columbia Investment Management Corporation (bcIMC) today announced an annual combined pension return, net of costs, of 12.4 per cent for the fiscal year ended March 31, 2017, versus a combined market benchmark of 11.7 per cent. This generated $680 million in added value for bcIMC's pension plan clients.

Infrastructure, private equity, real estate, and renewable resources outperformed for the calendar (error: fiscal) year and delivered above-benchmark returns. Tactical decisions to underweight fixed income in favour of public equities provided value-added returns. A key contributor was the outperformance of global equities relative to their benchmark. In a low return environment for fixed income, the decision to underweight nominal bonds added value and was further enhanced by outperformance relative to the benchmark. Strong performance in illiquid asset investments also provided value-add.

"I am proud of the bcIMC team and the strategic investment decisions they made to generate $680 million in additional value, as well as deploying new capital into long-term investments. This is a significant contribution to securing our clients' financial futures," said Gordon J. Fyfe, bcIMC's Chief Executive Officer and Chief Investment Officer. "Although annual returns provide us with a short-term perspective, it is the longer term that matters. Over the twenty-year period, we have exceeded their actuarial return requirements and have added $7.7 billion in cumulative value add."

Fiscal 2017 Highlights
  • Committed $9.9 billion to illiquid assets — infrastructure, mortgages, private equity, and real estate
  • Established QuadReal Property Group, a real estate asset and property manager 100 per cent owned by bcIMC
  • Transitioned $2.8 billion of externally managed public equity funds to bcIMC
  • Raised $750 million in debt financing for our real estate program
  • Expanded the team by 74 and added expertise in asset management, data governance, derivatives, illiquid assets, portfolio management, quantitative analysis, and tax
"We are required to work in our clients' best financial interests, and it influences our strategies, asset selection, and operations," said Fyfe. "bcIMC's new investment model emphasizes a greater degree of active management over indexing strategies, and creating new and diversified sources of market return and active return to increase the probability of meeting our clients' actuarial rate of return."

bcIMC's operating costs were 24.2 cents per $100 of net assets under management; compared to 23.7 cents in fiscal 2016. Costs incurred on our behalf by third parties and netted against investment returns are not included in operating costs. Our strategy refocuses bcIMC to become an in-house asset manager that uses sophisticated investment strategies and tools. By increasing the percentage of assets managed by bcIMC's investment professionals, we will transition from a reliance on third parties to a more cost-effective model of managing illiquid assets.

In fiscal 2017, bcIMC increased our managed net assets to $135.5 billion, an increase of $13.6 billion from the previous year. bcIMC's asset mix as at March 31, 2017 was as follows: Public Equities (48.3 per cent or $65.5 billion); Fixed Income (19.2 per cent or $26.0 billion); Real Estate (13.5 per cent or $18.2 billion); Infrastructure (8.1 per cent or $11.0 billion); Private Equity (5.8 per cent or $7.8 billion); Mortgages (2.1 per cent or $2.9 billion); Other Strategies–All Weather (1.5 per cent or $2.1 billion); and Renewable Resources (1.5 per cent or $2.0 billion). bcIMC's 2016–2017 Annual Report is available on our website at www.bcimc.com.

About bcIMC

With $135.5 billion of managed assets, British Columbia Investment Management Corporation (bcIMC) is a leading provider of investment management services to British Columbia's public sector. We generate the investment returns that help our institutional clients build a financially secure future. With our global outlook, we seek investment opportunities that convert savings into productive capital that will meet our clients' risk/return requirements over time. We offer investment options across a range of asset classes: fixed income; mortgages; public and private equity; real estate; infrastructure; and renewable resources.
At last, we get bcIMC's results so we can close out the year in terms of reporting the performance of all of Canada's large public pensions.

You should note there is only one blogger in the world who properly covers the results of large Canadian pensions. Let's briefly recap the performance of Canada's large pensions:
And now we see bcIMC gained 12.4% in fiscal 2017 (fiscal year ends March 31st). While the results are in line with those of CPPIB and PSP, it's important to note that bcIMC is relatively underweight private market asset classes relative to the former two and its large peer group (it's also important to note that no two pensions are the same, so making comparisons is trickier than just looking at headline results).

But with the arrival of Gordon Fyfe three years ago, the focus has shifted to private markets in a meaningful way. In fiscal 2017, bcIMC committed $9.9 billion to illiquid assets — infrastructure, mortgages, private equity, and real estate. That is a huge shift into private markets.

In order to do this properly, Gordon hired Jim Pittman, formerly of PSP, to be the SVP of Private Equity at bcIMC. Lincoln Webb is the SVP of Infrastructure and Renewable Resources and Dean Atkins is the SVP Mortgage and Real Estate Investments. Together, these three indivduals are responsible for private market investments.

Now, I want you all to take the time to read bcIMC's Annual Report for 2016-2017 which is avaliable here. You can begin by reading the Chair's Message and then the Report from the CEO/ CIO. The entire Annual Report is well written and contains most of the pertinent information for my analysis below.

First, let me begin with the table below from page 3 of the Annual Report which shows a profile of assets under management as of the end of March (click on image):


When I look at this table above, I see the weighting in Private Equity (5.8%) is well below its peer group. Jim Pittman is going to be in charge of ramping up operations in this asset class and his team was very busy in fiscal 2017.

Second, the table below from page 15 of the Annual Report provides a summary of returns by asset class for bcIMC's combined clients (click on image):


As you can see by looking at one-year results, the bulk of the outperformance in fiscal 2017 came from Fixed Income, Mortgages, Global Public Equity, Private Equity and Infrastructure. Real Estate and Renewable Resources also outperformed in fiscal 2017. Lastly, the All Weather strategy (Bridgewater) also outperformed in fiscal 2017, earning 14.3%, well above its benchmark of 9.8%.

I will let you read the notes of each asset class in the Annual Report, but I note below the activities in Private Equity and Infrastructure which are is described on pages 20 and 21 of the Annual Report (click on images):



The results for fiscal 2017 are excellent and it's important to note all asset classes contributed to these results (public and private) but going forward, it's clear the focus will primarily be on private markets to deliver the added-value and attain and surpass the actuarial target rate of return over the long run.

Below, as I customarily do when I go over results of large Canadian pensions, I provide you with the summary compensation table of bcIMC's five senior officers (click on image):


As always, keep in mind that compensation is based on long-term results, something Gordon Fyfe rightly emphasized in his Report from the CEO/ CIO. Gordon also mentioned this in his message:
In 2016—2017 we saw the retirement of Paul Flanagan, who led our fixed income & foreign exchange department for the past 11 years. We wish him all the best in this new chapter of his life. Chris Beauchemin, who has been with bcIMC since 1989, stepped into the position as acting senior vice president, fixed income & foreign exchange. Jim Pittman joined and leads our private equity department and Lawrence Davis also joined to lead our finance department.
One final note on compensation at bcIMC. A friend of mine who worked at BC Hydro told me that public sector compensation in British Columbia is "abysmal". He also told me "Gordon is going to have a hard time convincing his board and the government apparatchiks that they need to improve comp at bcIMC'.

I told him not to underestimate Gordon and the truth is bcIMC needs to improve its compensation at all levels for all sorts of reasons, chief among them is they need to attract and retain qualified people to do all sorts of sophisticated strategies across public and private markets. You need to pay for skill and this is in the best interests of bcIMC's contributors and beneficiaries.

Lastly, I did reach out to Gordon to gain more insights on bcIMC but his assistant Maria told me he's away on business (the old Gordon would have called me right away no matter where he was).

I was also happy to hear that my old colleague from PSP, Mihail Garchev, landed on his feet and is now working at bcIMC doing very similar work that he was doing at PSP.

I hope that Gordon, Mihail and Jim (Pittman) are all doing well and congratulate all of bcIMC's employees for a great fiscal year. Keep up the great work.

One last critical point, just like AIMCo, bcIMC flies too low under the radar and needs to significantly improve its communication. The leaders at both these large public pensions are smart and articulate, there is simply no good reason as to why they shun the media and don't give interviews to Bloomberg and other media just like their counterparts out east regularly do.

Proper communication is pension governance 101. PSP's CEO, André Bourbonnais, was absolutely right when he said: "If you don't take control of your brand and communication, someone else will." I wholeheartedly agree and I'm glad PSP is more active on social media, more present in traditional media and more engaged with its community.

On that note, a lot of people in British Columbia are struggling as wildfires rage in that province, wreaking havoc on communities and displacing thousands from their home. Below, a recent report from the CBC's The National. The Globe and Mail posted an article on the extent of the devastation and how you can help here.

Tuesday, July 18, 2017

CalPERS Goes Canadian in Private Equity?

Robin Respaut of Reuters reports, CalPERS says considering making own private equity investments:
The California Public Employees' Retirement System (CalPERS) on Monday said it was considering making direct investments in private companies, a potential major shift in strategy that would be the first such action by a U.S. public pension fund.

The change, discussed at a meeting of CalPERS board in Monterey, would be closely watched by other U.S. public pensions as they look to improve returns on their investments, in part by cutting fees.

The $323 billion pension fund, the largest in the country and a trend setter, has been under increasing pressure to achieve returns closer to the fund's assumed rate of return of 7 percent by 2020.

In the fiscal year ended June 30, private equity investment returned 13.9 percent, the second best performer behind public equities, or stock portfolio. The asset class helped to boost the fund's total year-end returns to 11.2 percent, exceeding expectations for the first time since 2014.

Private equity has been CalPERS' best performing asset class in the past two decades and accounts for about $26 billion of its portfolio. But CalPERS mainly invests in private equity funds and has been criticized for accepting the high fees and limited disclosures typically associated with the asset class.

The shift in strategy, if adopted, is likely to require a considerable investment in staff and expertise in the years ahead to handle the strategic shift.

CalPERS Chief Investment Officer Ted Eliopoulos told Reuters he would recommend CalPERS "explore setting up a separate vehicle" for direct investments and expand the current co-investment program.

Eliopoulos suggested CalPERS focus on opportunities that do not compete with its current private equity investments, such as owning companies for longer than 10 years, and investing in technology and life science companies.

"CalPERS has a unique opportunity to be a leader in the co-investment space," Sandra Horbach, U.S. buyouts co-head at The Carlyle Group, told the board on Monday.

CalPERS' massive size would make it a formidable player and allow the fund to dictate some investment terms, Horbach said.

Most U.S.-based funds shy away from such investments, while Canadian pension funds are considered leaders in the strategy.

By its own account, CalPERS has developed somewhat of a negative image among private equity firms as being difficult to work with and slow to make decisions, John Cole, CalPERS investment director, told the board at Monday's meeting.

A number of funds "have told us that we have become too unpredictable to do business with, and many larger general partners are cutting back the amounts that they are willing to allocate to us in their new funds", Cole said.
So, CalPERS is going Canadian, or at least attempting to by exploring the creation of a separate vehicle for direct investments and co-investments with top private equity funds.

The key passage in the article above is this:
"The shift in strategy, if adopted, is likely to require a considerable investment in staff and expertise in the years ahead to handle the strategic shift"
Why? Because in order to attract and retain qualified individuals to do direct lending (private debt), purely direct investing and co-invest with top private equity funds, they need to compensate these individuals properly or else this venture will be a failure.

This is why CalPERS' CIO Ted Eliopoulos told Reuters he would recommend CalPERS "explore setting up a separate vehicle" for direct investments and expand the current co-investment program.

Unlike Canada's large pensions, CalPERS doesn't have the governance to pay people to come to its pension fund to engage in these direct investing activities and therefore needs to create a separate vehicle to pay them properly.

Canada's large public pensions have the right governance to pay people properly to bring these activities in-house but they too have seeded specialized platforms when they need the expertise of people they cannot pay internally.

But the difference is Canada's large public pensions are way ahead of the game, having developed their fund investments and co-investments and entering private debt in a huge way.

Go read a comment I posted last week on whether pension funds are displacing private equity, where I wrote this:
So, are pension funds displacing private equity funds? Yes and no. Where they can compete effectively, they will and this is most notable in Canada where large public pensions have the right governance which allows them to higher industry experts and pay them properly.

But in the buyout world, large private equity funds reign supreme, and there's not a pension in the world that will ever displace them from their bread and butter. It won't ever happen, ever, and the reason is simple, when there's a major deal on the table, the first phone calls bankers make is to Schwarzman et al., not the CEO of a major pension fund.

In other words, while Canada's large pensions can compete with private equity funds in private debt, ramping up their operations in the US and Europe and pretty soon Asia, they will never compete with private equity titans on major deals and still need them to generate returns in the traditional buyout space where they invest and co-invest with top private equity funds.

But there is no question that large Canadian pensions are increasingly muscling into private debt an they are delivering stellar results in this area which was once dominated by top PE funds. Just look at the resuts of CPPIB and PSP Investments in fiscal 2017 to underscore this point.

Is private debt foolproof and the pinnacle of all asset classes? Of course not. I worry about public an private debt as the US and global economy slow over the next year but if the principals at large Canadian pensions can still originate great deals, they will be able to weather the storm ahead.
I have no worries that the individuals doing private debt at PSP and CPPIB know what they're doing, I am a little more worried about how CalPERS is going to engage in direct lending, direct investments, and co-investments.

Can it be done? Of course, it can. Should it be done? You bet as long as they get the governance right. If not, it will be doomed from the get-go.

Below, I embedded all three parts of the CalPERS' Investment Committee (June 19, 2017). Listen carefully as CalPERS' CIO Ted Eliopoulos attacks critics of their private equity program, stating that CalPERS is way ahead of its peers when it comes to transparency of fee disclosure (Part 1).



Monday, July 17, 2017

OPTrust Diversifying its Returns?

Colin McClelland of Bloomberg reports, Pension plan OPTrust seeks illiquid assets to diversify returns:
In a world of lower returns, OPTrust Chief Executive Officer Hugh O’Reilly is moving into riskier investments as contributors to the retirement pot age.

“We can’t just match cash flows, we have to take risks,” O’Reilly, whose company oversees $19.2 billion of investments for Ontario government workers, said in an interview. “We don’t want to increase contributions or reduce future benefit accruals where the active members will bear the whole risk.”

OPTrust is starting a $300 million venture-capital portfolio and is considering derivatives linked to insurance risk, O’Reilly said. The firm has allocated 1.5 per cent to these riskier assets and 3 per cent in hedge funds, though the latter is under review, O’Reilly said without elaborating. The fund more than doubled assets in hedge funds in 2016 compared with the previous year, according to the 2016 annual report.

“We want to allocate relatively small amounts of capital into new and different investment areas,” O’Reilly said. OPTrust will then “see if they’re viable, see if they make sense, see if we can incubate them and bring them back and put them where they best belong on the investment team.”

Falling Returns

OPTrust, which manages pension assets for almost 90,000 former and current members of the Ontario Public Service Employees Union, generated a return on investment of 6 per cent for last year. That was down from 8 per cent in 2015 and was less than half the 2016 return of Canada Pension Plan Investment Board, the country’s largest pension plan.

“Investment returns are unpredictable and can result in a wide range on any one year basis,” O’Reilly said. “We know that our portfolio can deliver on our pension sustainability objectives over the long run.”

O’Reilly declined to say what OPTrust targets in returns, saying the company is focused more on the amount of risk exposure it can tolerate.

The new venture-capital fund, known as the Incubation Portfolio, will target late-stage startups that are mostly already profitable, O’Reilly said. Another large Canadian pension fund and a venture-capital firm, which he declined to name because the details are still being worked out, will help fund and guide some of the investments, he said.

‘It’s the Future’

“Venture capital is where the future is in terms of Canada, understanding risk and disruption,” O’Reilly said. “We’re going to get active in this area.”

The strategy tweak comes at a time when the number of workers that support the Toronto-based fund is falling. Between 2007 and 2016, its retirees rose 60 per cent to more than 36,000, while its active members fell 8.7 per cent to almost 44,000, according to the pension fund.

The pension will keep outside management for most of its equity trading because of attractive pricing and the ability to learn from industry experts, O’Reilly said.
Let me begin by stating something you should all note whenever you read anything on OPTrust or OMERS. Unlike HOOPP and OTPP, these pension plans do not have conditional inflation provisions when their plans suffer a deficit.

What this means is that when there is a deficit, active members of the plan bear all the risk because they cannot partially or fully remove inflation protection which impacts retired members.

This is the basis of what I call a shared risk model. I have discussed it in my comment on the pension prescription which you all need to read, and it allows plans like HOOPP and OTPP to restore their plan to a fully-funded status a lot quicker when they run into trouble.

Now, what about the article above? It certainly caught my attention for many reasons which is why I emailed OPTrust's president and CEO, Hugh O'Reilly, to see if the statements are accurate.

Hugh was on vacation last week but put me in touch with Darcy McNeil who got in touch with managers at OPTrust to answer three questions of mine:
  1. $300M in venture cap, isn't this a bit risky given how hard it is to make money in VC (albeit this is late stage which is less risky)? We established an Emerging Alternatives Investment Group with a mandate to investigate and incubate strategies in the illiquid asset space where we currently do not have exposure. This currently includes Insurance Linked Securities, Agriculture and Emerging Growth (or late stage venture). This is the incubation portfolio which totals $300million. It is not exclusively VC. Also, at $300M it constitutes a fairly small portion of our total portfolio.
  2. Derivatives linked to insurance products? Can you please explain. Insurance Linked Securities have attractive characteristics that could potentially help improve risk efficiency in the Total Fund portfolio. We are considering the full spectrum of ILS related strategies. It is a relatively new asset class and we are taking our time in fully understanding the underlying risk profile.
  3. Doubled your allocation to hedge funds last year? Please explain which strategies you favor. We don’t think about hedge funds as a standalone program but in the context of how they fit into our Total Fund portfolio. Hedge Funds are valuable to pension plans because they offer uncorrelated risk premia to provide diversification to traditional asset classes (e.g. equities, fixed income). As a result, the Total Fund portfolio becomes more balanced from a risk exposure standpoint. Hedge Fund strategies are risk efficient (e.g. attractive return per unit of risk employed) which is aligned with our overall MDI investment philosophy that focuses on managing risk. We think about Hedge Funds not as a standalone program but in the context of how they fit into our Total Fund portfolio. It is our intent to build this portfolio to about 10% of the Total Fund – over a protracted period of time.
I thank Hugh O'Reilly and Darcy McNeil for answering my three questions and clarifying this article. It's clear the Bloomberg reporter didn't get what the Incubation Portfolio is all about (maybe it wasn't communicated well or maybe he just didn't understand what it's all about).

Apart from that, let me publicly recommend four absolute return funds in Montreal that fit well into OPTrust's portfolio or the portfolio of other institutional investors:
  1. Crystalline Asset Management: Founded in 1998 by Marc Amirault who formerly worked at the Caisse, this is one of Canada's oldest hedge funds running a great arbitrage fund.
  2. OpenMind Capital: Founded by Karl Gauvin and Paul Turcotte (the latter is also formerly of the Caisse), this fund is performing exceptionally well using very smart option strategies. They don't charge hedge fund fees and offer a lot more than just great returns.
  3. Razorbill Advisors: Founded by Pierre-Philippe Ste-Marie, a veteran of the National Bank of Canada and someone who was a classmate of mine in Honours Economics courses at McGill, this fund offers beta+ and portable alpha products and offers great risk-adjusted alpha at low cost. The alpha over bond indexes is particularly exceptional. Denis Senecal, the fomer SVP Fixed Income at the Caisse recently joined the fund to help them with their business development.
  4. LionGuard Capital Management: A L/S fund founded by Andrey Omelchak, an experienced investment professional. Prior to founding LionGuard in April 2014, Andrey worked as a Portfolio Manager, Canadian Equities, at a Montreal-based buy-side investment management company. The fund uses fundamental bottom-up research & analysis and offers industry leading investment products focused on small and medium capitalization equities. Their performance since inception is exceptonal.
Now, there are larger, more well-known funds in Montreal like Jarislowsky Fraser, Letko, Brosseau and Associates, Fiera Capital and Hexavest which are all excellent asset managers but they are mostly long-only shops (except Fiera is expanding its absolute return strategies and Hexavest uses rigorous macro analysis to help build its portfolios).

I have nothing againt the big shops in Montreal and think highly of all of them. But we need to bring attention to some of the smaller shops, including Jean Turmel's Perseus Capital, a macro fund run by a legend of the National Bank who also happens to be the Chair of the Board at Ontario Teachers' Pension Plan. If anyone can weather the storm ahead, it's Jean Turmel.

Now that I am done plugging Montreal asset managers, let me conclude by congratulating OPTrust's President and CEO Hugh O’Reilly for having been elected to the Board of Directors of the Canadian Coalition for Good Governance (CCGG).

The Chair of CCGG's board is Julie Cays, the Chief Investment Officer at the Colleges of Applied Arts and Technology (CAAT) Pension Plan which is the jointly sponsored, defined benefit pension plan for 43,000 members from 38 employers in the postsecondary sector in Ontario. I think very highly of Julie and need to cover CAAT more closely.

OPTrust's President and CEO is also very active on LinkedIn where he posts great articles and pension related stories even from fellow plans, like HOOPP's recent post on the changing retirement landscape (read it here, a must read).

I covered how OPTrust is changing the conversation and how it's boosting its internal management. This is another great Canadian pension plan which is focused on risk-adjusted returns and remaining fully-funded, which is the ultimate measure of success at any pension plan.

Below, Ontario eased its rules for its pension funds as years of low interest rates, poor equity returns and a looming retiree glut pressure companies. The biggest of a complex series of proposals would reduce the so-called “solvency funding” requirement of certain plans to 85 percent from 100 percent. That means companies would be in compliance if they had enough to pay 85 cents on the dollar if they were wound-up immediately. Hugh O'Reilly, president and CEO, speaks with Lily Jamali on "Bloomberg Markets Canada."

And OPTrust unveilled a brand new trading floor recently, as part of its plan to bring the management of foreign-exchange, fixed-income and derivatives portfolios in-house. The pension fund's Capital Markets Group will oversee about half of the company's $18.4 billion of assets. CEO Hugh O'Reilly speaks with Lily Jamali on "Bloomberg Markets Canada."


Friday, July 14, 2017

Pension Funds Displacing Private Equity?

Lisa Abramowicz of Bloomberg reports, That's Not Private Equity, That's a Pension Fund:
Pension funds are in an increasingly tight spot. They face falling investment returns and a growing volume of bills as more employees near retirement.

So it's not surprising that they've been looking for innovative ways to juice returns. As a result, some of these funds, which were set up to cover health benefits and stipends to retired public service employees, are looking more like the private-equity funds in which they've invested historically.

Pension funds are increasingly opting to acquire smaller and midsize businesses themselves or invest directly in their private debt rather than employing an alternative-asset manager. For example, OMERS, the pension plan for municipal employees in Ontario, agreed this month to acquire a minority stake in National Veterinary Associates, which operates pet boarding and day-care centers. (Sticking with the theme of dogs and cats, the Ontario Teachers' Pension Plan bought PetVet Care Centers several years ago.)

By making the investments themselves, these pension funds avoid paying big fees to alternative-asset managers, ostensibly generating bigger returns for themselves. In some cases, these funds are deciding it's worth it to just hire their own people to find investments like private, middle-market loans, which on average pay more than a percentage-point more in yield than broadly syndicated ones.

"They build their own teams," sometimes hiring from specialty direct-lending firms or banks, Andrew Steuerman, head of middle-market lending and late-stage lending groups at Golub Capital, said in a Bloomberg Radio interview on Monday. Many pensions are doing this, he said, with those in Canada being particularly aggressive in buying and investing in smaller companies.

Earlier this year, for example, OMERS hired Matt Baird from advisory firm Alvarez & Marsal to be its first Europe-based operating partner, according to the Financial News. Canada's Public Sector Pension Investment Board hired banker David Witkin from Goldman Sachs to help with its European private debt investments.

This trend is notable and has some significant implications. Until now, private-equity funds have enjoyed tremendous popularity because of their stellar returns, and they haven't had to cut fees as much as hedge funds. This will most likely change as more pension funds struggle to achieve returns that seem increasingly improbable and seek new ways to bypass asset managers. (It's not just pension funds, by the way. Family offices are looking to directly source private debt and even buy companies themselves as well.)


Also, this flood of cash has resulted in lower yields and higher corporate valuations, reducing future returns on private company investments. In the first quarter of the year, private-debt funds had estimated returns of 2.36 percent, down from 2.46 percent in the same period last year and 3.97 percent in the period in 2012, according to the Cliffwater Direct Lending Index.


But as they say, extreme times often call for extreme measures. And for pension funds facing some unpleasant math, those measures increasingly include morphing into the firms they have long invested in. Chalk another one up for the do-it-yourself crowd. But that means private-equity fees could soon be on the chopping block.
Lisa Abramowicz wrote a great article. I highly suggest you follow her on Twitter here. In my opinion, she posts some of the best articles on finance and covers a wide range of topics that other financial journalists ignore.

So, are pension funds displacing private equity funds? Yes and no. Where they can compete effectively, they will and this is most notable in Canada where large public pensions have the right governance which allows them to higher industry experts and pay them properly.

But in the buyout world, large private equity funds reign supreme, and there's not a pension in the world that will ever displace them from their bread and butter. It won't ever happen, ever, and the reason is simple, when there's a major deal on the table, the first phone calls bankers make is to Schwarzman et al., not the CEO of a major pension fund.

In other words, while Canada's large pensions can compete with private equity funds in private debt, ramping up their operations in the US and Europe and pretty soon Asia, they will never compete with private equity titans on major deals and still need them to generate returns in the traditional buyout space where they invest and co-invest with top private equity funds.

But there is no question that large Canadian pensions are increasingly muscling into private debt an they are delivering stellar results in this area which was once dominated by top PE funds. Just look at the resuts of CPPIB and PSP Investments in fiscal 2017 to underscore this point.

Is private debt foolproof and the pinnacle of all asset classes? Of course not. I worry about public an private debt as the US and global economy slow over the next year but if the principals at large Canadian pensions can still originate great deals, they will be able to weather the storm ahead.

Below, I embedded once again a recent interview where André Bourbonnais, president and CEO of PSP Investments, joins Bloomberg TV Canada’s Lily Jamali to discuss opportunities in the private debt market and his plans to expand globally. This is a great interview.

Tuesday, July 11, 2017

Are Macro Gods in Big Trouble?

Saijel Kishan of Bloomberg reports, Markets No Longer Make Sense to Macro Managers:
Financial markets no longer make sense to macro managers like Mark Spindel.

After spending three decades focusing on things like economic trends, currency moves, politics and policy, Spindel has been confounded by markets shaped by low volatility, algorithms and more. He finally gave up and closed his nine-year-old hedge fund.

“I felt the intensity of following markets at a time of increasing political and economic confusion very hard,” said Spindel, founder of Potomac River Capital in Washington. “My entire career had centered on an understanding of monetary politics and I had trouble getting my head around it all. It was exhausting.”

These are troubled -- and troubling -- times for macro managers, those figurative heirs of famed investor George Soros who were once dubbed the masters of the universe. They’ve barely made money this year and once again, their returns pale next to those of cheaper index funds. Many investors are looking elsewhere.

Andrew Law at Caxton Associates has posted record losses. Alan Howard had the worst first-half in his hedge fund’s history. Even the old hands in the business such as Louis Bacon haven’t been spared from losing money. And Soros’s son, Robert, conceded last month that his family firm has made fewer macro bets amid “lackluster” opportunities.

It’s enough to make a macro man wonder: in an age of untested central bank measures and algorithms, can this classic hedge fund style pay off like it used to?

Opaque Markets

The old guard made their fortunes when markets were more opaque, less efficient and when they had access to market information privy only to a few. Price trends were easier to latch onto, leverage heavily used and competitors fewer. Today, funds face an onslaught of technology that’s disseminating information more quickly and widely, while some algorithms are able to spot -- and capture -- price anomalies almost instantly. And computer models can more cheaply follow market trends.

Macro managers posted their worst first-half since 2013, losing on average of 0.8 percent after a 1 percent decline in June, according to Hedge Fund Research Inc. data. The managers returned less than 1 percent annually over the past five years. The broader hedge fund industry returned 3.7 percent in the first half after barely making any money last month, and returned about 4.9 percent annualized over the past five years, the research firm said.

After winning a brief reprieve at the end of 2016 in the wake of President Donald Trump’s election win, macro managers’ fortunes reversed this year as the dollar and oil declined, stocks rallied and a political crisis erupted in Brazil. Volatility in equity and currency markets also fell to their lowest in years. In recent weeks, though, the dollar and Treasury yields have risen amid a hawkish tone from developed-nation central banks.

Investors have lost patience with the strategy. They pulled about $3.8 billion from discretionary macro managers in the first quarter, the fifth straight quarterly outflow, while adding $4.9 billion into computer-driven macro funds, HFR data show.

For years, managers have blamed central bank policies for their failure to deliver stand-out profits. Low interest rates globally made it harder to make money from differences among nations, they say. And as computers probabilistically forecast economic and market data, some managers say it’s a challenge to compete with algorithms that can be a driver of short-term price action, and create shorter and sharper investment cycles.

Disconnected Markets

Spindel, a former investment chief at a World Bank unit, is searching for answers to why macro didn’t work for him. Things started going awry for the 51-year-old just after Greece skirted Grexit two years ago. Spindel was wrong footed by China’s currency devaluations and Brexit -- at times trading from his couch at home during the night to keep abreast of political developments overseas.

Over a salad lunch during a visit to New York last month, Spindel recounted times when he got his economic forecasts right but market predictions wrong. He referred to charts that show a declining relationship between economic-data surprises and bond yields, and discussed how he was perplexed by new central bank measures.

“The dispassion felt harder in the Grexit-Brexit window,” Spindel said, whose fund generated an annualized 11 percent return from 2007 to July 2015. “Markets had become increasingly disconnected with economics and politics.”

In addition, increased regulation and fee pressure made it more expensive to run his $760 million firm, he said. After losing 12 percent through September last year, he returned money to clients.

Elephant in Room

“The elephant in the room is that macro should have done well in the past seven or so years because of all the political and economic events,” said Adam Duncan, a managing director at Cambridge Associates, a Boston-based firm that advises clients on investing. “Yet no one has made any money. The idea that the opportunity set hasn’t been there is just not true. Markets have been moving all over the place.”

For example, in the past two years the pound touched its lowest against the dollar in more than three decades, the Canadian dollar fell to its lowest since 2003 and gold dropped to a five-year low.

Managers need to increase risk and some should do more tactical trading, which is moving in and out of positions more frequently, Duncan said.

Some founders have had to rethink their business models, especially those who employ scores of managers that have been hamstrung by risk limits. They’ve cut their fees while some have stepped to the fore.

Brevan, Tudor

Howard, whose clients are fleeing his Brevan Howard Asset Management, delegated management of his firm in September to deputies so he can focus on markets, according to people who know him. And earlier this year, the no-nonsense, straight-talking billionaire turned to coach and U.S. chess champion Josh Waitzkin to help hone his trading skills, the people said. Waitzkin, who was the subject of the 1993 film “Searching for Bobby Fisher,” runs programs that involve practicing mindfulness and journaling, according to his website.

Brevan has lost 5.2 percent this year. A spokesman for the firm declined to comment.

Paul Tudor Jones, whose Tudor Investment Corp. has also seen clients defect, last year told investors that he will handle a greater chunk of their money and push his managers to take on more risk. His fund is down 2.5 percent this year through June. And Caxton, where Law already manages most of the firm’s money, told investors that it was shifting away from a strategy called momentum. The firm has slumped 10.4 percent through June.

While managers like Leland Lim in Hong Kong closed their macro funds this year, others including Law and Jones have anticipated the day when markets will make sense once again and they’ll make a comeback. Bacon, who runs Moore Capital Management, last year said he’s “exceedingly upbeat” for the first time in years about the “game-changing” trading opportunities following Trump’s election win. His fund fell 2 percent this year through June 22.

Representatives for the firms declined to comment while a spokeswoman at Caxton didn’t return messages seeking comment.

Despite the current malaise, there are some bright spots. A younger cohort of managers such as Jeff Talpins and Chris Rokos, who heavily rely on options for their trading, have garnered billions in new investments this year even as they haven’t made money, while macro funds that focus on emerging markets such as Glen Point Capital are outperforming.

Back in Washington, Spindel is upbeat. He’s managing his own money while putting the finishing touches to a book he’s co-written about the Federal Reserve that’s due to be published later this year. Spindel regularly rows on Washington’s Potomac River in a single scull rather than his former eight-man boat. One day he may return to managing other people’s money, he said.

“I would love to be back in an eight again.”

Below is a sampling of performance by macro funds, compiled by Bloomberg (click on image):

 Source: Investors, Bloomberg News
*through June 30
**through June 22
***through May 31
^Since fund’s start in March
It's been a brutal year for large macro funds, especially Brevan Howard. According to an investor letter seen by Bloomberg News, its main hedge fund suffered its fourth straight monthly loss in June, slumping 1.5 percent, and its assets are shrinking fast:


Howard, 53, is fighting to reverse client withdrawals. The Brevan Howard Master Fund managed $8.2 billion at the end of May, down from almost $28 billion in 2013, investor letters show. The main hedge fund returned 3 percent in 2016, its first annual gain in three years, according to an investor letter. The fund lost 0.8 percent in 2014 and almost 2 percent in 2015.

Macro funds rose just 1.2 percent on an asset-weighted basis in the first five months of the year, the least among the main strategies tracked by Hedge Fund Research Inc. Equity and "creative financing" strategies, such as direct lending, are among the most attractive this year, said Darren Wolf, head of hedge funds for the Americas at Aberdeen Asset Management. The money manager is still positive on macro hedge funds because it expects "more volatility around the corner," Wolf said.
Headcount at Brevan Howard has been heading down this year, as Alan Howard’s hedge fund deals with fund outflows and ongoing poor performance. Still, Howard bit the bullet recently and hired a top quant, Duncan Larraz, who was latterly head of quant analytics at asset management firm Tages Capital. He joined Brevan Howard as a strategist in June.

Moreover, Howard has been busy seeding managers like Giles Coppel, a top trader in Brevan Howard's New York office, who will receive $200 million from the firm to start his own macro fund:
Coppel has headed trading at Brevan's New York office since 2012, according to his Bloomberg profile. He previously worked at Tudor Investment Corp. and Lehman Brothers, according to the profile.

Coppel couldn't immediately be reached for comment. The people familiar with the launch asked not to be named because the information is private.

Brevan was once one of world's largest hedge fund firms. It has been struggling over the past few years, with assets tumbling to about $12.6 billion at the end of May, a person familiar with the situation said. That's a big drop from its peak of around $40 billion in 2013.

Coppel's launch would follow others from Brevan alumni.

Earlier this year, former Brevan partner Ben Melkman launched Light Sky Macro, one of the largest launches of the year.
It should also be noted that in ealy 2015, Brevan Howard made peace with its former star trader Chris Rokos, and agreed to help him set up his own business, ending a legal battle that had threatened to spill over into a high-profile court case.

You'll recall I discussed Chris Rokos in my comment on hedge fund quants taking over the world and in a comment last year, One Up on Soros, where I discussed him and Scott Bessent, Soros's protege who went on to start his own macro fund, Key Square Group, with $2 billion seed capital from Soros.

I haven't heard much aabout Key Square but read that Bessent bought a co-op at the storied 720 Park Avenue for $19.3 million and gave $1 million to Trump's inauguration committee (Soros was probably not too happy about that). So I guess he's doing alright but who knows, it's a brutal environment for macro funds so far this year.

Rokos Capital Management is down 4.1% through the end of May (was down 5+% at the end of Q1) but I think very highly of Chris Rokos and wouldn't worry too much about the bad start to the year. If anyone can make back losses quickly, it's this guy, he has a license to print money when many others typically struggle.

Still, I talk to my buddy in Toronto, the one-man currency hedge fund machine, and he tells me he's beating his peer group but it's a brutal market for currency hedge funds (unless they're selling vol) and most of them cannot make money because currency markets are trendless, or the ranges are too tight, or they move in opposite direction of the fundamentals. He added: "It must be hell working at these big hedge funds, the bigger you are the harder it is to make money".

My buddy is right, for big macro funds, size is not your friend in this market, which is why you see guys like George Soros and Alan Howard seeding their top talent. They know it's better to seed talent and let them try to earn money on their own, hopefully reaping big gains by owning a piece of the management company.

But it's not just macro funds that aren't doing well this year. Last week, Dani Burger of Bloomberg reported, Cross-Asset Quants Are Facing Their Worst Losses in a Decade:
Hawkish signals from central bankers have punished stocks and bonds alike in the past week.

Also punished: investors who make a living operating in several asset classes at once. They’ve been stung by the concerted selloff that lifted 10-year Treasury yields by 25 basis points and sent tech stocks to the biggest losses in 16 months. Among the hardest-hit were systematic funds who -- either to diversify or maximize gains -- dip their toes in a hodgepodge of different markets all at the same time.

Losses stand out in two of the best-known quant strategies, trend-following traders known as commodity trading advisers, and risk parity funds. CTAs dropped 5.1 percent over the past two weeks, their worst stretch since 2007, according to a Societe General SA database of the 20 largest managers. The Salient Risk Parity Index dropped 1.8 percent, the most in four months.

To a category of critics, it’s an environment where the potential for snowballing losses becomes greater, as the overseers of such funds take steps to reduce risk. So many face losses at once, the theory goes, that a chain reaction of selling ensues with the potential to whack markets further (clickon image).


So far, there’s no clear indication that’s happening. Selling in U.S. equities has been confined mostly to tech shares, with financial stocks rising toward 10-year highs. Bonds yields have spiked, but remain below levels seen in May.

Any systematic selling was probably drowned out by discretionary managers, according to Roberto Croce, director of quantitative research at Salient Partners LP.

“I don’t think we can say that the moves in the market are due to them,” Croce said. “Some portion of the investing base freaks out and runs for the hills, but these types of portfolios tend to snap back quickly if you don’t take any risk off. It’s much more likely to be discretionary investors that are fleeing whatever they’re holding without a plan.”
SSS

It’s far from clear risk-parity and CTA funds react to the same set of inputs. While both invest in multiple asset classes and employ leverage, risk parity tends to be a slower and more passive strategy, aiming to engineer a smoother ride by giving smaller weightings to higher-volatility assets. CTAs, a type of managed futures strategy, follows short-term trends and tends to be more volatile and less correlated to the market.

Risk parity would only unload positions quickly if managers kicked in some type of stop loss, which only a few do, according to Croce.

That may be true for the biggest players, but doesn’t account for the actions of a less illustrious category of risk parity funds, many of which have started to unwind, according Brean Capital LLC’s Peter Tchir.

“I don’t think this move has caused much of an unwind from true risk parity funds, but much more from the homebrew or risk parity lite crowd -- making the real fun just beginning,” Tchir wrote in a note Thursday. “Risk parity selling should kick in when expected volatility of the strategy exceeds target volatility of the strategy.”

As employed like Bridgewater Associates LP’s All Weather Fund, risk parity holds consistent levels of exposures. When it rebalances, the fund buys assets that have fallen and sells ones which have gained -- hardly a recipe for disaster. AQR Capital Management LLC does use a risk management strategy to gradually reduce exposure when returns are very poor, but that hasn’t kicked in all year, according John Huss, a portfolio manager on the risk parity team.

“We’re not trying to chase one day or one week moves,” Huss said. “When there are larger shifts in exposure, like the way we were positioned in 2008 versus 2012 with really noticeable changes in size, they tend to happen more slowly over time.”

CTAs may be a bigger threat. They’re large -- Barclays PLC estimates them to be about 7 percent of hedge fund industry assets -- and react quickly. Take $1.4 billion Quest Partners LLC, which runs mostly managed futures funds. Before last week the firm was mostly long Treasuries, and has already flipped to a short position, according to Nigol Koulajian, co-founder and chief investment officer (click on image).


Last week’s pain wasn’t as clear cut as a selloff in fixed income for some trend-followers. The managed futures fund at Salient, for example, suffered from a short position in agricultural commodities after wheat futures rallied to four-year highs.

“Momentum trading can create systemic risks. CTAs are a good example, they’ll ride the trend up and ride the trend down,” said Maneesh Shanbhag, who co-founded $500 million Greenline Partners LLC after five years at Bridgewater. “Connecting that to risk parity, the more basic idea will not cause instability in markets. But a levered risk parity strategy is at risk of all asset classes falling.

On the surface, it’s strange that both strategies suffered over the past week since they’re supposed to behave differently. A classic risk parity strategy is always long fixed income, equities and inflation risk assets. But as momentum threw its weight behind stocks and bonds, many CTAs took a similar long position.

It gets worse zeroing in on CTAs: about half of the assets are controlled by 10 managers, who are about 98 percent correlated, meaning same-way bets will indeed affect the market, according to Quest’s Koulajian.

“CTAs who have adapted to this market environment are trading more and more long-term, and their position sizing has grown,” Koulajian said. “Many people are using exactly the same strategy, and as there’s a reversal in trends, they’re impacting the market significantly.”
I used to allocate to large global macro funds and large CTA funds all over the world. Macro funds use fundamental analysis to enter into their trades while CTAs use quant strategies based on prices. Macros tend to be early to a developing trend and tend to leave earlier too whereas CTAs come in later but ride the trend longer.

Together, macro and CTA funds account for a huge portion of hedge fund assets, with L/S Equity being the most popular strategy.

As far as risk parity strategies, I think there is a bunch of nonsense being disseminated out there, including from well-known macro manager Paul Tudor Jones who back in April warned us to be very afraid of these markets, blaming risk parity strategies for the coming downfall of markets.

I'm more worried about the ongoing ETF bubble which keeps expanding to the point where even John Bogle recently came out to warn index investors.

Fret not my dear macro gods, there is good news ahead. As I explained on Friday when I dismissed Ray Dalio's notion that we are witnessing the end of central banks' era, the Fed is making a mistake, raising rates at a time when the US economy is clearly slowing.

I believe the Fed wants to raise rates to have ammunition to cut rates when the next crisis hits us in the not too distant future but as central banks turn hawkish, I worry that they will only exacerbate global deflation.

Smart global macros know exactly what I'm talking about and let me repeat my macro positions:
[..] here are my global currency positions:
  1. Long the US dollar. Buy this weakness. The weakness in the US dollar is only temporary. As the US economy slows and everyone is talking about how great Europe is doing, pounce on the opportunity to load up on the greenback. Europe and Japan will also enter a significant slowdown over the near term and their currencies will bear the brunt of this slowdown.
  2. Short the CAD, Aussie, Kiwi and commodity-related currencies, including many emerging market currencies. 
I see global economic weakness ahead which is why I'm short oil and other commodities. People are delusional, the US economy isn't as strong as they think. Jim Chanos gets it but to my surprise, so many  others are completely out to lunch.

Even Jeffrey Gundlach is disappointing me, stating the bond wipeout is just beginning. Really Mr. Gundlach? My advice to institutional investors is the same as at the start of the year when some were warning it's the beginning of the end for bonds, namely, keep loading up on US long bonds (TLT) on any weakness. When the next crisis hits in the near future, you will thank me for saving your portfolio from being obliterated.

In short, I remain long US long bonds (TLT), the US dollar (UUP) and select US equity sectors like biotech (XBI) and technology (XLK) and I'm underweight/ short energy (XLE), materials (XME), industrials (XLI), financials (XLF) and emerging markets (EEM).
One final note to my institutional readers, take the time to carefully go over a document Francois Trahan and Michael Kantrowitz of Cornerstone Macro put out this week, A Review Of H1 2017 ... And What Lies Ahead (July 10, 2017). If you are not a subscriber to Cornerstone's research, make sure you become one, it's well worth it.

In short, the second half of the year will be a lot more difficult than the first half, so get ready for some rock n' roll and be prepared for negative economic surprises. This should help many macro funds that are struggling this year.

Below, Peggy Collins of Bloomberg News discusses why macro managers are having a rough year. Computers, low volatility in currencies, and central banks are the reasons often used as why macro managers are failing to deliver, but I can't stand flimsy excuses for underperformance, especially from managers that have more money than they know what to with. If you can't deliver, do what Mark Spindel did, return the money to your clients who will find somewhere else to place it.

I also embedded another clip where Mark Yusko, CEO and CIO of Morgan Creek Capital Management, makes a prediction that a bubble in US equities will burst and crash the stock market later this year. I worry that he might be right but his timing might be off (it could happen next year).

Please note I am publishing less in the summer in order to enjoy the nice weather and relax a bit. My last bit of advice to macro gods: Short the stupidity of hawkish central banks and send me a donation once in a while, thank you!!!