Best of TTU – Systematic Global Macro…An Experts View

A while back I had a very memorable time talking with Anders Lindell, discussing many trading related topics.  There was one part in particular that I want to share where Anders shared his understanding on US institutions and how they deal with asset allocation and position sizing.  If you would like to find out then read on! If you would like to listen to the full conversation just go to top traders episode 23 and Episode 24.
US institutions Dealing with Asset Allocation, Position Sizing
Niels: Now before we jump into the first topic more specifically to IPM, I want to ask you... you mentioned the traditional 60/40 bond stock, or stock bond, depending on whether you were European or whether you were a US institution - they seem to have a little bit of a different asset allocation, as far as I remember.



The world has changed in the last 10, 20, 30 years of course, and I just wonder, from a really big picture point of view, how do you see them dealing with this asset allocation, not from what you do, but from what they do and how they may interact with firms like you. Are they becoming more open, so it's not just 48/52 that they changed to or whatever it might be, are they starting to take bolder decisions in their own asset allocation?

Anders:  There's a whole range of answers to that. I think, generally, the answer will be yes, on sort of a global basis.

"In Europe, finding a long term institution having a hedge fund allocation exceeding 3%, 4%, 5% would be unusual. "

I think if you look at US institutional investors; they probably come further than their European counterparts in allocating very significant parts of the risk budgets to folks like ourselves, and generally hedge funds. Whereas, in Europe, finding a long term institution having a hedge fund allocation exceeding 3%, 4%, 5% would be unusual. Finding the same in the US would be the norm, being north about even up to 10%, 15% that would be the norm.

But then you have, obviously, various examples. If you look at your own native country and the big pension fund there, ATP they instituted, I believe about 10 years ago, a radically different asset allocation structure from the traditional, where they basically, and you can correct me if I'm wrong here, but basically what they do is they sort of equal weight their risk budget across 10, 15 different asset classes ranging from infrastructure to traditional markets.

So people are doing a large number of different things, but I think the general observation holds true that North Americans, generally speaking, are much more into seeking alternative sources and allocating significant parts of the risk budget to those alternative sources of returns, than Europeans are. Obviously this also has something to do with the state, generally, of the pension systems.

If you look at US pensions, corporate and state, they are generally underfunded to a very large degree - 60%, 70% funding ratio, whereas most European countries that have funded pension systems, would have significantly higher funding ratios. Many of them actually 100% or better. So this obviously changes your long term strategic allocation.



Yes, you have to match liabilities, but if you are underfunded, and if you are running something at 70% funding ratio, than you better seek methods to make up for the shortfall pretty quickly.

Another major point that I want to mention is a time horizon or investment horizon. People may trade in or out, or create trends and prices may deviate, you know that's noise of the shorter time spans. We're trying to step back and avoid that by explicitly trading and holding positions a longer period of time

Niels:  A couple of things that come to mind when you say that. In one sense, it actually is a great injustice, not just to your strategy,