GTAA Morphs into Hedge Fund Space
Nov 14th, 2006 | Filed under: Hedge Fund Industry TrendsBy: Rachel Alembakis, Global Pensions
Published: October 2006
The addition of active currency management to a portfolio is often referred to as Global Tactical Asset Allocation (GTAA). At the risk of oversimplifying the strategy, a GTAA manager over-weights countries she likes and under-weights those she does not. In essence, the manager runs a long/short overlay not too dissimilar to the equity overlays we have discussed here.
When these sets of over-weights and under-weights are isolated into separate portfolios and aggregated together in a pooled fund, the result is essentially a global macro hedge fund. This is a great example of how existing active management can be isolated, aggregated and delivered in a more efficient form: a hedge fund.
In fact, consultants now lop GTAA in with global macro managers. Says Global Pensions:
“‘GTAA products are often run very hedge fund-like,’ said Carl Hess,Watson Wyatt’s North American practice leader and global director for asset allocation.Leverage can clearly be seen in a large number of these strategies.
“From Mercer Investment Consulting’s perspective, GTAA is now ‘indistinguishable’ from global macro hedge fund strategies, Muysken (head fo global research at Mercer IC) said, noting that in Mercer’s manager research database, GTAA and global macro managers have been consolidated into one category.”
The drive toward efficiency seems to be fueling this trend:
“Administering one pooled GTAA fund, as compared to many segregated mandates, is far simpler, leaving managers free to innovate on the investment side, McClelland (head of INVESCO’s Sydney office) noted.
“‘There are a number of arguments for a pooled approach,’ he said. ‘The underlying sense is that as these vehicles get more complex, a fund manager has to ask if they’re in the investment management game or the administration game. You want to maximise the time spent on researching and managing the strategy, and not necessarily on administering many individual accounts. We are encouraging clients to buy collective vehicles. You administer once, and then have more time to focus on managing the strategy and adding alpha.’”
So welcome to the Portable Alpha bandwagon, GTAA!…
“…some consultants say GTAA has become analogous to hedge funds, and predict that pension funds will invest in GTAA as they would any other portable alpha strategy.”
Good GTAA Overview from Morgan Stanley
Academic Paper on GTAA from Duke’s Campbell Harvey
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[...] As you can see, this is really a half-step toward a pure alpha/beta approach. For example, the “Alpha” bucket actually contains a lot of beta simply because it includes active long-only managers. The portfolio construction process would therefore need to under-invest in “core” or risk having too much beta. It seems the “alternative” bucket can better be described as “alpha”. “Tactical” can be either high-alpha or low-alpha depending on the net market exposure. GTAA managers who have parceled off their active overlays into global macro-funds would be the first to say that trading beta can produce pure alpha as long as the portfolio remains market-neutral.   [...]