Q&A: Managed Futures Or Global Macro?

Aug 7 2008 | 7:48am ET

Managed futures funds have been gaining steam among institutional investors in recent years, albeit at a slower pace than hedge funds. Futures funds managed some $219.7 billion in the first quarter, according to BarclayHedge, compared to the $3.8 trillion managed by hedge funds
Despite their differences, investors often lump the two together as global macro strategies. FINalternatives recently spoke with Patrick Welton, CEO of $513 million futures shop Welton Investment Corp., about the maturing futures space and its increasing popularity among investors

FINalternatives: What’s the historical relationship between hedge funds and managed futures?

Welton: The U.S. had a regulatory distinction that existed from the Commodity Exchange Act from the 1970s, separating trading futures from securities trading, which in turn then separated it at broker-dealers. That left some legacy in terms of which clients they were marketed to, and some misperceptions that they were entirely different products.

If someone were to look at alternatives in general and then specifically at hedge funds, there are at least 15 to 20 categories that those funds are aggregated into. In general, global macro and managed futures still have separated nomenclatures, but in some of the more sophisticated shops they are now aggregating these two categories because they realize that each lies on the same spectrum of underlying return drivers.

Now that there is greater comfort in familiar hedge fund styles, like equity hedge and event-driven—in these classes alone, there are more than $1 trillion in assets under management—there's an entire wave of investors that are looking to diversify their portfolios so there are many hedge fund classes that are growing more rapidly. Managed futures and global macro are among those, but there are others, such as asset-backed lending and distressed securities.

FINalternatives: Are institutional investors now more knowledgeable and comfortable in their use of futures in their portfolios?

Welton: Although high-net-worth investors historically comprised macro and managed futures investors since the early 1990s, an increasing number of institutional allocators began to enter the space in early 2000.

Within the last five years, a small but growing cadre of institutional-class managed futures providers has emerged. A handful of managers like ourselves have endeavored to tailor the design of their products to these institutional investors. For example, we incorporate a number of refinements related to structure and transaction costs but the terms have to be updated every now and then. 

At this point, when institutions are looking for the best and most competitive returns, there's a search for that loose term "alpha," and if managed futures has the imprint and characteristics that help them, they'll use it. And they definitely lump it into the category of hedge funds.

FINalternatives: Do you have a lot of institutional clients?

Welton: We have not presented ourselves to many institutions, but we may do so in the future. Oftentimes, we're presenting ourselves to the consultants or the larger funds of funds. There is a large amount of pension fund capital that comes into managed futures via funds of funds and consultant-related products.

FINalternatives: Can you talk about your product’s strategy?

Welton: Our Global Directional Portfolio is representative of the entire global-macro and managed-futures space. We try to be highly diversified, so we trade approximately 100 markets globally in futures contracts on a dozen exchanges. Within the 100 markets, there are 15 to 30 in each of the four major asset classes of currencies, commodities, equity indices and interest rates.

FINalternatives: The portfolio is up about 17.4% through June. What are some of the drivers of your performance this year?

Welton: We've always been in all four of those asset classes and we plan to stay there, because we want to have the broader space of return drivers available to us. But they don't always contribute equally, and this year commodities and interest rates have been equally large contributors to our performance.

About every six months, we survey what markets are out there and the liquidity within those markets. We talk to the major Futures Commissions Merchants and currency dealers in the world to get their overall impression on how they're traded. Our markets will grow incrementally by twos and threes at a time.

FINalternatives: What are some things institutional investors still gripe about when it comes to allocating capital to the alternatives space?

Welton: One of the major investor complaints is that there is still a large dispersion in quality and performance characteristics inside most hedge fund spaces.  But that dispersion is even wider in managed futures and global macro in terms of the top to bottom quartile. Consequently, many yearn for only these best-of-class shops.

Do we bring out another product?  No, we make the product we have better because that's what institutional investors were demanding in the first place.

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