In November investors learned of some of the biggest macro blow-ups in years. Rokos, Alphadyne, Element, Odey and some of the largest macro hedge funds have suffered 15-50%+ losses YTD with many double-digit losses in June and October (see references for more). Contrast this to Auspice Diversified: in 15+ years, in which there’s been multiple corrections and crisis, we’ve never exceeded a 26% drawdown (and are up over 11% in 2021).
Auspice Diversified has had an average 285% gross notional exposure since inception and occasionally will approach 1000%. Some would consider these levels “high” – for example to be eligible as a liquid alternative fund (under 81-102) in Canada there is a maximum leverage of 300%. Like Auspice, the noted macro funds often have higher notional exposures, albeit macro funds are often concentrated in a few highly levered trades whereas Auspice and most CTAs are diversified across many small positions.
The use of notional as definition of risk, while useful from a starting point, is not comprehensive. Consider that the most common use of CTAs like Auspice is specifically for risk reduction. Institutional public pension plans have increasingly been abandoning traditional hedge fund portfolios and constructing “risk mitigating” or “crisis risk offset” portfolios. CTAs in these portfolios often take well above 1000% gross notional exposure and generally represent the largest sub strategy in these risk reducing portfolios.
For example CalSTRS, the largest educator-only pension fund in the world with $308.6 billion in AUM, has a target 10% allocation to “Risk Mitigating Strategies” of which trend-following CTAs have a target 45% allocation (see below).
Source: Auspice Capital. All info from https://www.calstrs.com/sites/main/files/file-attachments/r_-_rms_investment_policy.pdf
The $20bn Hawaii Employee Retirement System (“HIERS”) has a 25% total portfolio target allocation to Diversifying Strategies in which “Liquid Defensive” strategies represent 50% of the risk(5). Like CalSTRS, trend-following CTAs are a core part of this portfolio. As the table below demonstrates, CalSTRS and HIERS are among several sophisticated institutional investors embracing CTAs for risk reduction.
Source: Auspice Capital. See “Institutional Use of Commodities & CTAs” at auspicecapital.com for further information.
The use of notional leverage as a risk gauge should generally only apply when comparing strategies of one asset class. For example, an equity fund with 200% gross notional exposure will usually be twice as risky as an equivalent equity fund with 100% exposure, but a 200% bond fund could often have lower historical volatility and drawdown then a 100% equity fund.
Consider the below Auspice Diversified portfolio snapshot from December 2020. One position, the Euro-Schatz, represented 55% of our total notional exposure but only 4% of total Value-at-Risk (VaR). The Euro-Schatz (EBS) is a futures contract on short-term maturity German bonds – even in the event of a rate shock or other exogenous event a 264% EBS exposure historically is lower risk than a 4% exposure to crude oil or gasoline.
Beyond leverage, VaR, and volatility, correlation and concentration are paramount to risk management. The reason why CalSTRS and other sophisticated investors have a large overweight to CTAs, particularly versus macro, is the CTA trend-following historically has had zero to negative equity correlation, whereas macro tends to have a positive equity correlation. Further, as demonstrated in the Auspice December 2020 snapshot (above), CTAs tend to be highly diversified across markets and sectors whereas macro can become highly concentrated in a few themes.
For more about notional and leverage Auspice recently created a new comprehensive risk presentation. For a copy or for further questions please email info@auspicecapital.com.
REFERENCES
3. https://californianewstimes.com/element-capital-hit-with-1bn-loss-in-bond-market-shake-up/586352/
5. https://ers.ehawaii.gov/wp-content/uploads/2021/07/HIERS-IPS-June-2021.pdf
IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.
For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, or Auspice One Fund “AOF”, is only available to “Accredited Investors” as defined by CSA NI 45-106.