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ôReturns from our fixed-income managers has been disappointing,ö says Jacob Tsang, treasurer. ôFund managers canÆt even beat the Lehman Aggregate Index.ö Failing to do so against a backdrop of tough conditions for bonds û with tight spreads and flat yield curves, despite a recent widening in the credit crunch û has left the Jockey Club with annualised returns of 4-5%.
Given the nature of these core mandates, the Jockey Club is not keen to boost returns by overweighting niche asset classes like high yield, or to employ leverage. These defeat the purpose of its strategic asset allocation.
Instead it has decided to replicate the index via a swap, which costs a small spread over Libor, and use the rest of its portfolio money to invest in a diversified fund of hedge funds, which should return 400-500 basis points over Libor. Taking out the swap costs, this leaves the Jockey Club with a total return of 400-500 basis points over the Lehman Aggregate, net of fees.
ôThe writingÆs on the wall for traditional bond fund managers,ö Tsang says.
The Jockey Club has begun this strategy with a $200 million mandate to BlackRock Alternative Advisors, which is actually the old Quellos Group, a Seattle-based fund of funds specialist acquired by BlackRock in October 2007 and re-branded.
This made it easier for the Club to initiate the alpha-transfer program, as it was switching assets within the same service provider. It also made it pleasant for BlackRock, which lost a low-margin bond mandate in exchange for a higher-fee alternative mandate.
But it also implies that BlackRockÆs traditional bond management has underperformed its benchmark û and that all bond houses must sharpen their performance. ôGive me the alpha you promised me,ö Tsang warns, noting that two of the Club's three bond fund managers are underwater this year.
The Jockey Club also chose BlackRock Alternative Advisors because it has been an investor in the Quellos multi-strategy funds of funds since 2001. In the past five years, this investment has consistently returned 580 bps over Libor net fees. Tsang recognises this is not a guarantee for the future, but reckons that even at a 20% discount, the track record would return around 300bps over û still a better result than traditional bonds. Moreover, it comes at less volatility and lower correlations.
Although the Jockey Club would like to try new techniques, Tsang doubts he would include real estate or private equity as alpha sources; theyÆre too illiquid and long-term. He declined to quantify the size of the groupÆs bond portfolio. AsianInvestor magazine's annual ranking of the region's top 200 institutional investors estimated the Jockey ClubÆs total assets under management at $5.8 billion as of end-2006, and with market appreciation it is believed to be over $7 billion now.
BAA officials acknowledge this doesnÆt spell the end for bond fund managers, noting the Jockey Club is an endowment with more scope than other institutional investors, and is also several years ahead of its peers in Asia. But they hope the acceptance of portable-alpha strategies among many European institutions will be replicated in Asia. They would not comment on the performance of BlackRockÆs bond team.
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