Monday, June 20, 2016

HP investment model - an alternative to the endowment model - but global macro at heart

Gretchen Tai, the former CIO of the HP pension discussed her model for investment management as a alternative to mean variance optimization and the classic endowment model that many have followed. (See Institutional Investor article, "HP lays the foundation for a new investment model".)

The HP investment model described is very different from the endowment model that has been promulgated by Yale. In contrast to that model, the HP framework places more emphasis on a dynamic approach that changes with market conditions. They call this risk awareness approach.  It will also place more emphasis on staying liquid so as to be able to adjust allocations if there is a crisis. The HP approach will place more emphasis on diversification of risks and return sources through the use of more alternative risk premiums beyond equities. It will all try and protect gains related to its funded status.

When I step-back from reading about this approach two words come to mind - global macro. This sounds like a big global macro fund that will dynamically adjust exposures based on market conditions and risk premiums. Stay liquid in order to be nimble in the face of potential crises and don't follow a classic 60/40 allocation. Allow for different risks through active diversification. 
 In some sense, everyone can take a portion of their portfolio and allocate to global macro and in essence get a percentage allocation to the HP model. Now, the actual approach is much more complex than that but this would be the basic idea. Take active bets to generate positive convexity as an alternative to illiquid private equity investments or diversified stock holding.

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