In my last post I detailed the very fine performance by Gretchen Tai, the asset manager for the Hewlett Packard defined benefit fund. I was trying to work out how it was achieved.
Being ignorant in these matters I did not even know the defined benefit fund had to file detailed accounts at the Department of Labor on form 5500.
My readers are smarter than me. So they pointed me the right direction.
Now we can work out in much greater detail how the returns were made.
The pension fund is invested in a "Master Trust". Here is a statement of the assets and liabilities of the master trust:
Its pretty clear. There are $2.9 billion in US Government Securities, $3.2 billion in corporate bonds, $2.1 billion in common stock as well as a whole lot of other things ($0.3 billion in common collective trusts, $1.6 billion in limited partnerships and venture capital funds, $0.7 billion in registered investment companies, $0.6 billion in 103-12 entities and some derivative assets).
There is also some securities lending collateral which they are obliged to return.
The next page gives net income for the Master Trust by category.
We know now the government bonds appreciated by 157 million, the corporate bonds by 104 million and interest was earned of 167 million. That appears to be the bulk of the return on the $6125 million bond portfolio. That is about 7 percent - roughly the return I might have expected from a diversified bond portfolio provided they held some duration.
Much better returns are obtained from the limited partnerships and venture capital funds. They had a return of 263 million on 1383 million in starting capital. That is a very sweet 19 percent. Gretchen Tai chose funds well.
But the eye-popping number is the return of $543 million in swaps and other derivatives. This is after a more modest 152 million gain. This woman swaps cash flows amazingly well.
Breaking up the swaps return
The accounts are kind enough to give us a list of derivative exposures (at least in some aggregated form):
There is $2.8 billion up from $2.5 billion in total return swaps.
They are also kind enough to tell us the P&L for each of these types of derivatives (none of which are designated as hedges and hence all of which are marked to market).
Those total return swaps made $561 million - 22 percent return on the starting derivative asset. Its pure alpha too - the fund needs to pay out the return on the (similar sized) liability they swapped.
And so now we know at least of part of Gretchen Tai's secret. She is the wickedest, meanest and most effective trader of total return swaps I have ever seen. A good proportion of my readers would want to hire her immediately.
So here is an aspiration in life: work out what she does - learn to trade total return swaps like Gretchen Tai. (Or just hire her.)