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The Woodberry Museum (WM) invests in a number of alternative investments as part of its endowment. John Quest, WM's chief investment officer, oversees several direct investments as well as outside managers for the asset class. WM's investment committee is currently evaluating one of the outside managers, Duke Partners Asset Management (DPAM). WM's current allocation to alternative investments is presented in Exhibit 1. Quest states the justification for it: "I believe that the alternative investments we have provide good liquidity and strong portfolio diversification to the remainder of the portfolio, which consists of equities and fixed income." DPAM is the manager of a managed futures fund that seeks to achieve a positive absolute return. DPAM's chief investment officer, Randall Duke, CFA, is preparing a report for his first meeting with WM's investment committee. Knowing that WM's investment committee is less familiar with real assets than with equities and fixed income, he includes Exhibits 2 and 3. Exhibit 2 shows information on DPAM's portfolio positions, and Exhibit 3 provides information on selected futures contracts.  Duke calls Quest to ensure that his report addresses any questions the committee may have.Quest tells him, "There are two questions we would like you to address: Question 1: Could you explain why using managed futures is more beneficial to us than using an unlevered exchan commodity index fund? Question 2: Recently, there has been no clear trend in the commodity markets. It seems you could increase returns long-term options against your positions. Wouldn't that improve the Sharpe ratio?"Duke replies: "I will be prepared to explain why I believe neither the use of an index fund nor an option writing strategy will benefit the portfolio. In addition, we expect to be maintaining our short gold position for only another three months. Thereafter, we will seek an entry point to establish a long position in gold."Quest comments: "After exiting your gold futures position, I would suggest buying physical gold rather than futures." Duke answers: "Under certain conditions, we might want to follow your suggestion. I will address that in my comments to the committee." |
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