To Hedge or Not To Hedge?

We are getting mixed signals from the industry this week. First, on Monday P&I reported that CalPERS decided to discontinue their equity hedging overlay program which caused the plan to lose almost $1B in a year. The message here is that hedging proved to be a tricky business even for CalPERS.

Next day, Bloomberg reported that Putnam basically decided to add an overlay-type product to their target-date funds to hedge out potential risks and “will invest from 10 percent to about 50 percent of its target-date retirement accounts through its new absolute-return funds”

The new absolute return fund series launched by Putnam in Jan this year are supposed to hedge out risks, similar to what CalPERS overlay was supposed to do. And although these funds invest in fixed income securities and derivatives, the idea is the same.

“Jon Goldstein, a spokesman for Putnam, said the firm’s managers can use assets such as commodities and options to hedge their bets.
“They’ve got the freedom to go anywhere, Goldstein said in an interview.”

We are planning to post some analyses of these funds here on the blog shortly. Since the data quality is crucial for returns-based analysis, we first looked at NAVs of one of these funds, Putnam Absolute Return 100 A (PARTX), on Yahoo! Finance. Interestingly, we found that it had a large number of cases when NAVs remained the same for days and even weeks. This seems unusual given that the fund has 30% of assets invested in corporate bonds, CMBS, Govt bonds, High Yield bonds, etc. The chart below is showing daily fund NAVs from Yahoo!. Periods of constant NAVs could be identified by plateaus.