TheNew York City Police Pension Fund and the New York City FirePension Fund combined oversee about $50 billion, and in truth theyare no strangers to quantitative funds or even to trend-followers.(Photo: Shutterstock)

(Bloomberg) –Fighting fires. Upholding the law. Investing in aquant fund loaded up with some of the mostexotic and volatile derivatives trades on Wall Street.

It's all in a day's work for New York's finest.

The pension funds for New York City's police andfire departments last month allocated a combined $134 million toLondon-based Florin Court Capital. At first blush, it's an oddpairing: the quant shop follows trends in hard-to-trade assets fromEuropean power to cryptocurrencies.

This would be an exotic trading strategy at the best of timesfor even advanced investors like the storied pension institutionsof New York City. Right now, it stands out because frenzied marketshave battered the average returns posted by trend-following quants,also known as commodity trading advisers.

Yet the appeal of momentum-trading strategies — most of whichtrade liquid instruments like bond and stock futures — enduresbecause investors are on the hunt for what some in the industrycall “crisis alpha,” or funds that will outperform when marketscrash.

It's reinvigorated appetite for CTAs, which returned a profiteach time equities fell at least 15 percent between 1985 and 2016,according to a study by Man Group.

“Given where equity markets are and where interest rates seem tobe headed, they're looking for extra diversification,” DougGreenig, the founder of Florin Court and a former chief riskofficer of Man's AHL unit, said of the pension allocation. “Theexotic, alternative markets angle was critically important tothem.”

A bad year

At a very basic level, CTAs are programmed to buy assets withupward momentum and short those in free fall. The group is amongthe worst performing hedge fund types this year, thanks totrendless markets that have been experiencing short-livedspikes.

But recent turmoil — particularly in emerging markets — hashelped reanimate their money-making potential.

Greenig is the first to admit it's been a tough year fortrend-following, though Florin has benefited from operating in theless liquid corners of the market.

The firm returned 0.9 percent this year through August, comparedwith losses of 2.9 percent for standard CTAs over the same period,as measured by a Societe Generale-compiled basket of the largestmanagers. The overall universe fell 0.6 percent, according to HedgeFund Research.

Less liquid assets tend to exhibit more pronounced anduncorrelated trends, creating opportunities for quants to ride themarket, Greenig said.

“French power is just not correlated with Colombian interestrates or European credit,” he said. “Some of the markets have a lotof juice in them and make sustained, dramatic moves.”

Follow the trend

As for the New York City Police Pension Fund and the New YorkCity Fire Pension Fund, which combined oversee about $50 billion,in truth they are no strangers to quantitative funds or even totrend-followers.

According to New York City Police Pension Fund public documents,its quant allocations include D.E. Shaw & Co. along with QuestPartners LLC, whose main offering is a CTA.

Yet Florin, which manages $750 million and is backed by Swedishallocator Brummer & Partners, appears to be the onlytrend-follower focused on illiquid assets used by the New Yorkfunds.

This exotic breed of CTAs has been an increasingly popularchoice given the crowded nature of standard products, Greenigsaid.

Still, with returns picking up for all types of trend-following,CTAs across the board may see new inflows. Florin posted a 6.3percent return in August, while Soc Gen's CTA index posted 2.6percent.

“The one part people still care about is the alternative orexotic market space, but the tone may be changing,” he said.“People like to see returns and then they start gettingexcited.”

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