Invited lecture at UWL

1. Investment Management:
Luxury or Commodity?
Dr Drago Indjic
Sunningdale Capital Partners LLP
UWL, 25 November 2012

2. Contents
• UK plc: Jurisdiction, domicile = law, GBP, tax …
• Master of Science – Finance iff certified
• An example of asset class and related
investment strategies
• Packaging, features, costs and value of
(commoditised) investments

3. W5 5RF (c 2013)
• UK Financial Conduct Authority
– http://www.bankofengland.co.uk/
• “Square Mile”
– Law, insurance
– Silicon Roundabout: technology

4. Structure of Investments
• Investment business
• “Authorised and regulated” for clients; CIIA
• Fundamentals
• Rights and cash flows of an (financial) instrument and
(today’s) universe;
• Redundant, hence priced and arbitraged
• Investment strategy
• Stock pick, passive (index), traditional active (mutual
fund), hyper-active (long/short, hedged, leveraged),
replicated (exchange traded products)

5. What is this?
• 007
– Q0: Where is the market? Demand? Supply?
Price? Lending? Financing? Advisors? Products?
– Q1: What are its characteristics? Risk sensitivities?
– Q2: How do you calculate all this? In “bulk” and
on time?

6. Bond, Convertible Bond (“CB”)

7. Supply: Why issue CB?
•
– Discuss: IPO discount; liquidation and recovery

8. Market: Price vs Value
•
• Happy to leave pricing to PhDs and geeks!

9. Qualitative Strategy Analysis
•
– Time-varying credit and optionality

10. Good Old Times Always Exist

11. From ‘Good’ to ‘New Normal’ Time
•
– Note: balance sheet bank and sovereign (credit)

12. Time to Take Risk
• “Trade” - what is it about?
– Your role? Beneficiary? Preferences? Horizon?
Capital? Counterparty? Credit? Leverage? Spread?
• Investment View
– Leave “risk free”: inflation? Opportunity? Value?
– Asset class location, instrument, strategy, timing
– Risk (act) confidently only if it is rare or unique

13. Investment Strategies
• Informed trading: “Prices, probabilities and
preferences” (Andrew Lo)
– Timing - when? Cash - Buy – hold – sell
• Investment and Trading Objectives
– Legal claims and contracts: control rights (activist,
insolvency); market making; income – growth -
multiple – hedge – bet?
– Explanation: performance and risk attribution

14. Business Decisions
• Why investing or trading?
– Legal: Private, advisory, professional (FCA)
– Your hobby? Job? Business? Is it only about your
wealth (or time)?
• Principal/Agent; Cost/Benefit
– Market efficiency (public benefit) and innovations
(private)
– “Trust” and “reputation” (brand recognition)
– Outsourcing; total costs ( 0%);

15. “Long Term” Starting Position
• Why buy CB now? Who is selling it to us?

16. Active or Passive
• Buy fund or index? Or managing your fund?
– “Beta diet”: DIY cooking, take-away or Michelin?

17. Experimenting with Your “Beta”
• UWL Class 2012/13 “Endowment”
– Today’s class as active investment manager &
“market”: make “index” (est. NAV, Betas …)
• Q. Can we create some reports and charts?
• Q. Fundamentals and risks: events, corporate actions,
capital structure
• Risk manage
– Role playing: control and rebalance individuals or
groups? Strategy? Protect or enhance, hedge …

18. Xmas – White or Black?
Q. Mr Smart, what is the best strategy in 2012?
A. Credit Arbitrage: ABS - Mortgage-Backed
– Almost exclusive US, large size trade, macro
backdrop, complex derivatives (“not available in
shops”)

19. Real Markets
• “Freedom” of trading vs reality
– asset class, brokerage costs, “best execution”
Real-time: is market open? Trade size, spreads ..

20. Market Re-Regulation
• Market micro structure: CDA, “dark pool”, OTC
– High frequency trading: “special” orders for order
book queue jumpers, exchange rebate rentiers

21. Hedge Manager’s Wealth
• Sunday Times, 25 Nov 12: self-made, but
• Salary? Annual management fee? Performance-related
fee? Is it worth?

22. What is Risk Then?
• Capital: not “variance” and “mean”
– Ruin; impairment (“return of capital”); liquidity
• Statistical bells and whistles
– Correlation; Beta; fashionable: risk “parity”, risk
“off/on”
• Macro risks

23. Modern Performance Charts

24. Managing Portfolios
• Investment manager
• Life beyond a single trade: idea flow, edge …
• Launch and market as business: teamwork
• Hedge, arbitrage, speculation
• Core (“Beta”)
• Capital preservation, income, liquidity ...
• Satellite
• Theme: trend; opportunity/event: macro, dislocation,
corporate action

25. Crisis: Macro, Regs, Retail

26. What now?
• Macro context: “Perma-QE”
• “Anti-fragility”; Resources, demographics
• Syria, Iran, Gaza; North Korea …
• Policy agility divergence
• Growth vs solvency; global vs national level
• FX vol, trade, debt, IMF/OECD, Fed/ECB
• Fairness vs fraud
• LIBOR, HFT; Pension systems; DC risk transfer, SIPP
• Anglo-Saxon export: financial trading and technology

27. Your Future Portfolio
• Decisions
– Confidence, evidence, behavioural, utility (wrt
boss, partner, peers, client, child ..)
– Your benefit: aligned interest? Horizon?
• From single stock pitch to portfolio
– Value catalyst? Short? Including an index? Money
management? Performance attribution
– Emergence of Beta; control of max drawdown or
Beta; implied views (reverse optimisation)

28. Awarding Traders
• Minimal
– drawdown
– variance (max Sharpe)
– correlation (Beta)
– Minimal #trades (costs)
• Best
– Business development proposal (seeding offer)
– Research and analytics

29. Conclusions and Q & A
• Pricing and marketing “performance”
• Absolute or relative; “” as “undiscovered” 
• Value for money (or time)
– Hedged, more agile strategies outperform (smaller
losses, lower variance); long-only risks capital
• Alpha by design
– “Non replicable” only: activist, event driven;
macro relative value

30. Christmas Time post-2007
• “While tough regulations have spiked demand for
compliance, risk and legal officers, creating a bright
spot in an otherwise depressing job market for the
financial industry (…) If all of this is a little too dark
and gloomy for you, you can always take a sip of
Cognito’s latest set of financial services drinks,
specially designed to bring back some pre-2007
holiday cheer.
– 2 Dec 2012, WS&T Daily