MMI Fall 2004 10-20 330PM Bill Turchyn.ppt
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MMI Fall 2004 10-20 330PM Bill Turchyn.ppt

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  • 1. The Money Management Institute Managed Account Solutions 2004 The Role of Alternative Investments – What should you Expect? October 20, 2004 William Turchyn, Partner Mariner Investment Group, Inc. 780 Third Avenue New York, NY 10017 212-758-6200 M A R I N E R
  • 2. Mariner Investment Group, Inc.
    • Focused on seeking absolute returns, low volatility and low correlation to traditional markets with emphasis on non-directional fixed income and credit related investing
    • Mariner and related entities manage over $5 billion for public and corporate plan sponsors, university endowments, insurance companies, foundations, and wealthy families in multi-strategy portfolios
    • Principals formerly headed proprietary trading and risk management at firms including Bear Stearns, Goldman Sachs, UBS, and Morgan Stanley
    • Registered Investment Adviser with offices in New York, Boston, Tokyo
    • 100% employee owned
  • 3. T HE F UTURE O F I NSTITUTIONAL H EDGE F UND I NVESTING The Money Management Institute: Managed Accounts Solutions 2004 The Roosevelt Hotel – New York, NY October 20, 2004 Presented by: Robert I. Schulman, Co-Chief Executive Officer
  • 4. P AST A SSET G ROWTH O F H EDGE F UNDS Source of data: Tremont Capital Management, Inc. Total Assets in $Billions
  • 5. F UTURE A SSET G ROWTH O F H EDGE F UNDS Source of data: Tremont Capital Management, Inc. Total Assets in $Billions
  • 6. G LOBAL H EDGE F UND I NVESTORS
      • Not a U.S. Phenomenon; In Fact, U.S. is Behind
      • Family Offices
      • High-Net-Worth Individuals
      • Fund of Funds
      • Private Banks (United States and European)
      • U.S. Endowments and Foundations
      • Insurance Companies (Domestic and Offshore)
      • Pension Plan Sponsors Worldwide
  • 7. I NDUSTRY G ROWTH F ORECAST Source: Tremont Capital Management, Inc. 27.0% 272.4 82.5 Public Funds 33.0% 271.8 65.3 Corporate 27.0% 203.6 61.6 Foundations 28.0% 218.9 63.7 Endowments 25.0% 442.0 145.0 Fund of Funds 25.0% 936.4 307.0 HWN Individuals Growth Annualized 2008 2003 Client
  • 8. I NDUSTRY G ROWTH F ORECAST D RIVEN B Y C LIENT D EMAND
      • The industry project global hedge fund assets will quadruple by 2010; the adoption rate will rise from 1.2% to 3.0% of global high net worth individual (HNWI) and institutional assets.
      • An entire industry will be created out of the anticipation, identification, and measurement of hedge fund process and performance.
      • The industry will continue to embrace FoHFs, which enable an investor to diversify exposure to a range of hedging styles. Registered FoHFs will permit sponsors to distribute hedge funds to a wider group of private and institutional investors.
      • Pensions and public plans worldwide will asset allocate to this emerging asset class.
      • The traditional advisor is stuck; Beta is everywhere, and Alpha is scarce.
    Source: Putnam Lovell NBF
  • 9. H EDGE F UNDS’ V ALUE P ROPOSITION I N T HE P ORTFOLIO
      • More consistent, risk-adjusted returns
      • Absolute return goals are not reliant on the return of equity markets
      • Reducing agents of market volatility when blended into a traditional portfolios
      • Excellent diversifier because of low correlation with both traditional equity and bond markets
      • Investors can choose among different risk and return profiles ranging from enhanced cash to very aggressive
      • Emergence of risk management tools
  • 10. R ETURN S OURCES
      • Stock Market
      • Shape of Yield Curve
      • Credit Spreads
      • Correlations
      • Interest Rates
      • Volatility
  • 11. C ASE S TUDY O F A LLOCATING T O H EDGE F UNDS -14.85% 0.35 8.46% 6.16% Portfolio w/Hedge Funds -19.09% 0.13 9.60% 4.46% Traditional Long Only Maximum Drawdown Sharpe Std. Dev ROR 5.50 Years Ending 6/30/2004
  • 12. CSFB/T REMONT A SSET- W EIGHTED I NDICES Bull Market Case Relative Strength: January 1994 to Present
  • 13. CSFB/T REMONT A SSET- W EIGHTED I NDICES Bear Market Case Relative Strength: January 2000 to Present
  • 14. H EDGE F UND I MPACT O N I NSTITUTIONS A ND U LTRA H IGH N ET W ORTH
      • Shorter investment time frames
      • Benchmarking only works when markets go up
      • Modified thinking on traditional style box investing yields absolute return expectations
      • Modified risk management perspectives
      • Redefine equity and fixed income strategy allocations due to trading styles of hedge fund managers
      • Further erosion of benchmark considerations
      • More complex asset allocations methodologies
      • Flexible leverage analysis
  • 15. P ROFESSIONAL I MPACT O N H EDGE F UNDS
      • Liquidity accommodations
      • Transparency concessions
      • Sophisticated, consistent, but subjective, risk management processes
      • Capacity analysis consideration
      • Upgrading of reporting standards
      • Reduced return expectations
      • Lower returns
  • 16. W RAP U P
      • Absolute return vehicles are here to stay and growing, not a passing fade
      • Hedge funds are a proven, consistent, low correlating portfolio diversifier, improving risk adjusted returns
      • Benchmarking issues remain challenging
      • Style drift must be redefined
      • Risk management is compromised at best; it’s total risk, not tracking risk
      • Capacity constraints will drive investment results
      • Leverage requires consideration
      • Alpha elusive
      • Role of Beta
  • 17. Robert Alderman Managing Director Merrill Lynch Alternative Investments “ The Role of Alternative Investments . . . What should you Expect?” The Money Management Institute Managed Account Solutions 2004 October 20, 2004
  • 18. Why Alternative Investments
      • “ Alternative investments have become mainstream investment vehicles as high-net-worth individuals around the world strive for better performance and portfolio balance. ”
      • - World Wealth Report, 2004 Merrill Lynch/Cap Gemini Ernst & Young
  • 19. Why Alternative Investments
      • “ I went looking for a private banker who wasn’t fixated on having 60% in stocks, 30% in bonds and 10% in cash and would think in new, creative ways . . . ”
      • - CEO Internet Software Company
      • Barron’s, October 18, 2004
  • 20. Target Market Registration and Method of Offering
    • Hedge Funds (“traditional”)
    • Private Equity Funds
    • Registered Hedge Funds
    • Managed Futures Funds
    • Registered Fund (variety)
    Private Placement (always Privately Placed) Registered Private Placement (usually Privately Placed) Registered Fund (usually Publicly Offered)
    • Qualified Purchaser > $5 MM in Investments)
    • Accredited Investor NW (incl. Home) > $1 MM or Income > $200k (last 2 yrs) ($300k if joint with spouse)
    • Suitable Investors who understand the inherent risks
    Investment Referred to as . . . Investor Qualification
  • 21. Integration The AI Decision - Yes/No Comfortable with ILLIQUID investments Can accept limited TRANSPARENCY Not interested in INCOME from this investment Understand TAX & JURISDICTIONAL issues No YES No YES No YES No YES
  • 22. Portfolio Building How Much is Too Much?/ How Much is Not Enough? Step 2 High Level AA Step 1 AI Decision AI = 12%
  • 23. Portfolio Building Product Allocation Step 2 High Level AA Step 1 AI Decision Step 3 Product Allocation Hedge Funds Private Equity Futures Funds AI = 12%
  • 24. Portfolio Building Product Type Step 2 High Level AA Step 1 AI Decision Step 3 Product Allocation Hedge Funds Private Equity Futures Funds AI = 12% Step 4 Product Type Market Offerings Fund of Funds Single Mgr. Multi Mgr. Single Mgr.
  • 25. Portfolio Building Portfolio Recommendation ? Step 2 High Level AA Step 5 Portfolio Recommendation Step 1 AI Decision Step 3 Product Allocation Hedge Funds Private Equity Futures Funds AI = 12% Step 4 Product Type Market Offerings Fund of Funds Single Mgr. Multi Mgr. Single Mgr.
  • 26. Portfolio Building Core/Satellite Stocks Cash Bonds Alternative Investments (?) Directional Fund of Fund(s) non-Directional Fund of Fund(s) Rationale 1) Hedge Fund of Funds and Managed Futures Fund of Funds may provide diversification and potential non -correlation to traditional long only portfolios. 2) non-Directional - tend to be “market neutral” well diversified fund of funds with exposure to multiple strategies. 3) Directional - well run and potentially more concentrated or biased funds may provide opportunities for enhanced return.
  • 27. Portfolio Building Core/Satellite Arbitrage L/S Global Macro Stocks Cash Bonds Alternative Investments (?) Dir. FoF Non-Directional FoF
  • 28. Portfolio Building Core/Satellite Single Manager Managed Futures Arbitrage L/S Global Macro Stocks Cash Bonds Alternative Investments (?) Dir. FoF Non-Directional FoF
  • 29. Portfolio Building Core/Satellite Private Equity Single Manager Managed Futures Arbitrage L/S Global Macro Stocks Cash Bonds Alternative Investments (?) Dir. FoF Non-Directional FoF
  • 30. Recommended AI Asset Allocations Example AI Allocations - “Growth” clients* *Assumes same risk profile, investment objectives, time horizon, liquidity needs, etc Total portfolio: $1 MM AI allocation: $100 K Total portfolio: $5 MM AI allocation: $500 K Total portfolio: $20 MM AI allocation: $2 MM Core Hedge FoF 60% Futures FoF 20% Category Hedge FoF 20% Futures 10% Core Hedge FoF 50% Category Hedge FoF 20% Private Equity 20% Core FoF 100%
  • 31. Questions
  • 32. The role of alternative investments – what should you expect? John M. Kelly President & CEO Man Investments Inc. MMI Fall Conference – Managed Account Solutions 2004 October 20, 2004
  • 33. Important notes
    • Man Investments Inc. is registered as a broker-dealer with the U.S. Securities and Exchange Commission and is a member of NASD. Man Investments Inc. is also a member of Securities Investor Protection Corporation.
    • The Man Investments division of Man Group plc, of which Man Investments Inc. is a member, operates on a global basis and is referred to throughout this document as ‘Man’.
    • The material presented herein is informational only and is not an offer to sell, or a solicitation of an offer to buy, interests in any product.
    • Information contained herein is provided from the Man database except where otherwise stated. Alternative investments can involve significant risks and the value of an investment may go down as well as up. Movements in exchange rates between currencies may affect the value of an investment.
    • Past performance is not indicative of future results.
    • The registrations and memberships described above in no way imply that the SEC, NASD, or SIPC have endorsed the above-referenced entities to provide any of the services discussed herein.
    • Securities, futures and derivatives trading are speculative and involve substantial risk of loss. There can be no assurance that any investment will achieve profits or avoid incurring substantial losses. Prospective investors should particularly note that the past performance is not indicative of future performance.
    • www.maninvestments.com
  • 34. Statistics on the hedge fund industry Source: Hedge Fund Research Inc. The date range used is the most recent available. Past performance is not indicative of future results. There can be no assurance that any hedge fund strategy will generate profits or avoid incurring substantial losses. Source: HFR Industry Report, TASS, Absolute Return
    • CAGR of 26% since 1990
    • Total assets worldwide are estimated between $850 - $1,000 billion
    • Estimated 5,500 hedge funds
    • Approximately 75% of hedge fund assets under management in North America
    • Inflow growth rate for 1 st half of 2004 is estimated at 17%
  • 35. Concentration and capacity
    • Top 180 fund managers oversee $1 billion or more each
      • Equals over 60% assets under management
    • Many of the largest hedge funds are closed
    • Over 10% of hedge managers have been operating for less than 1 year
    • Approximately 40% of hedge fund managers have been operating for over 5 years
    • In 1991, around 70% hedge fund assets – global macro
      • In 2004, around 12% hedge fund assets – global macro
    Source: HFR Industry Report, TASS, Absolute Return
  • 36. Man Investments division (‘Man’) of Man Group plc Source: Man database. 1 As of March 31, 2004 2 As of March 31, 2004 3 Pre leverage since January 1, 1996. This excludes RMF and Westport data. Geographical distribution of sales 3 since 1996 As of June 30, 2004 1 Europe 53.2% 2 Asia 29.0% 3 Middle East 9.1% 4 North & South America 8.6%
    • Providing alternative investment solutions since 1983
    • Funds under management exceed $38.5 billion 1
    • Pioneer in principal-protected and multi-strategy alternative products
    • Launched over 450 2 alternative investment products
  • 37. Worldwide regulatory developments
    • Germany
    • A new investment law went into effect on Jan. 1 broadening managers’ abilities to offer hedge funds to both institutional and private client investors 1
    • Singapore
    • Recent regulatory developments have allowed private client investments into hedge funds 2
    • Lower investment requirements 2
      • - No minimum investment requirements for principal protected funds
      • - Investment minimums of S$20,000 3 for fund of hedge funds
    • Hong Kong
    • In 2002, local regulators introduced new hedge fund guidelines allowing retail distribution of hedge funds to the public
    1 Source: Hedgeworld 2 Source: Monatary Authority of Singapore 3 Approximately US$ 11,398
  • 38.
    • What are we seeing in the U.S. market?
    • Appetite for registered products
    • Significant increase in interest in principal protected alternative investment products
    • Conservative selling approach and high level of service and education
    • Differences between US and offshore markets
        • Platform issues
        • Time to market
  • 39. Some of the potential risks of investing in hedge funds
    • Potential loss of investment
    • Limited liquidity
    • Use of leverage and other speculative investment practices
    • Lack of regulatory oversight
    • Valuations
    • Tax risks
    • Layering of fees
    • Strategy risk
    These are some of the risks inherent in hedge funds and funds of hedge funds. Please see the Risks section and Important notes included in this presentation for a more detailed discussion.
  • 40. $100 protected at Maturity by a first Class bank 1 Investment life Total potential return at maturity Value of securities underpinning Guarantee Grows to US$ 100 over life of investment $40 (for trading) $60 approx. (Securities pledged to creditor to underpin principal protection) Value of securities underpinning principal protection grows to $100 over life of investment $100 Example of an enhanced structured product These products are not available to US investors The diagram below shows the general principles of an enhanced principal protected structured product. This product utilizes a credit facility to provide investors exposure to a complementary investment program. Given the low correlations between the core portfolio and complementary investment program, the product is designed to deliver higher investment returns without a corresponding increase in volatility. In addition to the principal protection, the potential lock-in of net new trading profits may raise the minimum protection level at maturity. Increased investment exposure of $60 through a credit facility Profit lock-in feature Total profit potential Profit potential Trading capital growth potential Schematic illustration. There is no guarantee that a fund will experience a profit as depicted above. Past performance is not indicative of future results. ¹Subject to the terms and conditions of the principal protection, payable on the Maturity Date for the Face Value of each bond outstanding and redeemed on the Maturity Date. Products that include a principal protection feature may also be subject to the risk of default by a bank or other counterparty providing the principal protection. The illustration assumes that the investment is held from inception to maturity and that no distributions are made. Investors could incur losses or lose their principal protection by redeeming some or all of their investment prior to maturity. This structured product employs leverage. The more leverage employed, the more likely a substantial change will occur, either up or down, in the value of the investment. In certain market conditions, investors could be invested entirely in bonds or other debt securities, which could mean forfeiting all potential gains should equity prices rise. Principal protection may be underpinned by zero coupon bonds. Because these bonds do not pay interest, their prices may be more volatile than other bonds with similar maturities that pay interest periodically. There are risks inherent in hedge funds.
  • 41. The Money Management Institute Managed Account Solutions 2004 The Role of Alternative Investments – What should you Expect? October 20, 2004 William Turchyn, Partner Mariner Investment Group, Inc. 780 Third Avenue New York, NY 10017 212-758-6200 M A R I N E R
  • 42. Retail investors don’t belong in hedge funds. The returns don’t justify the fees.
  • 43. Too much money is flowing into hedge funds and is chasing too few opportunities.
  • 44. Hedge funds blow up and are responsible for worldwide financial crises
  • 45. Pitfalls in Hedge Fund Investing*: * Source: Mariner Investment Group and Michael F. Griffin in March 3, 2003 Pensions and Investments article, “Dramatic Blowups share a few traits”, written by Chris Clair
    • Fraud
      • 2003 Canary
      • 1998 Manhattan Investments
    • Mispriced Securities
      • 2004 Clinton
      • 2002 Lipper
      • 2002 Beacon Hill
    • Strategy Failure
      • 1998-2000 Soros
      • 1998-2000 Tiger
    • High Leverage
      • 2003 Eifuku
      • 1998 LTCM
  • 46. What about transparency? Shouldn’t I be able to see every security that I own?
  • 47. What about liquidity? Shouldn’t I be able to get my money out in 3 business days?
  • 48. How much is Beta worth and how much should I pay for Alpha?
  • 49. Are there any smart people left in the long only business? Should I be worried that they are all moving to hedge funds?