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Liability Driven Investing (“LDI”)  Effective Risk and Asset Modeling Requirements                  Various Approaches to ...
TABLE OF CONTENTS                                                              1                  I | Various Approaches t...
CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI                                                                     ...
3                           I. Various Approaches to Managing to Liability                                            Benc...
4       CHALLENGES OF MANAGING TO LIABILITY BENCHMARKS        Role of the benchmark          What risk to manage?       ...
5       WHAT RISK(S) TO MANAGE TO?           Definitions             The following risks measure variability of:        ...
6     WHAT IS RELEVANT?                     Choice of benchmark can be a critical determinant of returns                 ...
7         RECENT EXPERIENCE               Up-market Period: 1984-2000, 2003-2007, 2009-2010                 Market-based...
OPTIMAL ALLOCATION OF ASSETS - DIFFERENT APPROACHES                      8       Modern portfolio management ignores risks...
OPTIMAL UTILITY FUNCTION APPROACH                                                      9                   Establish Effi...
10     TRADITIONAL LIABILITY IMMUNIZATION APPROACH                 Establish Liability Benchmark                   Liabi...
11     TRACKING ERROR ATTRIBUTION IN ASSET LIABILITY          Asset and Liability Performance            Asset = Duratio...
AN EXAMPLE OF A STUDY RUN IN APRIL 2001                                                                                   ...
BASIC RISK/RETURN DATA                                                                                                    ...
14     COMPARISON OF DIFFERENT STRATEGIES                                                                                 ...
RESULTS SUMMARY                                                        15                Optimal Sharpe ratio allocation,...
DISTORTION DUE TO STATIC-SPREAD DISCOUNTING IN VOLATILE SPREAD MARKETS                           16      Introduces      ...
0                                                                                                                       10...
18   TRADITIONAL ALTERNATIVES TO STATIC SPREAD DISCOUNTING          Two Alternatives            Market-based Spread     ...
19     OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY       Benefits        Minimizes tracking error and other forms...
20     OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY - BASIC STEPS                     Step 1: Target Return Over Tr...
OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY - BASIC STEPS                                   21                    ...
ONGOING EVALUATION OF DYNAMIC-SPREAD LIABILITY BENCHMARK                                       22                  Dynamic...
HISTORICAL SPREAD SUMMARY                    23PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. ...
OPTIMIZATION FRAMEWORK                             24PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights rese...
RISK OPTIMIZATION RESULTS                          25PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights rese...
26         ISSUES NOT CAPTURED BY DYNAMIC-SPREAD LIABILITY BENCHMARK                Duration Weighted Liability OAS (DWLOA...
KEY-RATE-MATCHED MARKET-BASED BENCHMARKS                                                          27                      ...
KEY-RATE-MATCHED MARKET-BASED BENCHMARKS                                              28                    • Marking-to-M...
29       SUMMARY         Optimal portfolios in absolute space can lead to significant risk vs.          liabilities      ...
30                                                 II. Liability Driven InvestingPROPRIETARY AND CONFIDENTIAL©2011 NewOak ...
CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI                                                           31     LDI...
CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI                                                                     ...
KEY LDI REQUIREMENT - KNOWLEDGEWARE                                                                                       ...
KEY LDI REQUIREMENT -KNOWLEDGEWARE                                                                                        ...
35                                    III. Relatively New Alpha StrategiesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital...
EXAMPLES OF RELATIVELY NEW ALPHA STRATEGIES                                                36                             ...
ALPHA STRATEGIES AND STYLES                                                                                    37    Mark...
ALPHA FIXED-INCOME AND REAL ESTATE STRATEGIES                                          38     Broad Based Asset Expertise ...
EMERGING STRATEGIES: MANAGING COMPLEX PRODUCTS FROM LOANS TO SECURITIES                             39 Credit crisis has c...
40                               IV. An Example of a Scalable Strategy:                                     Quantitative G...
41     GLOBAL QUANTITATIVE EQUITY     Example of Equity Investment Philosophy                     Well-defined investment ...
42   GLOBAL QUANTITATIVE EQUITY   Quant Equity Investment Experience and Approach              We have vast expertise in e...
43     GLOBAL QUANTITATIVE EQUITY     Quant Equity Investment Process                     We base our Investment Process u...
44   GLOBAL QUANTITATIVE EQUITY   Quant Equity Investment Experience and Approach                    We Believe Human Beha...
45   GLOBAL QUANTITATIVE EQUITY   Quant Equity Investment Process                    We divide the world into 90 categorie...
46     GLOBAL QUANTITATIVE EQUITY     Quant Equity Investment Process     We believe experience-driven insights into the d...
47     GLOBAL QUANTITATIVE EQUITY     Quant Equity Team’s Investment Performance                          Our team has out...
48     GLOBAL QUANTITATIVE EQUITY     Quant Equity Product Research & Development            We have developed a superior ...
49   GLOBAL QUANTITATIVE EQUITY   Quant Equity Product Research & Development                      An additional model for...
50                                   V. Dodd-Frank and Its Impact on LDIPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital L...
THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT                                51     The Dodd-Frank Wall S...
Fund Managers Under Dodd-Frank                                  52     Challenges and Requirements Ahead for OTC Derivativ...
Fund Managers Under Dodd-Frank                                                  53     Methodical Steps to Take     Types...
COLLATERAL MANAGEMENT FOR INSTITUTIONAL ASSET MANAGERS                          54     Integral part of risk and liquidity...
WHO NEEDS COUNTERPARTY AND COLLATERAL RISK MANAGEMENT CAPABILITIES                                                   55   ...
56               VI. LDI - Solutions and Infrastructure NeedsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rig...
LIABILITY DRIVEN INVESTING                                                                                                ...
ASSET MANAGEMENT/RISK MANAGEMENT ENVIRONMENT                                                                              ...
ANALYTICAL PLATFORMS NEEDS                                                                                         59     ...
WORLD OF COMPLEXITY                                                                                                       ...
OPEN RISK SOLUTIONS                                                                                                       ...
NEWOAK SOLUTIONS OpenRisk™ - OpenFixed                                                                                    ...
COUNTERPARTY RISK MANAGEMENT                                                                           63     Opportunitie...
FLEXIBLE SYSTEM APPROACH TO REDUCE OPERATIONAL RISK                                                                       ...
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
New Oak   Creating An Effective Risk Modeling Framework (Pensions Risk Management)
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Transcript of "New Oak Creating An Effective Risk Modeling Framework (Pensions Risk Management)"

  1. 1. Liability Driven Investing (“LDI”) Effective Risk and Asset Modeling Requirements Various Approaches to Managing to Liabilities Dodd-Frank LDI Financial Technology and Infrastructure Needs31 October 2011 For more information please contact: Ron D’Vari, CEO/Co-Founder (212) 209-0855 rdvari@newoakcapital.com Or visit us on the web at: www.newoakcapital.com/solutions
  2. 2. TABLE OF CONTENTS 1 I | Various Approaches to Managing to Liability Benchmarks I I | Liability Driven Investing and Alpha Strategies I I I | Relatively New Alpha Strategies I V | An Example of a Scalable Strategy: Quantitative Global Equity V | Dodd-Frank and Its Impact on LDI V I | LDI - Solutions and Infrastructure Needs Appendix I| OpenRisk M Appendix II| Investment Support ServicesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  3. 3. CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI 2 Comprehensive approach can meet complex institutional, product lines, and regulatory requirements  Asset Liability Management Approach  Various Styles  Basic cash-flow matched, key rate duration matched to full liability-driven investment with sophisticated asset allocation for active management of surplus  Surplus Optimization  Using alternative, real and uncorrelated assets and styles  Unique long dated assets: Life settlements, Structured settlements  Real Assets: Real estate, Commodities  Dollar Neutral Strategies: Long/Short global equities, Long/Short ETF  Unique liquidity management: Short High Yield (“SHYLD”) Strategies (REO Finance, Supply Chain Finance, Asset Based Finance)  Customized Solutions  Customized style and benchmark construction consistent to funding status and institutional profile  Separate accounts or commingled funds  Broad array of fixed income, equity, and alternative asset types and strategies including esoterics  Liquid Fixed Income: All liquid fixed income (Short Duration, Core, Core+, Long Duration)  Illiquid Fixed Income: Loans , structured products, specialty finance  Equities: Long/Short, Event Driven, International Quant Equities, ETFs, High Frequency, Private Equities  Real Investing: Real Estate, Land, Commodities  Multi-Strat Macro: Free-to-roam  Ongoing Risk Management and Reporting  Ongoing in-depth risk assessment, valuation, performance monitoring  Daily benchmark variance analysis and marked-to-market  Full cash flow scenario analysis  Periodic benchmark performance attributionPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  4. 4. 3 I. Various Approaches to Managing to Liability BenchmarksPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  5. 5. 4 CHALLENGES OF MANAGING TO LIABILITY BENCHMARKS Role of the benchmark What risk to manage? An Illustrative Case Study Traditional liability benchmarks and choice of discounting Static spread Dynamic spread How do you measure the manager’s performance in A/L framework? Impact of spread volatility on performance measurement Distortion due to static spread assumption Manager behavior and its impact on expected returns Case for dynamic-spread liability benchmark Role of Min-VAR Optimization in Asset/Liability Management Key-rate-duration matched dynamic spread benchmarks Key-rate-duration matched market-based benchmarksPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 4
  6. 6. 5 WHAT RISK(S) TO MANAGE TO? Definitions The following risks measure variability of: Absolute Return Risk = Std. Dev. (Portfolio Return) Relative Risk = Std. Dev. (Portfolio Return - Benchmark Return) Relative-to-Liability Risk = Std. Dev. (Portfolio Return - Liability Return) Basis Risk = Std. Dev. (Benchmark Return - Liability Return) How Should Risk Be Measured? Portfolio vs. Cash (Total Return Risk), Portfolio vs. Benchmark (Relative Risk), or Portfolio vs. Liability (Relative-to-Liability Risk)?PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 5
  7. 7. 6 WHAT IS RELEVANT? Choice of benchmark can be a critical determinant of returns Market-based benchmarks - Basis Risk Liability-based benchmarks - Absolute Risk What seems to be most relevant? The answer is “it depends!” or “it is regime dependent” Short-Run  Total/Absolute (sponsor) or Relative Risk (manager) Long-Run Relative-to-Liability Risk (sponsor) Is there a pattern? In down-markets there is reversion to liability-based approach Absolute returns look ugly Relative returns look horrific because liabilities outpace markets In up-markets market-based benchmarks rulePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 6
  8. 8. 7 RECENT EXPERIENCE Up-market Period: 1984-2000, 2003-2007, 2009-2010 Market-based strategies outperformed liability benchmarks Basis risk was profitable and led to huge pension surpluses Sponsors tended to down play relative risk to liability benchmarks Contributions to pension plans were kept at minimum Down-Market Period: 2000- 2003, 2007-2009, 2011 Liabilities have significantly outperformed portfolios and market-based benchmarks Basis risk has materialized and has led to huge pension deficits Sponsors are re-evaluating relative risk to liability benchmarks Contributions to pension plans are resuming and a must  Sponsors are reneging on their liabilitities Extension of retirement age Reducing post retirement health benefits Cutting off defined benefit (e.g. California)PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 7
  9. 9. OPTIMAL ALLOCATION OF ASSETS - DIFFERENT APPROACHES 8 Modern portfolio management ignores risks vs. liabilities Optimal Utility Function Approach Optimization is generally cast in absolute risk-return space Inter-temporal risk is measured in absolute terms rather than relative to the liabilities Based on some form of efficient frontier Market-based benchmarks Choice of benchmark is driven by risk-tolerance (utility) Liabilities ignored for the most part Liability Immunization Approach Optimization is cast in relative-to-liability risk-return space Inter-temporal risk is measured relative to the liabilities Estimation of liabilities are key Discounted-liabilities form the benchmark  Discounting methodology varies Choice of discounting methodology can influence results significantlyPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 8
  10. 10. OPTIMAL UTILITY FUNCTION APPROACH 9 Establish Efficient Frontier and Utility Function Select investable asset classes and corresponding indicative market indices Establish length of time and frequency of measurement most relevant Identify risk tolerance or a risk-return utility function  Establish Optimal Benchmark/Asset Mix Optimize Sharpe Ratio by solving for optimal asset class on efficient frontier and risk tolerance Actively Manage Optimize information ratio, i.e. alpha/tracking error Risks vs Liabilities Are Ignored Benchmark - Optimal Sharpe Ratio Management - Optimal Information RatioPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 9
  11. 11. 10 TRADITIONAL LIABILITY IMMUNIZATION APPROACH Establish Liability Benchmark Liability Cash Flows: Establish realistic liability (RL) or participating liability (PL) cash flow stream Discounting Methodology: Establish a discounting methodology Curve - Zero coupon curve + some spread Treasury, agency, or swap Tail Rate - A discount rate for flows past 30 years Spread - Sufficient spread that meets the liabilities in the long run and provide with additional risk- adjusted return Manage Assets vs. Benchmark Add alpha over liability benchmark through Actively manage key-rate duration around liability benchmark Actively manage spread exposure Discounting methodology affects funding status Static spread discounting of liabilities could distort funding status significantlyPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 10
  12. 12. 11 TRACKING ERROR ATTRIBUTION IN ASSET LIABILITY Asset and Liability Performance Asset = Duration/Curve Move+ Spread Moves + Credit Blow Ups Liability = Cash Flow Changes + Duration/Curve Move Asset/Liability Return Differences Actuarial gain or loss Mismatch in duration/curve exposure Spread volatility Credit blow ups Management performance may be hard to isolatePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 11
  13. 13. AN EXAMPLE OF A STUDY RUN IN APRIL 2001 12 Various Allocations Considered Immunized Portfolio Liabilities Date: April 01 Aggressive Moderate* Conservative Moderate Spread to Treasury (bp) 150 125 100 125 Average Quality A-/BBB+ A- A A- Minimum Quality BB BB BBB- BB Effective Duration 11.4 11.6 11.8 11.6 Portfolio Expected Return (IRR) 7.3% 7.1% 6.8% 7.1% Relative Expected Return 0.2% 0.0% -0.2% 0.0% Relative Volatility 2.3% 0.0% 1.2% 0.0% Absolute Volatility 8.0% 7.6% 7.1% 7.6% Efficient Frontier Portfolio Cash 0.0% Equity 50% Fixed - Core 40% High Yield 10% Portfoli Expected Return 10.18% Relative Expected Return 3.08% Relative Volatility 14.17% Portfolio Standard Deviation 9.34%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 12
  14. 14. BASIC RISK/RETURN DATA 13 Cash Expected Return 4.50% Equity Expected Return 9.0% Standard Deviation 17.5% Correlation to Core 0.3 Correlation to High Yield 0.4 Correlation to Long Bond 0.15 Relative Std Dev to Liability 17.97% Economic Downturn Stress Senario -29.2% Fixed Income 10 year T reasury Yield 5.30% 30 year T reasury Yield 5.85% Long Duration Liability 10s Yield Beta to 30s Yield 1.20 Core High Yield Aggressive Moderate Conservative (Moderate) Spread over T reasury (bp) 0.75% 3% 1.50% 1.25% 1% 1.25% Expected Return 6.05% 7.80% 7.35% 7.10% 6.85% 7.10% Duration 4.5 4 11.44 11.63 11.82 11.63 T reasury Yield Standard Deviation 0.50% Spread Standard Deviation 0.25% 0.45% 0.40% 0.25% 0.20% 0.25% Spread Correlation to T reasury 0.40 0.50 0.2 0.4 0.4 0.4 Return Standard Deviation 2.89% 3.29% 8.01% 7.47% 7.19% 7.47% Sharpe Ratio 0.54 1.00 0.36 0.35 0.33 0.35 Expected Relative Return to Liabilities -1.05% 0.70% 0.25% 0.00% -0.25% 0.00% Relative Return Standard Deviation 6.64% 6.81% 2.29% 0.00% 1.18% 0.00% Information Ratio -0.16 0.10 0.11 n.a -0.21 n.a Economic Downturn Stress Senario Equity Return -29% Fixed - Yield Changes 10 yr Treas Yield Change -1.00% Long Duration Liability 30Yr Treas Yield Change -0.75% Core High Yield Aggressive Moderate Conservative Moderate Spread Change 0.25% 0% 0.35% 0.25% 0% 0.25% Fixed - Returns 9.43% 10.20% 11.92% 12.91% 13.35% 12.91%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 13
  15. 15. 14 COMPARISON OF DIFFERENT STRATEGIES Initially 15% Overfunded Example Immunized Aggressive Immunized & Aggressive Immunized & Aggressive Immunized + Market Based Tail+Surplus in Equity Surplus in Equity Surplus in Equity Approach (Future O verlay) (Future O verlay) (No Future O verlay) Portfolio Weights - % Liabilities Cash 0.0% -25.0% -15.0% 0.0% Equity 58% 25.0% 15.0% 15.0% Fixed - Core 46% 0.0% 0.0% 0.0% High Yield 12% 0.0% 0.0% 0.0% Long Duration 0.0% 0.0% 0.0% 0.0% Aggressive 0.0% 115.0% 115.0% 100.0% Moderate 0.0% 0.0% 0.0% 0.0% Conservative 0.0% 0.0% 0.0% 0.0% Total - % Liabilities 115.0% 115.0% 115.0% 115.0% Long Term Expectations Liability Expected Return 7.10% 7.10% 7.10% 7.10% Portfoli Expected Return - % Liabilities 10.18% 9.58% 9.13% 8.70% Relative Expected Return - % Liabilities 3.08% 2.48% 2.03% 1.60% Relative Volatility 14.17% 8.31% 8.29% 8.28% Relative Information Ratio 0.22 0.30 0.24 0.19 Sharpe Ratio 0.47 0.41 0.40 0.40 Economic Downturn Scenario Portfolio 1-Yr Return - % Liabilities -11.30% 5.28% 8.65% 7.54% Liability 1-Yr Return - % Liabilities 12.91% 12.91% 12.91% 12.91% Relative 1-Yr Return - % Liabilities -24.21% -7.63% -4.26% -5.37% Ending Surplus (Deficit) - % Liabilities -9.21% 7.37% 10.74% 9.63%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 14
  16. 16. RESULTS SUMMARY 15 Optimal Sharpe ratio allocation, when viewed from relative stand point, is Highly risky in economic downturn scenario Not highest information ratio Variations of immunized strategy can lead to Superior relative risk profile Modest give up in expected return Much lower exposure to economic downturn scenarioPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 15
  17. 17. DISTORTION DUE TO STATIC-SPREAD DISCOUNTING IN VOLATILE SPREAD MARKETS 16 Introduces Funding status mismeasurement Measurement tracking error Makes it harder to distinguish impact of Credit calls/mistakes Curve bets/mismanagement Leads to sub-optimal spread allocation Tracking error risk leads to risk avoidance Managers may under invest in spread products and miss opportunities to earn higher yields Static spread discount rates distorts funding status and leads to sub-optimal sector allocationPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 16
  18. 18. 0 100 200 300 400 500 600 700 800 Agency 1-3 24 Agency 3-7 44 Jan-03 Agency 7-10 54 Agency 10+ PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 51 Max Agency TOT 39 Credit Cards 72 75% Disc MBS (P<=100) 0 Prem. MBS (P>=100) 86 Mean 15-Year MBS Source: Salomon Yield Book and State Street Research 90 Monthly Spread History - Jan 1989 to Jan 2003 Agency MBS 86 25% AAA/AA Corporates 1-3 60 AAA/AA Corporates 3-7 Min 100 AAA/AA Corporates 7-10 167 AAA/AA Corporates 10+ AAA/AA Corporates TOT 113 105 A Corporates 1-3 119 A Corporates 3-7 A Corporates 7-10 142 145 A Corporates 10+ 154 A Corporates TOT 141 BBB Corporates 1-3 30217 BBB Corporates 3-7 318 BBB Corporates 7-10 280 BBB Corporates 10+ 267 BBB Corporates TOT 291 BB Corp. 707 CASE FOR DYNAMIC-SPREAD LIABILITY BENCHMARKS -HISTORICAL SPREAD VOLATILITIES 17
  19. 19. 18 TRADITIONAL ALTERNATIVES TO STATIC SPREAD DISCOUNTING Two Alternatives Market-based Spread Examples include: Single-A long corporates Swap spread High-grade corporate option-adjusted spread Portfolio Spread Some use duration-weighted option adjusted spread of the portfolio Both Alternatives May Not Be Optimal Market and portfolio asset mix may not be necessarily optimal from absolute volatility standpoint Traditional alternatives to static spread discounting are not necessarily optimalPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 18
  20. 20. 19 OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY Benefits Minimizes tracking error and other forms of risk such as VAR vs. static-spread liability benchmark Based on an optimal allocation among spread sectors across all maturities Downside risk constraints can be used to control allocation of risk It is equivalent to highest Sharpe ratio portfolio in absolute space Optimal Dynamic-Spread methodology leads to benchmarks with minimum variance w.r.t. static-spread liabilitiesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 19
  21. 21. 20 OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY - BASIC STEPS Step 1: Target Return Over Treasury – Establish required long term spread to meet long term liabilities – Add a target strategic added value Step 2: Define Investible Fixed Income Universe – Treasuries, Agencies, ABS, CMBS, AAA-AA Corporates, A Corporates, BBB Corporates, BB Corporates, Mortgage Pass- Throughs Step 3: Collect appropriate historical volatility of option- adjusted spreads (OAS) for all sectors Step 4: Define Allocation ConstraintsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 20
  22. 22. OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY - BASIC STEPS 21 Step 5: Perform Risk Constrained Optimization – Objective: Min VAR (or Single Downside Risk) – Constraints: • Duration Weighted OAS = Target Return Over Treasury • Other constraints such as  Duration Spread < x1  Spread Product % < x2  ABS and CMBS % < x3  High Grade Corporates <x4  High Yield % <x5  Etc. Step 6: Mark-to-Market Duration Weighted Spread Periodically • Keep sector weights constant • DWLOAS = Duration-Contribution Weighted Liability OASPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 21
  23. 23. ONGOING EVALUATION OF DYNAMIC-SPREAD LIABILITY BENCHMARK 22 Dynamic Spread Liability Return For Each Period – DSLV1 = Cash flows discounted at Treasury+ beginning DWLOAS1 – DSLV2 = Cash flows discounted at Treasury+ ending DWLOAS2 – Return Liability = DSLV2/DSLV1 - 1 – Note: Process has to be unitized to each cash flow disbursement Review Funding Status and Surplus/Deficit Status – Portfolio - DSLV – Required return over treasuries – Appropriateness of VARPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 22
  24. 24. HISTORICAL SPREAD SUMMARY 23PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 23
  25. 25. OPTIMIZATION FRAMEWORK 24PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 24
  26. 26. RISK OPTIMIZATION RESULTS 25PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 25
  27. 27. 26 ISSUES NOT CAPTURED BY DYNAMIC-SPREAD LIABILITY BENCHMARK Duration Weighted Liability OAS (DWLOAS) does not reflect downgraded issues leaving the benchmark each month! This can lead to significant over-statement of liability benchmark returns Solution: Key-rate-matched Market Based BenchmarksPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 26
  28. 28. KEY-RATE-MATCHED MARKET-BASED BENCHMARKS 27 i n Blended Benchmark Wi * MktSeci i 1 Definitions – Sum of Square of Key Rate Errors = Sum (BB_Kduri minus Liab_KDuri)^2 – BB_KDuri = Blended Benchmark Key-Rate Duration I – Liab_KDuri = Static Spread Liability Key-Rate Duration I Solve for Wi’s – Minimize Sum of Key Rate Errors Squared – Subject to chosen constraints Revisit optimization periodically – Key-rate drift – Funding level – Risk tolerancePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 27
  29. 29. KEY-RATE-MATCHED MARKET-BASED BENCHMARKS 28 • Marking-to-Market Liabilities – Discount liability cash flows at Treasury + Duration-Weighted OAS of the Benchmark • Benchmark Return = RB = Σ { Wi * Ret Secti } • Benefits – Better Reflects Market Conditions – Less subject to market spread volatility – Clear Mandate - Managers are more accustomed to managing portfolios against market-based benchmarks – Transparent – More transparency of manager’s active management added value – More Observable – Can be independently measuredPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 28
  30. 30. 29 SUMMARY Optimal portfolios in absolute space can lead to significant risk vs. liabilities Static-spread liabilities can introduce significant mismeasurement of funding status and distort active management Dynamic-Spread Liability Benchmarks improve funding distortions but introduces credit migration and performance measurement ambiguities Key-Rate-Matched Market-Based Benchmarks mitigate many issues related to funding status and performance measurement Should lead to clearer definition of risk and more optimal active management in volatile marketsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 29
  31. 31. 30 II. Liability Driven InvestingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  32. 32. CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI 31 LDI == Disciplined Approach to Investing  Level I: Comprehensive portfolio strategy and capability analysis  Asset-Liability Assessment  Various Fund Due Diligence  management and operational evaluation  risk measures, scenario analysis, drawdown, performance analysis and attribution  Level II: Liability-Driven Investing  Asset and strategy allocation  Portfolio construction & optimization  Level III: Ongoing asset management and evaluation of emerging asset classes  Distinguished by thoughtful and in-depth ongoing risk assessment, valuation, performance monitoring and attribution for broad array of fixed income, equity, and alternative asset types and strategies including esoterics  Customized Strategies:  Fixed Income – Short duration, Core, Core+, Long Duration, Immunization,  Equity – Quant Equity (US, Non-US, Global), Long Only130/30, Long/Short  Alternatives - Structured Products, Asset-based Lending, Specialty Finance, EsotericsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  33. 33. CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI 32 LDI Challenges  Asset Management Infrastructure  Tailored and Integrated Front To Back Office Solutions - Full turn-key front-to-back solutions and services  Front Office: Decision support infrastructure, portfolio management workstation, up-to-date portfolio risk analytics & reporting, trade order management and execution, valuation, asset liability management and relative value analysis tools  Middle Office: Trade capture and processing, services, interface with depository and custodial services, collateral management, counterparty management, performance attribution and benchmark comparison  Back Office: Investor reporting, integration with third party administrators, performance attribution  Solution Elements  Quantitative and fundamental valuation, pricing and risk analysis of:  equities, fixed income, real estate, commodities  Hedge fund strategies, fund of funds  Private equities  Structured products  Derivatives  Esoterics  Emerging assets  Valuation of hard -to-value assets including residential, commercial, consumer, equipment, project finance loans and structured products  Cash flow forecasting, sensitivity analysis, stress testing , scenario analysis, relative hedge analysis, economic/rating agency/statutory capital  Daily, weekly, monthly portfolio and security valuation and risk analytics for broad array of fixed income, equity, structured products, derivatives, and alternative asset typesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  34. 34. KEY LDI REQUIREMENT - KNOWLEDGEWARE 33 Market Experience, Technology and Process Core Competencies: Experienced professionals providing independent and transparent solutions Experienced Disciplined Processes Advanced Technology Professionals • Team comprised of traditional and • Transparent • Accessible throughout the entire emerging assets as well as geo-political • Well tested process – allocation, portfolio experts with deep experience in • Understood throughout organization management, risk management trading, portfolio and risk management • Open technology to provide • Scalable • Quantitative and fundamental skills • Focused on both assets and liabilities customized analytics, data • Deep understanding of intrinsic values management an actionable reporting, • Covering both liquid and illiquid assets • Comprehensive - asset and liability • Complex liability structures sides Decision Traditional and Making Emerging Assets Integrated Reporting Infrastructure Evaluation, I Asset nvesting, and Liability Risk Analysis Trading ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  35. 35. KEY LDI REQUIREMENT -KNOWLEDGEWARE 34 Enablers Knowledge- Asset Management, Risk Management, Solutions, Kno Driven Experience wledge-Driven Support Advice and Services Services Seasoned Senior Management with Scalable Integrated Management Deep Operating and Team of Cross Functional Expertise Integrated Technology, Granular Data, Open Analytics Infrastructure Platform, Flexible Reporting Process and Workflow Transparent Disciplined Disciplined Processes Scalable Customizable Solutions EfficientPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  36. 36. 35 III. Relatively New Alpha StrategiesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  37. 37. EXAMPLES OF RELATIVELY NEW ALPHA STRATEGIES 36 Emerging Sectors (New Media , Renewable) Equity - High Frequency, Global Quant Equity Merchant Banking Distressed and/or Illiquid Fixed Income Distressed Real Estate Specialty Finance Esoterics Frontier InvestingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  38. 38. ALPHA STRATEGIES AND STYLES 37  Market-Based Fixed Income  Short-Duration, Core, Core+, Long Duration, High Yield, Emerging Markets, Real Portfolios  Global Quant Equities  Long only, Long/Short, 130/30 US-only, Non-Us, or Global for small, medium, large and all cap  Hedge Funds and Fund of Funds  Myriad of strategies  PRIVATE EQUITY  Renewable  New Media  Cloud-computing  Merchant bankingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  39. 39. ALPHA FIXED-INCOME AND REAL ESTATE STRATEGIES 38 Broad Based Asset Expertise Is Utilized Through Internal and External Resources  Active Trading  High Quality; High Yield; Leveraged Loan; Emerging Markets  Distressed Debt and Real Estate  Structured Products  Residential: REO Bridge Finance, Nonperforming Loans; REO Equity  CRE Recapitalization  Consumer Finance  Specialty Finance  Asset-based Finance  Supply Chain Finance  Insurance Linked: Premium finance, life settlement, longevity swaps  Esoterics: Structured settlement, Intellectual Property, Litigation  Real Estates  Debt, Equity, Distressed  Operating Companies and REITS  Core, Value Add, OpportunisticPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  40. 40. EMERGING STRATEGIES: MANAGING COMPLEX PRODUCTS FROM LOANS TO SECURITIES 39 Credit crisis has created unique opportunities within structured credit universe Spectrum of issues within structured credit leads to highly attractive and scalable skill-based asset management opportunities Structured product expertise, technology and process knowledge is highly specialized and leads to significant operational leverage Residential Real Estate Commercial Exotics Real Estate Structured Credit Expertise and Tools Specialty Consumer Finance Credit Leveraged FinancePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  41. 41. 40 IV. An Example of a Scalable Strategy: Quantitative Global EquityPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  42. 42. 41 GLOBAL QUANTITATIVE EQUITY Example of Equity Investment Philosophy Well-defined investment philosophy and well disciplined process.  We term our Philosophy Fundamental Objective  We believe human behavioral biases drive many existing market inefficiencies  We use both quantitative and qualitative research methods to exploit these inefficiencies  Our Philosophy’s practical and analytical process dominates “emotionally driven” approaches  Our Process manages multi-dimensional risks by using rigorous risk controls Fundamental  Quantitative  Practical PROPRIETARY AND CONFIDENTIAL41 ©2011 NewOak Capital LLC. All rights reserved.
  43. 43. 42 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Experience and Approach We have vast expertise in equity valuation techniques across equity asset classes. Our team have outperformed their benchmarks in long only, long short, and market neutral strategies. We have experience in both public and private equity analysis throughout the world and across company size.  Factor Analysis  Valuation  Long/Short Relative Value  Proprietary Nonlinear Transaction Cost Analysis  Portfolio Optimization and Trading  Includes transaction cost management  Risk Management  Scenario Testing  Time Series  Attribution AnalysisPROPRIETARY AND CONFIDENTIAL 42©2011 NewOak Capital LLC. All rights reserved.
  44. 44. 43 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Process We base our Investment Process upon three main concepts:  Alpha Driven  High alpha stocks are purchased and held – except when alpha data is suspect  Stocks become sell candidates when alpha drops below the top quintile  Risk Controlled  Stocks chosen to replace stocks sold are chosen to help control risk as well as to raise portfolio average alpha  Market, Size, Style, and Energy risk are kept close to benchmark exposure – Northfield, BARRA, Axioma are useful tools  Region, Sector, and Region/Sector weights are kept to within +/-10% of benchmark weights  Transaction Cost Sensitive  Alpha must exceed estimated transaction costs  Transaction costs are non-linear as trade sizes increase PROPRIETARY AND CONFIDENTIAL43 ©2011 NewOak Capital LLC. All rights reserved.
  45. 45. 44 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Experience and Approach We Believe Human Behavioral Biases are the key to Quantitative Modeling. Cause of Inefficiency Factor Group Factor Group Description How attractively is the stock priced Emotional Investor Behavior Relative Value relative to industry peers? Imperfect Reaction to New Momentum/Sentiment Are analysts and investors upgrading Information their view of the stock? Are insiders at the company acting Separation of Ownership and Insider/Management as if the stock is cheap in a Management shareholder-friendly way? Has the stock appreciably Impatient Trading and/or Short-term Short-Term/Technical out/underperformed its industry Overreaction peers recently? News Analytics Does stock price reflect qualitative Incomplete Information Set information?PROPRIETARY AND CONFIDENTIAL 44©2011 NewOak Capital LLC. All rights reserved.
  46. 46. 45 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Process We divide the world into 90 categories by Region and Economic Sectors. Region 0 1 2 3 4 5 6 7 8 Australi Middle United Europe UK & Asia Latin Sector FTSE AWI Weight a & New Japan Canada East & States ex UK Ireland Pacific America Zealand Africa 0 Oil & Gas 4.23% 1.27% 1.55% 0.18% 0.78% 0.12% 0.83% 0.71% 0.66% 1 Basic Materials 1.20% 1.38% 1.13% 0.88% 0.99% 0.61% 0.76% 0.48% 0.83% 2 Industrials 4.80% 2.45% 0.42% 0.23% 1.73% 1.64% 0.22% 0.15% 0.21% 3 Consumer Goods 4.25% 3.02% 1.05% 0.08% 1.24% 1.85% 0.05% 0.08% 0.34% 4 Health Care 4.50% 1.71% 0.74% 0.10% 0.09% 0.43% 0.00% 0.21% 0.01% 5 Consumer Services 4.93% 0.98% 0.79% 0.37% 0.53% 0.65% 0.17% 0.22% 0.26% 6 Telecommunications 1.39% 1.24% 0.59% 0.05% 0.70% 0.35% 0.11% 0.26% 0.30% 7 Utilities 1.45% 1.21% 0.35% 0.09% 0.36% 0.41% 0.03% 0.10% 0.22% 8 Financials 6.80% 4.43% 1.83% 1.48% 3.34% 1.37% 1.32% 0.63% 0.92% 9 Technology 6.75% 0.63% 0.10% 0.00% 1.43% 0.56% 0.12% 0.01% 0.00% Portfolio Weights are controlled, relative to these categories, as part of a rigorous risk control process which also controls for market beta, style, and size risks.PROPRIETARY AND CONFIDENTIAL 45©2011 NewOak Capital LLC. All rights reserved.
  47. 47. 46 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Process We believe experience-driven insights into the data are critical to the Process.  Bad Earnings Data: Spreadsheet Manual Entry  Conditions Change: Morning Earnings Surprise  Conditions Persist: Short-Term Price Reversal Window  Complex Industry Schemes: Japanese Financials, European Industrials  Global Correlations: Oil and Financials Good managers confirm the quantitative results, they don’t obey it. PROPRIETARY AND CONFIDENTIAL46 ©2011 NewOak Capital LLC. All rights reserved.
  48. 48. 47 GLOBAL QUANTITATIVE EQUITY Quant Equity Team’s Investment Performance Our team has outperformed their benchmarks since 1996  Managed 5-star Morningstar international equity long-only fund  Responsible for $10 billion in long-only mandates  Demonstrated value-add from both long and short positions Time Strategy Benchmark Period Asset Class Benchmark Period Return Return Alpha International BNY 2004 to 9.8% 7.1% 2.7% 130/30* ADR/FTSE 2010 Long Only MSCI EAFE 1996 to 5.9% -0.9% 6.8% International** 2002q1 US Large Cap*** S&P 500 1996 to 9.4% 6.8% 2.6% 2010 US SMid Cap*** Russell 2500 1996 to 17.5% 9.3% 8.2% 2010 * Returns are gross of fees. Note on the Benchmark and Universe: The fund Benchmark changed from the Bank of New York ADR Index to the FTSE All-World ex US Index on 1/1/2007 to reflect the expansion of the portfolio’s composition. Through November 2006, our universe consisted of the 650 most liquid ADRs and US GDRs. On December 1, 2006, our universe expanded to include 4,000 of the most liquid common equity shares on local exchanges in the global markets ex-US. Data referring to excess return over a “Benchmark” refers to the Benchmark that was in effect at the time in question. ** Long Only International performance was produced at ING/Aeltus Investment Management in mutual fund and institutional separate account vehicles including a five star Morningstar rated mutual fund. *** Large Cap and Smid Cap performance was produced at ING/Aeltus Investment Management in mutual fund and institutional separate account vehicles from 1996 until 2004. PROPRIETARY AND CONFIDENTIAL47 ©2011 NewOak Capital LLC. All rights reserved.
  49. 49. 48 GLOBAL QUANTITATIVE EQUITY Quant Equity Product Research & Development We have developed a superior International Small Cap Model: Global SC Fund Alpha Predicted Actual 9/30/2003 Tracking Error Tracking Error Inception 2003 14.63% 16.50% 1.88% 3.9% - 4.1% 6.0% 2004 30.42% 43.22% 12.80% 2005 22.51% 50.62% 28.11% Periodicity Hit Rates 2006 32.55% 45.15% 12.60% 2007 13.56% 23.21% 9.65% Monthly 69% 2008 -52.03% -46.02% 6.02% Quarterly 93% 2009 61.24% 69.32% 8.09% Annually 100% Part Year - Nov 2010 14.13% 19.81% 5.67% Annualized Since Inception 13.21% 24.90% 11.69% Time Period September 2003 to November 2010; PROPRIETARY AND CONFIDENTIAL48 ©2011 NewOak Capital LLC. All rights reserved.
  50. 50. 49 GLOBAL QUANTITATIVE EQUITY Quant Equity Product Research & Development An additional model for the US market: Annualized Alpha 14.0% 12.5% 12.0% 9.8% 10.0% 8.6% 7.7% 8.0% 6.0% 4.0% 2.0% 0.0% International v FTSE AWI Smid Cap v Russ 2500 Large Cap v S&P 500 Index Large Cap v Russ 1000 ex US Index Index Annualized Alpha Top Decile Versus Benchmark Time Period 2001 to 2010PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  51. 51. 50 V. Dodd-Frank and Its Impact on LDIPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  52. 52. THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 51 The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act") passed in July 2010 and required several regulatory agencies including the SEC, CFTC and FDIC to propose and finalize more than 500 rules in order to give shape and structure to the sweeping reform of the financial regulatory system envisioned by the Act. Several key regulations under Title VII of the Act related to the $600+ trillion derivatives market are being finalized in 2011 General objectives are transparency, reducing systematic risk, ensuring orderly markets OTC derivatives markets Significant objective is to move the OTC derivatives transactions (“Swaps”) activities to the regulated exchanges with clearing through central clearing houses Use of clearinghouses “mutualize “ the counterparty risks among members hence reduce the systematic risks  Implications: The definition of “swap” is very broad All parties will be affected and need to assess the relevant compliance rules, operational risks, business costs, and how it affects them. No one is exempted from record keeping, reporting, and rules of conductPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  53. 53. Fund Managers Under Dodd-Frank 52 Challenges and Requirements Ahead for OTC Derivatives Activities Collateral management requirements including Counterparty risk management Liquidity management Risk-based margining •Marked-to-market and Value-At-Risk •Collateral optimization  Operational •Collateral amount verification •Collateral movements mechanism and costs  Administrative •Record keeping and reporting •Rules of conduct Hedge Fund Transparency Fund-of-fund position aggregation Collateral management validation and optimization Hard-to-value assets and investor reportingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  54. 54. Fund Managers Under Dodd-Frank 53 Methodical Steps to Take Types of Transactions  Currently involved in (“on the book”)  Contemplated transactions  Entity Classification  Highly Regulated – depends on level of activity as well as purpose •SD – Swap Dealer • MSP – Major Swap Participants  Eligible Financial Participants –ECP •Can do bilateral transactions •Must have a level of sophistication and financial means Less Regulated - Commercial End Users (“CEU”) • Must be using it for hedging or mitigate risk •Cannot be a financial entity!  Execution and Clearing Requirements  Not all swap types require centralized execution and clearing but most doPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  55. 55. COLLATERAL MANAGEMENT FOR INSTITUTIONAL ASSET MANAGERS 54 Integral part of risk and liquidity management CREDIT RISK EXPOSURES • SECURITIES LENDING • PORTFOLIO LOANS • OTC DERIVATIVES • IF NOT ALREADY WILL BE 100% SUBJECT TO ISDA, CSA, AND COLLATERAL POSTING COLLATERAL MANAGEMENT MITIGATES COUNTERPARTY CREDIT RISK BUT INTRODUCES OPERATIONAL RISKS CREDIT RISK MANAGEMENT LEADS TO COLLATERAL MANATEMENT  OPERATIONAL ISSUES TIMELY FORECAST OF VARIATION MARGINS • DERIVATIVES AND COMPLEX SECURITIES PRICING SENARIO ANALYSIS  VALUATION AGENT AND DISPUTE MECHANISIM COMPLEX DOCUMENTAION OPTIMIZATION TIMELY EXECUTION REHYPOTHECATION CAN LEAD TO CASCADING EFFECTSPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  56. 56. WHO NEEDS COUNTERPARTY AND COLLATERAL RISK MANAGEMENT CAPABILITIES 55 VAST ARRAY OF FINANCIAL INSTITUTIONS WITH COUNTERPARTY EXPOSURES Banks • Global and Domestic Banking Institutions Insurers , REITS, Specialty • Life and P&C Insurance Companies, Reinsurers, REITS, Specialty Finance Finance Asset Managers/Treasurers • Traditional and Alternative Asset Managers, Treasurers Governmental Agencies • Central Banks, Sovereign Funds, Supra-nationals, Government Agencies Pension & Endowments • Pension Funds, Foundations and EndowmentsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  57. 57. 56 VI. LDI - Solutions and Infrastructure NeedsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  58. 58. LIABILITY DRIVEN INVESTING 57 LDI REQUIRES AN NTEGRATED APPROACH TO RISK, ASSET AND FINANCIAL MANAGEMENT Front Office: Portfolio Workstation, Risk & Trade Management, AL M STRUCTURED: Middle GLOBAL FIXED FIXED INCOME RMBS, CMBS, Office: Trade INCOME DERVIATIVES ABS, CDO, CLO, Regulatory Reporting & Processing, Cleari Compliance ng, Valuation, Col CSO, SIVS lateral Management INTEGRATED APPROACH TO WHOLE LOANS REAL ESTATE ALTERNATIVES ASSET MANAGEMENT SERVICES GLOBAL EQUITIES PRIVATE Counterparty Back Office: and Collateral Reporting, Performance EQUITIES DERIVATIVES EQUITIES Measurement, Attribution Management Liquidity, Credit & Asset Liability ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  59. 59. ASSET MANAGEMENT/RISK MANAGEMENT ENVIRONMENT 58 INFRASTRUCUTURE REQUIREMENTS RAPIDLY RISING WITH THE SIZE OF OPPORTUNITIESThe environment is ideal penetrating and Well-Definedcapturing market share in regimented Strategies: Fixed, Equities, Asset-global fixed income, equity, and alternative Based Lending, Specialtyasset management Finance Front Office:• The mounting importance of asset liability Counterparty and Collateral Management Portfolio, Risk & Trade Management and credit management• The growing demand for global fixed income and diversified equity products • Increase in fixed income-focused financial institutions Asset/Risk • Global quant equity opportunities• Global growth of multi-family offices Regulatory Reporting & Management Middle Office: Trade Processing, Clearing, V Compliance• Ever increasing demand for articulated and aluation, Collateral Management transparent asset management by pension plans, private wealth and financial institutions• The mounting complex regulatory risk Back Office: management and reporting requirements Credit Risk & Asset Liability Management Reporting, Performance Measurement, AttributionPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  60. 60. ANALYTICAL PLATFORMS NEEDS 59 TRANSPARENT, COMPREHENSIVE, AND SCALABLE TM Must be designed to leverage the best technology and expertise to provide best-in-class solutions to optimize the following key concerns:  Transparent and comprehensive  Embracing modern technologies to overcome legacy platform issues  Incorporate valuation, attribution, scenario analysis & reporting Performance Scalability Fixed Income Equities Customization Usability Portfolio Alpha Mgmt Models Web-based Reporting Credit Risk Customizable Risk Models Analytics Mgmt Complex Rapid Deployment Securities & Derivatives Loans Multi-Entity High Availability Hosted Services, Cloud ComputingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  61. 61. WORLD OF COMPLEXITY 60 Sophisticated Analytical & Execution Platform Needed Cross-Asset Class Capability Is Required for A Comprehensive Counterparty and Collateral Management System COMPLEXITY COMPLEX SECURITIES DERIVATIVES ILLIQUID LIQUID CONTINGENT CLAIMS SECURITIES AND DERIVATIVES RMBS CMBS Consumer ABS HY & IG Bonds Esoteric Assets LOANS/CREDITS Residential Commercial Consumer / Student Corporate Esoterics Contracts Mortgage Mortgage Loans Credit GRANULARITY Comprehensive state-of-the-art large scale analytical systems needed for valuation and risk management of complex securities and portfolios .  Credit intensive analysis is needed for most instruments to uncover risks not apparent from traditional analysis.  Forward-looking views and scenarios to  Multivariate stresses needed to be applied around forecasts to capture alternate future states of the world  Interest rates, currencies, defaults,PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  62. 62. OPEN RISK SOLUTIONS 61 Next Generation Portfolio and Risk Management Platform  Integrated platform – open, flexible, connecting risk management, portfolio management, trading, collateral management, financial management and reporting  Multi-asset class covering, liquid, illiquid, complex and derivatives, US and international  Proprietary plus open-interface credit and factor models supporting risk management, alpha generation, TM and asset allocation Fixed Income Equity Derivatives Complex Stratus - Loan Portfolio Risk Alpha & Risk Portfolio Electronic Risk & Collateral Securities & Collateral Management Management Models Management Trading Valuation Management Esoterics ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  63. 63. NEWOAK SOLUTIONS OpenRisk™ - OpenFixed 62 Next Generation Valuation & Risk Services  NewOak OpenRisk provides a comprehensive capabilities to managing multi-asset-class portfolios  Leveraging NewOak’s superior credit analytics and technology, NewOak can provide cost effective services across a variety of important functions: Deep-Dive Credit •See-through valuation, loss, cash flow analysis of structured products – RMBS, CMBS, CDO. CLO, Esoterics Analysis Risk Reporting •Risk reporting across first and second order sensitivities Cash Flow •Projected interest and principal (maturity, calls and prepayments) cash flows provided for static Forecasting (fixed-rate) and user defined dynamic scenarios (customizable shocks) Reinvestment Rate •The impact of changes in fixed rate and spread to benchmark upon projected cash flows Analysis Inflation Risk •Portfolio and asset class sensitivities to changes in realized and projected inflation rates Horizon Analysis •Projected return and forward-looking risk profile from user-defined interest rate shocks Drilldown Capability •Aggregate analytics provided at sector, subsector and cusip levels  With a customizable service model, NewOak can multiple deployment options:  Data Services  Hosted “Software-as-a-Service”  In-House installation and management.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  64. 64. COUNTERPARTY RISK MANAGEMENT 63 Opportunities and Perils In Counterparty and Collateral ManagementSpectrum of complex documentation COUNTERPARTYinterpretation, computation, valuation, optimi CREDIT ANALYSISzation, and execution leads to challenges andopportunities for state-of-the-art collateralmanagement systems and operations CREDIT TIMELY EXPOSURES EXECUTION DERIVATIVES & LOANS COUNTERPARTY Future RISK Today MANAGEMENT Legacy OPTIMIZATION ISDA & CSA VALUATION & MonitoringPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  65. 65. FLEXIBLE SYSTEM APPROACH TO REDUCE OPERATIONAL RISK 64 Collateral Management Capabilities Is Becoming A Requirement Systems to consolidate data across multiple Documentation Valuation/ platforms, sources and formats into a single Sensitivities integrated framework. CSA, Master Method ISDA, Scripti ng Agent Position Monitoring Tracking Cross Collateral Capability Dispute Simulation Resolution Liquidity Integrate Data from multiple sources and formats Management Optimization/ Credit Netting Rules-based workflow engine Customizable Reporting and Stratification of Portfolio Real-time reporting and status update Collect Collateral Web-based for global distribution Management & Analyze Reporting ExecutePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
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