Responsible Investing in a Hedge Fund Context: A Case Study.

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William C. Crerend, President and Chief Executive Officer - EACM - USA

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Responsible Investing in a Hedge Fund Context: A Case Study.

  1. 1. Responsible investing in a hedge fund context: a case study TBLI Conference Europe Paris 2007 Prepared for professional investors only
  2. 2. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) About EACM Advisors LLC (‘EACM’) ● Approximately US$3.5 billion fund of hedge funds manager1 ● Over 15 years of experience in managing hedge fund of fund portfolios ● Wholly-owned subsidiary of The Bank of New York Mellon Corporation − EACM exercises investment autonomy and substantial operating control 1Based on assets of fund of hedge fund products as of 1 Nov 2007 Page 2
  3. 3. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Beginning ● Through its relationships with faith based investors, BNY Mellon identified a desire for socially responsible hedge fund exposure and discussed with EACM ● Mutual belief that such exposure would be beneficial long-term for such institutions, if it could be done appropriately ● Few investment vehicles that satisfy such requirements: − SRI consistent − Investment quality Page 3
  4. 4. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Framing the question ● Consulted faith based investors as to: − Objectives − Governing principles − Terms − Size of potential allocations ● Consulted select hedge fund managers and performed EACM’s own evaluation: − Impact on strategy − Interest level − Operational capabilities Page 4
  5. 5. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Framing the question (contd.) What would a high quality solution require? ● Investment perspective − Importance of diversification in hedge fund arena – multi-manager approach − Manager quality − Diverse strategy exposures Page 5
  6. 6. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Current outlook Underweight Investment ● Long oriented distressed Premises − Poor risk/reward despite recent spread widening ● US Convertible Arbitrage − Redemptions, poor new issuance, dividend/cash takeover fears Overweight Strategy ● Merger Arbitrage Allocation − Dramatic spread widening, particularly in LBO deals, has created a robust opportunity set − Continued deal volume with greater participation from strategic buyers balanced against sizable capital hoards ● Opportunistic Equity Event-Driven (Special Situations, Value with a catalyst, Activism) − Significant improvement in environment for this form of investing as corporations pursue strategic actions to benefit the equity side of the balance sheet Manager − Deployment of large cash balances for buybacks, asset purchases, dividend increases Selection − Unwinding of conglomerates created during the 1990s ● Opportunistic Equity Hedge − Strong cash positions = higher M&A volume and capital expenditures Portfolio − Individual company fundamentals driving stock prices Construction & ● Macro Management − Higher volatility across major asset classes enhances trading opportunities for macro practitioners − Desirable subset of managers Page 6
  7. 7. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Framing the question (cont...) What would a high quality solution require? ● SRI perspective − Consensus − Transparency − Independent review Page 7
  8. 8. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Guiding principles ● Listen – investors and managers ● Emphasis on investment quality ● Only consider managers being used in unconstrained mandates ● Seek strategy diversification similar to that present in unconstrained multi-strategy mandates ● Sufficient transparency to monitor adherence to principles ● Institutional objectives . Page 8
  9. 9. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Challenges Investor issues ● Diversity of views within the faith based investment community ● Opportunity cost ● Start up ● Consultants ● Critical mass Manager reluctance ● Investment ● Operational Strategy issues ● L/S equity concentration ● Strategy driven opportunities Page 9
  10. 10. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Addressing the challenges Recruit talented managers ● Leverage existing relationships ● Address screens ● Emphasise long term potential ● Feedback Active in discussing and trouble shooting operational issues with managers ● Screens ● Mechanics Find common ground and identify mechanism to permit investors to provide feedback on an ongoing basis Draw on support of BNY Mellon financially and otherwise Page 10
  11. 11. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Results at launch ● Mellon First Principle Fund launched May 2006 with US$76.9 million ● Objectives of Libor +6% with moderate volatility ● 7 managers ● Allocation to major strategy groups ● Significant seed capital commitment from BNY Mellon ● Screens relating to abortion, tobacco, pornography, alcohol, gambling and weapons of mass destruction ● ISS retained to independently screen portfolio on monthly basis ● Investor Advisory Committee established Page 11
  12. 12. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Present ● Mellon First Principle Fund reaches 18 month mark with over $225 million in Country strategy allocation2 assets1 Event-driven ● 10 managers, (7 hired, 2 terminated)2 40% ● Strategy content2 ● Investment and support from major religious, charitable and healthcare Relative value organisations, as well as their consultants 20% Global as s et allocators 12% Equity hedge funds 28% 1Total fund assets as 1 Nov 2007, including cash reserve and accruals for FOF-level expenses 2Strategy and manager allocations based on 1 Nov 2007 total fund assets and excluding cash reserve of approximately 3%. All strategy and investment manager allocations are subject to change, without notice, at the discretion of EACM. Past Performance is not a guide to future performance. Page 12
  13. 13. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Going forward ● Continue to add quality managers ● Further broaden investor base ● Explore creating funds based on different criteria ● Keep listening Page 13
  14. 14. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Footnotes The enclosed material is confidential and not to be reproduced or redistributed without the prior written consent of EACM Advisors LLC (“EACM”). Any statements of opinion constitute only current opinions of EACM, which are subject to change and which EACM does not undertake to update. Nothing herein constitutes an offer to sell, or solicitation of an offer to purchase, any securities, nor does it constitute an endorsement with respect to any investment area or vehicle. Any offer of securities may be made only by means of a formal confidential private offering memorandum. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors. Parties should independently investigate any investment area or manager, and should consult with qualified investment, legal, and tax professionals before making any investment. Interests in any EACM Advisors LLC serves as investment adviser to EACM investment vehicles and is an indirect, wholly owned subsidiary of The Bank of New York Mellon Corporation. Past performance is not indicative of future results. Page 14
  15. 15. MGI Pres/01 Pres/2007/Oct/EACM SRI (Oct 2007) Important information This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional investors and should not be relied upon by retail investors. All information relating to EACM Advisors LLC and the Mellon First Principal Fund has been prepared by EACM Advisors LLC for presentation by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained in this document are those of EACM Advisors LLC at the time of going to print and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. All information prepared within has been prepared by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained in this document are those of BNYMAMI at the time of going to print and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. Except where specifically noted, performance is stated gross of management fees. The impact of management fees can be material. Generally, investment management fees are charged based upon the size of the portfolio, computed quarterly. A fee schedule is available on request from BNY Mellon Asset Management International Limited. This document should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorised by BNY Mellon Asset Management International Limited to do so. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. This document is issued in the UK and in mainland Europe (excluding Germany) by BNY Mellon Asset Management International Limited. BNY Mellon Asset Management International Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. BNY Mellon Asset Management International Limited has a branch office in Dubai which is regulated by the Dubai Financial Services Authority. BNY Mellon Asset Management International Limited and EACM Advisors LLC are ultimately owned by The Bank of New York Mellon Corporation. CP836-26-10-2007 Page 15

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