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Frontier

  1. 1. Managed Futures: Creating More Efficient Portfolios NMA Conference 2011Frontier Investment Management LLP, Berkeley Square House, Berkeley Square, Mayfair, London W1J 6DB United Kingdom t +44 (0) 20 7317 6900 e info@frontierim.com w www.frontierim.com
  2. 2. Frontier Investment Management Overview• Founded in 2004 and focus on strategic, diversified, low-cost investment solutions• Independent, privately owned and entrepreneurial business specialising in advanced indexation t t i i d ti strategies and alternative investments d lt ti i t t• Evidence-Based Investing: Investment philosophy founded on 100 years of research and empirical evidence• Manages both onshore and offshore multi-asset funds as well as innovative alternative investment strategies• AUM approximately $650m and 18 partners/employees• Diversified, high-quality client base comprising leading IFAs, wealth managers, private individuals, charities and institutions 2
  3. 3. What is Managed Futures?• Professional money managers pursuing an alternative investment strategy• Industry has been in existence for more than 25 years• Initially traded futures contracts only available on Commodities, hence the managers were originally called “Commodity Trading Advisors” or “CTA’s”• Today managers trade extremely liquid listed futures contracts and currencies across y g y over 80 markets/instruments worldwide on a 24 hour basis• Global opportunity set across commodities, currency and financial futures• Generally pursue market momentum or trend following strategies using rules based trading strategies. A minority of managers use discretion• Considered a separate asset class to Hedge Funds due to unique return profile and low correlation to other asset classes, particularly to equities during bear markets classes• Benefits from the technical and behavioural characteristics exhibited in financial markets
  4. 4. Trading Strategies• Managed Futures employ a number of different strategies to trade across all liquid global markets for which futures exist.• The most popular strategies are: Trend following: use of technical indicators (e.g. moving averages, breakouts) to detect trends. Counter Trend: designed to profit from pullbacks and reversals Arbitrage: seek to profit from price differences (e.g. the price of a commodity on two different exchanges Fundamental: use information such as weather patters, economic reports or crop data to determine a trade. Diversified funds use a combination of these trading strategies. g g• Time horizon is important – Identical trading strategies used in the same market may produce very different results depending on the time frame (short-, medium or long term) (short , medium- long-term)
  5. 5. Market Focus of Trading Strategies Market FocusSource: Frontier Investment Management LLP.Estimated market breakdown based on Managed Futures funds that report to industry databases.
  6. 6. Performance vs Global Equities and Bonds Superior Performance to Equities and Bonds Since 1991 500 Managed Futures 450 Global Equities Global Bonds 400 350 300 250 200 150 100 50 0 ec-90 ec-93 ec-96 ec-99 ec-02 ec-05 ec-08 ar-93 ar-96 ar-99 ar-02 ar-05 ar-08 un-92 un-95 un-98 un-01 un-04 un-07 un-10 ep-91 ep-94 ep-97 ep-00 ep-03 ep-06 ep-09 Ma Ma Ma Ma Ma Ma De De De De De De De Ju Ju Ju Ju Ju Ju Ju Se Se Se Se Se Se SeSource: Bloomberg, Frontier Investment Management LLP
  7. 7. Managed Futures Performance • Attractive annual returns, few negative years Annual Returns from 1991 20% 15% 10% 5% 0% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 -5%Source: Bloomberg, Frontier Investment Management LLP
  8. 8. Performance vs Global Equities • Positive correlation in rising markets and negative correlation in falling equity markets From To Global Equities Managed Futures Correlation January-80 November-80 Bullish 25% 45% -0.10 December-80 July-82 Bearish -24% 17% -0.04 August-82 August-87 Bullish 279% 147% 0.04 September-87 November-87 Bearish -21% 8% -0.01 December-87 December-89 Bullish 68% 29% 0.20 January-90 y September-90 p Bearish -28% 24% -0.76 October-90 August-00 Bullish 304% 125% 0.01 September-00 March-03 Bearish -46% 29% -0.47 April-03 p May-06 y Bullish 119% 25% 0.53 June-07 February-09 Bearish -50% 23% -0.20 March-09 December-10 Bullish 65% 5% 0.26 January 80 January-80 December 10 December-10 1320% 2491% -0 03 0.03Source: Bloomberg, Frontier Investment Management LLP
  9. 9. Why Invest in Managed Futures?Managed Futures provides diversification benefits when added to existing stock,bond and/or hedge fund portfolios by:• Reducing R d i overall portfolio volatility ll tf li l tilit• Enhancing overall portfolio returns in difficult economic environments• Providing uncorrelated returns and improved risk adjusted returns• High degree of liquidity, usually daily• Trade in the most liquid futures and currency markets in the world• Trade mainly exchange listed futures contracts on regulated exchanges• Large amount of academic research indicates large benefits when combined with traditional asset classes
  10. 10. Uncorrelated Returns Correlations to Other Asset Classes January 1991 to December 2010 100% 80% 60% 40% 30% 25% 20% Global Real 12% Equities 1% 3% Estate 0% Global Emerging Emerging E i -2% 2% Commo- Hedge -5% -20% Fixed Equities Bonds dities Funds Income -40% -60% 60% -80% -100%
  11. 11. Enhancing a Traditional Portfolio• An allocation to Managed Futures into traditional equity/bond portfolios can increase returns and decrease risk t dd i k 7.8% 100% Managed Futures 7.7% 7.6% 7.5% Annualised Return 46% Allocation to Managed Futures 7.4% R 7.3% 7.2% 7.1% 7.0% 6.9% 100% Equity/Bond Portfolio  (60/40) 6.8% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 1 Volatility (Annualised Standard Deviation)
  12. 12. Industry Growth The Managed Futures industry is has grown steadily since 1980 Managed Futures Industry Growth Since 1980 250 200 150 on $ Billio 100 50 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Q1 2010Source: BarclayHedge, Frontier Investment Management LLP
  13. 13. Risks of Investing in Managed Futures• Market risk – Managed futures need a trend or trigger to be able to trade – Performance can be lacklustre in flat markets – Trading costs can be high in a market that changes direction shortly after a signal is given (“whipsaw”)• Model risk – Trading strategies can involve very complex models• Manager risk – Si l manager event risk i an aspect of any f d i Single t i k is t f fund investment t t• Ensuring a high level of diversification within a portfolio of Managed Futures strategies helps to mitigate these risks – Across managers – Across strategies – Across time horizons
  14. 14. Frontier Multi-Asset Portfolios• Frontier’s multi asset funds have always included an allocation to Managed Futures Current Balanced Fund Asset Allocation• ‘Cautious’ fund launching February 2011 – Targeting lower volatility than Balanced Fund – Income and accumulation shares available
  15. 15. Accessing MF: FrontEdge Managed Futures Fund• Diversified fund of managed futures strategies – Provides investors with an efficient means to access the returns of the managed futures industry – Target 15-25 underlying single managers• Aims to generate risk-adjusted returns in excess of the managed futures industry* – L Low correlation to both equities and hedge funds (target -0.3 t +0.3) l ti t b th iti d h d f d (t t 0 3 to 0 3) – Minimize exposure to single manager risk – Maximise investor liquidity• High levels of liquidity – Fund liquidity twice per month, 5 days notice – High standard of underlying investment liquidity• Structural and specific alpha capture – Proprietary database enables unique industry viewpoint – Experienced investment team with proven track record investing in CTAs p p g* Currently defined as the CISDM CTA Asset Weighted Index 15
  16. 16. Investment Process Overview• Aim to build a portfolio of CTA managers with superior risk-adjusted returns and high diversification benefits, whilst minimizing exposure to single manager risk and maximising investor liquidity. g q y Portfolio Manager 1. Proprietary Database Selection Recommendations 2. 2 Universe Mapping Ongoing 3. Quantitative Portfolio 4. Qualitative 4 Q li i 5. Review via Risk Selection due diligence Management 16
  17. 17. 1. Proprietary Database• Proprietary database combines 5 leading databases to ensure maximum fund inclusion• Enhanced with in-house research on non-reporting f d that account for an E h d ith i h h ti funds th t tf additional 20% of industry assets 5 Databases; 25 000 entries 25,000 + Non-Reporting Funds 5,000 Unique Funds 1000 CTAs CTA• Enables an enhanced understanding of the industry and its drivers 17
  18. 18. 2. Universe Mapping Proprietary database mapping is a key tool: • Portfolio constructed and managed to be broadly representative of the industry g y p y • Captures embedded factors that make Managed Futures an attractive asset class Short-Term Trend Following 17% Long Term Trend Following 52% Long-Term Systematic Global Macro 14% Contrarian 7% Multi-Term Trend Following 10%The above weights are indicative only and may not represent the actual weights of the FrontEdge Managed Futures Fund 18
  19. 19. 3. Quantitative Screening & Monitoring• Managers are assessed and monitored according to both their individual attributes AND relative attributes vs other managers within the portfolio• A cross-correlation matrix provides th P tf li M l ti ti id the Portfolio Manager with a b i f b th ith basis for both selection, and risk management Sum  Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Correlation CN GM LT LT ST LT LT GM C ST LT LT LT MT GM LT Fund 1 15.5% 15.2% 14.1% 4.6% ‐17.0% 12.1% 29.0% 32.0% 20.2% ‐17.8% ‐31.2% ‐10.0% 31.5% 16.6% ‐9.2% 1.06  Fund 2 0.3% ‐9.1% ‐0.9% 10.2% ‐3.3% ‐10.2% 18.7% 29.6% 1.9% ‐31.0% 11.0% ‐18.2% 5.4% ‐10.3% ‐0.06  Fund 3 20.3% ‐23.4% ‐20.1% ‐3.6% ‐20.4% 39.9% 10.7% 7.2% 22.6% ‐21.9% ‐23.4% ‐37.3% 13.2% ‐0.36  Fund 4 ‐21.5% 5.1% 47.3% ‐13.8% 27.7% 14.9% 7.3% 49.8% 18.0% ‐13.2% ‐15.2% 40.9% 1.47  Fund 5 35.8% 57.1% 46.0% 21.7% 30.8% 29.4% ‐38.9% 55.4% 39.9% 66.7% 31.2% 3.75  Fund 6 45.2% 2.3% 17.3% 31.5% 65.0% ‐41.5% 54.6% 9.4% 64.3% 44.8% 2.93  Fund 7 19.7% 39.0% 29.3% 45.5% ‐9.7% 68.3% 27.0% 48.9% 64.8% 3.33  Fund 8 ‐15.9% 21.9% ‐11.8% ‐31.2% 14.0% 81.8% 35.8% 5.4% 1.00  Fund 9 45.1% 28.2% ‐1.9% 32.9% 1.0% 18.0% 15.6% 1.39  Fund 10 44.9% 7.3% 31.2% 27.6% 31.5% 31.1% 1.74  Fund 11 ‐16.7% 49.5% ‐3.9% 46.4% 63.3% 1.39  Fund 12 ‐32.0% ‐26.7% ‐63.9% 12.5% ‐1.10  Fund 13 22.0% 72.5% 42.2% 1.37  Fund 14 36.8% ‐0.9% 0.36  Fund 15 32.0% 0.32  Fund 16 Fund 16 Sum Correlation 0.00  0.15  0.16  0.25  ‐0.41  0.14  1.55  0.53  1.80  2.34  2.00  ‐1.22  2.71  1.55  3.27  3.77  ANN RETURN 2.3% ‐0.8% ‐1.7% ‐0.7% 0.9% ‐4.9% 1.2% ‐0.6% ‐1.6% ‐0.3% 0.3% ‐2.1% ‐1.0% 0.5% 1.2% ‐0.9% ANN ST DEV 3.0% 1.4% 1.5% 1.6% 3.0% 3.4% 2.5% 3.1% 1.2% 1.0% 1.8% 2.7% 2.9% 2.0% 4.0% 1.2% RAR 0.75 ‐0.54 ‐1.11 ‐0.43 0.31 ‐1.45 0.47 ‐0.20 ‐1.40 ‐0.33 0.18 ‐0.80 ‐0.34 0.24 0.31 ‐0.78 CORRELATION 1.06  0.10  ‐0.21  1.73  3.34  3.07  4.88  1.53  3.19  4.08  3.38  ‐2.32  4.08  1.91  3.59  3.77  RAR 1 11 14 10 3 16 2 7 15 8 6 13 9 5 4 12 39% CORRELATION 4 3 2 6 10 8 16 5 9 14 11 1 15 7 12 13 61% 19
  20. 20. 4./5. Qualitative Due Diligence & SelectionInitial Due Diligence Quantitative Analysis Predominantly backward looking• Conducted directly b the P f li M C d d di l by h Portfolio Manager• Expertise: Investment team has conducted Qualitative Analysis: due diligence on over 200 managers to date Forward looking / manager view• Advantage over typical Fund of Funds: Investment team have experience of Financial and Macro Indicators: underlying investments used by managers Under/Over weight strategies to exploit opportunities or reduce drawdown• All non-financial information is accounted for and consideredOngoing Due Diligence Ongoing Portfolio • Key part of risk-management and ongoing monitoring of the portfolio it i f th tf li • Forward-looking Review via Risk Management due diligence & compliance 20
  21. 21. Risk Management & Monitoring - structure• Quantitative risk management – Aim to mitigate drawdown risk – Information fed back into investment process to manage market exposure and negative tail risk – Adjust and maintain volatility targets to industry• Qualitative i k Q lit ti risk management t – Non systematic risk given equal consideration to systematic risk – Information fed back into investment process and portfolio construction• Frontier Operations team – Full independent NAV reconciliations to administrator – Monitoring of portfolio risk limits – Independent monitoring of position and cash exposures – Daily monitoring and management of counterparty collateral – Fast production of NAVs – twice monthly by T+8 21
  22. 22. FrontEdge Managed Futures: Summary1. Diversified portfolio of managed futures strategies 15-25 underlying managers2. Capturing the b t f th M2 C t i th best of the Managed Futures asset class while minimising risk dF t t l hil i i i i i k Target of 5% of equity exposure per manager3. Aims to generate risk-adjusted returns in excess of the managed futures industry with low correlation equities lo co elation to eq ities and hedge f nds funds4. High levels of liquidity and transparency Twice per month, 5 days notice5. Experienced team supported by capable and independent in-house operations 22
  23. 23. Frontier Multi-Asset Portfolios• Frontier’s multi asset funds have always included an allocation to Managed Futures Current Balanced Fund Asset Allocation• ‘Cautious’ fund launching February 2011 – Targeting lower volatility than Balanced Fund – Income and accumulation shares available
  24. 24. One Fund … Eight Asset ClassesTraditional Asset Classes Alternative Asset Classes• Global Equities • Global Real Estate – MSCI World Total Return Index – Dow Jones Global Select Real Estate (Currency Hedged) Securities Total Return Index (Currency – 23 countries, 1894 equities Hedged) – 27 countries, 238 securities• Global Fixed Income • Commodities – Barclays Global Aggregate Bond Index (Currency Hedged) – S&P GSCI Light Energy Total Return Index – 35 cou t es, 12,105 bo ds countries, , 05 bonds – 5 Sectors – 24 Commodities• Emerging Equities • Hedge Funds – MSCI Emerging Market Total Return Index – HFRI Fund of Funds Composite Index – 25 countries, 854 equities , q – 800+ constituent Fund of Hedge Funds• Emerging Bonds • Managed Futures – JP Morgan Emerging Market Bond Index – CISDM CTA Asset Weighted Index – 33 countries, 145 bonds , – 500+ constituent CTA Funds i d 24
  25. 25. Multi Asset Investing improves risk-adjusted returns Combining asset classes with variable correlations increases returns and significantly decreases risk (maximum loss) Benefits of Modern Portfolio Theory (January 1991 – December 2009) PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3 PORTFOLIO 4 PORTFOLIO 5 PORTFOLIO 6 Global Equities 100% 60% 50% 40% 30% 25% Global Fixed Income 30% 30% 30% 30% 25% Global Real Estate 10% 10% 10% 10% 10% Commodities 10% 10% 10% 10% Emerging Equities 5% 5% 5% Emerging Bonds 5% 5% 5% Hedge F d H d Funds 10% 10% Managed Futures 10% TOTAL 100% 100% 100% 100% 100% 100% Annualised Return 8.3% 9.3% 9.3% 10.1% 10.1% 10.2% Volatility (Ann Std Deviation) y( ) 14.2% 9.4% 8.6% 8.6% 7.8% 7.2% Maximum Loss -49.1% -35.0% -34.2% -32.9% -30.0% -26.4% Avg Top 3 Maximum Losses -35.7% -21.9% -19.8% -18.8% -16.4% -14.6% Return/Volatility Ratio 0.59 0.99 1.08 1.17 1.29 1.41 Return/Maximum Loss Ratio 0.17 0.27 0.27 0.31 0.34 0.39 Return/Top 3 Maximum Losses R /T M i L 0.23 0 23 0.42 0 42 0.47 0 47 0.54 0 54 0.61 0 61 0.70 0 70Returns above use major benchmark indices for each asset class and assume annual rebalancing. Returns are hedged into GBP. 25
  26. 26. Why Invest in Managed Futures?Managed Futures provides diversification benefits when added to existing stock,bond and/or hedge fund portfolios by:• Reducing overall portfolio volatility• Enhancing overall portfolio returns in difficult equity market conditions• Providing uncorrelated returns and improved risk adjusted returns• High degree of liquidity trading the most liquid futures and currency markets in the world. Exchange traded and cleared with daily transparent pricing.• Large amount of academic research indicates large benefits when combined with L t f d i h i di t l b fit h bi d ith traditional asset classes• Large investors committed: Harvard Endowment, CALPERs, Norway State Pension fund• “The results are so compelling that the board of any institution, along with the portfolio manager, should be forced to articulate in writing their justification in not having a substantial allocation to the liquid alpha space of Managed Futures”• CME Group research paper: Lintner Revisited: The Benefits of Managed Futures 25 Years Later
  27. 27. Strategic Partnerships with Frontier• Frontier want to provide an extremely high level of service to a small number of “Strategic Partners (maximum 100) Strategic Partners”• Common understanding of how capital markets function• Focus on investor education• 4 Pill Pillars and H d F d M t l d Hedge Fund Masterclass h ld every month held th• Strategic status means helping you to simplify and systemise your investment offering and build your business – O t Outsourced one stop investment solution or core holding d t i t t l ti h ldi – Internal educational presentations – Development of your own Investment Policy – J i tl sponsored client d Jointly d li t days: “b i a f i d” “bring friend”• Frontier Engagement Process: Mutual due diligence 27
  28. 28. Contact DetailsFrontier Investment Management Andrew Cracknell t: +44 (0) 152 783 9747Berkeley Square House Partner, m: +44 (0) 781 0484 023Berkeley Square, Mayfair Head of Intermediary Business e: andrew.cracknell@frontierim.comLondon, W1J 6DBUnited Kingdom Bruce Gascoine m: +44 (0) 776 0263 666 Business Development Manager e: bruce.gascoine@frontierim.comt: +44 (0) 207 317 6900 ( )f: +44 (0) 207 317 6901 Jacob Berry t: +44 (0) 207 317 6906w: www.frontierim.com Business Development Manager m: +44 (0) 779 2525 635e: info@frontierim.com e: jacob.berry@frontierim.com 28
  29. 29. Important InformationThis document is issued for information purposes only by Frontier Investment Management LLP (“Frontier”) in respect of the Multi Asset Platform FundSegregated Portfolio company (the ‘Fund’). FrontEdge Managed Futures is a segregated portfolio within the Fund. Frontier is authorized and regulated bythe Financial Services Authority (“FSA”).The Fund is defined as an unregulated collective investment scheme and the promotion of such a scheme either within the UK or from the UK is restricted bythe Financial Services and Markets Act 2000 (“FSMA”). Consequently, this document is only made available to professional clients and eligible counterpartiesas defined by the FSA Conduct of Business Sourcebook 4.12.1R and the statutory requirements under FSMA. f fEach asset class is represented by a relevant market index. UK Equities are represented by the FTSE All Share Total Return Index. UK Bonds are represented bythe Citigroup 10-year Gilt Benchmark Index to April 1992 then FTSE Gilts All Stocks thereafter. US Equities are represented by the Standard & Poor’s 500 TotalReturn Index. US Bonds are represented by the Citigroup 10-year Treasury Benchmark Index to February 1990 then the Salomon Brothers Broad InvestmentGrade Index thereafter. Global Equities are represented by the MSCI World Total Return Index. Global Fixed Income is represented by the Citigroup WorldGovernment Bond Index (WGBI) to March 1993, then a blend of the Citigroup WGBI and US Corporate Bonds to September 2009 then the Barclays GlobalAggregate index. Emerging Equities are represented by the MSCI Emerging Markets Index. Emerging Bonds are represented by the JP Morgan EmergingMarkets Bond Index Plus. Real Estate is represented by US NAREIT to December 1989, followed by blend of 75% NAREIT and 25% to April 2007 then the DowJones Global Select Real Estate Securities Total Return Net Index. Commodities are represented by the S&P GSCI Index until April 2007 and the S&P GSCILight Energy Index thereafter. Hedge Funds are represented by the HFR Fund of Funds index (minus 1% survivorship bias) and Managed Futures by theCISDM CTA Asset Weighted Index (minus 1% survivorship bias).This document does not constitute an offer by Frontier to enter into any contractual/agreement nor is it a solicitation to buy or sell any investment. Nothingin this document should be deemed to constitute the provision of investment, financial or other professional advice in any way. Potential investors aredirected tdi t d to read the Fund prospectus and should always consult with their professional advisors. In the event that there are any diff d th F d t d h ld l lt ith th i f i l d i I th t th t th differences between this b t thipresentational material and the Prospectus, the terms of the Prospectus will prevail.The contents of this document are based upon sources of information believed to be reliable. Frontier has taken reasonable care to ensure the informationstated is factually true. However, Frontier make no representation, guarantee or warranty that it is wholly accurate and complete.Past performance is not necessarily a guide to future performance. 29

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