Global 2009 Global Markets Conference Tel Aviv A Lawler

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Global 2009 Global Markets Conference Tel Aviv A Lawler

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Global 2009 Global Markets Conference Tel Aviv A Lawler

  1. 1. Hedge funds in the aftermath of the 2008 crisis 2009 Global Markets Conference – Tel Aviv Anthony Lawler 2 November 2009 A member of the Man Group
  2. 2. Important information This material is issued by Man Investments Limited which is authorised and regulated by the Financial Services Authority. This material is for informational purposes only and does not constitute a recommendation/solicitation of any kind. Information contained herein is provided from the Man database except where otherwise stated. Potential investors should note that alternative investments can involve significant risks and the value of an investment may go down as well as up. There is no guarantee of trading performance and past performance is no indication of current or future performance/results. This material is proprietary information of Man Investments Limited and its affiliates and may not be reproduced or otherwise disseminated in whole or in part without prior written consent from Man Investments Limited. This material is not suitable for Hong Kong or US investors. www.maninvestments.com 2
  3. 3. Prior hypothesis Time to reflect Why hedge funds? Attractive characteristics of alternatives still appealing Transparency and liquidity Why you should care 3
  4. 4. Prior hypothesis • Hedge funds add value when added to traditional portfolios – Improved downside protection – Lower volatility – More efficient portfolio 4
  5. 5. Prior hypothesis Time to reflect Why hedge funds? Attractive characteristics of alternatives still appealing Transparency and liquidity Why you should care 5
  6. 6. Time to reflect A difficult period for investors and asset managers 1 July 2007 to 31 August 2009 Fed launches Fannie/Freddie Short selling HFRI Fund of Funds Composite Index 1400 rescue plan3 World stocks ban4 Liquidity Reuters / Jefferies Commodities Index 1200 mismatch6 Period of market failure 1000 800 600 G7: Sub-prime Bernanke: losses > USD Index value USD (log scale) Sub-prime to 400bn cost USD Sharpest 100bn stock market 400 falls since 9/112 IMF: Credit crunch losses > USD 1 Counterparty Corporate and bank trillion bond markets failures5 ‘Green shoots’ seize1 rally Quantitative easing commences Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 7 “The worst nightmare of any risk manager is not when markets fall, but when markets fail” Source: BBC, Bloomberg and Reuters. World stocks: MSCI World Index hedged to USD (price return). There is no guarantee of trading performance and past or projected performance is not a reliable indicator of future performance. 1BNP Paribas reports complete evaporation of liquidity. The Fed, the ECB and the Bank of Japan all begin pumping money into the bond markets. 2 Stock exchanges in France and Germany fell by 7% on 22 January 2008 while the FTSE 100 suffered its sixth-worst daily decline. 3US Congress agreed to underwrite USD 1.54 trillion of collective debts to rescue Fannie Mae and Freddie Mac on 14 July 2008, popularising the term ‘too big to fail’. 4Authorities in the US, the UK, France and Germany simultaneously banned the ‘shorting’ of financial stocks on 19 September 2008. 5 Hedge fund service providers such as prime brokers abruptly curtailed activity and some went bankrupt, rendering certain hedge strategies unworkable. 6During October and November of 2008, hedge funds suffered a liquidity mismatch as they struggled to liquidate underlying investments sufficiently quickly to meet a flood of investor redemptions borne of a an almost universal desire to de-leverage and de-risk investment portfolios. 7Quote: Alexander Ineichen, author of ‘Absolute Returns: The Risk and Opportunities of Hedge Fund Investing’. 6
  7. 7. Time to reflect Hedge funds were the last casualty of the crisis not the perpetrator • More than 70% of equity market losses occurred after the short-selling ban was implemented1 • Hedge funds were caught in the flight to liquidity • A number of other technical factors converged to undermine investment models: – Liquidity squeeze, margin increases – Government intervention – Counterparty stress (brokerage, custody, financing) The end result was that hedge funds in aggregate survived the market crisis and market failures with a negative return of 21% at the fund of funds index level Source: Bloomberg: ¹MSCI World Index hedged to USD (price return) fell 54.1% between 1 August 2007 and 9 March 2009, declining 45.7% between 19 September 2008 and 9 March 2009. 7
  8. 8. Prior hypothesis Time to reflect Why hedge funds? Attractive characteristics of alternatives still appealing Transparency and liquidity Why you should care 8
  9. 9. Why hedge funds? Attractive characteristics of alternatives still appealing • Well risk managed fund of hedge funds improve the risk/reward of any traditional stocks and bonds portfolio • Hedge fund assets under management expanded by more than 20% per annum in the eight-year period1 preceding the credit crisis • Strong inflows reflected an increasing investor focus on: – Low correlation to traditional investments – Downside protection – Consistent investment returns These fundamental attractions of hedge funds remain firmly in place 1Source: Casey Quirk/The Bank of New York Mellon Thought Leadership Series, ‘The hedge Fund of Tomorrow’ (April 2009). 9
  10. 10. Why hedge funds? Resilience during periods of market stress 1 January 1994 to 30 September 2009 HFRI Fund HFRI Fund of Funds Composite Index of Funds 3000 World stocks Composite World End value Index stocks 2500 USD 2491 Return over -1.2 % -5.6 % 1 year 2000 End value Return over 0.3 % -20.8 % USD 1859 3 years Index value USD (log scale) 1500 Return over 18.5 % 4.5 % 5 years Return over 65.3 % -12.7 % 10 years 1000 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Russian crisis Technology bubble September 11 Market slump Height of credit crisis (Aug 98 to Sep 98) (Sep 00 to Mar 01) (Sep 01) (Jun 02 to Sep 02) (Jul 07 to Feb 09) -1.6 % -1.6 % -2.3 % -9.8 % -9.0 % -14.2 % -20.4 % -19.3 % -25.4 % -51.0 % Source: Bloomberg. There is no guarantee of trading performance and past or projected performance is not a reliable indicator of future performance. Please note that the HFRI data over the last 4 months may be subject to change. World stocks: MSCI World Index hedged to USD (price return). 10
  11. 11. Why hedge funds? Hedge funds suffer smaller drawdowns 1 January 1994 to 31 December 2008 0% Total return -10 % -20 % World stocks 56.7 % -30 % -40 % HFRI Fund of Funds Index 129.2 % -50 % -60 % World stocks Drawdown -70 % HFRI Fund of Funds Composite Index -80 % 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Hedge fund exposure mitigates the impact of negative compounding Source: Bloomberg. Returns in USD. There is no guarantee of trading performance and past performance is no indication of current or future performance/results. Returns may increase or decrease as a result of currency fluctuation. Please note that the HFRI Index data over the past four months may be subject to change. 11
  12. 12. Why hedge funds? Smoother return profile of hedge fund strategies Since 1994 hedge funds have performed well both in bull and bear markets… 23 quarters of negative performance for world stocks 39 quarters of positive performance for world stocks 8.0 % MSCI World Index hedged to USD (price return) 6.3 % 6.0 % HFRI Equity Hedge (40) 5.5 % HFRI Fund Weighted Index 6.0 % (45) 4.2 % 4.0 % (Number of negative quarters) (49) 4.0 % 2.0 % 2.0 % 0.0 % 0.0 % -2.0 % -2.0 % -4.0 % -3.5 % Average return -3.6 % Average return (18) (14) -4.0 % MSCI World Index hedged to USD (price return) HFRI Equity Hedge -6.0 % HFRI Fund Weighted Index -6.0 % (Number of positive quarters) -8.0 % -7.3 % (23) -8.0 % …enjoying more positive quarters and fewer negative quarters Source: Bloomberg. There is no guarantee of trading performance and past performance is no indication of current or future performance/results. Returns may increase or decrease as a result of currency fluctuation. Please note that the HFRI index data over the past 4 months may be subject to change. Analysed period: 1 January 1994 to 31 August 2009. SlideID-17145 12
  13. 13. Why hedge funds? Hedge funds outperformed equities, bonds and real estate 1 January 1994 to 30 September 2009 5000 Periods of equity 4500 market difficulty 4000 HFRI Fund Weighted Composite Index 3500 World stocks World bonds 3000 2500 Index value USD (log scale) 2000 1500 1000 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 • More consistent performance • Lower volatility • Superior risk-adjusted returns Source: Bloomberg. There is no guarantee of trading performance and past performance is no indication of current or future performance/results. Hedge funds: HFRI Fund of Funds Composite Index. World stocks: MSCI World Index hedged to USD (price return). World bonds: Citigroup World Government Bond Index hedged to USD (total return). Please note that the HFRI index data over the past 4 months may be subject to change. 13
  14. 14. Why hedge funds? Enhanced portfolio efficiency 1 January 1994 to 30 September 2009 10.0 % 100% fund of hedge funds index 9.0 % 8.0 % 7.0 % Annualised return 20% fund of hedge funds index 80% traditional portfolio 6.0 % 100% traditional portfolio 5.0 % 6.25 % 6.50 % 6.75 % 7.00 % 7.25 % Annualised volatility Source: Bloomberg. World stocks: MSCI World Index hedged to USD (price return). World bonds: Citigroup World Government Bond Index hedged to USD (total return). Cash: 3 month USD LIBOR index. Hedge fund index: HFRI Fund of Funds Composite Index. Chart illustrates efficient frontier theory. There is no guarantee of trading performance and past performance is no indication of current or future performance/results. Traditional portfolio: 45% world stocks, 45% world bonds and 10% cash. 14
  15. 15. Why hedge funds? Fundamental attractions remain firmly in place Relative to traditional investment schemes hedge funds provide: • A low correlation to traditional asset classes • Downside protection • More consistent investment returns • Medium-to-long term outperformance on a risk adjusted basis • Potential for medium-to-long term outperformance on an absolute basis • Significant enhancement to a traditional stocks plus bonds portfolio The hypothesis remains valid 15
  16. 16. Transparency and liquidity 16
  17. 17. Transparency is important Five most important factors when assessing a hedge fund manager What five factors are most important when assessing a hedge fund manager?1 90 % 2008 80 % 2009 70 % 60 % 50 % Percentage of respondents 40 % 30 % 20 % 10 % 0% y en er ns co of t ee cy y p A s nc e t p ph en es a en ilit ‘ k u- hi em n d tio r e th rd en t gr Fe so em ns rm tm t ag u la ck n g da di c ar ilo Lo io vo rf o es an ts ag pe tr a Le en sp at m se ph pe In v an d el an m s n er t rr m m Fu en Tr ag io co k tm Pr is an re R es M er v In Pe Business transparency on the way hedge fund businesses themselves are run Asset transparency on the liquidity, security and application of assets 1Source: ‘2009 Alternative Investment Survey: A closer look at the hedge fund industry’, March 2009, Deutsche Bank. 17
  18. 18. Liquidity is important • Liquidity risks – Assets / liability mismatch – Side pockets – Gates – Suspensions Managed accounts address liquidity and transparency needs 18
  19. 19. Transparency and liquidity Heightened emphasis on managed accounts 60 40 20 Respondents (%) 0 2003/4 2005 2008 2009 Yes No N/A • Investor demand for MACs has continually increased throughout the last 6 years • Managers are now realising the benefits of MACs in regards to capital raising and maintenance of capital Quelle: 2009 Deutsche Bank Alternative Investment Survey. 19
  20. 20. Transparency and liquidity The case for MACs Heightened Structural issues concerns post 2008 Fraud Control of assets Trading outside agreed mandate Transparency Gating Independence NAV suspension Governance Misappropriation Liquidity The future hedge fund industry will be shaped by improved governance, higher operational standards and more informed investment management. Schematic illustration. 20
  21. 21. Conclusion The ongoing importance of hedge funds • A portfolio of traditional assets can be significantly improved with the addition of alternative strategies • The risks of liquidity and transparency can be addressed through managed accounts 21

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