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DORCHESTER CAPITAL ADVISORS, LLC Presentation to NCPERS 2009 ...

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DORCHESTER CAPITAL ADVISORS, LLC Presentation to NCPERS 2009 ...

  1. 1. DORCHESTER CAPITAL ADVISORS, LLC Presentation to NCPERS 2009 Public Safety Employees Pension & Benefits Conference
  2. 2. Table of Contents The Hedge Fund Industry 3 Fund Of Hedge Funds 15 New Hedge Fund Era 20 © Dorchester Capital Advisors, LLC CONFIDENTIAL 2
  3. 3. The Hedge Fund Industry
  4. 4. History of Hedge Funds • Contrary to popular belief, hedge fund investing has been around for decades • Alfred Winslow has been credited by many with starting the first hedge fund in 1949, introducing the concepts of shorting, leverage, performance fees, and investing firm capital alongside partners • Other than a few small peaks and valleys, the industry inched along in relative obscurity until the 1990’s, when the popular press picked up on the uncorrelated returns achieved by hedge fund managers that had become household names • Between increased media awareness of the hedge fund industry and the explosion of derivative instruments previously unavailable, the hedge fund industry grew rapidly with hedge funds numbering in the thousands managing hundreds of billions of dollars • Contrary to media reports in Q4 2008, the hedge fund industry is still vibrant with an estimated $1.4 trillion in assets under management © Dorchester Capital Advisors, LLC CONFIDENTIAL 4
  5. 5. Hedge Fund Industry Growth - AUM $2,000,000 $ 1,868,419 $1,750,000 $1,500,000 $ 1,464,526 $ 1,407,095 $ 1,430,603 $ 1,331,695 $1,250,000 $ 1,105,385 $1,000,000 $ 972,608 Assets ($MM) $ 820,009 $750,000 $ 625,554 $ 539,060 $ 490,580 $500,000 $ 456,430 $ 374,770 $ 367,560 $ 256,720 $250,000 $ 185,750 $ 194,515 $ 167,790 $ 167,360 $ 91,431 $ 99,436 $ 126,474 $ 95,720 $ 55,340 $ 73,585 $ 58,370 $ 57,407 $ 46,545 $ 70,635 $ 38,910 $ 27,861 $ 36,918 $ 46,907 $ 8,463 $ 14,698 $ 4,406 $ 23,336 $0 ($ 1,141) ($ 42,824) ($ 103,291) ($250,000) ($ 154,447) ($500,000) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 Q2 Estimate d Asse ts Ne t Asse t Flow 2009 2009 Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009 © Dorchester Capital Advisors, LLC CONFIDENTIAL 5
  6. 6. Hedge Funds and Mutual Funds Assets: Hedge Funds vs Mutual Funds (Billions of $ as of 6/30/09) $1,431 , 12% $3,653 , 32% Hedge Funds Stock Funds Hybrid Funds Bond Funds Money Market $4,031 , 35% Funds $1,822 , 16% $527 , 5% Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009 and Investment Company Institute © Dorchester Capital Advisors, LLC CONFIDENTIAL 6
  7. 7. Hedge Fund Industry Growth - # of Firms 11,000 10,096 10,000 9,462 9,284 9,056 8,923 9,000 8,661 8,000 7,436 7,000 6,297 6,000 # Funds 5,379 5,000 4,454 4,000 3,873 3,617 3,325 2,990 3,000 2,781 2,383 1,945 2,000 1,514 1,105 1,000 821 610 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 Q2 2009 2009 Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009 © Dorchester Capital Advisors, LLC CONFIDENTIAL 7
  8. 8. A Consolidated Industry Distribution of Hedge Fund Industry Assets by Fund According to the “HFR Global Hedge Fund AUM Tier Industry Report – Q2 2009 and InvestHedge: June 30th 2009 • About 300 hedge fund firms manage over $1 0.65% 1.08% billion and collectively these firms represent 9.10% 0.19% 2.17% approximately 75% of all hedge fund assets 19.46% 3.79% 5.07% • About 90 hedge fund firms manage over $5 8.27% billion and collectively these firms represent 11.35% roughly 60% of all hedge fund assets 8.16% 17.07% 11.72% 75.69% 12.96% 13.27% < $10 Million $10 to $25 Million $25 to $50 Million $50 to $100 Million $100 to $200 Million $200 to $500 Million $500M to $1 Billion > $1 Billion Source: HFR Global Hedge Fund Industry Report – Q2 2009, InvestHedge © Dorchester Capital Advisors, LLC CONFIDENTIAL 8
  9. 9. Characteristics Of Hedge Funds Benefits • Flexible Mandate: less constrained regarding benchmarks, use of short selling, leverage, and permitted securities; therefore, can focus on absolute returns • Incentive Structure: fee structure attracts highly talented money managers who personally invest in their funds; therefore, interests are aligned with investors • Diversification: hedge funds are typically uncorrelated with traditional asset classes © Dorchester Capital Advisors, LLC CONFIDENTIAL 9
  10. 10. Characteristics Of Hedge Funds Drawbacks • Transparency: hedge funds can seem opaque to new or nervous investors because disclosure standards are not universal across strategies or managers • Manager Risk: so much of a fund’s performance may be the result of a few key people • Liquidity: hedge fund investing involves lock ups © Dorchester Capital Advisors, LLC CONFIDENTIAL 10
  11. 11. Hedge Fund Strategies • While many of these strategies sound exotic, they play in the same sandbox as your traditional long- only managers • The only major difference is that they do so in a less-constrained fashion Strategy Name Markets Convertible Arbitrage Convertible bonds, stocks, options Emerging Markets Stocks in developing countries Global Macro Fixed income, equity indexes, Same commodities futures and options on these markets Equity Market Neutral Stocks, sometimes options Long/Short Equity Stocks, sometimes options Event Driven, Risk Arbitrage Stocks, corporate bonds, bank loans, convertible bonds, options Some overlap Distressed Securities Corporate bonds, bank loans, sometimes trade or litigation claims Managed Futures Commodities, bond futures and options, stock futures and options Multi-Strategy Any or all of the above Distinctly different Dedicated Short Bias Short-selling stocks © Dorchester Capital Advisors, LLC CONFIDENTIAL 11
  12. 12. Attractiveness of Hedge Funds • Hedge funds (using the HFRI Fund of Hedge Fund Index as a proxy*) offer an attractive risk/return profile compared to traditional equity investments during the last 10 years Risk/Return Characteristics (August 99 to July 09) 7% Barclays Agg Bond 6% 5% HFRI Fund of Fund Compound Return 4% 3% 2% 1% 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% -1% S&P 500 TR -2% Standard Deviation *Over the last ten years, the HFRI Fund Composite Index earned a higher cumulative return versus the HFRI FOF Index because fees-on-fees reduce fund-of-fund returns. However, the HFRI Fund Composite Index suffers from “survivorship bias” because hedge fund liquidations and non-contributions are not included in the hedge fund index, but are included in the fund-of-fund index. © Dorchester Capital Advisors, LLC CONFIDENTIAL 12
  13. 13. Hedge Funds in Down Markets HFRI Fund of Fund S&P 500 TR 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% Aug-Oct 1990 Feb-Mar 1994 Jul-Sep 1998 Jan-Feb 2000 Sep-Dec 2000 Sep 2001 Apr-Sep 2002 Sep 2008 - Feb 2009 Persion Gulf Fed Tightening LTC M C ollapse Tech Wreck I Tech Wreck II September 11th 2002 Meltdown Recent Meltdown © Dorchester Capital Advisors, LLC CONFIDENTIAL 13
  14. 14. Hedge Funds’ Diverse Returns 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD 2009 HFRI Emerging HFRI ED: HFRI RV: Barclays HFRI Emerging HFRI ED: HFRI Emerging HFRI Emerging HFRI Emerging Barclays HFRI RV: S&P 500 Markets Merger Arb ConvertArb Gov't/Credit Markets Distressed Markets Markets Markets Gov't/Credit ConvertArb 28.59% 55.86% 18.02% 13.37% 12.10% 39.36% 18.89% 21.04% 24.26% 24.92% 6.09% 29.33% HFRI Equity HFRI Equity HFRI EH: Eq HFRI ED: HFRI RV: HFRI ED: HFRI Emerging HFRI Equity HFRI ED: HFRI Emerging HFRI Macro HFRI Macro Hedge Hedge Mrkt Ntrl Distressed ConvertArb Distressed Markets Hedge Distressed Markets 15.98% 44.22% 14.56% 13.28% 9.05% 29.56% 18.42% 10.60% 15.94% 11.11% 4.83% 20.29% Barclays HFRI Fund HFRI RV: HFRI Event- HFRI Event- HFRI Fund HFRI Equity HFRI ED: HFRI Relative HFRI Macro S&P 500 S&P 500 Gov't/Credit Wghtd Comp ConvertArb Driven Driven Wghtd Comp Hedge Merger Arb Value 12.00% 31.29% 14.50% 12.18% 7.44% 28.67% 15.01% 9.30% 15.78% 10.48% -5.36% 12.76% HFRI EH: Eq HFRI FOF HFRI Relative HFRI Emerging HFRI Relative HFRI Event- HFRI ED: HFRI Event- HFRI FOF HFRI EH: Eq HFRI Equity S&P 500 Mrkt Ntrl Composite Value Markets Value Driven Distressed Driven Composite Mrkt Ntrl Hedge 8.30% 26.47% 13.41% 10.36% 5.44% 25.33% 10.86% 8.27% 15.33% 10.25% -5.93% 12.05% HFRI RV: HFRI Event- Barclays Barclays HFRI ED: HFRI Fund HFRI FOF HFRI ED: HFRI Fund HFRI Relative HFRI Event- HFRI Macro ConvertArb Driven Gov't/Credit Gov't/Credit Distressed Wghtd Comp Composite Merger Arb Wghtd Comp Value Driven 7.77% 24.33% 13.27% 9.40% 5.28% 21.42% 9.03% 7.49% 14.24% 9.96% -18.04% 9.90% HFRI ED: HFRI Equity HFRI Relative HFRI Emerging HFRI Equity HFRI Equity HFRI Event- HFRI Fund HFRI Relative HFRI Fund HFRI ED: S&P 500 Merger Arb Hedge Value Markets Hedge Hedge Driven Wghtd Comp Value Wghtd Comp Distressed 7.23% 21.03% 9.09% 8.92% 3.70% 20.54% 7.68% 7.29% 12.89% 8.94% -19.02% 9.70% HFRI Event- HFRI FOF HFRI Fund HFRI FOF HFRI Relative Barclays HFRI FOF HFRI Fund HFRI Macro HFRI Macro HFRI Macro HFRI Macro Driven Composite Wghtd Comp Composite Value Gov't/Credit Composite Wghtd Comp 6.19% 17.62% 6.74% 6.87% 1.02% 19.55% 6.86% 6.79% 12.37% 7.75% -21.36% 9.46% HFRI Relative HFRI ED: HFRI Fund HFRI EH: Eq HFRI EH: Eq HFRI FOF HFRI Relative HFRI ED: HFRI RV: HFRI ED: HFRI Event- HFRI ED: Value Distressed Wghtd Comp Mrkt Ntrl Mrkt Ntrl Composite Value Merger Arb ConvertArb Merger Arb Driven Merger Arb 2.81% 16.94% 4.98% 6.71% 0.98% 11.61% 5.58% 6.25% 12.17% 7.05% -21.82% 7.29% HFRI Fund HFRI Relative HFRI FOF HFRI Fund HFRI ED: HFRI RV: HFRI EH: Eq HFRI Equity HFRI Event- HFRI ED: HFRI FOF HFRI Macro Wghtd Comp Value Composite Wghtd Comp Merger Arb ConvertArb Mrkt Ntrl Hedge Driven Distressed Composite 2.62% 14.73% 4.07% 4.62% -0.87% 9.93% 4.63% 6.22% 11.71% 6.61% -25.20% 5.36% HFRI Event- HFRI RV: HFRI ED: HFRI FOF HFRI Fund HFRI Relative Barclays HFRI Relative HFRI FOF HFRI Equity S&P 500 S&P 500 Driven ConvertArb Distressed Composite Wghtd Comp Value Gov't/Credit Value Composite Hedge 1.70% 14.41% 2.78% 2.80% -1.45% 9.72% 4.54% 6.02% 10.39% 5.49% -26.65% 3.19% HFRI ED: HFRI ED: HFRI ED: HFRI Event- HFRI ED: HFRI EH: Eq HFRI RV: HFRI RV: HFRI Macro S&P 500 HFRI Macro HFRI Macro Distressed Merger Arb Merger Arb Driven Merger Arb Mrkt Ntrl ConvertArb ConvertArb -4.23% 14.34% 1.97% 2.76% -4.30% 7.47% 4.15% 4.91% 8.15% 5.33% -33.71% 1.27% HFRI FOF HFRI EH: Eq HFRI Equity HFRI Equity Barclays HFRI ED: Barclays HFRI EH: Eq HFRI EH: Eq Barclays S&P 500 S&P 500 Composite Mrkt Ntrl Hedge Hedge Gov't/Credit Merger Arb Gov't/Credit Mrkt Ntrl Mrkt Ntrl Gov't/Credit -5.11% 7.09% -9.09% 0.40% -4.71% 5.07% 4.08% 2.55% 7.32% 5.29% -36.99% 0.59% HFRI Emerging Barclays HFRI Emerging HFRI EH: Eq HFRI RV: HFRI RV: Barclays HFRI ED: HFRI Emerging HFRI EH: Eq S&P 500 S&P 500 Markets Gov't/Credit Markets Mrkt Ntrl ConvertArb ConvertArb Gov't/Credit Distressed Markets Mrkt Ntrl -32.96% -2.40% -10.71% -11.85% -22.09% 2.44% 1.18% -1.86% 4.07% 5.08% -37.26% 0.12% Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009, YTD 2009 Returns through June 30th, 2009 © Dorchester Capital Advisors, LLC CONFIDENTIAL 14
  15. 15. Fund of Hedge Funds
  16. 16. What is a Fund of Fund? Fund of Funds Strategy 1 Strategy 3 Strategy 2 HF HF HF HF HF HF HF HF HF © Dorchester Capital Advisors, LLC CONFIDENTIAL 16
  17. 17. Benefits of Fund of Funds • One-stop shop for hedge fund managers and strategy diversification • Less expensive than building a direct and diversified portfolio in-house which requires dedication of time and staff • Skilled and experienced staff dedicated to sourcing managers and performing comprehensive investment and operations due diligence, analysis and monitoring • Risk management overlay to monitor portfolio exposures by asset classes, geography, market cap and leverage and to perform stress tests and scenario analysis • “Liquidity pooling” allows for greater liquidity and flexibility for reallocation between strategies than direct investments • “Termination risk” is absorbed at the fund-of-fund level adding liquidity while limiting the likelihood for exposure imbalances when unwinding direct investments with staggered liquidity • Enhanced returns due to the inheritance of the high-water marks in their underlying managers in 2009 © Dorchester Capital Advisors, LLC CONFIDENTIAL 17
  18. 18. What Other Say About Fund-of-Funds Barclays Capital Fund of Funds Overview, January 2009 For institutions investing less than $500M in hedge funds, Fund of Hedge Funds provide a valuable service that is not easily replicated without substantial investments in people, infrastructure, and processes. AIMA’s Roadmap to Hedge Funds, November 2008 Manager selection has become more difficult as well as labor-intensive over time, this despite the whole industry becoming more transparent and more information being available. A couple of years ago, a fund of funds would have argued that his value proposition was based on generating “alpha.” Today, the value-added of a fund of funds manager is probably better described as offering a laborious service at a lower cost than could otherwise be obtained by the investor directly. © Dorchester Capital Advisors, LLC CONFIDENTIAL 18
  19. 19. Fund of Funds in 2008 Funds of funds demonstrated the following during the 2008 bear market: • exposed asset-gathering firms who over-promised liquidity • managed through the crisis without the need for a government bail out • manager diversification worked • capital was preserved better: HFRI FOF S&P 500 Goldman S&P REIT S&P 500 S&P Listed Sachs Financials Private Cmmdty Equity Total Return -21.4% -37.0% -38.3% -49.4% -57.0% -64.2% Return needed 27% 59% 62% 98% 132% 179% to recover loss © Dorchester Capital Advisors, LLC CONFIDENTIAL 19
  20. 20. New Hedge Fund Era
  21. 21. State of the Markets The markets today: • Market volatility spiked in the last half of 2008. Many hedge fund managers mismanaged (or failed to manage) this volatility • Credit is no longer cheap. Hedge fund strategies that rely on leverage for returns stopped working for investors We anticipate the following changes will be prominent in the New Hedge Fund Era: • Recognition that low volatility does not equate with alpha but, rather, entails liquidity and pricing risks • Migration to lower leverage strategies where the ROA of investments is sufficient to achieve the ROE for investors • Preference for managers that are large enough to survive as institutions, yet small enough to retain an entrepreneurial culture and commercial focus • Greater attention to managers adding value from alpha through security selection versus through sector market timing or leverage © Dorchester Capital Advisors, LLC CONFIDENTIAL 21
  22. 22. The Future for Hedge Funds We anticipate the following changes will be prominent in the New Hedge Fund Era (continued): • Greater regulation of opaque and illiquid markets that previously were dominated by hedge funds (derivatives, CDS, structured products and OTC trading) • May lead to more “legitimacy” of hedge funds in eyes of the public as hedge funds become more regulated • At the end of 2008 there was a shift in negotiating power from hedge funds to their clients and prime brokers • Expect hedge funds to more closely align their withdrawal terms with the underlying liquidity of the markets they trade • Hedge fund terms: Old Era New Era Management Fees 2% 0.5% to 1.5% Incentive fees 20% 10% to 20% Hurdle rate No Perhaps High-water mark Modified Intact Clawback No Perhaps Lockup period 3 or 5 years 1 to 2 years Disclosure Limited Detailed Dialogue Infrequent More Frequent © Dorchester Capital Advisors, LLC CONFIDENTIAL 22
  23. 23. Disclosure / Disclaimer Dorchester Capital Advisors, LLC is the General Partner of Dorchester Capital Partners, LP (“DCP”), Dorchester Capital Partners Select Opportunities, LP (“DCPSO”), Dorchester Capital Partners III, LP (“DCP III”), Dorchester Capital Partners Global, LP (“DCPG”), Dorchester Capital Partners Low Volatility, LP (“DCPLV”), and Dorchester Capital International Retirement Plan, Ltd (“DCIRP”). Dorchester Capital Advisors, LLC (“DCA”) is the investment manager for Dorchester Capital International Retirement Plan, Ltd (“DCIRP”). Dorchester Capital Advisors International, LLC is the Investment Manager of Dorchester Capital International, Ltd (“DCI”), and Dorchester Capital International Select Opportunities, Ltd (“DCISO”). Dorchester Capital Advisors, LLC (“DCA”) and Dorchester Capital Advisors International, LLC (“DCAI”) are collectively referred to as “Dorchester”. This presentation is not intended to be a risk disclosure document and should be read in conjunction with offering and subscription documents (collectively, the “Documents”) for DCP, DCPSO, DCP III, DCPG, DCP LV, DCIRP, DCI, and/or DCISO, each referred to as the “Fund” or collectively referred to as the “Funds.” The indices included in this presentation are disclosed to allow for comparison of the Fund’s performance to that of well-known and widely recognized indices. The S&P 500 (dividends included) is an index of common stock prices and is generally considered representative of the U.S. stock markets. The Barclays Aggregate Bond Index is comprised of approximately 6,000 publicly traded bonds including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an approximate average maturity of 10 years. The HFRI Monthly Indices (“HFRI”) are equally weighted performance indices and represent a database of over 1,000 funds. The HFRI are broken down into 37 different categories by strategy. Funds included in the HFRI must report monthly returns net of all fees and report assets in USD. There is no required asset- size minimum or required length of time a fund must be actively trading before inclusion in the HFRI. Trailing 4 months are left as estimates and are subject to change. Performance prior to that is locked and no longer subject to change. The HFRI are updated 3 times a month. We have selected the HFRI indices which include onshore funds only. Some information contained in this presentation is from third-party sources and believed to be reliable. However, Dorchester does not guarantee the accuracy or completeness of such information. This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities, units or interests in any Fund. In making decisions to invest in a Fund, prospective investors should rely solely upon their independent investigation, including a review of the Documents. Neither Dorchester nor any of its affiliates, employees or agents are authorized to make (or, through the information in this presentation, are making) any representations or warranties inconsistent with or in addition to those contained in the Documents. Prospective investors must review the actual Documents for complete information as to the rights and obligations of an investor. Certain historical numbers are included in this document; however, no representation is made that an investor will or is likely to achieve results similar to those shown herein, as such, results may vary. No assurance can be given that the objectives of Dorchester or any of its Funds will be achieved. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INHERENT IN ANY INVESTMENT IS THE RISK OF LOSS. © Dorchester Capital Advisors, LLC CONFIDENTIAL 23
  24. 24. DORCHESTER CAPITAL ADVISORS, LLC 11111 Santa Monica Boulevard, Suite 1250 Los Angeles, California USA 90025 Attn: Kelsey Quane +1.310.402.5090 investor@dorchestercapital.com www.dorchestercapital.com

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