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CFAvictoriapresentation5 Use SHIFT ENTER to open the menu ...

  1. 1. KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management Contemporary Perspectives on Hedge Fund Investing CFA Victoria – February 21 st , 2007
  2. 2. Agenda <ul><li>Why add hedge funds to a portfolio? </li></ul><ul><li>Why take a portfolio approach? </li></ul><ul><li>What are the merits of low volatility hedge funds? </li></ul><ul><li>Is an equity investing framework useful? </li></ul>
  3. 3. <ul><li>What is a Hedge Fund? </li></ul>
  4. 4. Description <ul><li>Similar to mutual fund </li></ul><ul><ul><li>Professionally managed pool of assets </li></ul></ul><ul><ul><li>Specified objectives </li></ul></ul><ul><li>Investors typically must be qualified or accredited </li></ul><ul><li>Short positions/hedging allowed </li></ul><ul><li>Leverage </li></ul><ul><li>Position concentration </li></ul><ul><li>Lower liquidity </li></ul><ul><li>Trading strategy ≠ investment strategy </li></ul>What is a Hedge Fund?
  5. 5. Hedge Fund Strategies <ul><li>Equity Long/Short </li></ul><ul><li>Equity Market Neutral </li></ul><ul><li>Dedicated Short Bias </li></ul><ul><li>Emerging Markets </li></ul><ul><li>Convertible Arbitrage </li></ul><ul><li>Fixed Income Arbitrage </li></ul><ul><li>Event Driven </li></ul><ul><ul><li>Merger Arbitrage </li></ul></ul><ul><ul><li>Distressed </li></ul></ul><ul><li>Global Macro </li></ul><ul><li>Managed Futures / CTA </li></ul><ul><li>Multi-Strategy </li></ul>What is a Hedge Fund?
  6. 6. Typical Hedge Fund Trade Hypothetical Convergence/Divergence Pairs Trade 50 60 70 80 90 100 110 Price Asset 1 Asset 2 Trade Completed Trade Initiated Trade Completed Trade Initiated What is a Hedge Fund?
  7. 7. Typical Hedge Fund Trading Model <ul><li>A convergence hypothesis underlies the trading model of most hedge fund managers </li></ul><ul><li>Trading models are analogous to business models for private or public companies </li></ul><ul><li>Evaluation of likelihood of success is similar: </li></ul><ul><ul><li>Focus on quality, track record of managers </li></ul></ul><ul><ul><li>Ensure strategy is well articulated </li></ul></ul><ul><ul><li>Look for sustainable competitive advantages </li></ul></ul>What is a Hedge Fund?
  8. 8. <ul><li>Why add Hedge Funds to a Portfolio? </li></ul>
  9. 9. Stability of Returns & Outperformance Why add Hedge Funds to a Portfolio?
  10. 10. High Return per Unit of Risk CS FB / Tremont Indices vs. Traditional Assets – Since February 1997 9. 8 % 7 . 2 % 9 . 0 % 7. 1 % 1 5 . 2 % 16. 3 % 0% 5% 10% 15% 20% Tremont Hedge Fund Index S&P 500 TSX Returns St andar d Deviation Why add Hedge Funds to a Portfolio?
  11. 11. Diversification Benefits Correlations – Since February 1997 CSFB/ Tremont S&P 500 TSX S&P 500 0.4 3 TSX 0.6 2 0.7 9 Scotia Bond Index 0. 12 - 0. 02 0. 05 Why add Hedge Funds to a Portfolio?
  12. 12. Drawdown & Recovery <ul><li>Drawdown </li></ul><ul><ul><li>Period of negative returns from peak to trough </li></ul></ul><ul><li>Hedge Fund Indices </li></ul><ul><ul><li>Less severe and faster recovery </li></ul></ul>Why add Hedge Funds to a Portfolio? Other Metrics - Since February 1997 % Positive Months Maximum Drawdown Months to Recover / % Yet to Recover S&P 500 60 . 5 % -46.28% 52 / 6 . 55 % TSX 61 . 3 % -45.05% 38 / none Scotia Bond Index 6 9 . 7 % -11.19% 9 / none HFRI Conservative FoF Index (HFRI CFI) 7 7 . 3 % -6.62% 6 / none CSFB/Tremont Index 71 . 4 % -13.81% 12 / none
  13. 13. <ul><li>The Need for a Portfolio Approach </li></ul>
  14. 14. Benefits of Portfolio Approach 26.27 % 83.18 % 55.59 % 16.4 0% 0 10 20 30 40 50 60 70 80 90 BCE Nortel Kinross TSX Annualized Standard Deviation of Various Equities Need for a Portfolio Approach
  15. 15. Benefits of Portfolio Approach Need for a Portfolio Approach 13.72% 12.44% 7.82% 5.81% 0% 5% 10% 15% 20% 25% 30% 10 Largest Canadian Hedge Funds Annualized Standard Deviations of Hedge Funds 10 Largest Global Hedge Funds CSFB/Tremont Hedge Fund Index HFRI Fund of Funds Index
  16. 16. Risk of One Stock vs One Hedge Fund Need for a Portfolio Approach BCE - February 1997 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Representative Canadian Hedge Fund - February 1997 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
  17. 17. Risk of non-“Blue Chip” stocks Some extreme returns exceed scale and are lumped at +/- 50% Need for a Portfolio Approach Nortel Networks Corp. - February 199 7 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Kinross Gold Corp - February 199 7 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
  18. 18. Risk of Hedge Fund Index vs Equity Index Need for a Portfolio Approach S&P 500 Index - February 1997 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Credit Suisse / Tremont Hedge Fund Index - February 1997 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
  19. 19. Risk of Hedge Fund Index vs Equity Index Need for a Portfolio Approach TSX Index - February 199 7 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Scotia Capital Universe Bond Total Return Index - February 199 7 to December 2006 0% 5% 10% 15% 20% 25% 30% 35% 40% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
  20. 20. <ul><li>The Merits of Low Volatility </li></ul><ul><li>Hedge Funds </li></ul>
  21. 21. Hedge Fund Strategy Risk Profiles Hedge Fund Strategies to the left are less volatile and have higher return per unit of risk (i.e. standard deviation). Merits of Low Volatility Hedge Funds CSFB/Tremont Risk/Return - Since February 1997 - Annualized 9.9% 9.8% 5.4% 9.0% 10.7% 11.9% 12.4% 7.1% 9.6% -1.5% 2.7% 3.6% 3.8% 4.8% 5.9% 9.4% 10.7% 11.9% 15.0% 17.8% -5% 0% 5% 10% 15% 20% Equity Market Neutral Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Futures / CTA Emerging Markets Dedicated Short Bias Tremont Returns Tremont Std Deviation
  22. 22. Hedge Fund Strategy Betas Hedge Fund Strategies to the left have lower beta (i.e. sensitivity) to the S&P 500. Merits of Low Volatility Hedge Funds CSFB/ Tremont Strategy Beta s vs. S&P 500 - Since February 1997 0.07 0.0 4 -0.01 0.04 0.21 0.10 0.40 -0.1 3 0.54 -0.9 1 -1.0 -0.5 0.0 0.5 1.0 Equity Market Neutral Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Futures / CTA Emerging Markets Dedicated Short Bias
  23. 23. Best Diversification includes Global HFs <ul><li>Globally $1.5 Trillion with 8,000 managers </li></ul><ul><li>Canada approx. $60 Billion with 70+ managers (Canada Hedge Watch) </li></ul>As of December, 2006 Need for a Portfolio Approach Scotia HF Index CSFB/Tremont Index 2 7 Managers Strategies 341 Managers 39 Funds 410 Funds 56 % Equity L/S 28 % 1 1 % Multi - Strategy 11 % 1 0 % Market Neutral 4 % 9 % Event Driven 24 % 2 % Managed Futures 5 % 2 % Fixed Income 8 % 3 % Global Macro 11 % 0 % Emerging Markets 4 % 2 % Convertible Arbitrage 2 % 2 % Dedicated Short Bias 1 % 3 % Other 2 %
  24. 24. <ul><li>Applying an </li></ul><ul><li>‘ Equity Investing Framework’ </li></ul><ul><li>to Hedge Funds </li></ul>
  25. 25. U.S. Value Stock Selection Process <ul><li>Quantitative Screens </li></ul><ul><li>Price-to-book </li></ul><ul><li>Price-to-earnings </li></ul><ul><li>Dividend-Yield </li></ul><ul><li>Create ‘Short list’ </li></ul>‘ Short list’ 10,000+ US equities Diversified Mutual Fund Quantitative Screens <ul><li>Qualitative Analysis </li></ul><ul><li>Bottom-up company review </li></ul><ul><li>Core competencies and competitive advantages </li></ul><ul><li>Industry position </li></ul><ul><li>Diversified Portfolio </li></ul><ul><li>Reduces risk </li></ul><ul><li>Manager monitors holdings </li></ul>Applying an ‘Equity Investing Framework’ Bottom Up Analysis
  26. 26. Hedge Fund Selection Process <ul><li>Quantitative Screens </li></ul><ul><li>Understand drivers of returns </li></ul><ul><li>Assessment of risks </li></ul><ul><li>Consistency of results with stated strategy </li></ul><ul><li>Quantitative fit with overall portfolio </li></ul>‘ Short list’ 8,000+ US and International hedge funds Diversified Portfolio of Hedge Funds Quantitative Screens <ul><li>Qualitative Assessment </li></ul><ul><li>Bottom-up manager review </li></ul><ul><li>Core competencies and competitive advantages </li></ul><ul><li>Qualitative fit with overall portfolio </li></ul><ul><li>Nature and extent of risk controls </li></ul><ul><li>Diversified Portfolio </li></ul><ul><li>Reduces risk </li></ul><ul><li>Manager monitors holdings </li></ul>Applying an ‘Equity Investing Framework’ Bottom Up Analysis
  27. 27. Demands of Hedge Fund Investing <ul><li>Successful hedge fund investing requires: </li></ul><ul><ul><li>Expertise in analyzing trading strategies as businesses </li></ul></ul><ul><ul><li>Entry and exit discipline </li></ul></ul><ul><ul><li>Time commitment </li></ul></ul><ul><ul><li>Sufficient size of investment to allow diversification </li></ul></ul><ul><ul><ul><li>Need more than a single manager multi-strategy </li></ul></ul></ul><ul><li>Decide between: </li></ul><ul><ul><li>Self manage </li></ul></ul><ul><ul><li>Outsource </li></ul></ul><ul><ul><ul><li>Custom portfolio </li></ul></ul></ul><ul><ul><ul><li>Funds of hedge funds </li></ul></ul></ul><ul><ul><li>Combination </li></ul></ul>Applying an ‘Equity Investing Framework’
  28. 28. <ul><li>KCS Approach </li></ul>
  29. 29. Investment Strategy <ul><li>Based on </li></ul><ul><ul><li>10 years Hedge Fund Investing experience </li></ul></ul><ul><ul><li>AIMA Award-winning Research </li></ul></ul><ul><ul><li>Proprietary Analytics </li></ul></ul><ul><ul><li>Focus on risk reduction </li></ul></ul><ul><li>Objectives </li></ul><ul><ul><li>Low volatility </li></ul></ul><ul><ul><li>Low correlations with traditional assets </li></ul></ul><ul><ul><li>Tax-preferred deferred capital gains </li></ul></ul><ul><ul><li>‘ Equity-like’ returns with ‘bond-like’ volatility </li></ul></ul><ul><li>Strategy </li></ul><ul><ul><li>Levered low-volatility </li></ul></ul>KCS Approach
  30. 30. HF Strategy Risk Profiles & the ACRF KCS Approach Notes: Weights are as at December 30 , 2006 . All risk/return measures are since February, 1997, and have been annualized. CSFB/Tremont Weights vs. Current ACR Basket Weights 5.1% 9.9% 6.2% 2.7% 23.1% 10.9% 29.6% 5.1% 7.0% 0.5% 11.3% 40.8% 11.2% 11.9% 6.3% 9.7% 2.5% 0.0% 0.0% 0.0% 0% 10% 20% 30% 40% 50% Equity Market Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Futures / CTA Emerging Markets Dedicated Short Bias Tremont Weights ACR Basket Weights CSFB/Tremont Risk vs. Current ACR Basket Risk - Annualized 2.7% 3.6% 3.8% 4.8% 5.9% 9.4% 10.7% 11.9% 15.0% 17.8% 2.3% 2.8% 4.4% 2.1% 6.0% 3.4% 5.9% 0.0% 0.0% 0.0% 0% 5% 10% 15% 20% Equity Market Neutral Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Futures / CTA Emerging Markets Dedicated Short Bias Tremont Std. Dev ’ n ACR Basket Std Dev ’ n
  31. 31. Performance <ul><li>+ 15.7% for 2006 </li></ul><ul><li>Ranked #1 Fund of Funds in 2006 on </li></ul><ul><li>Canadian Hedge Watch </li></ul>
  32. 32. KCS ACR Fund Performance
  33. 33. <ul><li>Questions and comments? </li></ul>
  34. 34. <ul><li>This presentation is confidential. The contents are not to be reproduced or distributed to the public or the press. Securities legislation may prohibit such distribution. This presentation is a summary only and should be used in conjunction with the detailed information in the Confidential Offering Memorandum. The information contained in this presentation is believed to be reliable, but is not guaranteed as to its accuracy or completeness. This presentation is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. No securities commission or similar regulatory authority has reviewed this document or has in any way passed on the merits of the securities describe and any representation to the contrary is an offence. </li></ul><ul><li>Historical performance is not a guarantee future results. KCS Fund Strategies Inc. recommends consulting appropriate investment and financial advisors when considering any investment decision. </li></ul><ul><ul><li>KCS Fund Strategies Inc. </li></ul></ul><ul><ul><li>2150 – 555 West Hastings Street </li></ul></ul><ul><ul><li>Vancouver, British Columbia </li></ul></ul><ul><ul><li>V6B 4N6 </li></ul></ul><ul><ul><li>Ph: 604-730-0729 x 225 </li></ul></ul><ul><ul><li>www.kcsfunds.com </li></ul></ul>

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