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Selective alternatives
This document discusses alternative investment strategies and hedge funds. It provides information on 5 hedge funds that have been selected through a thorough due diligence process. The funds represent different alternative investment strategies - Equity Hedge, Event Driven, Relative Value, Tactical Trading, and non-capital market strategies. For each fund, the document summarizes key details like assets under management, liquidity terms, minimum investment size, historical returns and risk metrics. The document emphasizes the importance of being selective in hedge fund investing due to risks and return dispersion across funds. It describes MC Investments' multi-stage due diligence process for evaluating hedge funds before selecting them for investors.
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Selective alternatives
- 1. Selective Alternatives 2015 JULY MariusČiuželis, Managing Partner T: +370 698 40 095 E: marius.ciuzelis@mcwealth.lt
- 2. SELECTIVE ALTERNATIVES Alternative strategies generallyinclude anything that isn't plain vanilla investment Alternative investments comprise hedge funds, life settlements, real estate, “passion” commodities, art, financial derivative instruments, private equity deals, etc. Due to transparency, certainty and retail class accessibility hedge funds are heading as most attractive and desirable alternatives. Hedge Fund assets (USD bn.) Assets Net asset flow Source: Hedge Fund Research, MC Wealth Management institutional investors (that in total manage ~ USD13 bn.) will increase or at least keep the same investments into alternatives. 87 100 out of 2,9 This year Source: Prequin
- 3. SELECTIVE ALTERNATIVES Hedge fund strategies Under“alternative” hedge funds we define Equity Hedge Fundamental Quantitative Relative value Fixed income Volatility arbitrage Event Driven Yield alternative Merger arbitrage Opportunistic creditActivist Special situations Asset backed Distressed/high yield Tactical Trading Discretionary macro Exclusive Managed futures Quantitative macro Life settlements Direct lending Student accommodation Market neutral Fund of Funds Diversified Market DefensiveConservative Strategic SIXhedge fund investing strategies:
- 4. SELECTIVE ALTERNATIVES The secret ofbenefit – REVEALED Hedge Funds provide one stop access to: • Active & skill-based investing • Long & short investment positions • Greater portfolio diversification & lower traditional market correlation 60% 40% Traditional portfolio Equities Bonds 50% 30% 20% Enhanced portfolio Equities Bonds Alternatives Return: 9,35 % Standard deviation: 6,63 % Return: 10,86 % Standard deviation: 5,49 % Return: up by 1,51% Time period: 2010 12 – 2105 03 Equities: S&P 500; Bonds: Global broad market index (BofA ML) Alternatives: MCWM Alternative Index Standard deviation: down by 1,15% • Multiple investment strategies • Hardly accessible markets • Lower portfolio volatility & higher investment return The benefit of selective alternatives to a traditional portfolio in numbers
- 5. SELECTIVE ALTERNATIVES Investors MUST beselective due to return dispersion HFRI Fund Weighted Composite Index return dispersion* * Source: Hedge Fund Research, Inc. HFRI Fund Weighted Composite Index (Include ~ 2 200 Hedge Funds) 41,6%2013: Total return 9,13% 27,4%2014: 3% TOP 10 %BOTTOM 10 % -18,9% -19,5% Top 10% average returnBottom 10% average return
- 6. SELECTIVE ALTERNATIVES Investors MUST beselective due to funds‘ overall risks Management style and limitations, fund strategy and structure, internal operations, third party collaborations, investor rights, etc. are core parts investor should feel comfortable with before making an investment. Commercial Market Liquidity Valuation Counterparty Fraud Leverage Expenses Regulatory Hedge Fund Risks Loss of promotion // Inability to attract new clients // Competition Traditional market correction // Change in market interest rates, currency rates Increase in redemptions // Extra assets demand Proprietary methodology // Independency // Non-exchange tradable asset valuation Third party reliability // Turnover analysis // Transaction transparency Fraudulent moment analysis Stress test analysis for limits, possible capital coverage Tax issues // Possible kickback fees // Fee analysis Regulatory changes
- 7. SELECTIVE ALTERNATIVES MC Investments givesONE STOP access to reliable alternatives We go through a thorough revision, due diligence and selection procedures until we feel confident, comfortable and prepared to show them for investors. We search and review the main fund information: • Risk return profile • Investment field • Liquidity and fees • Management company profile, etc. We collect all available info and examine it based on the best market practices • Investment strategy sustainability • Manager reputation and target achievement • Fulfilment of supervisory requirements • Information quality and transparency • Risk management procedures • Compensation structure and independency, etc. Examine Select/ Monitor Review Once we feel comfortable with a fund, we: • Make a personal on site visit • Analyze future trends • Update collected info 283 funds reviewed in 2014 53 funds undergone the due diligence stage in 2014 5 funds were selected in 2014
- 8. SELECTIVE ALTERNATIVES Stage I –REVIEW DUE DILIGENCE • Performance figures‘ reliability • Return consistency • Return volatility • Benchmark correlation • Exceptional return rationale • Fund AUM and its dynamics • Strategy AUM • Subscription fees • Lock up terms and conditions • Redemption frequency • Minimum investment • Management fee • Performance fee • Sales/distribution fee • Currency classes • Underlying assets of investments • Investment strategy in common • Management company profile Firstly we check:
- 9. SELECTIVE ALTERNATIVES DUE DILIGENCE StageII - EXAMINE • Investment target • Investment selection process • Investment decision making • Investment restrictions • Portfolio diversification rules • Position concentration policy • Stop loss rule • Changes in investment processes • Market potential • Competitive edge • Position and overall fund leverage • Fund structure • Fund jurisdiction • Fund governance • Fund valuation • All fund expenses • Cash flow • Investment advisors • Bios of key professionals • Marketing strength • Investor breakdown • Risk profile: • Commercial risk • Market risk • Liquidity risk • Valuation risk • Counterparty risk • Fraud risk • Currency risk • Leverage risk • Expenses risk • Regulatory risk • Capacity • Reporting • Conflict of interest • Third parties: • Price • Changes • Contracts • Supervision • Certificates • Employee compensation We analyze:
- 10. SELECTIVE ALTERNATIVES Stage III -SELECT DUE DILIGENCE • Application of best practice • Strategy sustainability • Successful target achievement • Fund manager experience • Reputation • Fund manager’s key people competence • Fulfillment of supervisory requirements • Risk management • Transparency • Limits of contactor parties‘ mandates • Compensation structure and independency • Valuation, calculation and audit objectivity We consider:
- 11. SELECTIVE ALTERNATIVES There are morethan 11 000 hedge funds in the world managing USD3bn of assets. It takes 2 weeks for an initial due diligence review for one of them. That is 22 000 weeks or 423 years just to review all of them. Source: 2014 Deutsche Bank Alternative Investment Survey How about spending all this time on your client relationships and service excellence while we take care of your alternative investments offering?
- 12. SELECTIVE ALTERNATIVES Pipeline Case Studies Themost common reason the fund is being rejected is a lack of transparency whereas sometimes serious misinformation is captured. #1 Fund investment field: Real Estate (RE) Rejection reason: Conflict of interest Explanation: Fund manager and RE developer are from the same corporation where fund investors‘ interest might be improperly represented. #2 Fund investment field: Forex Rejection reason: Inappropriate background Explanation: The director of fund management company was sentenced for criminal activity and is associated to mafia connections. #3 Fund investment field: Life Settlements Rejection reason: Incorrect Valuation Explanation: Fund Management had the right to evaluate fund value by themselves or correct the valuation done by a third party. #4 Fund investment field: Global Macro Rejection reason: Side pockets Explanation: Illiquid assets are held in separate “side pocket accounts” and belong only to those investors that are already invested not to the new ones.
- 13. SELECTIVE ALTERNATIVES EQUITY HEDGE Fund #1is a long/short fund focused on small / mid-cap biotech and specialty pharma. TOP PICKS AUM USD405M Liquidity No lock up Redemption quarterly, 45 d. notice Minimum USD1M 2015* 39,8% 2014 73,5% 2013 122,4% 2012 20,9% 2011 12,9% 2010 8,1% Total CAGR: 51,41% Annualized St Dev: 25,94% Sharpe ratio: 1,95 ** EVENT DRIVEN Fund #2 finds attractive opportunities in structured debt finance. AUM USD179M Liquidity 1Y lock up Redemption quarterly, 60 d. notice Minimum USD100k 2015* 1,8% 2014 11,4% 2013 17,1% 2012 30,1% 2011 -3,6% 2010 25,1% 2009 7,3% Total CAGR: 14,62 % Annualized St Dev: 4,86% Sharpe ratio: 2,85 ** * 2015 returns are YTD – till the 30th of June, 2015 ** Risk free rate – 0,77% (German 10 year bond yield on the 30th of June, 2015)
- 14. SELECTIVE ALTERNATIVES NON CAPITAL MARKETSTRATEGIES Fund #3 invest in carefully selected and diversified life insurance policies in the US. AUM USD187M Liquidity No lock up Redemption quarterly, 90 d. notice Minimum EUR125k 2015* 11,5% 2014 22,1% 2013 28,8% 2012 31,0% 2011 22,1% 2010 9,4% 2009 7,5% Total CAGR: 21,98% Annualized St Dev: 3,73% Sharpe ratio: 5,68 ** TOP PICKS RELATIVE VALUE Fund #4 seek to capitalize on out-of- favor, analysis-intensive securities in the mortgage-backed securities space. AUM USD184M Liquidity 1Y lock up Redemption quarterly, 60 d. notice Minimum USD500k 2015* 5,1% 2014 13,9% 2013 23,4% 2012 48,9% 2011 14,8% Total CAGR: 27,24% Annualized St Dev: 4,52% Sharpe ratio: 5,85 ** * 2015 returns are YTD – till the 30th of June, 2015 ** Risk free rate – 0,77% (German 10 year bond yield on the 30th of June, 2015)
- 15. SELECTIVE ALTERNATIVES TACTICAL TRADING Fund #5is an opportunistic, global- macro fund that takes exposure to liquid asset markets. AUM USD395M Liquidity No lock up Redemption monthly, 3 d. notice Minimum USD100k 2015* -7,4% 2014 31,9% 2013 34,9% 2012 4,9% 2011 53,5% 2010 28,1% 2009 13,7% 2008 -6,0% Total CAGR: 18,68% Annualized St Dev: 15,92% Sharpe ratio: 1,12 ** TOP PICKS * 2015 returns are YTD – till the 30th of June, 2015 ** Risk free rate – 0,77% (German 10 year bond yield on the 30th of June, 2015)
- 16. SELECTIVE ALTERNATIVES DISCLAIMER This publication isfor general information only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Past performance is no guarantee for future results. You should note that high performance targets can only be achieved through accepting higher risk of the portfolio. Where included in this document, benchmarks and index data provided are for illustrative purposes only. The portfolio / strategy mentioned does not formally track any such benchmarks or indices and no representation is made as to relative future performance or tracking deviation. In some circumstances it may be difficult for the investor to sell or realise such investments or obtain reliable information about their value. Where an investment is denominated in a currency other than the investor‘s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. The investments discussed may not be suitable for all investors. Before committing to an investment, you should seek for the professional investment, legal, tax or accounting advise. All information provided in this publication is considered reliable. In the event of changing market circumstances MC Investments will not be held responsible for any damages experienced by investors.