Hedge Funds and SRI Investing

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William C. Crerend (Speaker 3)
President and Chief Executive Officer - EACM Advisors LLC - United States of America

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Hedge Funds and SRI Investing

  1. 1. Presentation on: Hedge Funds and SRI Investing William C. Crerend, CFA President & CEO TBLI Conference Europe – November 2009 Prepared for professional investors only
  2. 2. About EACM Advisors LLC [“EACM”] <ul><ul><li>Approximately US$2.7 billion fund of hedge funds manager 1 </li></ul></ul><ul><ul><li>One of the most experienced managers with over 18 years in managing hedge fund of funds portfolios </li></ul></ul><ul><ul><li>Wholly-owned subsidiary of BNY Mellon </li></ul></ul><ul><ul><ul><li>EACM exercises investment autonomy and substantial operating control </li></ul></ul></ul>1 Based on assets of fund of hedge fund products as at 1 Oct 2009
  3. 3. Background <ul><ul><li>Through its relationships with faith based investors, BNY Mellon Asset Management identified a desire for socially responsible hedge fund exposure and discussed with EACM </li></ul></ul><ul><ul><li>Mutual belief that such exposure would be beneficial long-term for such institutions, if it could be done appropriately </li></ul></ul><ul><ul><li>Few investment vehicles that satisfy such requirements: </li></ul></ul><ul><ul><ul><li>SRI consistent </li></ul></ul></ul><ul><ul><ul><li>High quality investment managers </li></ul></ul></ul>
  4. 4. Process of Consultation <ul><ul><li>Consulted faith based investors as to: </li></ul></ul><ul><ul><ul><li>Objectives </li></ul></ul></ul><ul><ul><ul><li>Governing principles </li></ul></ul></ul><ul><ul><ul><li>Terms </li></ul></ul></ul><ul><ul><ul><li>Size of potential allocations </li></ul></ul></ul><ul><ul><li>Consulted leading hedge fund managers on a highly selective basis and performed EACM’s own evaluation: </li></ul></ul><ul><ul><ul><li>Impact on strategy </li></ul></ul></ul><ul><ul><ul><li>Interest level </li></ul></ul></ul><ul><ul><ul><li>Operational capabilities </li></ul></ul></ul><ul><ul><li>Regular process of review involving EACM and independent board </li></ul></ul>
  5. 5. Prerequisites <ul><li>What does a high quality solution require? </li></ul><ul><ul><li>Investment perspective </li></ul></ul><ul><ul><ul><li>Importance of diversification in hedge fund arena – multi-manager approach </li></ul></ul></ul><ul><ul><ul><li>Manager quality </li></ul></ul></ul><ul><ul><ul><li>Diverse strategy exposures </li></ul></ul></ul><ul><ul><li>SRI perspective </li></ul></ul><ul><ul><ul><li>Consensus </li></ul></ul></ul><ul><ul><ul><li>Transparency </li></ul></ul></ul><ul><ul><ul><li>Independent review </li></ul></ul></ul>
  6. 6. Guiding Principles <ul><ul><li>Listen to views from investors and managers </li></ul></ul><ul><ul><li>Emphasis on investment quality </li></ul></ul><ul><ul><li>Only consider managers being used in other (i.e., non-SRI) vehicles </li></ul></ul><ul><ul><li>Seek strategy diversification similar to that present in EACM's other multi-strategy mandates </li></ul></ul><ul><ul><li>Ensure sufficient transparency to monitor adherence to principles </li></ul></ul>
  7. 7. Guiding Principles <ul><ul><li>The strategy’s prohibited investments include companies that derive a significant (or, in some cases, any) portion of their revenues from tobacco, alcohol, gambling, pornography, abortion and the production of weapons of mass destruction </li></ul></ul><ul><ul><li>In cases where the strategy’s underlying Portfolio Managers acquire positions in companies that derive a small portion of their revenues from activities inconsistent with the tenets of faith-based investing, when possible the goal is to decrease or terminate a particular company’s involvement in such activities by the exercise of proxy voting and participation in shareholder resolutions, when available </li></ul></ul>
  8. 8. Challenges <ul><li>Investor issues </li></ul><ul><ul><li>Significant diversity of views within the faith based investment community </li></ul></ul><ul><ul><li>Opportunity cost </li></ul></ul><ul><ul><li>Consultants – lack of familiarity </li></ul></ul><ul><li>Manager reluctance </li></ul><ul><ul><li>Investment </li></ul></ul><ul><ul><li>Operational </li></ul></ul><ul><li>Strategy issues </li></ul><ul><ul><li>L/S equity concentration </li></ul></ul><ul><ul><li>Extreme market stress over the past two years </li></ul></ul>
  9. 9. Addressing the Challenges <ul><li>Recruit talented managers </li></ul><ul><ul><li>Leverage existing relationships </li></ul></ul><ul><ul><li>Address screens </li></ul></ul><ul><ul><li>Emphasise long-term potential </li></ul></ul><ul><ul><li>Feedback </li></ul></ul><ul><ul><li>Growing familiarity and enthusiasm </li></ul></ul><ul><li>Very active in discussing and trouble shooting operational issues with managers </li></ul><ul><ul><li>Screens </li></ul></ul><ul><ul><li>Mechanics </li></ul></ul><ul><li>Find common ground and identify mechanism to permit investors to provide feedback on an ongoing basis. </li></ul><ul><li>Focus on the highest quality/most experienced managers and risk controls – operational and investments areas. </li></ul>
  10. 10. Portfolio Management Process Strategy allocations are subject to change, without notice, at the discretion of EACM Advisors LLC, the strategy’s investment manager Please see important disclosures at the back of this presentation for additional information Manager Research & Selection Strategy Allocation Monitoring Portfolio Construction Macro Analysis Preliminary Screening & Analysis Investment Evaluation Operational Risk Review Portfolio Investment Operations + - + - + - + - Event Driven Relative Value Global Macro Equity Hedge
  11. 11. Strategy Allocation <ul><ul><li>Macroeconomic views are derived from analysis of a wide array of inputs: investment research, historical context, market sentiment, manager outlooks </li></ul></ul><ul><ul><li>Views drive target allocations designed to balance opportunity and volatility </li></ul></ul><ul><ul><li>Incremental tilts within strategies designed to maximise near-term return potential across an array of sub-strategies </li></ul></ul><ul><ul><li>Focus on fundamentally-driven, opportunistic managers </li></ul></ul><ul><ul><li>Low and medium volatility objectives </li></ul></ul>Strategy allocations are subject to change, without notice, at the discretion of EACM Advisors LLC, the strategy’s investment manager Please see important disclosures at the back of this presentation for additional information Discretionary US Opportunistic Global/International Dedicated Short Opportunistic Equity Event Credit Oriented Multi-Strategy Equity Market Neutral Convertible Arbitrage Sub-strategies 7-10% 25-35% 25-40% 20-35% Tactical Tilts 10% 30% 35% 25% Strategic Target Relative Value - + Global Macro Equity Hedge - + Event Driven - + - +
  12. 12. Current Portfolio Positioning <ul><li>Underweight </li></ul><ul><ul><li>Opportunistic Equity Event-Driven (Special Situations, Value with a catalyst, Merger Arbitrage) </li></ul></ul><ul><ul><ul><li>More difficult in highly volatile environment </li></ul></ul></ul><ul><ul><li>Fewer catalysts in near term </li></ul></ul><ul><ul><ul><li>Closely monitoring recent uptick in deal flow </li></ul></ul></ul><ul><li>Neutral </li></ul><ul><ul><li>US Convertible Arbitrage </li></ul></ul><ul><ul><ul><li>Increasing new issuance, waning demand, and reasonable historical valuations </li></ul></ul></ul><ul><ul><li>Opportunistic Equity Hedge </li></ul></ul><ul><ul><ul><li>Individual company fundamentals driving stock prices; alpha opportunities both long and short </li></ul></ul></ul><ul><ul><ul><li>Strategic M&A and capital expenditures </li></ul></ul></ul><ul><ul><li>Long oriented distressed </li></ul></ul><ul><ul><ul><li>Anticipating supply increase </li></ul></ul></ul><ul><ul><ul><li>Fewer market participants afford survivors attractive risk adjusted returns (e.g. DIPs) </li></ul></ul></ul><ul><li>Overweight </li></ul><ul><ul><li>Fundamental Market-Neutral Equity </li></ul></ul><ul><ul><ul><li>Increased volatility and increased dispersion among equities enhances the opportunity set for these strategies </li></ul></ul></ul><ul><ul><li>Opportunistic Credit </li></ul></ul><ul><ul><ul><li>Increased differentiation among corporate credit issues yields greater opportunities both long and short </li></ul></ul></ul><ul><ul><ul><li>Distressed debt capability will allow for participation once the opportunity set improves for strategy </li></ul></ul></ul><ul><ul><ul><li>Market dislocations have pressured the strategy, but have also created areas of opportunity (e.g. distressed mortgages) </li></ul></ul></ul><ul><ul><li>Discretionary Macro </li></ul></ul><ul><ul><ul><li>Higher volatility across major asset classes enhances trading opportunities for macro practitioners </li></ul></ul></ul><ul><ul><ul><li>Desirable subset of managers </li></ul></ul></ul>Strategy allocations are subject to change, without notice, at the discretion of EACM Advisors LLC, the strategy’s investment manager Please see important disclosures at the end of this presentation Manager Selection Portfolio Construction & Management Strategy Allocation Investment Premises
  13. 13. Investment Process <ul><li>There is no return without risk. </li></ul><ul><ul><li>EACM job is to assess what risks a manager is taking and to diversify those risks </li></ul></ul><ul><li>The past does not predict the future. </li></ul><ul><ul><li>Superior historical performance can be a trap </li></ul></ul><ul><li>Diversification is more important than optimisation. </li></ul><ul><ul><li>An optimiser is a tool, not a decision-maker </li></ul></ul><ul><li>EACM look for skilled managers with a competitive edge. </li></ul><ul><ul><li>EACM sift through the manager universe to concentrate on the limited number of firms that may have that edge </li></ul></ul><ul><li>EACM do not look for “investment geniuses.” Humility is the key to survival. </li></ul><ul><li>Decisions not driven solely by performance. </li></ul><ul><ul><li>Performance must reconcile to strategy and risks taken </li></ul></ul>Manager Selection Portfolio Construction & Management Strategy Allocation Investment Premises
  14. 14. Mellon First Principle Fund, Ltd 1 The pie chart represents strategy allocations based on 1 Oct 2009 total fund assets excluding cash reserve of approximately 4%. Strategy and manager allocations, along with the number of underlying managers, are subject to change, without notice, at the discretion of EACM Advisors LLC, the investment manager. Review Hedge Fund Risk Factors page for a listing of the various risks associated with any hedge fund investment. See Offering Memorandum for specific information regarding the Fund and the Investment Manager. <ul><ul><li>Launched 1 May 2006 </li></ul></ul><ul><ul><li>Current assets US$226 million 1 </li></ul></ul><ul><ul><li>Underlying manager investments in separate accounts or special share classes </li></ul></ul><ul><ul><li>Investment and support from major charitable, religious and healthcare organisations </li></ul></ul>Global macro 15.3% / $33.1M (2 managers) Event-driven 35.2% / $76.2M (6 managers) Relative value 21.1% / $45.8M (3 managers) Equity hedge funds 28.4% / $61.5M (4 managers) Strategy Allocation 1
  15. 15. Against Peers 1 1 May 2006 – 30 September 2009 Created with MPI Stylus TM Graph displays annualised returns for various trailing time periods of the Mellon First Principle Fund, Ltd (Class A shares) versus a quartile distribution of annualised returns (represented by gray and white bars) for the HFR FOF Offshore Diversified Universe. The letter “M” plots, for each time period, the annualised returns of the Fund. HFRI FOF Diversified Universe comprise onshore and offshore funds of hedge funds, selected by Hedge Fund Research, Inc., which invest with multiple managers across a variety of hedge fund strategies. There are no minimum asset size or operating history constraints.  All underlying funds of hedge funds report returns net of fees and in US dollars.  Mellon First Principle Fund, Ltd performance results are based on terms for the Fund’s Class A shares. Investors in Class A shares are subject to the Fund’s regular schedule of fixed management and performance-based incentive fees, which equal, respectively, 1% of the total NAV of investors’ shares per annum, and 10% of any annual appreciation in the NAV of such shares in excess of 3M LIBOR. An investor’s actual returns for such periods depicted may differ from the figures shown above due to the timing of an investment, the Class of Fund shares purchased by the investor and the level of management fees paid by the investor. Review Hedge Fund Risk Factors page for a listing of the various risks associated with any hedge fund investment. See Offering Memorandum for specific information regarding the Fund and the Investment Manager. Past performance is not indicative of future results. Mellon First Principle Fund, Ltd. vs. HFR Diversified Fund of Funds Universe: Annualised Returns Ending September 2009 1 -25 -20 -15 -10 -5 0 5 10 15 Total Annualised Return, % Since Inception 3 Years 2 Years 1 Year
  16. 16. Future Developments <ul><ul><li>Continue to add quality managers </li></ul></ul><ul><ul><li>Further broaden investor base </li></ul></ul><ul><ul><li>Explore creation of new funds based on different criteria </li></ul></ul><ul><ul><li>Keep listening to a wide range of SRI/ESG conscious investors </li></ul></ul>
  17. 17. Hedge Fund Risk Factors <ul><li>Investments in fund of hedge funds are speculative and involve special risks. </li></ul><ul><ul><li>There can be no assurance that a fund’s investment objectives will be realised or that suitable investments may be identified </li></ul></ul><ul><ul><li>An investor could lose all or a substantial portion of his or her investment </li></ul></ul><ul><ul><li>Successfully overcoming barriers to entry, e.g. legal and regulatory enterprise, does not guarantee successful investment performance </li></ul></ul><ul><li>Hedge funds are generally not subject to the same regulatory oversight and/or regulatory requirements as a mutual fund. </li></ul><ul><ul><li>Investments may involve complex tax structures resulting in delays in distributing important tax information </li></ul></ul><ul><ul><li>Underlying managers or their administrators may fair value securities and other instruments for which there is no readily available market or third party pricing, or for which the manager believes the third party pricing does not accurately reflect the value of those securities, based on proprietary or other models </li></ul></ul><ul><ul><li>Funds may not be required to provide periodic pricing or valuation information to investors </li></ul></ul><ul><li>Performance may be volatile. </li></ul><ul><ul><li>Underlying managers may employ leverage and other speculative investment practices that may increase the risk of investment loss </li></ul></ul><ul><ul><li>Adherence to risk control mechanisms does not guarantee investment returns </li></ul></ul><ul><ul><li>High fees and expenses at both levels may offset an investor’s profits </li></ul></ul><ul><li>EACM Advisors LLC as investment adviser may have total discretion over underlying manager and strategy selection and allocation decisions. </li></ul><ul><ul><li>A lack of manager and/or strategy diversification may result in higher risk </li></ul></ul><ul><ul><li>EACM reserves the right to limit transparency and other notification to investors </li></ul></ul><ul><li>There may be restrictions on transferring interests in a fund of hedge funds vehicle. </li></ul><ul><ul><li>There is generally no secondary market for an investor’s interest in a privately-offered fund </li></ul></ul><ul><li>This is not an inclusive list of all risk factors. </li></ul><ul><ul><li>Investments in hedge funds may be suitable only for certain investors </li></ul></ul><ul><ul><li>Parties should independently investigate any area or manager, and consult with qualified investment, legal, and tax professionals before making any investment </li></ul></ul>
  18. 18. Disclosures PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Performance is shown net of fees and expenses and includes the reinvestment of dividends and capital gain distributions. Many factors affect fund performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. Some information in this report is based on unaudited information and is subject to change. The enclosed material is confidential and not to be reproduced or redistributed without the prior written consent of EACM Advisors LLC (“EACM”). Any statements of opinion constitute only current opinions of EACM, which are subject to change and which EACM does not undertake to update. Nothing herein constitutes an offer to sell, or solicitation of an offer to purchase, any securities, nor does it constitute an endorsement with respect to any investment area or vehicle. Any offer of securities may be made only by means of a formal confidential private offering memorandum. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors. Parties should independently investigate any investment area or manager, and should consult with qualified investment, legal, and tax professionals before making any investment. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. BNY Mellon Asset Management is the umbrella organisation for The Bank of New York Mellon Corporation’s affiliated investment management firms and global distribution companies.
  19. 19. Important information <ul><li>This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional investors and/or distributors and should not be relied upon by retail investors. </li></ul><ul><li>All information relating to EACM Advisors LLC (“EACM”) and Mellon First Principle Fund has been prepared by EACM for presentation by BNY Mellon Asset Management International Limited ('BNYMAMI'). Any views and opinions contained in this document are those of EACM at the time of going to print and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. </li></ul><ul><li>This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. </li></ul><ul><li>Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. </li></ul><ul><li>No warranty is given as to the accuracy or completeness of this information and no liability is accepted for errors or omissions in such information. </li></ul><ul><li>The impact of management and performance fees can be material. Generally, investment management fees are charged based upon the size of the portfolio. Some portfolios also include fees based on investment performance. A fee schedule providing further detail is available on request from BNYMAMI. </li></ul><ul><li>This document should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorised by BNYMAMI to do so. </li></ul><ul><li>To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. </li></ul><ul><li>BNYMAMI is the global (ex US) distributor of the capabilities of its asset managers including those of EACM. </li></ul><ul><li>The Mellon First Principle Fund outlined are unregulated collective investment schemes. This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. </li></ul><ul><li>In the UK this document is directed only at persons who are Professional Investors or Eligible Counterparties as defined by the FSA COBs Chapter 3 or are persons to whom this document may otherwise lawfully be issued or passed on (all of the persons above being referred to together as “relevant persons”). </li></ul><ul><li>This document is issued in the UK and in mainland Europe (excluding Germany) by BNY Mellon Asset Management International Limited. BNY Mellon Asset Management International Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. </li></ul><ul><li>BNY Mellon Asset Management International Limited, EACM and any other BNY Mellon entity mentioned are ultimately owned by The Bank of New York Mellon Corporation. </li></ul><ul><li>CP4431-10-11-2009(1D) </li></ul>

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