Hillsdale Investment Management Inc. in a Rising Market. Strategy Institute Hedge Fund Conference. December 9, 2003

Transcription

1 Hillsdale Investment Management Inc. Why Buy Hedge Funds in a Rising Market Strategy Institute Hedge Fund Conference December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. Why Buy Hedge Funds in a Rising Market? 1. Alpha lasts longer than beta and market timing is difficult. 2. Fixed risk is good. 3. Lower risk is better, 4. Efficient portfolios are best. December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 2 1

2 Finding Alpha, Managing Beta December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 3 Alpha or Beta? (value-added) (market risk) Historically, the market has always been able to provide a hot fund, or a strong sector trend, but finding a fund with consistent long term performance and an ability to navigate through a succession of market environments is very difficult. ALPHA is a fund s return net of risk and is also characterized as that portion of the manager s/fund s returns generated, in excess of the overall market. BETA, on the other hand, is the measure of how the fund s returns track, in relation to the overall market. December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 4 2

3 The Monkey Return John Schmitz Always ask yourself what is the monkey return for any given strategy If a monkey ran the strategy, what return would he achieve (i.e., the random active security selection and market timing return) E.g., The monkey return for a Market Neutral Equity strategy is the T-bill rate (less base fees and expenses) For a US long-short strategy which is on average 50% net exposed to the US equity markets, the monkey return is 50% of the S&P 500 return plus 50% the US T-bill rate Only give the portfolio manager credit for his or her ability to generate returns in excess of the monkey return December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 5 Canadian Mutual Funds Top Ten for Year Returns Returns (%) Beta Std. Dev. (%) 1 Yr 3 Yr Best 3 Yrs Worst 3 Yrs 3 Yr 3 Yr RBC Precious Metals Dynamic Global Precious Metals Altamira Precious & Strategic Metals Sprott Gold & Precious Metals n/a n/a n/a n/a 0.0 Dynamic Power Hedge n/a n/a n/a n/a 0.0 Dynamic Global Resource AGF Precious Metals Dynamic Cdn Precious Metals CIBC Precious Metals S&P/TSX Median Gold Stock 86.5 December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 6 3

4 Canadian Mutual Funds Top Ten for 1999 Returns to 2003 (%) Beta Std. Dev. (%) Yr 3 Yr Best 3 Yrs Worst 3 Yrs 3 Yr 3 Yr Talvest China Plus Excel India AIM Global Technology AGF Aggressive Growth Altamira e-business Cda Pacific Basin (KBSH) Clarica MVP Asian Pac RSP Altamira Sci& Tech Talvest Global Sci& Tech Elliot & Page Asian Growth December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 7 Most of academic finance is teaching that you can t earn 50 percent a year without some risk of losing a lot of money. William Sharpe December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 8 4

5 Reducing & Controlling Volatility December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 9 Good Hedge Funds Offer A Consistent Risk Profile 30 Annualized Return Market Neutral TSE Aggressive Hedged NASDAQ Risk (annualized standard deviation) December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 10 5

6 and a Consistent Return Profile (12 months) 120% 100% NASDAQ 80% 60% 40% 20% Mkt Ntl Agg Hedged TSE 300 0% -20% -40% -60% -80% Maximum Return Maximum Drawdown December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 11 Maximizing Risk-Adjusted Returns December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 12 6

7 The Value of Non-Correlation In a multi-asset class portfolio, the greater the negative correlation between asset classes, the greater the contribution to reducing risk. This relationship is not linear December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 13 A Non-correlated Return Profile $50.00 $40.00 Use leverage to increase returns 19% ± 10 $30.00 $20.00 $10.00 Long Equity 10% ± 10 Blend 9.5% ± 5 Market Neutral 9% ± 10 $ Years December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 14 7

8 Hedge Fund Mechanics December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 15 Market Neutral Equity Return Mechanics Market Returns Particulars -40% -20% -10% 0% 10% 20% 40% Market Neutral Equity Products Long Return -40% -20% -10% 0% 10% 20% 40% Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6% Net Long Return -34% -14% -4% 6% 16% 26% 46% Leverage Gross Long Return -34% -14% -4% 6% 16% 26% 46% Short Return 40% 20% 10% 0% -10% -20% -40% Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6% Net Short Return 46% 26% 16% 6% -4% -14% -34% Leverage Gross Short Return 46% 26% 16% 6% -4% -14% -34% Add: Net Cash Return on Shorts (2) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Gross Fund Return 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% Less: Mgmt. & Admin Fees 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Net Return before Perf Fees 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% Less: Performance 20% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% Net Return After ALL Fees 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 16 8

9 Long Short Equity Return Mechanics Market Returns Particulars -40% -20% -10% 0% 10% 20% 40% Long Short Equity Products Long Return -40% -20% -10% 0% 10% 20% 40% Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6% Net Long Return -34% -14% -4% 6% 16% 26% 46% Leverage Gross Long Return -58% -24% -7% 10% 27% 44% 78% Short Return 40% 20% 10% 0% -10% -20% -40% Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6% Net Short Return 46% 26% 16% 6% -4% -14% -34% Leverage Gross Short Return 46% 26% 16% 6% -4% -14% -34% Add: Net Cash Return on Shorts (2) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Gross Fund Return -11.3% 2.7% 9.7% 16.7% 23.7% 30.7% 44.7% Less: Mgmt. & Admin Fees 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Net Return before Perf Fees -13.8% 0.2% 7.2% 14.2% 21.2% 28.2% 42.2% Less: Performance 20% 0.0% 0.0% 1.4% 2.8% 4.2% 5.6% 8.4% Net Return After ALL Fees -13.8% 0.2% 5.8% 11.4% 17.0% 22.6% 33.8% December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 17 Portfolio Construction December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 18 9

10 Strategy Design Hillsdale strategies are designed around a proprietary approach, known as The 5 Dimensions of Investment Measurement. Products are created with these 5 distinct measurements in mind: 1. Return 2. Risk (Volatility) 3. Correlation 4. Drawdown 5. Time Underwater December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 19 Hedge Fund Strategy Profiles Strategy / Product Market Neutral Cdn Market Neutral Long Short Equity Return Success Measurement Objectives Time Volatility Correlation Drawdown Underwater BETA # of Stocks Other Risk Controls Target Net GIC Wgts. Wgts. Net Mkt Exp. Leverage TBills + 5-8% 6-8% 0 Max 10% 6-9 mths % 0% 0% Max 1X Benchmark Cdn/US Aggressive Hedge + 8% 14-16% 40-60% Performance Equity Cdn/US Performance Benchmark + 4% 16-20% 80% 1/2 of Market Less than Market 1/2 of Market % +- 15% 40-80% Max 2X Less than Market % Max 20% 100% 0 December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

11 Portfolio Optimization December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 21 Alternate Allocations for Risk Tolerance Ranges Proposal to Sample Portfolio 8 Year Analysis to October-03 TSX MSCI SMcL MT World Index Bond S&P 500 TRI Cdn Toronto Cdn Market Cdn Aggressive Real Estate Cdn 90 Day Neutral Performance Hedged Annualized Annualized Informatio Portfolio Board T-Bills Equity Equity Equity Net Return Risk n Ratio Beta Best 12 Mth Return Worst 12 Mth Draw 7.5% Volatility 7.5% Risk - Allocation #1 10% 0% 20% 10% 10.0% 10.0% 10.0% 10.0% 20.0% 11.8% 7.5% % -7.3% 7.5% Risk - Allocation #2 10% 10% 20% 0% 20.0% 0.0% 10.0% 10.0% 20.0% 11.4% 7.5% % -7.1% 8.0% Volatility 8.0% Risk - Allocation #1 10% 0% 30% 0% 0.0% 10.0% 10.0% 20.0% 20.0% 13.2% 8.0% % -5.6% 8.0% Risk - Allocation #2 10% 0% 10% 10% 30.0% 0.0% 10.0% 20.0% 10.0% 12.0% 8.0% % -6.5% 8.5% Volatility 8.5% Risk - Allocation #1 0% 0% 20% 0% 10.0% 0.0% 20.0% 20.0% 30.0% 15.1% 8.5% % -6.7% 8.5% Risk - Allocation #2 10% 0% 10% 10% 0.0% 10.0% 30.0% 20.0% 10.0% 13.7% 8.5% % -9.6% Current Portfolio Mix 25% 8% 38% 15% 10.0% 5.0% 0.0% 0.0% 0.0% 7.6% 8.3% % -12.1% Proposed Portfolio Mi 20% 5% 30% 13% 10.0% 2.5% 7.5% 2.5% 10.0% 9.7% 7.9% % -9.4% December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

12 Portfolio Correlation Analysis Cdn 90 Day T-Bills Toronto Real Estate Board Cdn Market Neutral Equity SMcL MT Bond Cdn Aggressive Hedged Equity Cdn Performance Equity S&P 500 TRI MSCI World Index TSX Correlation vs. TSX December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 23 The Impact of Non-Correlation Existing Portfolio Profile Return 7.7%, Vol. 8.3%, Beta = 0.44 => IR = 0.93 Portfolio Modifications Sell 5% TSX: Profile = 8.4% Ret / 17.8% Vol / Correl. = % MSCI: Profile = 3.3% Ret / 15.5% Vol / Correl. = % SM Bond: Profile = 7.5% Ret / 4.6% Vol / Correl. = % S&P500: Profile = 8.8% Ret / 17.1% Vol / Correl. = % C$ TBills: Profile = 4.0% Ret / 0.3% Vol / Correl. = Purchase 8% Cdn Market Neutral: Profile = 14.2% Ret / 9.6% Vol / Correl. = % Cdn Small Cap: Profile = 21.1% Ret / 17.5% Vol / Correl. = % Cdn Long Short: Profile = 18.6% Ret / 15.9% Vol / Correl. = 0.45 New Portfolio Profile Return 9.7%, Vol. 7.9%, Beta = 0.41 => IR = 1.24 VALUE ADDED: Return +200 bps, Vol. -40 bps, Beta -0.03, IR (+33%) December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

13 Hillsdale Investment Management Inc. Client Portoflio Analysis Client: Date: Sample Portfolio October-03 FX Rate: H O L D I N G S Current Portfolio Mix Recommended Add'ns / Delet'ns Portfolio C$ Equivalent % Benchmark CAN$ US$ C$ Equivalent Proposed Portfolio Portfolio % Benchmark Cash & Equivalents 50, % (25,000) - 25, % Cash - 0.0% C$ TBills % C$ TBills Tbills / MM Funds 50, % C$ TBills (25,000) - 25, % C$ TBills GICs - 0.0% C$ TBills % C$ TBills Fixed Income 375, % (75,000) - 300, % Short Term Bonds - 0.0% % Mid - Long Term Bonds 375, % SM MT (75,000) - 300, % SM MT Equities (Long Only) 475, % (75,000) - 400, % Canadian Equities 250, % TSX (25,000) - 225, % TSX US Equities 150, % (25,000) - 125, % S&P Foreign Equities 75, % MSCI (25,000) - 50, % MSCI Alternative Investments 100, % , % Real Estate 100, % TREB , % TREB Private Equity - 0.0% CPE % Other - 0.0% CVC Hedged Investments - 0.0% 175, , % Hillsdale - 0.0% 175, , % Other Hedge - 0.0% % TOTAL PORTFOLIO $ 1,000, % $ - $ - $ 1,000, % Return Risk I.R. (1) Return Risk I.R. (1) Return / Risk Profile 7.7% 8.3% % 7.9% 1.24 Beta 0.44 (vs. TSX) Beta 0.41 December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 25 Efficient Frontier with Portfolio Weighted Options 8 Years to Oct % Cdn Performance Equity 20.0% Efficient Frontier Cdn Aggressive Hedged Equity Annualized Return 15.0% 10.0% Cdn Market Neutral Equity Proposed Mix 5.0% Cdn 90 Day T-Bills SMcL MT Bond Current Portfolio Mix Toronto Real Estate Board MSCI World Index S&P 500 TRI TSX 0.0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Volatility (Standard Deviation) December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

14 C O N T A C T S Chris Guthrie, CFA, President cguthrie@hillsdaleinv.com Arun Kaul, CFA, COO akaul@hillsdaleinv.com John Loeprich, SVP Private Client Division jloeprich@hillsdaleinv.com, (416) John Motherwell, VP Institutional Marketing jmotherwell@hillsdaleinv.com, (416) Information: December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 27 Appendices December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

15 Canadian Performance Equity: Performance December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 29 Canadian Aggressive Hedged Equity: Performance December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

16 Canadian Market Neutral Equity Performance December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 31 Hillsdale Performance Record To change reports, click on tab) Sort Order : 3 yr % (To change, click column heading once to sort up, again to sort down) Update Fundlis t As of October 31, 2003 Fund name Hillsdale Cdn Performance Equity (11/14) Hillsdale Cdn Aggressive Hedged A (11/14) Hillsdale Cdn Market Neutral Equ A (11/14) S&P/TSX Total Return (11/17) 5 Star Rating Volatility 1 yr % 3 yr % 5 yr % 10 yr % 15 yr % Incep (mm/yy) CSM LO (01/96) ALT AV (12/99) ALT LO (04/00) To delete a fund from your Personal Fundlist, uncheck the box at the left and then click Update Fundlist. Update Fundlis t Charts /Info December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc

17 Fees & Compensation Fund Name Fund SERV Codes Sales Option Commission Mgmt Fee Trailer Fee Perf. Fee Highwater Mark Min. Invest. RRSP Eligible Canadian Performance Equity HIL 240 HIL 241 Front End 0%-5% 2.00% 1.00% C$ 150,000 U.S. Performance Equity N/A Front End 0%-5% 2.00% 1.00% US$ 100,000 No Canadian Aggressive Hedged Equity HIL 200 HIL 201 Front End 0%-5% 2.00% 1.00% C$ 150,000 U.S. Aggressive Hedged Equity HIL 120 HIL121 Front End 0%-5% 2.00% 1.00% US$ 100,000 No Canadian Market Neutral Equity HIL 220 HIL 221 Front End 0%-5% 2.00% 1.00% C$ 150,000 (1) Advisors have the option of choosing the published trailer fee, with no share of the performance fee -OR- the published rate less 0.25% plus up to a 25% share of the performance fee. (2) Performance fees are charged to the fund based on 20% of gross returns (subject to a high-water mark). Advisors share of the performance fee (should you choose this option) is up to 25%. (3) Minimum investment for hedge funds is C$ 50,000 (US$ 35,000) for purchases by an accredited investor through a financial advisor. December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc. 33 Why Hillsdale? A LEADER in alternative investment management strategies. Rational & Systematic portfolio management decisions. Disciplined commitment to risk control. Full range of institutional quality hedge fund products to match client risk/return profiles. Non-correlated products provide TRUE portfolio diversification. Competitive compensation structure which allows Advisor to share in the profits of the fund. December 9, 2003 Copyright 2003 Hillsdale Investment Management Inc