Institute. Yale School of Management EDHEC-Risk Institute Commodities & Hedge Funds Seminar. February 24-25, 2015, London United Kingdom

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1 Institute Yale School of Management EDHEC-Risk Institute Commodities & Hedge Funds Seminar February 24-25, 2015, London United Kingdom

2 Yale SOM EDHEC-Risk Commodities & Hedge Funds Seminar Seminar Description Investors are increasingly turning to alternative investments to find new ways of increasing the performance and decreasing the risk of their portfolio, in a context where the benefits of diversification within traditional equity and bond portfolios have decreased. This seminar is the second in a series of two two-day seminars, which provide participants with an in-depth analysis of various alternative investment vehicles including real estate, private equity, hedge funds, infrastructure and commodities. The focus of this second seminar, led by two renowned experts, is to give deeper insight into the asset classes of commodities and hedge funds, which are of significant interest to institutional investors. The first day of the course, led by Professor K. Geert Rouwenhorst, will examine, in addition to the theoretical foundations, the empirical evidence on risk and return in commodity markets. This will include the perspective of a variety of market participants including investors, hedgers, and asset managers such as CTAs. Throughout the class the speaker will illustrate how the insights from research have been implemented in the design of commodity benchmarks and the products offered in the market. On the second and last day dedicated to hedge funds, Professor François-Serge Lhabitant will look into questions that have been heavily debated between practitioners and academics over the past decade. Hedge funds have been called into question over recent years, particularly by investors focusing on their performance relative to the S&P 500. The first half of the day will review and test a series of tools and techniques to identify what drives hedge fund risks and returns. The second half of the day will focus on different tools and techniques to strategically allocate capital to hedge funds as well as to measure the particular impact of one manager in a given portfolio. Key Learning Objectives > Explore the major trends in commodities trading, production, and demand around the world > Investigate investable commodity indices, the effects of the financialization of commodity markets, and the influence of speculative capital in the markets > Understand the fundamental interconnection between spot and futures markets > Learn why commodity investments sometimes outperform or underperform spot prices > Identify what drives hedge fund risks and returns > Explain hedge fund performance by reviewing various single- and multi-factor models > Identify possible relevant risk factors > Learn how to allocate capital to hedge funds strategically > Explore how to measure the particular impact of one manager in a given portfolio > Learn the good and bad reasons for investing in hedge funds 2

3 Detailed Outline Day 1 Professor K. Geert Rouwenhorst Commodities constitute a relatively young asset class that is not widely understood by investors and asset allocators. They have unique attributes and factor exposures that can be attractive when building diversified portfolios. The investment case for commodities requires understanding of the drivers of the risk premium in futures markets and their relation to scarcity and disruptions in physical markets. In addition to the theoretical foundations, this course will examine the empirical evidence on risk and return in commodity markets. This will include the perspective of a variety of market participants including investors, hedgers, and asset managers such as Commodity Trading Advisors (CTAs). Throughout the class we will illustrate how the insights from research have been implemented in the design of commodity benchmarks and the products offered in the market. All sections will be co-taught by: K. Geert Rouwenhorst, Yale University, and Matthew C. Schwab, Goldman Sachs. Morning Session: The Investment Case for Commodities The morning session is designed to provide an overview of commodities markets around the world: what are the major global trends in trading, production, and demand? Next is an analysis of historical price trends over various economic cycles, and inflationary versus deflationary episodes over the past 200 years. We discuss the key differences between spot and futures markets and develop the basic theory behind drivers of return in commodity futures markets, followed by a discussion of empirical studies to illustrate how commodities fit into a portfolio of traditional assets. The session will include an overview of investable commodity indices, the effects of the financialization of commodity markets, and the influence of speculative capital in the markets. How should an investor construct an expected return forecast for commodities as an asset class? Afternoon Session: The Fundamentals of Commodities Markets The afternoon session will start with the fundamental interconnection between spot and futures markets, followed by a discussion of contango, backwardation, and the convenience yield and how the shape of the futures curve conveys information about scarcity in physical markets. The topics discussed will include: Scarcity as the fundamental driver of returns What should be the performance benchmark of a commodity investor: spot prices or futures prices? Explaining investment performance: why do commodity investments sometimes outperform or underperform spot prices? How is fundamental investing different from trend following the predominant investment style of CTAs? Issues in performance evaluation of CTAs. Do investors chase returns? Who provides and who consumes liquidity in commodity futures markets and its implications for the returns earned by investors How are the insights from understanding the fundamentals incorporated into investable products that are available in the market? 3

4 Day 2 Professor François-Serge Lhabitant Are hedge funds generating alpha or beta? Or maybe alternative beta? Does the answer vary from one strategy to another? Are hedge fund fees excessive for the alpha they deliver? These questions have been heavily debated between practitioners and academics over the past decade. Morning Session In the first half of the day, we will review and test a series of tools and techniques to identify what drives hedge fund risks and returns. The topics discussed will include: A review of various single- and multi-factor models to explain hedge fund performance An identification of possible relevant risk factors An estimation with real life data, issues and possible solutions Style analysis, Kalman filters and smoothers Application no 1: Hedge fund replication Application no 2: Hedging overlay Application no 3: Value-at-Risk estimation Application no 4: Implied fees calculation Hedge funds have been called into question over recent years, particularly by investors focusing on their performance relative to the S&P 500. More recently, several institutional investors (Calpers, PMT, etc.) have decided to divest from hedge funds, officially for a variety of reasons (complexity, inability to scale, fees, poor performance, etc.). The reality is that hedge funds are not a homogeneous asset class, but a range of very different investment strategies that cannot be considered as static buy-and-hold portfolios of securities. To be successful, allocating to hedge funds must incorporate the unique nature of the specific target managers at the very beginning of the investment process, and not just leave it to the manager selection step. Afternoon Session In the second half of the day, we will focus on different tools and techniques to strategically allocate capital to hedge funds as well as to measure the particular impact of one manager in a given portfolio. The topics discussed will include: What are the good and bad reasons to invest in hedge funds? Issues with hedge fund indices and benchmarks Risk-based versus capital-based approaches Impact of adding hedge funds in a traditional portfolio beyond mean and variance How many managers before one starts over-diversifying? Monte Carlo simulation and Extreme Risk analysis Illiquidity and hedge funds: a potential source of risk - and return 4

5 Seminar Instructors K. Geert Rouwenhorst, Robert B. and Candice J. Haas Professor of Corporate Finance & Deputy Director of the International Center for Finance, Yale SOM PhD, University of Rochester Geert Rouwenhorst s research interests include the empirical tradeoff between risk and return in financial markets, hedge fund strategies, commodity markets, and the history of finance. He has consulted for a variety of public pension funds, asset management firms and investment banks on quantitative equity and commodity strategies. Geert is a founding partner and director of research at SummerHaven Investment Management, a commodity investment company. Geert s articles have been published in academic as well as in applied journals. His book The Origins of Value: the Financial Innovations that Created Modern Capital Markets (with William Goetzmann eds.) surveys key historical innovations in the field of finance, and was named a book of the year by Barron s and The Economist. François-Serge Lhabitant, Affiliated Professor of Finance, EDHEC Business School, Chief Investment Officer, Kedge Capital Fund Management PhD, University of Lausanne François-Serge is responsible for the investment management of the Kedge Capital Funds and investment mandates operated by the Kedge Group. Before joining Kedge, he was a senior executive at UBP, where he was in charge of the quantitative analysis and the management of dedicated hedge fund portfolios. Prior to that, he was a director at UBS Private Banking Division and Global Asset Management. His research has been published in refereed academic and practitioner journals such as the Journal of Alternative Investments, European Finance Review and the Journal of Risk Finance. He is a member of the AIMA Investor Steering Committee, and he contributes to the International Association of Financial Engineers and the Professional Risk Managers International Association. François-Serge has written several bestsellers on hedge funds and co-edited books on commodities, hedge funds, and stock market liquidity. His latest reference text is the Handbook of Hedge Funds (Wiley Finance). He is a seasoned keynote speaker at top industry events. He holds graduate degrees in engineering, banking, and finance and a PhD in finance from the University of Lausanne. Yale SOM EDHEC-Risk Certificate in Risk and Investment Management Institute Participants in the seminar series can acquire the joint Yale School of Management EDHEC-Risk Certificate in Risk and Investment Management. For further information on the Yale SOM EDHEC-Risk Certificate in Risk and Investment Management, please refer to the Certificate brochure. 5

6 Fees, Billing and Further Information Fees Standard rate: EUR3,000 CFA Institute Member rate: EUR2,250 Early bird available before January 25 Fees include instruction, documentation, refreshments at breaks, and lunch. Accommodation is not included. Billing and payment The fee is billed upon registration and must be settled before the seminar begins. Payment can be made by credit card or wire transfer. VAT at a rate of 20% applies to all sales. Invoicing will be in Euros. Transfer or cancellation Transfer of registration to a colleague, upon written notice, is allowed and free of charge. Transfer of registration fees to another Yale SOM - EDHEC-Risk programme must be requested in writing and is subject to the following charges: 45 to 30 days notice: 15% of the tuition fee; 29 to 11 days notice: 30% of the tuition fee; 10 days notice or less: 50% of the tuition fee. Cancellations of confirmed seats must be received in writing and are subject to the following charges: 45 to 30 days notice: 25% of the tuition fee; 29 to 11 days notice: 50% of the tuition fee; 10 days notice or less: 100% of the tuition fee. Schedule A typical programme day lasts from 8:30 am to 6:00 pm and is usually divided into lectures and application cases. The two class sessions in each half-day period are separated by 30-minute refreshment breaks. Lunch is included. Venue EDHEC-Risk Institute London 10 Fleet Place (8th Floor) London EC4M 7RB United Kingdom Continuing Professional Education Credits EDHEC-Risk Institute is registered with CFA Institute as an Approved Provider of continuing education programs EDHEC-Risk Institute is registered with GARP as an Approved Provider of continuing professional education credits for FRMs and ERPs. Registration For further information, please contact Mélanie Ruiz at: yalesom-eri@edhec-risk.com or on: To register, please visit: 6

7 Yale School of Management Edward P. Evans Hall 165 Whitney Avenue, New Haven, Connecticut Tel.: Institute EDHEC-Risk Institute 393 promenade des Anglais BP Nice Cedex 3 France Tel: +33 (0) EDHEC Risk Institute Europe 10 Fleet Place, Ludgate London EC4M 7RB United Kingdom Tel: EDHEC Risk Institute Asia 1 George Street #07-02 Singapore Tel: EDHEC Risk Institute North America One Boston Place, 201 Washington Street Suite 2608/2640, Boston, MA United States of America Tel: EDHEC Risk Institute France rue du 4 septembre Paris France Tel: +33 (0)