Understanding Hedge Fund Replication Strategies. Live Webinar October 26, :00 3:00 pm EDT

Transcription

1 Understanding Hedge Fund Replication Strategies Live Webinar October 26, :00 3:00 pm EDT

2 Welcome Alternative Beta Dave Nadig Director of Research IndexUniverse.com How hedge funds generate returns How do synthetic approaches work IndexUniverse.com Exchange-Traded Funds Report Journal of Indexes

3 Panel Discussion Peter Little, CFA Director, Portfolio Management Liquid Alt. Beta, Credit Suisse Dave Nadig Director of Research IndexUniverse.com Ken Coniglio Senior Vice President CoreStates Capital Advisors

4 Alternative Beta Defined The common risk exposures shared by hedge fund managers pursuing similar strategies. Different. Systematic. Credit, Volatility, Event-driven Leverage, Shorting, Arbitrage

5 Why Alternative Beta? Source: Deutsche Bank

6 What s An Alternative? Hedge Funds 4.20% Traditional Beta 87.60% Other 12.40% Real Estate 4.10% Source: Russell Private Equity 3.10% Commodities 0.70% Infrastructure 0.30%

7 Alternative beta: Hedge funds Over last 15+ years, Hedge funds have been the main vehicle: Industry AUM has gone from $100 billion in 1995 to $1.5 trillion in 2010 (as estimated by CS and DB) Superior risk-adjusted returns (of some strategies) versus traditional markets

8 250 Alternative beta: Hedge funds /1/00 10/1/01 10/1/02 10/1/03 10/1/04 10/1/05 10/1/06 10/1/07 10/1/08 10/1/09 S&P 500 CS/Tremont HF DJ/CS HF HFRX Global

9 Hedge Funds: Not Vanilla Absolute return Market Directional Equity Hedge Market Neutral Short Bias Event Driven Systematic Diversified Relative Value Convertible Arbitrage Individual Asset Class Volatility and more

10 The Average hedge fund sure looks pretty Source: IFSL

11 but will you bet on the right horse? Source: IFSL

12 What s Wrong With Hedge Funds Accessibility constraints with hedge funds Minimum net worth requirements Popular funds closed to new investors High fees Poor liquidity/long lock-up periods Limited transparency

13 Q: Can You Really Replicate Active Management? A: A finite number of factors explain the bulk of hedge fund returns.

14 In other words: Groupthink!

15 Why hedge fund replication? Source: AllAboutAlpha

16 Why hedge fund replication? Source: Edhec

17 Some Additional Reasons for Alt-Rookies Minimize impact of rising correlation when markets fall Avoid Manager-specific/idiosyncratic risk Performance attribution

18 Why hedge fund replication? Liquidity

19 Why hedge fund replication? Transparency

20 Why hedge fund replication? Lower costs

21 What are synthetic hedge funds?

22 What are synthetic hedge funds? 2 main types: Factor-based-weights determined via regression models Trade replication-rely on formulas to mimic hedge fund trading strategies

23 What are synthetic hedge funds? Over 2 dozen hedge fund replication products on the market Investable indices, ETFs, options, equity index futures Players: CS, IndexIQ, Goldman, SSGA, DB, JPM, Partn ers, SGAM - Just a handful of ETFs emerging

24 Do They Work? The Academic View: Yes Accurate replication of diversified indices Good explanatory power for some styles (e.g., equity long/short, event-driven) Source: Man Investments

25 Replication Caveats Unclear definitions Depends on strategy being replicated Depends on provider Can not reproduce returns of certain styles (e.g., market neutral, merger arbitrage, commodities)

26 Index Specification Dilemma Representation Problems Survivorship/Selection Bias

27 May not solve correlation issues Source: 2010 Journal of Alt Investments

28 Correlation Revisited HFRX Global S&P 500 JPMorgan Hedge Fund AltBeta Re Credit Suisse Long/Short Equit Morgan Stanley alt-era hedge f BAIF HF MULTI STYLE CS Long/Short Liquid Net DGAM SYNTHETIC ALTERNATIV LP IQ Hedge Composite Beta1 Index IQ CPI Inflation Hedged Index IQ Hedge Multi-Strategy IQ ARB Merger Arbitrage Index MSCI Daily TR Net Emerging Mar RYDEX MULTI-HEDGE STRATEG-H SGI Alternative Beta Daily Returns, 10/26/08 10/26/10

29 Correlation Revisited HFRX Global S&P 500 JPMorgan Hedge Fund AltBeta Re Credit Suisse Long/Short Equit Morgan Stanley alt-era hedge f BAIF HF MULTI STYLE CS Long/Short Liquid Net DGAM SYNTHETIC ALTERNATIV LP IQ Hedge Composite Beta1 Index IQ CPI Inflation Hedged Index IQ Hedge Multi-Strategy IQ ARB Merger Arbitrage Index MSCI Daily TR Net Emerging Mar RYDEX MULTI-HEDGE STRATEG-H SGI Alternative Beta Weekly Returns, 10/26/00 10/26/10

30 Performance

31 The Crowbar Issue: Alpha

32 Conclusion Get Informed, Do The Homework

33 Panel Discussion Peter Little, CFA Director, Portfolio Management Liquid Alt. Beta, Credit Suisse Dave Nadig Director of Research IndexUniverse.com Ken Coniglio Senior Vice President CoreStates Capital Advisors

34 Thank You! For more information: CFP & CIMA Non-ICMA Credits Forms will follow in in a few days for live webinar attendees.