The Challenges of Long/Short Funds Operating in a Multi-Specialist World

Transcription

1 July 2008 T R E A S U R Y & S E C U R I T I E S S E R V I C E S The Challenges of Long/Short Funds Operating in a Multi-Specialist World Susan Ebenston Managing Director, Head of Global Funds, JPMorgan Investor

2 Agenda Dynamics of of a Multi-Specialist World The World of of Long/Short Funds JPMorgan s Approach 3

3 Four main drivers are shaping our industry Improve Performance Broader & Deeper Regulatory Insight Continuing Margin Challenges Globalisation of distribution & investment process The contradiction in our industry is the need for greater specialisation and diversification at the same time! 4

4 Some examples of how our industry is responding to these drivers Managers Single fund managers Activities Expand offerings to include funds of funds and long-only products (Cantillon, D.E. Shaw) Resembling multi-asset managers: higher AUM, diversified products and infrastructure Many funds have private equity-like styles with lock-up periods and innovative strategies Similar to asset managers: multiple offerings based on investor return and risk profiles Fund of funds Acquiring hedge fund capabilities to take advantage of specific expertise Several funds of hedge funds are now offering single manager products (Gotte) Asset managers & insurers Launching hedge funds or funds of funds to build out offerings and capture enhanced fees (Five Mile Capital seeded by MBIA & AIG; Tribeca platform built by Citigroup) Built from expertise within organization, by external hiring or acquisition 5

5 Some examples of how our industry is responding to these drivers Managers Private Equity Activities Fund of funds launches transform buyout firms into integrated asset managers High-profile entrants include Blackstone, Carlyle, KKR, Texas Pacific Group, Whitney Summit Partners acquisition of 33% of Coast Asset Management emphasises convergence CDO Managers Financing structures allowing hedge / private equity firms to use longer-term financing Sankaty Advisors, GoldenTree, ICG, Fortress, Anchorage are early entrants CDO managers attracted to the structure, as they have greater flexibility to trade assets And with this comes complexity 6

6 Polling question What concerns you most about long/short strategies? Unforeseen risk Settlement Investment performance 7

7 With more complex investment strategies, execution complexity and the need for data increase Emerging Buy Side Segmentation Comparative Investment Techniques Traditional Beta Managers Relaxed Long Managers Market Neutral Funds Broad Asset Managers Multi-Strat Funds Advanced Alpha Funds Buying and Holding Assets Underweighting or Overweighting Assets Selling Short Cash Beta Competitive Alpha Cash Beta Structured Alpha Trading Options or Derivatives Low Multi-Strat Funds Arbitraging Pricing Inefficiencies Execution Complexity Investing in Anticipation of a Specific Event Placing Multiple Bets Around a Macro Trend Investing in Deeply Discounted Securities High Correlating around Credit Profiles Source: Detica Limited Need for Information Across Trade Life Cycle Extensive 8

8 Asset allocation has changed dramatically over the last 30 years 100 Average UK Pension Fund Asset Allocation % allocation UK eq O'seas eq UK FI ILG O'seas FI Cash Prop Source: UBS Pension Fund Indicators 2007 Leading to: Increased cost technology investment time reconciliations - reporting Need for higher skill levels people and training the perpetual challenge 9

9 We are seeing asset managers seeking to aggregate specialist capabilities, as well as those who specialise Fund Administrators Long-Only Long/Short Property Private Equity Hedge Funds Specialists Aggregated Strategy Multi-Specialists Fund Administrators 10

10 To do this requires a very complex set of capabilities Transaction Administration Management Trade Execution & Financing Securities Lending Settlement Custody & Asset Servicing Trustee & Fiduciary Fund Accounting Risk, Compliance & Performance Collateral Mgt Cash & Liquidity Mgt Long / Short Trading Product Global Custody Global Derivatives Private Equity Fund Fund Admin Compliance Reporting Investment Analytics Securities Coll. Mgt. Derivatives Coll. Mgt. Liquidity Products Hedge Fund Alternative Investment Portfolio Servicing Trustee & Fiduciary This is the range of components an administrator needs to have 11

11 JPMorgan addresses this by establishing Centres of Expertise and Utilities with dedicated teams of experts Third-Party Asset Managers Asset Manager Investor Prime Brokers JPMorgan JPMorgan Investor Investor Messaging Messaging Hub Hub Sub Custody Network Hedge Hedge Fund Fund JPMorgan Centres of Expertise Global Global Fund Fund Private Private Equity Equity Fund Fund Custody Custody Data Vendors Asset Asset Setup Setup and and Maintenance Maintenance Pricing Pricing JPMorgan Utilities Global Global Derivatives Derivatives Corporate Corporate Actions Actions and and Income Income Cash Cash and and Asset Asset Reconciliations Reconciliations Release NAV We aim to deliver services in a seamless way that adds value and is economic 12

12 Polling question Do you think a one-stop shop is most appropriate when dealing with complex portfolios? Yes No Unsure 13

13 Case Study 130/30 (UCITS III) 14

14 What is 130/30? 130/30 strategy: To increase risk-adjusted returns by going short while simultaneously taking longer stock positions thought to be undervalued. Investors often employ the strategy as a replacement for long equity positions, rather than a substitute for a hedge fund or other absolute-return allocation. Short positions can either be taken physically, which entails borrowing actual securities, or synthetically using swaps. Two structures are available under UCITS III: 100% cash assets with 30% long and 30% short through derivatives Fully synthetic solution: 130% and 30% short through derivatives 15

15 What is 130/30? 130/30 is also called: Enhanced alpha extension Active extension Edge strategies Short extension Enhanced active equity Hedge fund lite The most common term used when talking about the strategy is 130/30. 16

16 How enhanced long strategies work ($) Buy $100 of stock with cash Long $130 of Stock Short $30 of Stock 100 Buy $30 of stock using the cash generated from the short sales 130 Gross Exposure = $160 Net Exposure = $ (30) (30) T H E S T R A T E G Y Sell short $30 of stock 17

17 Polling question Are you planning to launch long/short funds? Have already launched Plan to launch in six to 12 months Plan to launch in 12+ months No plans to launch 18

18 Cash and derivatives under UCITS III structure Asset portfolio 100 Return Investor 100 Fund units Structured fund 30/30 payout JPMCB swap counterparty Fund manager 19

19 View from the regulators: operational risk FSA: The main benefit of reducing equity derivatives confirmation backlogs is to increase certainty about financial firms positions, so they can be more confident of what trades they have on their books in the event of a stressed market situation such as a crash. Fed: Regulators will continue to monitor OTC derivatives processing closely and work with the financial industry until there is a post-trade infrastructure that is efficient, scalable and manages operational risk effectively. 20

20 130/30 operational challenges Regulatory: UCITS III restrictions Short Selling Stock Borrow (Physical) Synthetic Exposure Leverage Financing Cost Availability Trade booking Recall/Rerate Independent verification of the financing fee Traditional asset management platforms not equipped to deal with negative or short positions Booking excess borrow (where physically short) Confirmations Regulators view (Fed, FSA): Soc Gen case highlights importance once again Electronic confirmation platforms Fundamental to risk management Negative affirmations 21

21 130/30 operational challenges Independent valuations UCITS III requirement: daily valuations Challenges with illiquid instruments, complex instruments Tolerance levels Fund accounting Global custody Custody of short positions Asset servicing (long/short) STP requirement Reconciliations of OTC derivatives Frequency of reconciliations Sanity check!! 22

22 130/30 operational challenges Collateral management Managing counterparty risk exposure Risk management VaR reporting required Reporting Lack of detailed collateral reporting (risk & compliance) 23

23 JPMorgan partnership with our clients JPMorgan offers a partnership based on our fortress balance sheet, derivatives expertise and advanced risk management practices which enables us to structure innovative derivatives solutions for our clients. 24

24 Market recognition: recent awards Derivatives House of the Year 2008, Risk magazine Best Derivatives House over the past 20 years ( ) Risk magazine Equity Derivatives House of the Year 2007, Asia Risk Derivatives Research House of the Year 2007, Risk magazine Equity Derivatives House of the Year 2007, Derivatives Week 25

25 This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client s subsidiaries, the Company ) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan. The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. JPMorgan s opinions and estimates constitute JPMorgan s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P.Morgan Europe Limited, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing entities. This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services. 26