- HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? -

Transcription

1 - HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? -

2 - LYXOR AM, WHO ARE WE? -

3 - A FOCUS AND FAST-GROWING ASSET MANAGER - -French Asset Manager regulated in France according to the UCITS Directive - ASSET UNDER MANAGEMENT (USD billions) % Subsidiary of Société Générale Alternative Investments Index Tracking businesses: - ETF, Lyxor is a market leader (n 2) in Europe: USD bn - Structured Products : USD bn - Structured Management Alternative Investments : USD bn YTD 2008 Source: Lyxor AM, figures as of June 30, 2008 HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 3

4 - OUR ALTERNATIVE INVESTMENT BUSINESS - -Assets: USD 41.1 bn - Managed Account Platform - principle: full transparency, through a Lyxor fund - number one managed account solutions provider - Funds of Funds Manager - Ranked 9th in the world for Fund of Hedge Fund in terms of AuM (Investhedge December 31, 2007 ) - KEY FIGURES - > 23 hedge fund analysts > 14 FoHF portfolio managers including 3 strategists > 4 Hidden Assets specialists > AUM: USD 41.1 bn - Best strategic allocation process - Best monitoring and risk control - Best product development Source: Lyxor AM, figures as of June 30, 2008 HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 4

5 - LIQUIDITY AND RISK MANAGEMENT OFTEN PERCEIVED AS CONSTRAINTS BY FUNDS OF FUNDS MANAGERS. HOW TO TURN ALL THESE INTO BENEFITS FOR CLIENTS?-

6 -HOW TO TURN RISK MANAGEMENT INTO BENEFITS FOR CLIENTS? - - Risk Management is often perceived as a constraint -Due diligences are costly -Risk adverse attitudes But there is no return without RISKS GOOD RISKS - Market Risks BAD RISKS (unpaid risks) - Fraud - Operational risks - Style drift risk Purpose of Managed Accounts: Eliminate Bad Risks HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 6

7 MANAGED ACCOUNTS, HOW DOES IT WORK? - Dedicated version of highly performing hedge funds Paulson Jana Thirdpoint Carlson York PSAM Canyon Altima Longacre Symphony Centaurus Bridgewater Mellon Capital TT Augustus NWI Star Event Driven Global Macro Challenger Havens Thaddeus TG Lumen Armajaro Cabezon Omega Chilton Zweig DiMenna Gartmore Old Mutual Jupiter GLG Sandler Marble Bar Pequot PAW Threadneedle Marshall Wace Deephaven NWI Ellington Constellation Long/Short Equity Long/Short Credit Oxburgh Myojo Himeji Litchfield Gems Bond Observatory Winton Campbell IKOS Transtrend Graham CFM Aspect Rotella CTA NuWave QIM Altis Forest Argent Canyon Quattro Lazard Convertible Arbitrage Acuity Quest Mohican HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 7

8 - MANAGED ACCOUNTS, HOW DOES IT WORK? - - Mandate given to the manager to replicate its benchmark fund within the Lyxor fund INDEPENDENT FUND ADMINISTRATOR Weekly Independent Valuation Trade Trade and and Position Position Reports Reports Daily Trade and Position Reports TRADING ADVISOR (Hedge Fund Manager) Daily Trade Tickets PRIME BROKERS Mandate Trade and Position Reports Position Reports HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 8

9 - MANAGED ACCOUNTS, HOW DOES IT WORK? - - Examples of alleged problems not likely to happen in a managed accounts environment. Drake Management - Global Opportunities AMARANTH GLT Management Sentinel Management Group International Management Associates Lydia Capital - insurance Source: hf-implode.com LIQUIDITY STYLE DRIFT MISVALUATION PROVIDER BANKRUPTCY FRAUD NATURE OF INVESTMENT 2008, loss: - 25 % in 2007, the fund had unsuccessfully appealed to investors to drop withdrawal requests before deciding to pay out only 25 % of the money asked for. 2007, loss: $6.4 billion, the fund held about 10% of the global market in natural-gas futures. 2007, loss: $7.8 million, The fund posted losses almost from the beginning, but it reported gains to investors. 2007, the money market firm which holds collateral for futures trading try to halt redemptions. Cash of some hedge funds was invested in Sentinel funds. 2006, loss: $185 millions, Kirk Wright targeted a niche of wealthy black Atlantans and famous athletes and poured their money into his own various luxury expenditures 2008, Loss: $34 millions, the SEC alleged that fund manager purchased assets ( life insurance policies from individual holders ) whereas such purchase is not legal. HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 9

10 - MANAGED ACCOUNTS ALLOW MORE THAN MITIGATING RISKS - - Know what Hedge Funds really do, with real positions to show it -Measure their real alpha, among peers -Understand their real source of alpha -Understand the sustainability of performances -More information is better than less information -Fund of Hedge Fund managers must understand and challenge - Know Your Hedge Fund principle, like KYC principle HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 10

11 -HOW TO TURN LIQUIDITY INTO BENEFITS FOR CLIENTS? - - Matching Active and Passive liquidity is a hurdle for Fund of Fund managers -Assets have lower liquidity than Fund of Hedge Fund promised liquidity -Promised Liquidity is therefore not in line with Effective Liquidity - Investors behaviour can amplify the problem - To access liquidity, investors in Funds of Hedge Funds must redeem as soon as possible - When Funds of Hedge Funds become gated, they lose their attractiveness The Liquid Platform Lyxor model solves this issue HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 11

12 -HOW DOES THE LYXOR PLATFORM DEAL WITH LIQUIDITY? - - Lyxor platform benefits from a weekly liquidity Separate funds with a specifically negotiated liquidity, in general weekly Investors can redeem every Friday on the NAV of next Tuesday Never since the beginning of the crisis (August 2007) have we failed to execute weekly redemptions on any of our Funds of Hedge Funds - Paradox: No Redemptions - Because investors know they have the right to redeem every week, they don t have any need to redeem immediately - Weekly reporting of problems and NAV avoids paranoia HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 12

13 - LIQUIDITY HAS ANOTHER ADVANTAGE: QUICK RE-ALLOCATION (1/2)- - High dispersion of performances among the different alternative strategies CTAS SHORT TERM 20.45% L/S EQUITY SHORT BIAS 13.35% MERGER ARBITRAGE 18.86% CTAS LONG TERM 10.40% SPECIAL SITUATIONS 18.30% L/S EQUITY STATISTICAL ARBITRAGE 3.51% EMERGING MARKETS 13.84% GLOBAL MACRO 2.34% L/S EQUITY VARIABLE BIAS 12.62% MERGER ARBITRAGE 1.65% CTAS LONG TERM 11.49% CTAS SHORT TERM 1.34% L/S EQUITY MARKET NEUTRAL 9.16% L/S EQUITY MARKET NEUTRAL 0.51% CONVERTIBLE BONDS & VOLATILITY ARBITRAGE 5.37% SPECIAL SITUATIONS -2.12% L/S EQUITY LONG BIAS 4.67% CONVERTIBLE BONDS & VOLATILITY ARBITRAGE -2.14% GLOBAL MACRO 3.89% L/S EQUITY VARIABLE BIAS -2.48% DISTRESSED SECURITIES 2.25% L/S CREDIT ARBITRAGE -6.18% L/S EQUITY SHORT BIAS 0.62% DISTRESSED SECURITIES -6.33% L/S CREDIT ARBITRAGE -0.26% L/S EQUITY LONG BIAS % FIXED INCOME ARBITRAGE -0.56% EMERGING MARKETS % L/S EQUITY STATISTICAL ARBITRAGE -5.48% FIXED INCOME ARBITRAGE % source: Lyxor Hedge Fund Indices July 31, 2008 HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 13

14 - LIQUIDITY HAS ANOTHER ADVANTAGE: QUICK RE-ALLOCATION (2/2) - BOTTOM-UP Fund of Hedge Funds performances TOP-DOWN - Top-down a real source of performance - Variations of return for different strategies are a source of performance. - Active allocation allows to benefit from such variations - The key is to anticipate which one will perform - Anticipating is not enough: the manager must be able also to execute Lyxor managers can re-allocate in only one week HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 14

15 - EXAMPLE OF EFFICIENT RE-ALLOCATION (1/2)- - Weekly liquidity enables us to re-allocate without delay - Our successive downgrades on our equity view were immediately translated in the portfolio SHARP DECLINE IN EQUITY EXPOSURE 70% 60% 50% 40% Playing the Rally Protecting the portfolio Profit taking Change in Top Down views 30% 20% 10% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Source: Lyxor AM, figures as of June 30, 2008 HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 15

16 - EXAMPLE OF EFFICIENT RE-ALLOCATION (2/2) - -Our top down views are always reflected rapidly in the allocation - The equity underweight was reflected in the sharp cut in L/S Long Only and Event driven Managers - Instead, we invested on Variable funds and managers with a real trading talent - Our views on a higher volatility regime favour a higher allocation to Convertible Arbitrage and Volatility Trading RAPID ROTATION IN STRATEGIES 30% 25% 20% 15% 10% 5% 0% CB&Vol Arb CTAs Merger Arbitrage Special Sits Global Macro Fixed Income Arb. Long Bias Long Short Variable Bias Market Neutral Short Bias 30-Nov 31-Dec 31-Jan Variable Bias Quant HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 16

17 - LYXOR PROCESS TAKES FULL ADVANTAGE OF LIQUIDITY - -As a result, added performance from Liquidity -This compensates by far the so-called illiquidity premium -Tactical allocation -Enhance the Risk/Return profile -High level of reactivity thanks to weekly liquidity TOP-DOWN APPROACH (allocation per strategy) INVESTMENT PROCESS - LYXOR FUNDAMENTAL VIEWS ALLOCATION PER STYLE AND STRATEGY FUND MANAGEMENT AND RISK MONITORING Performances confirm the efficiency of Lyxor investment process - Best strategic allocation process - Best monitoring and risk control - Best product development BOTTOM-UP APPROACH (Managers selection) MANAGERS / FUNDS SELECTION LYXOR PLATFORM HEDGE FUND WORLD HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 17

18 - CONCLUSION - - Lyxor business model has pushed risk management to its ultimate conclusion - Full transparency of Hedge Funds positions - This has allowed the most sophisticated «Know Your Hedge Fund» process - We offer the ultimate liquidity: weekly liquidity of the assets - This is possible - This is a strong guarantee for investors - This is also efficient to deliver performance, in good as well as bad market conditons HOW TO TURN LIQUIDITY AND RISK MANAGEMENT INTO BENEFITS FOR INVESTORS? Slide 18