Mutual Fund Directors Forum

Transcription

1 Mutual Fund Directors Forum Alternative Investments: What are They? November 28, 2012 Devin McCune, Head of Board Reporting and Compliance, Thomson Reuters Laurie Thomsen, Independent Trustee, MFS Funds Elizabeth Reza, Ropes & Gray LLP

2 Increasing Interest Both investors and sponsors have shown increased interest in registered alternative investment products Reasons Interest by retail investors in hedge funds and other alternative strategies Interest by institutions in transparency and liquidity Focus on absolute returns/uncorrelated returns Regulatory developments 2

3 Alternative Fund Launches in Past Year Alternative Classification New Launches 11/01/11-10/31/12 3 Total Number of Funds Percentage Increase Absolute Return % Long Short Equity % Managed Futures % Specialty Fixed Income % Commodities % Extended US Large Cap Core Equity Market Neutral Dedicated Short Bias % % % Currency % Equity Leveraged % Source: Lipper

4 Examples of Alternative Products Absolute Return Funds Typically seek positive returns (generally above inflation) over a certain period/market cycle Generally has flexibility to go anywhere Precious Metals Absolute Return Funds Commodities Market Neutral Indexing Event Driven Currencies Foreign Securities Hedging REITs Arbitrage Dedicated Short Bias Derivatives Leverage Managed Futures Short Sale Emerging Markets Long/Short Convertibles MLPs 4 Source: Lipper

5 Examples of Alternative Products (cont.) Long/Short Funds Typically achieve long and short exposure through short sales and/or derivative positions 130/30 funds use short sales to increase long exposure Commodities Currencies Long Short Equity Market Neutral Indexing Hedging Event Driven Foreign Securities Arbitrage Dedicated Short Bias Managed Futures Derivatives Short Sale Leverage Convertibles Long/Short Emerging Markets 5 Source: Lipper

6 Examples of Alternative Products (cont.) Managed Futures Funds Aim to provide low correlation to stock and bond investments through investments in futures Focus of CFTC/NFA regulatory initiatives Managed Futures Funds Indexing Foreign Securities Commodities Currencies Managed Futures Derivatives Leverage Short Sale Long/Short MLPs 6 Emerging Markets Source: Lipper

7 Examples of Alternative Products (cont.) Commodity Funds Capitalize on inflation fears and lower correlation to securities portfolios Regulatory Developments Amendments regarding registration Treatment of commodity subsidiaries Commodities Market Neutral Precious Metals Indexing Derivatives Long/Short Leverage 7 Arbitrage Source: Lipper

8 Examples of Alternative Products (cont.) Market Neutral Funds Use long and short exposure to seek to eliminate correlation to broad market movements Equity Market Neutral Funds Infrastructure Derivatives Market Neutral Short Sale Convertibles Event Driven Managed Futures Foreign Securities Hedging Dedicated Short Bias Leverage 8 MLPs Long/Short Source: Lipper

9 Examples of Alternative Products (cont.) Multi-Strategy Funds (or Manager of Manager Funds) Allocation of sleeves to multiple portfolio management teams Managers often seek to implement hedge fund/alternative strategies, subject to regulatory restrictions Registered Fund of Hedge Funds Permits access for less than the minimum investment level, making diversification easier to achieve Regulators have imposed eligibility requirements notwithstanding 1933 and 1940 Act registration 9

10 Challenges for Board Understanding strategy and the fund s role How will the alternative product behave on its own and in tandem with other portfolio holdings and/or products? Appropriate expertise (portfolio management and operational) Does the adviser possess the necessary expertise for this alternative product? Lack of track record may make evaluation difficult Track record may have been developed in a non-1940 Act product Compliance considerations (liquidity, valuation, leverage, etc.) Accounting Tax 10

11 Challenges for Board (cont.) How should the board measure success? Understand the aim/goal of the alternative product Define how success should be measured Prior to launch, if possible Complexity may make peer analysis and benchmark comparison best available 11

12 Challenges for Board (cont.) How should the board measure success (cont.)? Performance benchmarking Provide blended indexes by strategy, if possible Hurdle rate analysis of returns Performance by investment sleeve Provide risk measures for analysis Expense benchmarking Multiple techniques cause expenses to vary Benchmark against cost to manage traditional assets Look for peer groups comprised of funds with similar investment techniques and weightings, if possible Be wary of outliers within peer group 12

13 Challenges for Board (cont.) Risk Management Does management have a process for identifying and managing risk? Has strategy been tested in times of market stress? Managing the sales process Will wholesalers/brokers be able to properly sell product? Conflicts issues 13

14 Process No one size fits all solution Consider executive session pre-meetings Consider 2-step process conceptual proposal then specific approvals Consider providing a template with specific questions the Board wants answered in connection with new fund launches Consider forming a special committee to oversee alternative products ad hoc or permanent 14

15 This summary should not be construed as legal advice or a legal opinion on any specific facts or circumstances and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have Ropes & Gray LLP 15