Palladium Fund Alpha Generating Strategy

Transcription

1 s Palladium Fund Alpha Generating Strategy April 2005 Marcel Dupuis Société Générale and Lyxor AM Equity Derivatives & Structured Products

2 Disclaimer This document does not constitute an offer or an invitation to invest or purchase any financial instrument Its purpose is simply to describe the approach set by Société Générale and Lyxor AM and Lyxor Asset Management in the management of alternative investment products The products herein described are subject to various legal or regulatory restrictions Société Générale and Lyxor AM ( SG ) and Lyxor Asset Management assume no fiduciary responsibility or liability for any consequences financial or otherwise arising from the subscription or acquisition of any instrument described in this document The investor should make its own appraisal of the risks and should consult to the extent necessary its own legal, financial, tax, accounting and other professional advisors in this respect prior to any subscription or acquisition 2

3 Characteristics of the Palladium Fund Mutual Fund managed by Lyxor Asset Management 6 year horizon Non conventional strategy: capture the dispersion of stocks over time Objective : generate alpha versus long only position Formula-based and transparent 90% capital guaranteed 3

4 Mechanism Palladium Fund takes advantage of dispersion in equity market: Performance is driven by dispersion within a diversified basket of 25 stocks Individual stock values are recorded on annual observation dates (in % of initial value) The Average Value of the basket of 25 stocks is calculated on each observation date (arithmetic average) The distance between each individual stock value and the Average Value is observed (in absolute value) on each observation date For each annual observation date, the Dispersion Amount is defined as the average of the distances multiplied by a leverage factor of 225 At maturity the Palladium Fund will redeem the highest of the 6 annual Dispersion Amounts 90% of capital is guaranteed at maturity Through this mechanism, Palladium Fund automatically goes : - long the stocks that outperform the average - short the stocks that underperform the average 4

5 Example Product similar to Palladium Fund - Same portfolio of 25 stocks Starting on 1 May 1996 and maturing on 1 May 2002 First observation date = 1 May 1997 Distances from the average /05/96 01/05/97 Start Date Year 1 Outperforming stocks (long position) Average value = 1282 Underperforming stocks (Short position) 25 stocks Value on Value on Individual stock value 1st May st May Average value INTEL = 908 BMW = 508 BASF = 378 TOYOTA MOTOR = 328 ING GROEP CERTS = 238 INTLBUSMACH = 208 L'OREAL = 198 BAE SYSTEMS = 188 VIVENDI UNIVERSAL = 168 GENERAL ELECTRIC = 138 COCA COLA = 128 DU PONT E I DE NEMOURS = 58 Dispersion Amount for Year 1 Leverage Factor EXXON MOBIL Average = 58 D1= 7024 x 225 NESTLE 'R' value = = ENDESA = 02 AXA = 92 = 632 SEVEN - ELEVEN JAPAN = 152 E ON = 162 UBS 'R' = 202 SUN MICROSYSTEMS = 272 FORD MOTOR = 332 GENERALI = 432 NTT DOCOMO INC = 492 DEUTSCHE TELEKOM = 612 MITSUBTOKFINLGP = 762 Total

6 Example Second observation date = 1May /05/96 01/05/96 01/05/98 Start Date Year 1 Year Outperforming stocks (long position) Average value = 1808 Underperforming stocks (Short position) Value on Value on Individual stock value Dispersion Amount 1st May st May Average value for Year 2 ING GROEP CERTS = 812 BMW = 632 AXA = 622 INTEL = 492 BAE SYSTEMS = 442 NESTLE 'R' = 342 INTLBUSMACH = 322 GENERAL ELECTRIC = 242 L'OREAL = 212 VIVENDI UNIVERSAL = 202 UBS 'R' = 142 BASF = 122 DU PONT E I DE NEMOURS Average = 52 D2 = 9345 x 225 FORD MOTOR value = ENDESA = 18 EXXON MOBIL = 58 = 841 GENERALI = 88 COCA COLA = 158 E ON = 258 NTT DOCOMO INC = 348 TOYOTA MOTOR = 358 SUN MICROSYSTEMS = 368 SEVEN - ELEVEN JAPAN = 538 DEUTSCHE TELEKOM = 998 MITSUBTOKFINLGP = 1478 Total

7 Example The same method is repeated on each annual observation dates A total of 6 Dispersion Amounts are recorded (D1 to D6) Trajectories of the 25 stocks from 1/5/96 to 1/5/02 Dispersion Amounts D1 D Start Date Year 1 Year 2 Year 3 Year 4 Year 5 Year Highest Dispersion Amount Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 At maturity (1st May 2002) : Redemption formula = max [90%, max (D1 D6)] The Palladium Fund redeems the highest of the 6 annual Dispersion Amounts = 3645 % of notionnal IRR = 2406% pa 7

8 Portfolio Basket of 25 stocks diversified in terms of countries and sectors Sectorial allocation Company Country Sector BAE Systems Plc BRITAIN Aerospace/Defense Bayerische Motoren Werke AG GERMANY Auto Manufacturers Toyota Motor Corp JAPAN Auto Manufacturers Ford Motor Co UNITED STATES Auto Manufacturers Mitsubishi Tokyo Financial Group Inc JAPAN Banks UBS AG SWITZERLAND Banks Coca-Cola Co/The UNITED STATES Beverages BASF AG GERMANY Chemicals EI Du Pont de Nemours & Co UNITED STATES Chemicals Sun Microsystems Inc UNITED STATES Computers International Business Machines Corp UNITED STATES Computers L'Oreal SA FRANCE Cosmetics/Personal Care EON AG GERMANY Electric Endesa SA SPAIN Electric Nestle SA SWITZERLAND Food AXA SA FRANCE Insurance Assicurazioni Generali SpA ITALY Insurance ING Groep NV NETHERLANDS Insurance Vivendi Universal SA FRANCE Media General Electric Co UNITED STATES Miscellaneous Manufactur Exxon Mobil Corp UNITED STATES Oil&Gas Seven-Eleven Japan Co Ltd JAPAN Retail Intel Corp UNITED STATES Semiconductors Deutsche Telekom AG GERMANY Telecommunications NTT DoCoMo Inc JAPAN Telecommunications Geographical allocation Telecommunications Semiconductors 8% Retail Oil&Gas Miscellaneous Manufactur Media Insurance 12% Food Electric 8% Cosmetics Aerospace/Defense Auto Manufacturers 12% Computers 8% Banks 8% Beverages Chemicals 8% United States 32% Switzerland 8% Spain Britain France 12% Netherlands Japan 16% Italy Germany 16% 8

9 First simulation : historical data Price data have been collected on a weekly basis from 3rd January 1980 to 4st March 2005 Each week of the period has been taken as a theoretical starting date for a period of 6 years For each of these periods, we have calculated the Internal Rate of Return (IRR) for a structure identical to that of Palladium Fund 1002 tests were carried out Given insufficient historical data, Sun Microsystems, Seven-Eleven Japan, Mitsubishi Tokyo Financial Group, NTT DoCoMo Inc, BAE Systems Plc, Deutsche Telekom AG, Endesa SA, ING Groep NV were replaced when data was missing by respectively: Hewlett-Packard Co, Daiei Inc, Resona Holdings, AT&T Corp, Boeing Co, Telecom Italia SpA, RWE AG, Allianz AG 9

10 Results of historical simulation IRR of Palladium IRR Excess return (" # % ) 5# 5486% ) # -037% Return Evolution " /012 Distribution of returns of Palladium versus underlying stocks measures the relative r isk of an asset compared to the risk of its benchmark Thus i t has an impact on individual assets returns and prices In our case, i t is a measure of the product s ri sk relative to its underlying portfolio of stocks measur e of perfor mance on a r isk adjusted basis It i s calculated as the di fference between a product s excess returns and the excess return of its benchmark adjusted by its beta ! Alpha of Palladium Versus underlying stocks = 385% pa " /032 Beta of Palladium versus underlying stocks = 087 Risk-free rate 3 ""#$%%% &&'&&()"*+,+&&'&&()*%%-%%, #(*%,% %,, - %, &&'&&()# 10

11 Second simulation : Monte Carlo Over 5000 random trajectories for 6 year period have been generated on a Monte Carlo model for the underlying stocks for the Palladium Fund The following inputs were used: expected return (trend) for the underlying stocks = risk-free rate + 3% = 64 % volatilities : historical average over last 10 years correlations : historical average over last 10 years 11

12 Results of Monte Carlo simulation Simulated IRR IRR Excess return Minimum -176% -519% Average 933% 590% Return distribution Palladium: -asymmetric return distribution -positive convexity Return distribution of Palladium versus underlying stocks " /012 8#769# " / :+ 5 :+ 5 Palladium : -performances shifted to the right -left tail cut off (90% capital guaranteed) Alpha of Palladium versus underlying stocks = 31% pa Beta of Palladium versus underlying stocks = 094 ""#$%%% &&'&&()"*+,+&&'&&()*%%-%%, #(*%,% %,, - %, &&'&&()# 12

13 Strategy benefits from current market conditions Market timing is favourable for the Palladium Fund : as implied equity volatility is at 7-year low as implied equity correlation is at high levels The product is vega + : the higher the realised volatility, the higher the performance at maturity the Fund s NAV on secondary market will benefit from an increase of the implied volatility The product is correlation - : the lower the realised correlation, the higher the performance at maturity the Fund s NAV on the secondary market will benefit from a decrease of the implied correlation 13

14 Strengths of Palladium Fund A unique product to capture the dispersion of stocks over time Historical data and Monte Carlo simulation show alpha versus long only position Favourable market timing Formula-based and transparent 90% capital guaranteed 14

15 Special Attention This product is a combination of a zero coupon bond and a derivative instrument Secondary Market Valuation The valuation of this product on the secondary market, will fluctuate with the movement in the EUR swap rates as well as with the changes in the implied parameters of the underlying The following table summaries the sensitivity of the product to market parameters : During the life time of the Fund, in case of a low Dispersion of the shares in the basket and unfavourable trend of market parameters, the price of the product can be lower than 90% Redemption at maturity Parameter movement Impact on the Price of the Product EUR Swap Rate Portfolio's Performance (Neutral long bias) Volatility of the Stocks Correlation of the Stocks Whatever happens, the redemption at maturity follows the formula defined on launch date The price of the product and the redemption value converge to the same value at maturity 15