U.S. Stock Market Plummeted on February 27, 2007: A Market Correction Made in China

Transcription

1 U.S. Stock Market Plummeted on February 27, 2007: A Market Correction Made in China The Dow dropped 241 points in 3 minutes Source: Bloomberg 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00

2 Higher Degree of Integration Between NYSE and Shanghai Stock Exchange Index, Jan = Correlation = January 2006 March 2007 Dow Jones Industrial Average Shanghai Stock Exchange Composite Source: Bloomberg 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1

3 Converging Yield to Maturity Percent Emerging Markets Sovereign Bonds U.S. Treasury Source: Merrill Lynch

4 Sources of Funds into Emerging Markets Percent Foreign Direct Investment Source: International Monetary Fund Equity Debt

5 21 st Century Global Equity Market Convergence Correlation with Dow, 12-Month Rolling Returns Source: Bloomberg S&P 500 COMPOSITE NASDAQ COMPOSITE FTSE 100 EURONEXT 100 DAX 30 MSCI WORLD

6 Convergence in Sovereign Bond Yields Source: Michael A. Clemens and Jeffrey G. Williamson (2004)

7 Increasing International Financial Convergence Sum of Foreign Assets and Liabilities as a Ratio to GDP Percent Emerging Markets China India Sources: Lane and Schmukler and Milken Institute staff estimates (e)

8 Narrowing Spread Between Hedge Fund Return and One-Year Treasury Yield Percent Spread between average hedge funds return and 1-year Treasury yield Sources: Hedgefund.net, Bloomberg and MI staff

9 Financial Convergence Michael Keough Principal Stark Investments

10 Hedge Funds: A Growing Business 2005: $1.53 trillion in assets 23.5% growth 2006: $1.89 trillion in assets Source: Institutional Investor News and Hedgefund.net

11 Top 50 Hedge Funds # FIRM JAN 07 AUM $BN GROWTH IN 2006 # FIRM JAN 07 AUM $BN GROWTH IN JP Morgan Asset Management % 26. Stark Investments % 2. Goldman Sachs Asset Management % 27. Davidson Kempner Advisers % 3. Bridgewater Associates % 28. Highfields Capital Management % 4. D.E. Shaw Group % 29. Wellington Management Co % 5. Farallon Capital Management % 30. Canyon Capital Advisors % 6. Renaissance Technologies Corp % 31. AOR Capital Management % 7. Och-Ziff Capital Management % 32. Fortress Investment Group % 8. Cerberus Capital Management % 33. Maverick Capital % 9. Barclavs Global Investors % 34. Duquesne Capital % 10. ESL Investments % 35. Millennium Management % 11. Citigroup Alternative Investments % 36. Adage Capital Management 8.10 n/a 12. Tudor Investment Corporation % 37. Cantillon Capital Management % 13. Caxton Associates % 38. York Capital Management % 14. Atticus Capital % 39. Lone Pine Capital % 15. Campbell & Co % 40. Black River Asset Management % 16. Citidel Investment Group % 41. King Street Capital Management % 17. Moore Capital Management % 42. Baupost Group % 18. Avenue Capital Group % 43. Bain Capital/Brookside Capital % Partners 19. Perry Capital % 44. BlackRock % 20. SAC Capital Advisors % 45. Pequot Capital Management % 21. Soros Fund Managment % 46. AllianceBernstein % 22. HBK Investments % 47. TPG-Axon Capital % 23. FX Concepts % 48. Paulson & Co % 24. Angelo, Gordon & Co % 49. Elliot Associates % 25. Fairfield Greenwich Group % 50. Grantham, Mayo,Van Otterloo %

12 Private Equity 1,546 Private Equity Firms (US): $811.2 billion under management approx worldwide: $1.2 trillion under management Source: Crossing the Line, Grant Thornton

13 Largest Private Equity Firms PRIVATE EQUITY FUND 1. Blackstone 2. The Carlyle Group 3. Goldman Sachs PE Group 4. Credit Suisse Customized Event Fund Investment Group 5. KKR 6. Texas Pacific Group 7. Warburg Pincus 8. Permira 9. HarbourVest Partners 10. Apollo Management 11. Bain Capital Partners 12. Oaktree Capital Management 13. Apax Partners 14. CVC Capital Partners 15. Lehman Brothers Holdings Source: Private Equity Experience

14 Comparing Returns Average Returns Over the Last 10 Years: S&P: 8.33% Hedge Funds: 11.8% Private Equity: 13.2% Source: Bloomberg Source: MSCI Source: Wall Street Journal

15 Examples of Convergence Private equity firms that have started hedge funds: Bain Capital The Blackstone Group Carlye Group Quadrangle Group Texas Pacific Group Hedge funds with private equity: Carlson Capital Cerberus Capital Management D.E. Shaw Eton Park Capital Management HBK Och-Ziff Capital Management Odyssey Partners Reservoir Capital Source: Crossing the Line, Grant Thornton

16 IPO s: A Growing Trend Accelerating Convergence Blackstone Valued at: $40 billion Hedge Funds Private equity Real estate group Alternative investments Corporate debt group Relative value fixed income Core management services Fortress $29.9 billion in assets IPO: $35.00 Hedge funds Private equity funds Publicly traded alternative investment vehicles

17 Risk in Long-Only Equity Investing

18 Sustainable Growth in the Future Public + Private Markets Multi-strategy Approach Factor Hedges New Alpha Model Multi-disciplinary Multi-asset

19 Evolution of Portfolio Management We believe that building, managing and increasing wealth requires categorizing, organizing and analyzing the universe of investment opportunities differently than has been done in traditional allocation models. Modern Portfolio Theory Post-Modern Portfolio Theory Guggenheim Approach Cash Stocks Alternatives Cash Real Assets Low Beta Cash Stocks Bonds Bonds High Beta Traditional Assets Diversification Harry Markowitz (1950s) Introduction of Alternatives Endowment Model (1970s 2000s) Forward Looking Innovation Based Integrated Alpha & Beta Approach

20 Portfolio Construction & Management Our approach is reinforced by example when one observes the evolution of some of the industry s most admired endowments. As illustrated below, the Yale University endowment over the past 20 years has moved from a classical Modern Portfolio Theory allocation 10% to a much more innovative and diversified portfolio mix. 10% 14% 10% 25% 25% 5% 15% 65% 20% 20% 15% 10% 17 % 25% 14% U.S. Equity Foreign Equity Absolute Return U.S. Bonds Real Assets Private Equity. Harvard Domestic Equities 15% Foreign Equities 10% Emerging Markets 5% Private Equities 13% Absolute Return 12% High-Yield 5% Commodities 13% Real Estate 10% Domestic Bonds 11% Foreign Bonds 5% Inflation-Indexed Bonds 6% Cash (5%) Stanford Public Equity 40% Real Estate 16% Private Equity 10% Natural Resources 7% Absolute Return 15% Fixed Income 12% Endowments $1B+ U.S. Equity 28% Non-U.S. Equity 17% Hedge Funds 22% U.S. Fixed Income 12% Non-U.S. Fixed Income 2% Private Equity 6% Venture Capital 4% Natural Resources 3% Real Estate - Private 3% Real Estate - Public 1%

21 Yale is not alone in this pursuit of less traditional allocations. Harvard, Stanford and many of the nation s largest endowments and foundations employ equally creative and less traditional approaches to allocation, with widely noted success

22 CAPM William F. Sharpe Harry M. Markowitz

23 Efficient Frontier Return Risk

24 Efficient Portfolios Return The unattainable set under strict CAPM Risk

25 Returns from Financial Talent Return Risk

26 Returns from Financial Talent Return Risk

27 Returns from Financial Talent Return Unattainable Risk

28 Geometric Annual Mean Return is 8.0% Annualized Standard Deviation is 23.8% Geometric Annual Mean Return is 0.0% Annualized Standard Deviation is 24.9% Source: NASDAQ Composite.

29 Source: NASDAQ Composite.

30 if you bought NASDAQ Composite for $100 on 2/8/01 and held it until 4/20/07, you'd just now be breaking even. If you waited until about two months later and bought on 4/5/01, you d earn about 8% per year (59.5% total return). Source: NASDAQ Composite.

31 Geometric Annual Mean Return is 8.0% Annualized Standard Deviation is 23.8% Geometric Annual Mean Return is 0.0% Annualized Standard Deviation is 24.9% Source: NASDAQ Composite.