U.S. Stock Market Plummeted on February 27, 2007: A Market Correction Made in China 12450 12400 The Dow dropped 241 points in 3 minutes 12350 12300 12250 12200 12150 12100 12050 Source: Bloomberg 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00
Higher Degree of Integration Between NYSE and Shanghai Stock Exchange Index, Jan. 2006 = 100 120 115 Correlation = 0.8773 January 2006 March 2007 Dow Jones Industrial Average 300 250 110 200 105 100 95 Shanghai Stock Exchange Composite 150 100 50 90 0 Source: Bloomberg 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1
Converging Yield to Maturity Percent 16 14 Emerging Markets Sovereign Bonds 12 10 8 U.S. Treasury 6 4 2 1999 2000 2001 2002 2003 2004 2005 2006 Source: Merrill Lynch
Sources of Funds into Emerging Markets Percent 100 80 1980-1984 1990-1994 2000-2004 60 40 20 0 Foreign Direct Investment Source: International Monetary Fund Equity Debt
21 st Century Global Equity Market Convergence Correlation with Dow, 12-Month Rolling Returns 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Source: Bloomberg S&P 500 COMPOSITE NASDAQ COMPOSITE FTSE 100 EURONEXT 100 DAX 30 MSCI WORLD 95 96 97 98 99 00 01 02 03 04 05 06 07
Convergence in Sovereign Bond Yields 1870-1913 40 35 30 25 20 15 10 5 0 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 Source: Michael A. Clemens and Jeffrey G. Williamson (2004)
Increasing International Financial Convergence Sum of Foreign Assets and Liabilities as a Ratio to GDP Percent 140 120 100 80 60 Emerging Markets China India 40 20 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Sources: Lane and Schmukler and Milken Institute staff estimates 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006(e)
Narrowing Spread Between Hedge Fund Return and One-Year Treasury Yield Percent 16 14 12 10 8 6 4 2 0 Spread between average hedge funds return and 1-year Treasury yield 1981 1986 1991 1996 2001 2006 Sources: Hedgefund.net, Bloomberg and MI staff
Financial Convergence Michael Keough Principal Stark Investments
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
Top 50 Hedge Funds # FIRM JAN 07 AUM $BN GROWTH IN 2006 # FIRM JAN 07 AUM $BN GROWTH IN 2006 1. JP Morgan Asset Management 34.00 74.36% 26. Stark Investments 10.83 42.46% 2. Goldman Sachs Asset Management 32.53 47.87% 27. Davidson Kempner Advisers 10.26 65.48% 3. Bridgewater Associates 30.20 47.32% 28. Highfields Capital Management 10.00 29.87% 4. D.E. Shaw Group 26.30 39.89% 29. Wellington Management Co. 10.00 19.05% 5. Farallon Capital Management 26.20 58.79% 30. Canyon Capital Advisors 9.60 18.52% 6. Renaissance Technologies Corp. 24.00 175.86% 31. AOR Capital Management 9.50 21.79% 7. Och-Ziff Capital Management 21.00 40.00% 32. Fortress Investment Group 9.40 38.24% 8. Cerberus Capital Management 19.15 69.60% 33. Maverick Capital 9.30-15.45% 9. Barclavs Global Investors 18.90 28.57% 34. Duquesne Capital 8.80 10.00% 10. ESL Investments 18.00 20.00% 35. Millennium Management 8.60 32.31% 11. Citigroup Alternative Investments 15.77 162.85% 36. Adage Capital Management 8.10 n/a 12. Tudor Investment Corporation 15.17 17.60% 37. Cantillon Capital Management 8.10 6.58% 13. Caxton Associates 14.20 10.08% 38. York Capital Management 8.00 5.26% 14. Atticus Capital 14.00 60.92% 39. Lone Pine Capital 7.94 5.84% 15. Campbell & Co. 13.80 15.00% 40. Black River Asset Management 7.90 75.56% 16. Citidel Investment Group 13.50 12.50% 41. King Street Capital Management 7.40 21.31% 17. Moore Capital Management 12.50 22.55% 42. Baupost Group 7.36 26.90% 18. Avenue Capital Group 12.40 37.78% 43. Bain Capital/Brookside Capital 7.36 40.38% Partners 19. Perry Capital 12.34 8.26% 44. BlackRock 7.30 92.11% 20. SAC Capital Advisors 12.00 41.18% 45. Pequot Capital Management 7.30 2.82% 21. Soros Fund Managment 12.00 25.00% 46. AllianceBernstein 7.20 53.19% 22. HBK Investments 11.90 35.23% 47. TPG-Axon Capital 7.20 26.32% 23. FX Concepts 11.25 44.19% 48. Paulson & Co. 7.14 62.36% 24. Angelo, Gordon & Co. 11.00 10.00% 49. Elliot Associates 7.00 25.00% 25. Fairfield Greenwich Group 11.00 50.68% 50. Grantham, Mayo,Van Otterloo 7.00 52.17%
Private Equity 1,546 Private Equity Firms (US): $811.2 billion under management approx. 3000 worldwide: $1.2 trillion under management Source: Crossing the Line, Grant Thornton
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
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
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
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
Risk in Long-Only Equity Investing
Sustainable Growth in the Future Public + Private Markets Multi-strategy Approach Factor Hedges New Alpha Model Multi-disciplinary Multi-asset
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
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 1985 1995 2005 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%
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
CAPM William F. Sharpe Harry M. Markowitz
Efficient Frontier Return Risk
Efficient Portfolios Return The unattainable set under strict CAPM Risk
Returns from Financial Talent Return Risk
Returns from Financial Talent Return Risk
Returns from Financial Talent Return Unattainable Risk
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.
Source: NASDAQ Composite.
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.
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.