Perspectives on the Changing Landscape in Alternative Asset Management Global Conference 2009
Perspectives on the Changing Landscape in Alternative Asset Management Monday, April 27, 2009; 11:00 AM - 12:15 PM Moderator: Robert Matza, Partner and President, GoldenTree Asset Management LP Speakers: Timothy Barrett, Executive Director and Chief Investment Officer, San Bernardino County Employees' Retirement Association Simon Ruddick, Co-Founder and Managing Director, Albourne Partners Anthony Scaramucci, Managing Partner, Skybridge Capital Group LLC Arthur Tully, Partner, Co-Leader of Global Hedge Fund Practice and Leader of Asset Management Practice, Ernst & Young LLP
Pension funds have increased holdings in alternative assets Percent 70% 60% 50% 40% 30% 61% 59% 52% 27% 26% 28% 2007 2006 2008 20% 10% 0% 2% Source: Pensions & Investments. Note: Data are the aggregate asset mixes for the top 1,000 defined benefit plans. 2% 2% 8% 10% 14% Equity Fixed income Cash Private equity, real estate, mortgages 4% 4% Other 5%
Alternative assets in the top 200 defined benefit plans Alternative assets (in US$ billions) Real estate equity Hybrid plans Buyouts Other private equity and VC Overlay (notional value) Hedge funds TIPS Other High-yield bonds/bank loans Portable alpha REITs Source: Pensions & Investments. Note: Assets as of September 30. 2008 $214 $124 $114 $111 $107 $81 $65 $65 $45 $41 $26 2007 $170 $115 $108 $55 $81 $76 $54 $51 $40 $50 $25
Defined benefit plans with the most assets in private equity Fund California Public Employees General Electric New York City Retirement New Jersey DuPont Michigan Retirement Ohio Public Employees Alaska Retirement Virginia Retirement Alabama Retirement Source: Pensions & Investments. Note: Assets as of September 30, 2008. Assets in PE (in US$ millions) 22,178 6,000 4,157 3,247 3,196 2,604 2,566 1,327 1,207 1,120
Defined benefit plans with the most assets in venture capital Fund California Public Employees New York State Common Pennsylvania Employees Verizon California State Teachers Washington State Board Colorado Employees Michigan Retirement Massachusetts PRIM New York State Teachers Source: Pensions & Investments. Note: Assets as of September 30, 2008. Assets in VC (in US$ millions) 2,609 1,848 1,538 1,423 1,324 1,295 1,160 958 901 842
Defined benefit plans with the most assets in hedge funds Fund Pennsylvania Employees California Public Employees South Carolina Retirement Massachusetts PRIM New Jersey New York State Common Pennsylvania School Employees Texas Teachers Verizon General Electric Source: Pensions & Investments. Note: Assets as of September 30, 2008. Assets in hedge funds (in US$ millions) 8,300 7,058 5,279 4,717 3,966 3,661 3,506 3,469 3,080 3,000
Worldwide hedge fund assets drop by 40 percent since Q2 2008 US$ trillions 3.5 3.0 2.5 2.0 1.5 1.0 0.8 1.0 1.1 1.2 1.3 1.4 1.4 1.5 1.5 1.7 1.9 2.0 2.2 2.4 2.6 2.7 2.9 2.8 2.9 2.5 1.9 1.8 0.5 0.0 2004 2005 2006 2007 2008 2009 Sources: Hedgefund.net, The Milken Institute.
Total returns of selected asset classes Crude Oil Emerging markets Hedge funds U.S. Treasuries Commodities Corporate bonds Small Cap High Yield S&P 500-3.0% Annualized return Q1 1998- Q1 2009 4.4% 3.6% 3.5% 6.2% 5.0% 7.0% 10.8% 9.7% Annualized return Q1 2008- Q1 2009 U.S. Treasuries Corporate bonds -8.1% High Yield -12.6% Hedge funds -16.7% Emerging markets -36.5% Small Cap -37.9% S&P 500-38.1% Commodities -56.5% Crude Oil -67.1% 7.2% -5% 0% 5% 10% 15% Sources: Bloomberg, Datastream, The Milken Institute. -100% -50% 0% 50%
Private equity activities slow globally United States Western Europe Asia Middle East Eastern Europe Latin America Africa Total Sources: Dow Jones, Dealogic. Deal value announced (US$ millions) 2007 368,400 185,900 67,000 898 27,900 4,600 7,900 662,598 2008 59,600 88,000 52,500 1,700 8,000 1,200 2,200 213,200 2007 325,200 101,500 28,700 5,000 14,600 4,400 2,300 481,700 Fund raised (US$ millions) 2008 256,900 96,100 37,100 6,400 5,400 4,000 2,600 408,500
Price performance of major bond, equity and commodity indices Index, January 30, 2000 = 100 400 350 300 250 200 150 Lehman Bond Composite Index S&P GSCI Commodity Index 100 50 S&P 500 Index 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: Bloomberg, Milken Institute.
Global IPO market froze in first quarter 2009 Amount raised, US$ billions 350 299 300 256 250 209 200 174 163 150 137 105 107 105 100 68 75 74 88 59 51 50 31 8 24 0 1990 1994 1998 2002 2006 * 2009 number is annualized. 83 5 2009* Source: Dealogic.
Venture capital investment in the U.S. 1998-2008 US$ billions Thousands 120 Total venture capital investment (left axis) 100 Number of deals (right axis) 80 60 40 20 9.0 7.5 6.0 4.5 3.0 1.5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0.0 Source: PricewaterhouseCoopers.
Panelists slides
Timothy Barrett Executive Director and Chief Investment Officer San Bernardino County Employees' Retirement Association
Asset allocation Why we must evolve
San Bernardino County Employees Retirement Association Asset allocation evolution 2002 2003 2005 2007 2008 2009 Domestic Equity 43% 33% 32% 29% 20% 10% International Equity 18% 13% 13% 14% 11% 7% Emerging Market Equity 3% 3% 4% 4% 3% Total Equity 61% 49% 48% 47% 35% 20% Investment Grade Debt 28% 17% 14% 10% 8% 8% US Credit 8% 8% 4% 8% 13% International Investment Grade Debt 5% 5% 5% 3% 3% 4% International Credit 5% 5% Emerging Market Debt 2% 2% 4% 4% 4% Cash 2% 2% Total Debt 33% 32% 29% 21% 30% 36% Real Estate 6% 8% 8% 8% 8% 10% Timber 2% 4% 3% 4% Infrastructure 2% 2% 1% Commodities 2% 3% 3% Total Real Assets 6% 8% 10% 16% 16% 18% Absolute Return 5% 7% 7% 7% 10% Private Equity 6% 6% 9% 12% 16% Total Alternative Assets 11% 13% 16% 19% 26% *Not Shown - Alpha Pool Target: 7% in '03; 19% in '08 Source: SBCERA.
San Bernardino CERA Evolution Equity exposure synthetic exposure, volatility strategies and hedged equity strategies. Debt exposure synthetic exposure with risk exposures in combination of traditional and alternative strategies. Greater use of alternatives that are uncorrelated with volatility spikes Global Macro, Market Neutral Equity and Commodity trading strategies. End result: Alternatives will be incorporated into traditional structures.
Domestic equity structure - SBCERA
Domestic debt structure - SBCERA
Proof statement
Due diligence
Due diligence Traditional pension fund approach annual meetings on-site with investment manager New approach Pre-hire on-site due diligence (2-3 days) Operational review by external specialist firm (2-3 days on-site) Legal review to negotiate contract/side letters Portfolio monitoring Charles River System, non-investment compliance and weekly video teleconferencing with managers Onsite due diligence with board, staff and respective consultant
Robert Matza Partner and President GoldenTree Asset Management LP
Dow and S&P gain 80 percent in a 10-year period S&P 500 levels 1 5 5 0 1 4 5 0 S&P 500 S&P 500 DJIA DJA levels 1 4 5 0 0 1 3 5 0 0 1 3 5 0 1 2 5 0 0 S&P 500 Levels 1 2 5 0 1 1 5 0 1 0 5 0 1 1 5 0 0 1 0 5 0 0 9 5 0 0 DJIA Levels 9 5 0 8 5 0 7 5 0 Dow Jones Composite Average (DJA) D e c - 9 7 J u n - 9 9 D e c - 0 0 J u n - 0 2 D e c - 0 3 J u n - 0 5 D e c - 0 6 8 5 0 0 7 5 0 0 6 5 0 0
Dramatic growth of alternative asset managers 2001-2007 ($ in Billions) $2,000 $1,500 $1,000 $500 Hedge Fund AUM Rose to Nearly $2 Trillion $0 $539 $626 23% CAGR $820 $973 $1,105 $1,465 $1,868 2001 2002 2003 2004 2005 2006 2007 PE Capital Raised and Deal Flow Grew 4-5x Since 2003 ($ in Billions) Funds of Hedge Funds Grew to 43% of Industry AUM $900 $750 $600 $450 $300 $150 $0 $103 $207 41% CAGR $293 $359 $395 $656 $799 2001 2002 2003 2004 2005 2006 2007 19% % of HF Industry 43% ($ in Billions) $400 $300 $200 $100 $0 $167 Capital Raised Capital Invested $33 $124 $101 $46 $53 '03 - '07 CAGR 39% 53% $143 $85 $271 $109 $366 $375 $250 2001 2002 2003 2004 2005 2006 2007 $288
Equity markets give back 10-year gain in 17 months S&P 500 levels 1 5 5 0 1 4 5 0 1 3 5 0 Dow Jones S&P 500 Composite DJIA Average (DJA) DJA levels 1 3 5 0 0 1 2 5 0 0 S&P 500 Levels 1 2 5 0 1 1 5 0 1 0 5 0 S&P 500 1 1 5 0 0 1 0 5 0 0 9 5 0 0 DJIA Levels 9 5 0 8 5 0 0 8 5 0 7 5 0 7 5 0 0 6 5 0 O c t - 0 7 D e c - 0 7 M a r - 0 8 M a y - 0 8 J u l - 0 8 O c t - 0 8 D e c - 0 8 M a r - 0 9 6 5 0 0
4Q 2008 credit markets meltdown The 2008 credit market decline was equivalent to the cumulative total of losses incurred during the last 5 credit crises HY was down 24.9% for the 2 months post-lehman bankruptcy (compared to other 2 month period declines) HY Stock Market Crash -2.74% Drexel Burnham -8.50% Mexican Peso -3.90% Russia LTCM -5.05% WorldCom Fraud -3.88% Total -24.07%
FRAUD Madoff: His $65 Billion Ponzi Fraud U.S. NEWS & WORLD REPORT Dreier Indicted in $400 Million Fraud Scheme Stanford s Trail of Tears: $8 Billion BARRON S BLOOMBERG.COM No bond for Fla. money manager accused of $300MM fraud Chinese Warren Buffet Ran Hedge Scam: SEC HEDGEFUND.NET Associated Press
Number of hedge funds and funds of hedge funds 12,000 Hedge Funds Funds of Hedge Funds 10,000 8,000 Funds of hedge funds Hedge funds 1,997 2,221 2,462 4% 2,368 1,654 6,000 781 1,232 11% 4,000 2,000 538 3,335 550 3,904 4,598 5,065 5,782 6,667 7,241 7,634 6,808 0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Hedge funds Size and growth AUM declined by $460bn to $1.4tn, a 25% decline vs. EOY 07 levels 2, 0 0 0 1, 6 0 0-25% 1, 2 0 0 24% 1, 8 6 8 0 0 1, 4 6 1, 7 2 1, 4 0 4 0 0 6 2 6 8 2 0 9 7 3 1, 1 0 0 ' 0 2 ' 0 3 ' 0 4 ' 0 5 ' 0 6 ' 0 7 Q3 '08 ' 0 8
Early reaction Hedge Fund Investors Hire Private Eyes Bloomberg.com A New Service-Provider Pitch: Is Your Hedge Fund Madoff-Proof? Investors Turn The Table On Hedge Fund Fees SEC Plans New Money Manager Rules Bloomberg.com REUTERS HEDGEFUND.NET
Simon Ruddick Co-Founder and Managing Director Albourne Partners
Albourne investor meeting February 2009 Albourne Partners hosted an event for its institutional investors, at their request, in New York on February 18th, 2009 Attendees participating in a live vote on a number of questions. These votes were combined with prior-recorded votes collected from those who were unable to attend. Investors were asked to put a deemed value on various possible terms. This deemed value was described in terms of basis points increase, or decrease, to the annual management fee.
Participants Respondents by investor type Quasi-governmental Public pension Corporate pension Insurance-related Endowments Foundations TOTAL Number 5 9 7 7 14 8 50 Hedge fund investments (US$ billions) Current In 18 months 14.3 23.8 19.9 23.1 16.6 19.2 8.4 7.6 14.9 18.9 6.5 7.1 80.5 99.7
Summary of results I 1. The $80 billion of current hedge fund investments of the 50 respondents were expected to grow by almost 25% in next 18 months. 2. 50% of investors said that both structure and fees come up regularly in discussions within their organization, whereas 20% were focused mostly on fees. 3. Almost 80% of investors showed a willingness to lockup for at least 2 years, with 50% willing to go at least 3 years, and 16% wiling to go longer. 4. Most estimates of the deemed cost/value of a 2 year lockup were between 50 and 100 bps. 5. Virtually every investor appreciated that there were circumstances when gates were necessary. Less than 15% of investors thought the invocation of gates should be mandatory, while 90% of investors thought there should be some waiving of fees on gated funds.
Summary of results II 6. A clear majority voted that a rescission penalty should be paid to the fund if an investor were to pull a redemption notice. 7. Three quarters of investors thought a LIBOR hurdle had a deemed value of 25 bps or more, with almost a fifth voting it had a value of 75 bps or more. 8. The deemed value to investors of a deferred performance fee appeared to be above the theoretical value, illustrating its popularity. By comparison, a performance fee structure which deducted statistically significant beta had a deemed value below its theoretical value. 9. The majority of investors don t have, but are now considering, both managed accounts and managed account platforms. 10. Almost all investors thought their organization would deem a value to segregation of assets and transparency, but over 65% felt their organization would not pay much for it or make it a pre-condition to investing.
Summary of results III 11. 84% of those who considered managed accounts had a deemed value estimated this at 20 or 40 bps. No one was willing to assign managed funds a deemed value of more than 40 bps. 12. All investors were concerned about transparency. About 60% of investors thought monthly risk-bucketed information would be sufficient. 13. Corporate and public pension plans were most willing to be proactive regarding Best- Practice initiatives. Most thought Albourne should be active, but that investors would rather not be named. 14. Over 85% voted that annual general meetings were either essential or nice-to-have. 15. 100% of investors indicated that an independent administrator would either be a clear preference or a pre-condition. While this is already a pre-condition for over 25% of investors, the highest vote was for this to become a pre-condition within a year. 16. All investors were interested in the transferability of hedge fund investments.