The Northern Trust Experience ACCESS. EXPERTISE. SERVICE. Are Alternatives Still Alternative? November 4, 2010 Anthony M. Zanolla, CFA SVP, Senior Director of Hedge Fund Investments 2010 Northern Trust Corporation northerntrust.com
Alternatives Set for Continued Growth Over the Next 2-3 Years Allocations to alternatives are expected to grow substantially over the coming years. Hedge Fund allocation is projected to grow from 4.2% in 2009 to 5.7% by 2012. Growth in alternatives is coming largely at the expense of equities. 2 The Northern Trust Experience Source: Russell 2010 Global Survey on Alternative Investing *NOTE: The 12.4% total above is the sum of allocations to each type, and it is drawn from a different survey question than the 14% total allocation to equities discussed earlier. The 1.6% difference may be to uncategorized alternative allocations (not assigned to a specific type).
Drivers for Increasing Alternatives According to the Russell Global Survey of Alternative Investing, three attributes were indicated as drivers for increasing allocations to alternatives: Reducing volatility (83%) Improving returns (76%) Better risk-adjusted performance (61%) 3 The Northern Trust Experience
Structural Advantages of Hedge Funds Hedge funds private placement status provides them far more flexibility in the investment decision making process and the securities they can employ versus traditional asset managers. Wider investment mandate using broad array of securities, including derivatives, commodities, and private investments not available through traditional vehicles. Selling securities short (rather than being underweight versus a benchmark) allows the manager to profit from sell decisions and reduce risk in the portfolio. Buying securities on margin allows the fund to generate alpha on both sides of the portfolio, while lowering net exposure and reducing risk. Hedge Funds low correlation with traditional assets make them an attractive addition to an overall asset allocation. Hedge Fund managers interests are aligned with those of their investors. Performance fee incentivises manager and staff Manager co-investment - Managers eat their own cooking 4 The Northern Trust Experience
Capital Preservation in Difficult Markets Hedge Funds Flexibility Allows Outperformance in Difficult Markets 7.00% Hedge Fund Performance vs. S&P 500 Months where S&P 500 Declined 2% or More January 2000 September 2010 3.00% -1.00% -5.00% -9.00% -13.00% S&P 500 HFRI Fund Weighted Composite Index -17.00% -21.00% 5 The Northern Trust Experience
Risk Return of Hedge Funds vs. Traditional Asset Classes 12.0% Risk - Return Landscape of Hedge Fund Strategies January 2000 - July 2010 10.0% Emerging Markets Annualized Returns 8.0% 6.0% 4.0% Relative Value Arb Global Macro HFRI Fund Weighted Composite Event-Driven Equity Hedge MSCI Emerging Markets Free ($) 2.0% 0.0% Citi 3-Mo. T - Bill 60% Barclay Agg / 40% S&P 500 MSCI AC World -2.0% S&P 500 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Annualized Volatility Source: Pertrac 6 The Northern Trust Experience
Asset Growth of Hedge Funds 7 The Northern Trust Experience
The Importance of Manager Selection Despite factors that contribute broadly to a strategy s performance, each fund is unique in its talent and approach, leading to a wide range of results. 2009 Average Strategy Returns 2008 Average Strategy Returns Source: Credit Suisse 8 The Northern Trust Experience
Hedge Fund Key Considerations Hedge funds private placement status provides them far more flexibility in the investment decision making process and the securities they can employ versus traditional asset managers. The unique characteristics of hedge funds means manager selection is more critical than in traditional asset classes due to wide dispersion between strategies and among funds within each strategy. Hedge funds must to be evaluated in the context of a portfolio and the overall investment objective. A well-structured allocation to hedge funds / hedge fund strategies can lead to enhanced portfolio efficiency with better risk adjusted returns. 9 The Northern Trust Experience
The Northern Trust Experience ACCESS. EXPERTISE. SERVICE. Thank you. November 4, 2010 Anthony M. Zanolla, CFA SVP, Senior Director of Hedge Fund Investments 2010 Northern Trust Corporation northerntrust.com