Global Macro & Managed Futures Strategies: Flexibility & Profitability in times of turmoil. Robert Puccio Global Head of Macro, Quantitative, Fixed Income and Multi-Strategy Research For attendees at the MondoHedge event only and not to be distributed to the public
Presentation Highlights & Objectives How have the global macro & managed futures strategies performed during past market dislocations? What factors enabled these strategies to achieve these returns? How do the strategies behave in a diversified portfolio? Is correlation beneficial? What changes have occurred since 2008 within the industry? In what environments do these strategies perform best? What is the outlook following the crisis? For attendees at the MondoHedge event only and not to be distributed to the public Page 2
Global Macro & Managed Futures Funds Definition, Styles and How They Make Money Global Macro & Managed Futures funds, by definition, have the broadest mandate within the hedge fund universe. They have no long bias and, as such, are agnostic with respect to direction. Long and Short positions are expressed in interest rates, commodities, currencies, equities and volatility on both a Relative Value and a Directional basis in countries around the world. There are many different styles with different risk/return profiles falling under two broad categories of macro : Discretionary The classic approach. Through the use of a top-down approach based on internal forecasts for global macroeconomic trends, managers construct a portfolio of uncorrelated themes across different time horizons. Strong risk management is key to the survival of a manager with this philosophy. The strategy has changed from the early-days when a manager generally had a single-book or portfolio. Today, the largest discretionary managers employ a prop-desk approach in which many individual portfolio managers are each allocated a portion of the total capital or risk. Quantitative Commodity Trading Advisors (CTA s) or Managed Futures Funds. There are different types, including trend followers, mean reversion and pattern recognition. Trend Following strategies tend to invest over medium to long-term horizons (holding period of weeks and months) while Pattern Recognition and Mean Reversions strategies can be shorter-term in nature. What is common among all of these trading styles is the liquidity of the instruments that a Macro trader uses to express their views and the well defined risk management policy followed to avoid steep losses. For attendees at the MondoHedge event only and not to be distributed to the public Page 3
Historic performance How have the Macro & Managed Futures strategies performed? Macro strategies have shown their resilience in negative years for equity indices. 30% HFR Macro CSFB Managed Futures MSCI World Local Price Index 20% 10% 0% -10% -20% -30% -40% -50% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 - Sept Source: Pioneer Alternative Investments, HFR Macro, CSFB, Bloomberg. Data as of September 30 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 4
How is performance in extreme monthly environments? Down capture is limited for Macro. We witness negative down capture for Managed Futures: The average return of the 10 worst months for the MSCI World is -10.4% The average return of the HFR Macro is -0.16% and the CSFB Managed Futures is +3.71% Up capture is also limited for Macro, but nevertheless positive. Managed futures again shows negative capture: The MSCI World averages +7.46% in the 10 best months The HFR Macro average is +1.12% and the CSFB Managed Futures average is -0.40% Manager selection is vital as dispersion of returns tends to be high in this environment 15% 10% 5% 0% -5% -10% -15% MSCI World Local Price Index CSFB Managed Futures HFR Macro -20% Oct-08 Aug-98 Sep-02 Sep-08 Feb-09 Sep-01 Aug-02 Jan-08 Jun-08 Feb-01 Apr-09 Apr-03 Dec-99 Sep-09 Oct-02 Nov-99 Oct-98 Apri-01 Sep-10 Mar-10 Source: Pioneer Alternative Investments, HFR Macro, CSFB, Bloomberg. Data as of September 30 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 5
Global Macro & Managed Futures Shock Absorber in Times of Dislocation The 6 month period between September 2008 and February 2009 was one of the greatest stress environments that portfolios have had to endure. 20% 10% 0% -10% HFRX Equity Hedge Index HFRX Convertible Arbitrage Index MSCI World Local Price Index HFRX Distressed Securities Index CSFB Managed Futures HFRX Macro Index 9.49% 3.49% -20% -30% -40% -50% -60% -40.77% -22.24% -50.26% -28.90% Other positive strategies included dedicated short-bias funds and long volatility strategies. Macro and CTA strategies showed their diversification benefits during this stressed environment. Source: Pioneer Alternative Investments, HFR, CSFB, Bloomberg. Data as of September 30 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 6
Strategy Correlations Change in Times of Stress The 2007-2009 period proved that long-term correlation assumptions for various alternative strategies may not hold in severe market stress. Result: portfolio managers were unable to diversify away the systemic risk in their portfolios. Macro & CTA strategies maintained their long-term correlations when they were needed most in many cases they even improved, becoming less correlated with traditional asset classes. Correlation Matrix Period: Apr '03 to Jun '07 Benign, Lo-Vol environment MSCI World Local Price Index Period June 2007 - March '09 Stressed, Hi-Vol environment HFRX Macro Index 0.60 0.01 CSFB Managed Futures 0.58 (0.27) Fund 1 (0.21) (0.28) Fund 2 0.08 (0.26) Fund 3 0.48 (0.28) Fund 4 0.42 0.30 Fund 5 0.57 0.18 Fund 6 0.16 0.18 Fund 7 0.44 (0.22) Fund 8 0.50 (0.54) HFRX Equity Hedge Index 0.83 0.80 HFRX Distressed Securities Index 0.31 0.44 The table above shows the correlations of various hedge fund strategies, and some individual Macro & Managed Futures funds to the MSCI World Local Price index. Source: Pioneer Alternative Investments, HFR, CSFB, Bloomberg. Data as of September 30 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 7
Macro investing Risk adjusted returns EDHEC strategy indices ranked by Sharpe ratios over the past 10 years. Sharpe Ratios (Nov 2000 - Sept 2010) 1.20 1.00 1.09 0.97 0.93 0.80 0.75 0.73 0.68 0.64 0.60 0.40 0.20 0.53 0.50 0.42 0.38 0.24 - (0.20) (0.06) (0.40) (0.60) (0.35) Distressed Securities EDHEC Global Macro EDHEC Trading EDHEC Event Driven EDHEC Multistrat Emerging Market EDHEC Relative Value Fixed Income Arbitrage EDHEC CTA Global Equity Market Neutral Convertible Arbitrage Long/Short Equity EDHEC Short Selling S&P 500 Price Index Source: Pioneer Alternative Investments, EDHEC, Bloomberg, S&P. Data as of September 30 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 8
Transparency & Liquidity Good and getting better since 2008 Investor concern and disappointment post-2008 forced managers to make improvements in liquidity terms and transparency. Macro strategies generally offer investors quarterly or monthly liquidity. Annual lock ups have been removed. CTA s generally offer monthly liquidity in a fund structure, and weekly or daily liquidity in a managed account Risk reports have become more detailed and there has been a strong movement to thirdparty risk reporting, ex. MeasureRisk & RiskMetrics. Macro strategies trade liquid underlying instruments mostly futures are used for Equities, Interest Rates, Commodities and Currencies where leverage is embedded in the instruments. This type of leverage is less dependent on the changing behavior of prime brokerage counterparties. UCITS III is now available for many CTA s, and the availability of UCITS offerings among discretionary macro funds is growing, too. Limitations on leverage, exposure to commodities and concentration limits have been encountered and addressed in the development of UCITS for macro managers. Investors, however, must still expect some tracking error and lower volatility of returns. Due diligence is a two-way street; managers are now concerned about a potential investor s level of sophistication and want to make sure they understand their strategy. For attendees at the MondoHedge event only and not to be distributed to the public Page 9
PAI approach to selecting managers PAI Due Diligence focuses on: Proven ability of a manager to make money in a variety of economic environments Low to negative correlation of returns to equities and credit markets Combining managers with different areas of expertise and low correlation to each other to gain diversification benefits Preference for prop-desk style of fund with multiple risk-takers and strong risk management processes. Avoiding dedicated leveraged fixed-income relative value strategies Predictability of returns A well chosen Fund of Macro & Managed Futures Hedge Funds is the purest form of an absolute return strategy. Why? No directional bias, flexible mandate across all asset classes, and stringent risk management. For attendees at the MondoHedge event only and not to be distributed to the public Page 10
Strategies Focus: Macro and Trading Yield Curve Illustrative Trade Example An investor has a strong belief at the start of 2009 that the monetary stimulus, which has been orchestrated by the central banks, will remain in place for far longer than is typical in an economic recovery cycle. Policy makers can not risk the backlash in case they de-rail an economic recovery. The long-term implications of this stimulus by policy makers has potential inflation implications which would affect longterm rates. At the same time the government will have to issue massive amounts of new debt in order to pay for the fiscal stimulus programs. This supply of debt could also push yields on longer dated bonds higher. The investor implements a yield curve steepening trade where they are long the 2-year and short the 10-year Treasury rates. (hoping the spread will widen from 133bps where it closed in 2008). While there is risk of volatility in the legs of the trade, the liquidity in the trade should allow for quick exit from the trade should the thesis change. Result: The 2yr yield moves just 8bps higher while the 10yr rises by 1.37%. (spread widens to 262bps) Source: Pioneer Alternative Investments, Bloomberg. For attendees at the MondoHedge event only and not to be distributed to the public Page 11
Economic environments Best & Worst Best conditions: Steep yield curves Active Central Banks Strong trends Global economies in divergent cycles Reasonably high volatility (not massive spikes) Worst conditions: Low volatility Flat yield curves High correlation among assets Choppy, trendless markets For attendees at the MondoHedge event only and not to be distributed to the public Page 12
Recent attribution 2008 2009 2010 BEST Short equity indices Long govt bonds Long USD Short Commodities Curve steepness Relative value opportunities Long risky assets Emerging Markets long Asian FX vs G3 Short Europe through CDS Curve Trades CTA s helped by bonds + S.T. rates WORST Less liquid instruments Credit exposure Quantitative trend following in equities and FX following Q1 reversal of trends CTA s hurt by choppy markets in equity + energy commodities For attendees at the MondoHedge event only and not to be distributed to the public Page 13
Outlook & Current Opportunities For Global Macro managers Most Macro managers remain bearish in the medium to long-term but are again showing flexibility by not fighting the Fed in the short-term. The Fed s aggressive QE2 program has reduced worries of a double-dip recession but longer-term issues concerning the markets include: European sovereign deficits, high unemployment in the U.S., weak housing market, tight credit and excess capacity. How are funds positioned? Long positioning in bonds has been a crowded, but profitable, trade for CTA s and discretionary macro managers. Volatility is likely to return to fixed income markets following the Feds experiment with QE2 and its uncertain impact on inflation. Commodities Dollar debasement and the China growth story have been supportive of strength in energy, agricultural and base metals markets. Gold Multiple reasons to own it include: safe haven, inflation hedge, and as an alternative currency. FX - The bet that China will allow the renminbi to strengthen is an area of considerable interest to macro traders. A common bet is long EM baskets and short G3 currencies. Equities Opportunistic trading of country stock indices has been the preferred way to play the changing appetite for risk. Source: Pioneer Alternative Investments, HFR Macro, CSFB, Bloomberg. Data as of September 30 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 14
Global Macro Strategy - Conclusion Historically low correlation to traditional markets with potential to generate strong absolute returns Historically performed well in bear equity markets Potential to improve risk / return characteristics of traditional portfolios Manager selection is key Today s environment is rich in opportunity For attendees at the MondoHedge event only and not to be distributed to the public Page 15
Pioneer Alternative Investments FOR ATTENDEES AT THE MONDOHEDGE EVENT ONLY AND NOT TO BE DISTRIBUTED TO THE PUBLIC Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Pioneer Alternative Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any units of the Funds or any services, by or to anyone in any jurisdiction. For additional information on the Funds, a free prospectus should be requested from Pioneer Alternative Investment Management SGRpa, Galleria San Carlo 6, Milan Italy. The content of this document is approved by Pioneer Alternative Investment Management SGRpA Pioneer Alternative Investment Management Limited is the manager of the funds underlying the Italian domiciled funds of hedge funds managed by Pioneer Alternative Investment Management SGRpA. Pioneer Alternative Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Source: Unless otherwise stated all information contained in this document is from Pioneer Alternative Investments and is as at 30 September 2010. For attendees at the MondoHedge event only and not to be distributed to the public Page 16