What Institutional Investors are Looking for from Hedge Funds CTA-EXPO Chicago September 2015
let s look briefly at: The role hedge funds are playing in institutional portfolios Why are Institutions adding to hedge funds when equities have been strong Who is Investing in Hedge Funds What are some Key statistical criteria that institutional investors are looking at 1
The Role Alternatives Can Play in Asset Allocation Risk Reduction for a Portfolio s Equity Exposure (partially replacing Fixed Income) Downside Risk Mitigation Diversification of Sources of Return Attractive Risk Adjusted Returns Defense Against Selected Tail Risks 2
Hedge Fund Performance vs. Stocks & Bonds hedge funds perform favorably over the long term periods ending 31 Dec 2013 Source: AIMA, Research Paper, Apples and Apples: How to better understand hedge fund performance, 2013, page 3. For further detail on the Indices referred to in this and subsequent exhibits, please see the footnotes in the Disclosure page at the end of this document. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 3
Hedge Fund Risk vs. Stocks & Bonds hedge funds have bond-like volatility; half that of stocks annualized volatility: periods ending 31 Dec 2013 Source: AIMA, Research Paper, Apples and Apples: How to better understand hedge fund performance, 2013, page 4 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 4
Periods When Hedge Funds Outperform Equities hedge funds outperform equities consistently except in major equity uptrends periods from 1990 to 2013 Source: Barclays Bank, Waiting to Exhale: 2014 Global Hedge Fund Investor Trends and Allocation Outlook, August 2013, page 16 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 5
Hedge Funds Can Mitigate Tail Risks Not viewed as a separate asset class Source: Commonfund, Alternatives Reality: What to Expect from Future Allocations, December 2013, page 4 6
Have Hedge Funds Met Institutional Expectations? institutions evaluate alternatives very positively Source: Prequin, Prequin Investor Outlook: Alternative Assets H1 2014, July 2014, page 3 7
Investor Intentions for Hedge Funds Longer Term institutions intend to increase allocations Source: Prequin, Prequin Investor Outlook: Alternative Assets H1 2014, July 2014, page 4 8
How Much is Allocated to Alternatives? endowments in particular have moved aggressively into alternatives NACUBO-Commonfund study of endowments Source: Commonfund, Alternatives Reality: What to Expect from Future Allocations, December 2013, page 2 9
How Much is Allocated to Hedge Funds? the answer for Endowments and Foundations % allocated to HFs: 2013 vs. 2011 Source: Barclays Bank, Waiting to Exhale: 2014 Global l Hedge Fund Investor Trends and Allocation Outlook, August 2013, page 7 10
How Much is Allocated to Hedge Funds? the answer for Family Offices % allocated to HFs: 2013 vs. 2011 Source: Barclays Bank, Waiting to Exhale: 2014 Global l Hedge Fund Investor Trends and Allocation Outlook, August 2013, page 7 11
How Much is Allocated to Hedge Funds? the answer for Private Banks % allocated to HFs: 2013 vs. 2011 Source: Barclays Bank, Waiting to Exhale: 2014 Global l Hedge Fund Investor Trends and Allocation Outlook, August 2013, page 7 12
Much is Allocated to Hedge Funds? the answer for Public Pensions % allocated to HFs: 2013 vs. 2011 Source: Barclays Bank, Waiting to Exhale: 2014 Global l Hedge Fund Investor Trends and Allocation Outlook, August 2013, page 7 13
How Much is Allocated to Hedge Funds? the answer varies considerably depending on the investor % allocated to HFs: 2013 vs. 2011 Source: Barclays Bank, Waiting to Exhale: 2014 Global l Hedge Fund Investor Trends and Allocation Outlook, August 2013, page 7 14
Performance Analysis Report HFRI Macro Systematic Diversified Index (Jan1990 Aug 2015) Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 15
Some Key Statistical Criteria for Evaluating Managers Risk/Return comparisons HFRI Macro: Systematic diversified Index over period Jan 1990 Aug 2015) Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 16
Some Key Statistical Criteria for Evaluating Managers Alpha and Beta relative to Equities HFRI Macro: Systematic diversified Index (over period Jan 1990 Aug 2015) Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 17
Some Key Statistical Criteria for Evaluating Managers Alpha and Beta relative to Equities: Considerable Variation HFRI Macro: Systematic diversified Index (over period Jan 1990 Aug 2015) Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 18
Some Key Statistical Criteria for Evaluating Managers Down Capture relative to Equities HFRI Macro: Systematic diversified Index over period Jan 1990 Aug 2015) 1. See definitions of the Capture Ratios in Notes at end of the document. Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 19
Some Key Statistical Criteria for Evaluating Managers Down Capture relative to Bonds and Hedge Funds HFRI Macro: Systematic diversified Index over period Jan 1990 Aug 2015) Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 20
Some Key Statistical Criteria for Evaluating Managers Comparisons against worst months for key benchmarks HFRI Macro: Systematic diversified Index over period Jan 1990 Aug 2015) Source: Silvercrest Asset Management PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 21
Some Key Statistical Criteria for Evaluating Managers Convexity graph versus equities HFRI Macro: Systematic diversified Index over period Jan 1990 Aug 2015) Source: Silvercrest Asset Management 22
Why Smaller Hedge Funds? Smaller hedge funds have consistently outperformed larger ones Smaller hedge funds have consistently outperformed the larger hedge funds January 2001 March 2011 Source: Arden Asset Management, Size and Age Matter: An Empirical Analysis of Size and Age on Hedge Fund Returns May 2011, page 5 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 23
Cumulative Returns by Hedge Fund Size the power of compounding makes a big difference over time Source: Arden Asset Management, Size and Age Matter: An Empirical Analysis of Size and Age on Hedge Fund Returns May 2011, page 5 24
Size Matters Even More in the Macro Space Smaller hedge funds have significantly outperformed the larger funds Period: Jan 2001 Mar 2011 Source: Arden Asset Management, Size and Age Matter: An Empirical i Analysis of Size and Age on Hedge Fund Returns May 2011, page 6 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 25
Younger Hedge Funds Outperform younger hedge funds have consistently outperformed more mature ones Period: Jan 2001 Mar 2011 Source: Arden Asset Management, Size and Age Matter: An Empirical i Analysis of Size and Age on Hedge Fund Returns May 2011, page 8 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 26
Momentum and its Implications for Managed Futures the rise of smart beta in the form of simple momentum 12-month Trend-following Sharpe ratios for individual assets and asset classes January 1880 September 2014 Source: Hurst, B., Ooi, Y.H., and J.H Pederson, Demystifying Managed Futures, Journal of Investment Management, (2013) and updated by AQR PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 27
But Manager Selection Makes a Big Difference wide variation in returns Range of annual performance for equity long/short hedge funds: large versus small January 2003 December 2012 Source: Beachhead Capital Management, Performance of Emerging Equity Long/Short Hedge Fund Managers 2003-2012, February 2013, page 6 Source: Beachhead Capital Management, Performance of Emerging glong/short Hedge Fund Managers 2003-2012, February 2013,,page 6 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 28
Periodic Table of Hedge Fund and Index Returns a reminder of the challenge and opportunity in asset allocation 29
Michael Dubin Silvercrest Asset Management Group LLC 1330 Avenue of the Americas, 38 th floor New York, NY 10019 Tel: 1-212-649-0697 e-mail: mdubin@silvercrestgroup.comcom Notes: Capture Ratio Definitions 30
Important Disclosures PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. For the exhibits in this document, the S&P 500 Index is a capitalization-weighted, unmanaged index that measures 500 widely held US common stocks of leading companies in leading industries, representative of the broad US equity market. The MSCI World Index is a free float-adjusted capitalization-weighted, unmanaged index that measures widely held global common stocks of leading companies in leading industries in developed markets, representative of the broad global equity market in developed countries. The Barclays Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollardenominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. The S&P GSCI is an index of principal physical commodities calculated primarily on a world production-weighted basis, comprised of principal physical commodities that are subject of active, liquid futures markets. The HFRI Hedge Fund-of-Funds Index (HFRI FOF) is an equal weighted performance index based on a set of the hedge fund-of-funds in the Hedge Fund Research (HFR) data base. Hedge funds are speculative and involve a number of risks including those associated with the use of leverage, options, derivative instruments, futures, illiquid investments and short sales. In addition, alternative investment funds with an emphasis on specific industry sector and/or public and private companies present certain risks that may not exist in a more diversified portfolio. Multi-manager funds are dependant not only on the investment performance of individual managers but also on the ability of the investment manager to effectively allocate the fund s assets. Investors may not receive the full amount invested upon redemption or withdrawal. Exchange rate fluctuations may affect fund returns. When investing in hedge funds or in multi-manager alternative investments, an investor should carefully evaluate the risks involved when investing, including, but not limited to the following: 1. Transparency with respect to the holdings of investments held in portfolio funds may be limited; 2. There is no secondary market for an investor s interests in hedge funds, liquidity may be limited and restrictions may be imposed on transferring interests in the Fund; 3. Incentive fees/allocations could encourage parties to make investments that are riskier or more speculative, and 4. many hedge funds are not subject to any comprehensive regulatory scheme. Silvercrest LLC believes that the information contained herein is accurate as of the date of the materials. No entity of Silvercrest makes any warranties of accuracy of the information, and they shall not be liable for any losses or damages relating to it. This document represents the personal views of the author, which are not necessarily the views of Silvercrest Asset Management Group LLC. The document is issued by Silvercrest Asset Management Group LLC ( Silvercrest LLC ), which is authorized and regulated by the Commodity Futures Trading Commission ( CFTC ) and the National Futures Association ( NFA ). Recipients of these materials may not share them with any other person or party without the prior written approval of Silvercrest LLC. All recipients of these materials understand that they are confidential/proprietary to Silvercrest LLC and such recipients agree to treat them as such. The information and opinions contained in this document are for background purposes only and do not purport to be full or complete; it may be subject to revision. This document is not intended to be construed as an offer or solicitation of securities or any investment product. Nor does this document constitute investment advice. It may not be reproduced, further distributed or published by any recipient without prior permission from Silvercrest LLC. No representation, warranty, or undertaking, express or limited is given as to the accuracy or completeness of the information or opinions contained in this document by any of Silvercrest LLC, its partners or employees and no liability is accepted by such persons for the accuracy or completeness of any information or opinions. The value of investments and any income generated may go down as well as up and may be affected by fluctuations in exchange rates. Silvercrest Asset Management Group LLC is registered in the United States (NFA # 0333874) Business Address: 1330 Avenue of the Americas, New York, New York 10019 31