Investing in liquid alternative strategies Andrew Dreaneen Head of Schroder GAIA Product & Business Development Trends & Morningstar Investment Summit 9 March 2016 For professional investors or advisers only.
Agenda Trends in Alternatives Introducing Schroders capabilities in liquid alternatives Leading blue-chip hedge fund managers Main reservations and dispelling the myths The power of diversifying returns streams Conclusions 1
Trends in Alternatives
Why liquid alternatives now? Global stress points/ downside risks for investors 2016 US Election Oil Glut Rate Increases Brexit QE Effectivenes s EU Integration Middle East Tensions Russia Expansion Yuan Devaluation China Growth South China Sea tension Commodities EM Hangover Source: MSCI December 2015 3
Oil Has Really Collapsed Wow, US oil is really cheap Source: Bloomberg January 2016 4
China s slowing growth has crushed shipping rates It is now cheaper to rent a 1,100 foot dry bulk tanker than a Ferrari ($5,597) ($1,563) Source: Bloomberg, Baltic Exchange, Supercarexperiences.com January 2016 5
Why liquid alternatives now? Liquid alternatives have mitigated losses in recent sell-offs Egerton 115 Sirios 110 110 105 100 95 90 85 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 BSP 105 Schroder GAIA Egerton Equity MSCI World 105 3.63% 100 95-8.63% 90 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Schroder GAIA Sirios US Equity KKR 110 S&P 500 Net Total Return -1.01% -4.29% 100-1.25% 105 95 90-8.79% 100 95 90-2.51% -6.51% 85 Jun-15 Aug-15 Oct-15 Dec-15 85 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Source: Bloomberg as at 31 January 2016. Performance shown from 31 December 2014 to 31 January 2016. All GAIA performance is shown for the C Acc share class in base currency. Performance is calculated on an NAV to NAV basis. 6 Schroder GAIA BSP Credit Merrill Lynch HY Index Schroder GAIA KKR Credit Credit Suisse HY Index
Rationale for using hedge funds has changed through time Investors now see hedge funds as "shock absorbers" $bn 3,500 3,000 Capture excess return Downside protection Diversification & risk adjusted returns 3,200 2,845 2,500 2,000 1,868 1,500 1,000 500 491 - Global hedge fund AUM reached new highs of $3.2tn in 2015 Source: 2016 Preqin Global Hedge Fund Report 7
European Investors have > $800bn invested in hedge funds Investor sentiment now strongly in favour of UCITS and non UCITS AIFs Hedge Fund Vehicles Total AUM AUM from European Investors 1. Offshore, unregulated HF vehicle Offshore Hedge Fund Most popular pre-2008/9, but comparatively low demand in Europe in recent years AIFMD regulations have made the marketing of offshore HFs more challenging $2.9tn $600bn 2. Liquid, regulated European onshore fund structure that can be used for alternatives UCITS Liquid Alternatives Harmonised format that can be passported across Europe for distribution purposes $204bn $164bn Suitable for sale to retail as well as professional investors 3. New onshore structures post-aifmd implementation; less stringent regulation than UCITS funds Non-UCITS Onshore Fund Structures include QIAIF, RIAIF, PIF (Ireland); Part II, SIF, SICAR (Lux); some formats (e.g. RIAIF) may be suitable for sale to retail investors $60bn (est.) $60bn (est.) Still largely unproven as a concept for HF managers Source: HFR, HFI, Central Bank of Ireland, McKinsey The Mainstreaming of Alternative Investments (2011), Barclays Strategic Consulting estimates and analysis 8
Who are the buyers of liquid alternatives today? The main buyers are private banks/ wealth managers with demand broad-based $bn 100% 90% 80% 41 18 27 40 17 7 14 2 3 1 3 3 1 7 5 2 8 1 70% 60% 22 5 6 1 8 50% 25 1 40% 30% 20% 10% 0% 6 11 5 1 8 3 1 1 2 1 1 5 6 3 1 3 3 1 1 UK France Germany / Austria Switzerland Italy / Spain Nordics Benelux Source: Estimates based on data from Lipper, ICI, Mercer, Towers Watson, Insurance Europe, The Consulting Partnership AG, BCG, PWC, Strategic Consulting Proprietary Market Sizing Model. Individual numbers may not match sums due to rounding. AUM on a look-through basis i.e. disregarding FOFs, consultants and advisers. As at September 2015. 9 Mass Affluent E&F Family Office Private Banks Pension Insurance
Future expected investor behaviour Where is the growth expected to come from? There are three main constituencies of buyers for HF strategies in Europe; we estimate that those that only invest in UCITS could become the majority of AUM over time Investors Comments Key Channels Est. Potential Asset Pool 1 Entrant New Alternatives Buyers Investors with no prior HF investments getting exposure to alternatives through UCITS Includes retail investors as well as some institutions Potentially the largest asset pool but growth still uncertain Local/retail banks Financial advisors/ifas Distribution platforms Small institutional investors Wealth managers $750bn Migration Investors with prior offshore HF exposure now using UCITS structures Private banks Former Offshore HF Buyers Driven by mixture of preference for the format and regulatory pressures Significant regional skew towards certain countries, particularly Southern Europe Wealth managers/multi-family offices Certain institutions (e.g. insurance) FOFs $200bn Crossover Current Offshore HF Buyers Market for offshore HFs in Europe is stagnant, with limited growth potential However, many of the buyers of offshore HFs in Europe also invest in UCITS funds UCITS vehicle may be chosen if it is the only available option or offers superior terms to offshore vehicle Family offices Institutions Private banks FOFs $600bn 1 Source: Barclays, October 2015. Barclays Strategic Consulting estimates and analysis. 1. For offshore buyers includes amount of continued allocation to offshore funds as well as UCITS funds. Estimated long-term potential based on analysis of total investable assets and likely appetite for HFs/UCITS going forwards 10
Who are the main providers of liquid alternatives today? AUM dominated by Asset Managers 75%: but Hedge Fund Managers now 25% Long Only Asset Managers Convergence Asset Managers Hedge Fund Managers Using distribution capabilities to build alternatives businesses Marketing HF expertise to UCITS investor base # Products Examples AUM (USDbn) 93.2 60.1 50.6 58 207 185 45.7% 29.5% 24.8% % AUM 11 Source: HFR, HFI, Strategic Consulting analysis
Introducing Schroders capabilities in liquid alternatives
Schroders AUM breakdown Broad liquid alternatives capability within the firm GAIA $6bn Liquid Alternatives $18bn UCITS Funds $156bn Firm AUM $487bn Source: Schroders, as at 30 June 2015 13
Schroders liquid alternatives capabilities Total AUM of Schroders liquid alternatives is $18.2bn Internally managed Schroder ISF European Equity Absolute Return Schroder ISF European Alpha Absolute Return* Schroder ISF European Total Return Schroder ISF Asian Total Return* Externally managed Schroder GAIA Egerton Equity* Schroder GAIA Sirios US Equity Schroder GAIA Paulson Merger Arbitrage Internally managed Schroder ISF Global Property Securities Schroder ISF Asia Pacific Property Securities Schroder IF Flexible Cat Bond Internally managed Schroder ISF Strategic Bond Schroder ISF Asian Bond Absolute Return Schroder ISF Emerging Marlets Debt Absolute Return Externally managed Schroder GAIA BSP Credit Schroder GAIA KKR Credit Source: Schroders as at 30 June 2015. * Fund is hard closed. Schroder ISF: Schroder International Selection Fund. Schroder IF: Schroder Investment Fund 14
UCITS hedge fund platforms Investment Bank Platforms Asset Manager Platforms Independent/Boutique Platforms Deutsche Bank Banor Alceda UCITS Platform Goldman Sachs E.I. Sturdza Strategic Management Ltd Alpha UCITS Merrill Lynch Investment Solutions Guggenheim Altex UCITS Morgan Stanley FundLogic Hedge Invest Bryan Garnier SEB Prime Solutions UCITS HDF Rothschild Dexion Lyxor Asset Management Schroder GAIA Tages Independent UCITS Gateway Milltrust EMMA Platform Montlake UCITS Platform SIG Global Trium Universal Investments Source: Kepler Partners LLP as at December 2015 15
Schroder GAIA Overview of sub-funds Source: Launch Schroders as at 30 September 2015. *Hard closed. date Manager Fund Strategy Geographic focus AUM (USD) 25 Nov 2009 Schroder GAIA Egerton Equity* Equity long short Global 1,399m 27 Feb 2013 Schroder GAIA Sirios US Equity Equity long short Predominantly US 2,003m 6 Nov 2013 Schroder GAIA KKR Credit Credit long short Predominantly Europe 293m 25 Jun 2014 Schroder GAIA Paulson Merger Arbitrage Merger Arbitrage US, Canada and Western Europe 950m 17 Jun 2015 Schroder GAIA BSP Credit Credit long short Predominantly US 34m 9 Dec 2015 Schroder GAIA BlueTrend Trend Following Global 96m Total AUM 5,533m Source: Schroders as at 31 January 2016 *Hard closed. 16
Alternative UCITS platforms GAIA compares favourably against its competitors AUM (USD) $7,000 $6,000 $5,000 $4,000 $3,000 Schroders Number of external funds on platform AUM (USD m) Average AUM per fund (USD m) Schroders 6 4,775 795 BAML 16 6,276 392 HDF Rothschild 3 1,286 429 Deutsche Bank 11 3,686 335 $2,000 $1,000 $- 0 5 10 15 20 Number of Funds Lyxor 8 1,533 192 Morgan Stanley 18 2,419 134 Goldman Sachs 4 524 131 Guggenheim 1 175 175 Alpha UCITS 5 384 77 When trying to identify the quality of each platform we believe that AuM per fund is Montlake one of the most telling 9 statistics. 546 Schroder GAIA 61 once again takes the leading spot by a significant margin with $795m invested in the average fund on its platform, reflecting the quality of the hosted funds and their impressive distribution capabilities. Kepler Source: Kepler. As at 31 January 2016. Data refers to external managers for each platform. This is collected on a best efforts basis and there could be omissions 17
Leading blue-chip hedge fund managers
Schroder GAIA Egerton Equity Equity long short fund with significant outperformance over time Egerton Capital Limited: AUM $13.7bn Independent money management firm based in London, founded in 1994 by John Armitage Experienced investment team of 16 professionals Employee investments account for c. 7% of total firm assets Key to success is research-intensive stock picking. Bottom-up approach to stock selection creates a portfolio that is dynamic, eclectic, and uncorrelated Fund key features Fundamental long short equity fund, typically long-biased Straightforward, liquid strategy investing predominantly in large cap equities Opportunistically invest in corporate bonds Uses little or no leverage Reduces volatility through the use of alpha shorts, hedges (e.g. index put options) and cash Avoids large drawdowns Portfolio Manager John Armitage, Egerton Inception date 25 November 2009 Base currency EUR Institutional share class fee 1.25%/20% Liquidity Weekly (on Wed) and month end Performance objective The strategy aims to deliver equity type returns with less volatility than the market over the medium to long term Performance analysis (Egerton s equity long short strategy*) 2000% 1500% 1000% 500% 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 2015 Schroder GAIA Egerton Equity Strategy MSCI World Strategy* Index Annualised return 13.7% 7.4% Annualised volatility 9.6% 15.4% Sharpe ratio 1.1 0.3 Maximum drawdown -28.3% -50.9% Source: Schroders and Egerton as at 31 January 2016. *Performance shown for chain-linked track record of Egerton long short Equity B1 USD since its inception on 31 December 1994. Egerton s offshore fund has been used from December 1994 to November 2009. From December 2009 onwards Schroder GAIA Egerton Equity C Acc USD Hedged has been used. The MSCI Europe Index has been used from December 1994-January 2012, from February 2012-onwards the MSCI World Index is used.. Performance is shown net of fees, NAV to NAV. 19
Schroder GAIA Sirios US Equity US equity long short fund with demonstrated downside protection Sirios Capital Management: AUM $3.5bn Boston based US focused firm co-founded by John Brennan in 1999 Experienced team of 15 investment professionals Employee investments account for a significant percentage of total firm assets Ability to analyse and invest across the capital structure for best riskadjusted returns Fund key features Fundamental long short equity fund, typically long-biased Invests primarily in US mid/large-cap companies with material exposure in Asia and Europe Opportunistic exposure to fixed income for equity-like returns with lower risk Identifies attractively valued, growth-oriented companies for longs; shorts in companies with deteriorating fundamentals and poor balance sheets Moderate use of leverage Low correlation to equity markets Low downside participation Portfolio Manager John Brennan, Sirios Inception date 27 February 2013 Base currency USD Institutional share class fee 1.50%/20% Liquidity Daily Performance objective The strategy aims to deliver equity type returns with less volatility than the market over the medium to long term Performance analysis (Sirios equity long short strategy*) 400% 300% 200% 100% 0% -100% 1999 2001 2003 2005 2007 2009 2011 2013 2015 Schroder GAIA Sirios US Equity Strategy S&P 500 Strategy* Index Annualised return 8.6% 3.9% Annualised volatility 9.0% 15.1% Sharpe ratio 0.71 0.11 Maximum drawdown -19.3% -50.9% Source: Schroders and Sirios as at 31 January 2016. *Performance shown for Sirios Overseas Fund Limited in USD. Sirios offshore fund has been used from July 1999 to February 2013. From March 2013 onwards Schroder GAIA Sirios US Equity C Acc USD has been used.. Performance is shown net of fees, NAV to NAV. 20
Schroder GAIA Paulson Merger Arbitrage Superior risk-adjusted returns that are uncorrelated to markets Paulson & Co. AUM $14.9bn* Globally renowned hedge fund founded by John Paulson in 1994 Strategies include merger arbitrage, event-driven, credit and special situations. The merger funds have one of the longest and most successful track records, compounding at 12.4% over the last 21 years** Proven team of 52 experienced investment professionals consisting of both sector and M&A transaction specialists Fund key features An absolute return focused merger arbitrage UCITS fund looking at opportunities in US, Canada and Europe Predominantly listed equities with opportunistic exposure to credit Aims to deliver returns in all market cycles by using different strategies. ie; cash/stock deals, topping bids, bankruptcies, restructurings High potential for alpha generation given sophisticated investment approach seeking unique and complex merger situations Capital preservation, low correlation to markets and low volatility just 2 down years since inception in 1994 and returned +7.9% in 2008 Portfolio Managers Inception Date 25 June 2014 Base Currency 21 John Paulson, Andrew Hoine, Jim Hoffman USD Institutional share class fee 1.25%/20% Liquidity Weekly (on Wed) and month end Performance objective The fund targets an absolute return of 8 10% net of fees Performance analysis (Paulson Partners LP**) 0% 1994 1996 1997 1999 2001 2002 2004 2006 2007 2009 2011 2012 2014 Schroder GAIA Paulson Merger Arbitrage Strategy Paulson Merger Arbitrage** Ann. Ret. Ann. Vol. Correlation to Paulson 12.4% 9.3% 1.00 S&P500 9.1% 15.0% 0.27 HFRI Merger Arbitrage Index 7.3% 3.5% 0.44 Source: Schroders as at 31 January 2016. * Note that fund level AUM excludes the Gold Fund as at 31 July 2015. **Inception July 1994. Performance shown for Paulson Partners LP from July 1994 until June 2014 and Schroder GAIA Paulson Merger Arbitrage C Acc USD has been used from July 2014 onward.. Performance is shown net of fees, NAV to NAV. 1400% 1200% 1000% 800% 600% 400% 200%
Schroder GAIA KKR Credit Low net credit long short fund investing predominately in Europe KKR Credit Advisors (UK) AUM: c.$26.4bn* The KKR Credit Alpha strategy is a directional long/short liquid European credit strategy. It invests primarily in liquid high yield and low investment grade fixed income securities and derivatives (bonds, CDS, credit indices and credit options). KKR Credit Long Short team is one of the most established in Europe Dedicated team of 6 experienced investment professionals Fund key features Performance objective The fund targets an absolute return of 7-10% net of fees Performance analysis (KKR credit long short strategy**) 250% 200% An absolute return focused credit long short UCITS fund 150% Investment grade and high yield exposure predominately in Europe 100% Aims to identify companies with improving or deteriorating capacity to service 50% their debt, where that change is not reflected in their current pricing 0% Deep dive credit research and value investing approach -50% Best-in-class technology at the centre of the credit process 2000200120022003200420052006200720082009201020112012201320142015 All weather positive returns through the cycle, the strategy has had Schroder GAIA KKR Credit no down years in last decade Portfolio Manager Simon Thorp and James Sclater, KKR Inception date 06 November 2013 Base currency EUR Institutional share class fee 1.25%/15% Liquidity Weekly (on Wed) and month end Ann. Ret. Ann. Vol. Sharpe ratio Strategy** 7.1% 6.9% 0.8 IBOXX Liquid HY 5.0% 10.3% 0.3 Barclays Gbl. Agg. 5.0% 2.7% 1.1 MSCI World 2.7% 14.5% 0.1 Source: Schroders as at 31 January 2016. KKR & Co. L.P. acquired Avoca Capital on 19 February 2014. * AUM as at 31 December 2015 **Performance shown for KKR s credit long short strategy: From 11 November 2000 until 31 October 2013 the KKR Credit Alpha Fund has been used. From 1 November 2013 to 6 November 2013 a net estimate of the KKR Credit Alpha fund has been used. From 7 November 2013 onwards performance is for Schroder GAIA KKR Credit C Acc EUR.. Performance is shown net of fees, NAV to NAV. 22
Schroder GAIA BSP Credit Low net credit long short fund investing predominately in US Investment Manager: AUM $11.0bn* Benefit Street Partners (BSP) was established in 2008 and manages over $10 billion in assets Multi-strategy credit specialist including high yield, levered loans, private/opportunistic debt, liquid credit, structured credit and commercial real estate debt Team of 59 investment professionals BSP is the debt investment arm of Providence Equity with AUM of $45bn Fund key features Based on an existing Cayman hedge fund with $1.4 billion AUM, which includes ~$110 million from employees Targets 5-7% net return with low volatility, low correlation Aims to provide capital growth through investment worldwide, with at least 51% of the Fund invested in US companies Absolute return approach combining fundamental credit analysis Sophisticated trade structuring and active trading to maximize expected return while limiting downside risk across market cycles Strategies employed include fundamental longs/shorts, relative value pair trades and capital structure arbitrage 23 Portfolio Manager Thomas Gahan Inception date 17 June 2015 Base currency USD Institutional share class fee 1.50%/20% over Libor capped at 2% 1.00%/15% over Libor capped at 2% (early bird up to $80m) Performance objective The fund targets an absolute return of 5 7% net of fees Performance analysis (Cayman hedge fund) Annualised return 4.7% Annualised volatility 3.4% Max drawdown -5.3% Liquidity Weekly (on Wed) and month end The BSP Credit Long Short Strategy includes BSP Credit Alpha Fund and a separately managed account (SMA) following a similar strategy. Performance is shown net of fees. From 7 February 2011 to 1 March 2012, the performance is for SMA, from 1 March 2012 until June 2015 for the BSP Credit Alpha Fund, and from July 2015 onwards for Schroder GAIA BSP Credit C Acc USD. *As at 31 September 2015. Source: Schroders, BSP, Bloomberg, Merrill Lynch as at 31 October 2015.. Performance is shown net of fees, NAV to NAV. 35% 30% 25% 20% 15% 10% 5% 0% Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15
Schroder GAIA BlueTrend Diversified Systematic Macro Trend Following Strategy Investment Manager: AUM $9.0bn Systematica founded in January 2015 after a decade of experience within BlueCrest Capital Management Systematica manage total assets of $9.0bn, with $7.2bn in their trend-following strategy Investment team headed by Leda Braga, former President and Head of Systematic Trading at BlueCrest Capital Management Fund key features Diversified systematic trend following fund, launched in April 2004 Extremely competitive track record with average annualised return of 11%, with 14% annualised volatility Positive in 9 out of the past 10 years Uncorrelated returns over time/delivered positive returns in both up and down markets Performed well in periods of prolonged market downturns like 2008 Trades the most liquid assets among equity, currency, commodity and fixed income 24 Investment team Head Leda Braga Inception date 9 December 2015 Base currency USD Institutional share class fee 1.50%/20% Liquidity Weekly (on Wed) and month end Performance objective The fund aims to provide capital growth by adopting a pure systematic trend following strategy, across global markets, based on quantitative signals with multiple time horizons. It targets returns of 10-15%. Performance analysis (BlueTrend strategy*) 300% 250% 200% 150% 100% 50% 0% -50% Jan-04 Aug-04 Mar-05 BlueTrend Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 HFRI Fund Weighted Composite Index Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Barclays Global Aggregate Bond Index MSCI World Strategy Annualised return 11.2% Annualised volatility 14.1% Maximum drawdown -22.1% Source: Systematica Investments and Schroders, as at 31 January 2016. Managed by BlueCrest Capital Management Group from inception to 1 January 2015 when Systematica Investments Limited (acting in its capacity as general partner of Systematica Investments LP) became the investment manager. *BlueTrend strategy refers to an SMA from January 2004 to March 2004 and BlueTrend Fund Limited (Class A USD) from 1 April 2004 to 31 December 2015. From 1 January 2016 onwards performance is provided for Schroder GAIA BlueTrend C Acc USD. Performance for Barclays Global Aggregate Bond Index and HFRI Fund Weighted Composite Index as at 31 December 2015. Performance is shown net of fees, NAV to NAV.
Main reservations and dispelling the myths
Main reservations and typical alternative allocations Fees, liquidity, education Top reasons to hesitate on alternatives % of advisors Alternatives allocation 0.6 25 Knowledge 0.5 0.4 0.3 0.2 20 15 10 Can retail allocations to alternatives increase with the introduction of Liquid Alternatives? 0.1 0 Fees Lack of liquidity Lack of transparency Institutional Retail Benefits uncertain Unclear how strategy works in portfolio framework 5 0 Institutional Retail Source: Goldman Sachs, Morningstar/Barron s, McKinsey, Simfund, November 2013 26
Myth 1: Liquid Alts don t offer genuine hedge fund talent An increasing number of the largest hedge fund managers already offer UCITS US Based Managers Abrams Capital Management Greenlight Capital Adage Capital Management HBK Capital Management Anchorage Capital Group Highfields Capital Management Angelo, Gordon & Co. JANA Partners Apollo Management Kayne Anderson Capital Advisors Appaloosa Management King Street Capital Management Avenue Capital Group Lone Pine Capital Bain Capital/Brookside Capital Luxor Capital Group Partners Baupost Group Magnetar Capital Blue Ridge Capital Marathon Asset Management BlueMountain Capital Management Mariner Investment Group Bracebridge Capital Mason Capital Management Bridgewater Associates Maverick Capital Carlson Capital Millennium Management Caxton Associates MKP Capital Management Centerbridge Partners Monarch Alternative Capital Cerberus Capital Management Moore Capital Management Citadel MSD Capital Claren Road Asset Management Pennant Capital Management Coatue Capital Perry Capital Convexity Capital Management Pershing Square Capital Management Corvex Management Pine River Capital Management D.E. Shaw Group PointState Capital Davidson Kempner Capital Renaissance Technologies Management Discovery Capital Management Samlyn Capital DW Partners Scopia Capital EJF Capital Senator Investment Group Element Capital Silver Point Capital Ellington Management Group Soroban Capital Partners Elliott Management Corporation Steadfast Capital Management Emerging Sovereign Group Taconic Capital Advisors Eton Park Capital Management Third Point Farallon Capital Management Tiger Global Management Fir Tree Partners Trian Fund Management First Quadrant Tudor Investment Corp. Glenview Capital Management Two Sigma Investments GMT Capital ValueAct Capital Management GoldenTree Asset Management Viking Global Investors AQR Capital Management Guggenheim Partners Balyasny Asset Management Halcyon Asset Management Beach Point Capital Management Indus Capital Partners Blackstone Group/GSO Capital Och-Ziff Capital Management Group Partners Canyon Capital Advisors Omega Advisors Fortress Investment Group Paulson & Co. Graham Capital Management Visium Asset Management Grantham, Mayo, Van Otterloo York Capital Management 17% 62% UK Based Managers AKO BTG Pactual Europe LLP Capula Investment Management LLP Lansdowne Partners The Children's Investment Fund Brevan Howard Asset Management LLP Cheyne Capital Management CQS (UK) LLP Egerton Capital Marshall Wace LLP Odey Asset Management Winton Capital Management Limited Man GLG Source: Schroders analysis and HFI data based on US and UK headquartered hedge fund centric managers with $5bn+ AUM data as at 1 January 2015 27 27
Myth 2: All liquid alternatives are hedge fund lite Schroder GAIA strategies represent core capabilities with low tracking error Egerton 190 170 150 130 110 90 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Schroder GAIA Egerton Equity C Acc EUR Egerton European Equity Fund Ltd - Class B20 Paulson* 105 100 95 90 85 80 Jun-14 Dec-14 Jun-15 Dec-15 Schroder GAIA Paulson Merger Arbitrage C Acc USD Pauslon Partners LP Sirios 140 130 120 110 100 90 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Schroder GAIA Sirios US Equity - C Acc USD SiriosReference fund 105 100 95 KKR 90 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Schroder GAIA KKR Credit - Class C Acc EUR KKR Credit Alpha Source: Schroders, Egerton, Sirios and KKR. As at 31 January 2016. *Paulson as at 31 December 2015 Performance data is net of all fees and charges. The GAIA C share class has been used for all GAIA funds. For Egerton European Equity from November 2009 to 31 December 2011 the B16 share class has been used. Please note, Egerton s offshore hedge fund included a provision for potential tax liabilities at the end of March 2010 resulting in a 5.1% decrease in the NAV. These tax liabilities did not impact Schroder GAIA Egerton Equity. For illustrative purposes the data here ignores this provision and therefore shows the two strategies on a more like for like basis. No indicative weekly NAVs were produced for Egerton s B16 share class during April 2010, therefore the B1 share class has been used as a proxy over this period. From 1 January 2012 to 31 December 2012 the B29 share class was used. From 1 January 2013 onwards the B20 share class is used 28
Myth 3: Liquid alternatives are inferior to hedge funds Despite limitations, liquid alts can provide similar benefits to hedge funds Performance comparison UCITS vs. offshore hedge funds 30% 20% Opportunity set HFRI HFRU 10% Number of funds 2,200 500 0% -10% Regulatory regime Flexible UCITS -20% -30% 2008 2009 2010 2011 2012 2013 2014 2015 HFRI Fund Weighted Composite Index HFRU Hedge Fund Composite Index Industry performance Index YTD 2016 F/Y2015 F/Y 2014 Annualised Return Annualised Volatility Drawdown Months to Recover Correlation to S&P 500 (5 years) Traditional Hedge Fund HFRI Offshore Hedge Fund Weighted Composite Index Liquid Alternatives HFRU UCITS Hedge Fund Composite Index -1.7% -1.1% 3.0% 2.1% 6.6% -20.1% 14 0.84-3.0% 1.7% 4.5% 1.7% 3.5% -6.7% 10 0.63 Source: HFR as of 31 January 2016 29
Myth 4: All liquid alts are expensive What is most important price or performance? Typical Fee Structures Cumulative performance Typical Fees Variable Fees Cumulative return since 1994 1800% 1600% 1400% MSCI World ETF Global Equity long only 10bps None 158% 0.50-1.00% None 197% 1200% 1000% 800% 600% 400% Source: Morningstar, Schroders, as at 31 December 2015. Common inception date taken of September 1994. Egerton performance shows Egerton offshore fund from December 1994 until November 2009. From December 2009 onwards Schroder GAIA Egerton Equity C Acc EUR is used. Performance shown is net of any fees and calculated on an NAV to NAV basis. 30 HFRI 1.25-1.75% 15-20% 431% Schroder GAIA Egerton Equity 1.25% 20% 1,523% 200% 0% 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 Global Equity Large Caps Blend Egerton MSCI World HFRI
The power of diversifying return streams
Schroder External Hedge Fund Manager Partnerships Cumulative performance 400% 350% 300% 250% 200% 150% Paulson BlueTrend Egerton KKR Sirios 100% 50% 0% MSCI World BSP -50% -100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 32 Egerton KKR Paulson Sirios BSP MSCI World BlueTrend Source: Schroders. Analysis shown from November 2000 (common inception date) to 31 January 2016. The data shown for Schroders External Hedge Fund Manager Partnerships is shown for the relevant flagship hedge fund strategy from November 2000 until inception of the Schroder GAIA fund. From each inception, performance is shown for Schroder GAIA Egerton Equity, Schroder GAIA Sirios US Equity, Schroder GAIA KKR Credit and Schroder GAIA Paulson Merger Arbitrage. From 7 February 2011 to 1 March 2012, BSP performance is shown for SMA, and from 1 March 2012 onwards for the BSP Credit Alpha Fund.. Performance is shown net of fees, NAV to NAV.
Schroder External Hedge Fund Manager Partnerships All strategies have outperformed equity markets on a risk adjusted basis Return 12% 10% 8% 6% 4% 2% 0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% Volatility Schroder GAIA Paulson Merger Arbitrage Schroder GAIA KKR Credit Schroder GAIA Egerton Equity Schroder GAIA Sirios US Equity Schroder GAIA BSP Credit BlueTrend MSCI World Return Std dev Sharpe ratio Schroder GAIA BlueTrend** 11.2% 14.1% 0.7 Schroder GAIA Egerton Equity 8.4% 8.5% 0.8 Schroder GAIA Paulson Merger Arbitrage 9.2% 8.3% 0.9 Schroder GAIA KKR Credit 7.1% 6.9% 0.8 Schroder GAIA Sirios US Equity 6.7% 8.5% 0.6 Schroder GAIA BSP Credit* 4.7% 3.4% 1.3 MSCI World 2.7% 14.5% 0.1 Source: Schroders. Analysis shown from November 2000 (common inception date) to 31 January 2016. *Please note that BSP and BlueTrend have an inception date since November 2000 and performance is included from inception of the strategy. For BSP, from 7 February 2011 to 1 March 2012, the performance is for SMA, from 1 March 2012 until June 2015 for the BSP Credit Alpha Fund, and from July 2015 onwards for Schroder GAIA BSP Credit. The data shown for Schroders External Hedge Fund Manager Partnerships is shown for the relevant flagship hedge fund strategy from November 2000 until inception of the Schroder GAIA fund. From each inception, performance is shown for Schroder GAIA Egerton Equity, Schroder GAIA Sirios US Equity, Schroder GAIA KKR Credit, Schroder GAIA Paulson Merger Arbitrage and Schroder GAIA BSP Credit. Schroder GAIA BlueTrend strategy performance from January 2004. From January 2004 until March 2004 a SMA is used and BlueTrend Fund Limited (Class A USD) from 1 April 2004 onwards. 33
Schroder External Hedge Fund Manager Partnerships Performance simulation with equal allocation to each external manager 300% 250% 200% 150% 100% 50% 0% -50% -100% 2000 2002 2004 2006 2008 2010 2012 2014 Schroders External Hedge Fund Manager Partnerships MSCI World NR LCL 0.0% 5.0% 10.0% 15.0% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% Schroders External Hedge Fund Manager Partnerships* MSCI World 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Schroders External Hedge Fund Manager Partnerships* Source: Schroders. Analysis shown from November 2000 (common inception date) to 31 January 2016. *Please note that BSP and BlueTrend have an inception date since November 2000 and performance is included from inception of the strategy. For BSP, from 7 February 2011 to 1 March 2012, the performance is for SMA, from 1 March 2012 until June 2015 for the BSP Credit Alpha Fund, and from July 2015 onwards for Schroder GAIA BSP Credit. The data shown for Schroders External Hedge Fund Manager Partnerships is shown for the relevant flagship hedge fund strategy from November 2000 until inception of the Schroder GAIA fund. From each inception, performance is shown for Schroder GAIA Egerton Equity, Schroder GAIA Sirios US Equity, Schroder GAIA KKR Credit, Schroder GAIA Paulson Merger Arbitrage and Schroder GAIA BSP Credit. Schroder GAIA BlueTrend strategy performance from January 2004. From January 2004 until March 2004 a SMA is used and BlueTrend Fund Limited (Class A USD) from 1 April 2004 onwards. 34 Return Std Dev Sharpe ratio 8.9% 5.4% 1.3 MSCI World NR LCL 3.1% 14.5% 0.1 Combining alternative funds provides superior risk adjusted returns
Conclusions Hedge fund AUM continues to grow with strong demand for liquid alternatives as portfolio diversifiers given expected heightened volatility Growth has been fuelled by sophisticated private banks and wealth managers, looking forward we expect this client base to expand to include broader UCITS investors with growing demand The UCITS hedge fund industry is now >$200bn of AUM with 25% managed by hedge fund managers** and a number of high profile launches expected in 2016 Total UCITS hedge fund platform assets grew in 2015 from $24.1bn* to $32.4bn* and represents c10% of total market share Fees are an important consideration for liquid alternatives and each strategy should be assessed based on numerous criteria such as manager skill, unique alpha generation, consistent risk adjusted returns, proven downside protection and volatility management Schroders offers a broad range of liquid alternative funds including a leading platform of external managers Source: Schroders January 2016 *Kepler as at 30 September 2015. **Barclays strategic consulting analysis as at 30 September 2015 35
Important Information Important Information: This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder GAIA (the Company ). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders have expressed their own views and opinions in this presentation and these may change. This presentation is issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. Registration No 1893220, England. For your security, communications may be taped or monitored. Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.com contains additional disclaimers which apply to the third party data. 36