360 likes | 532 Views
KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management. Contemporary Perspectives on Hedge Fund Investing CFA Victoria – February 21 st , 2007. Why add hedge funds to a portfolio? Why take a portfolio approach? What are the merits of low volatility hedge funds?
E N D
KCSFund Strategies Inc.Disciplined Fund of Hedge Funds Portfolio Management Contemporary Perspectives on Hedge Fund Investing CFA Victoria – February 21st, 2007
Why add hedge funds to a portfolio? Why take a portfolio approach? What are the merits of low volatility hedge funds? Is an equity investing framework useful? Agenda
Similar to mutual fund Professionally managed pool of assets Specified objectives Investors typically must be qualified or accredited Short positions/hedging allowed Leverage Position concentration Lower liquidity Trading strategy ≠ investment strategy What is a Hedge Fund? Description
Equity Long/Short Equity Market Neutral Dedicated Short Bias Emerging Markets Convertible Arbitrage Fixed Income Arbitrage Event Driven Merger Arbitrage Distressed Global Macro Managed Futures / CTA Multi-Strategy What is a Hedge Fund? Hedge Fund Strategies
What is a Hedge Fund? Typical Hedge Fund Trade Hypothetical Convergence/Divergence Pairs Trade 110 Trade Initiated Trade Initiated Trade Completed 100 Trade Completed 90 Price 80 70 60 50 Asset 1 Asset 2
A convergence hypothesis underlies the trading model of most hedge fund managers Trading models are analogous to business models for private or public companies Evaluation of likelihood of success is similar: Focus on quality, track record of managers Ensure strategy is well articulated Look for sustainable competitive advantages What is a Hedge Fund? Typical Hedge Fund Trading Model
Why add Hedge Funds to a Portfolio? Stability of Returns & Outperformance
Why add Hedge Funds to a Portfolio? High Return per Unit of Risk CSFB/Tremont Indices vs. Traditional Assets – SinceFebruary 1997 20% 16.3% 15.2% 15% Returns 9.8% 9.0% 10% 7.1% 7.2% Standard Deviation 5% 0% Tremont Hedge Fund Index S&P 500 TSX
Why add Hedge Funds to a Portfolio? Diversification Benefits Correlations – Since February 1997 CSFB/ Tremont S&P500 TSX 0.43 S&P500 TSX 0.79 0.62 Scotia Bond Index 0.12 -0.02 0.05
% Positive Months Months to Recover / % Yet to Recover Maximum Drawdown Other Metrics - Since February 1997 S&P 500 60.5% -46.28% 52 / 6.55% TSX 61.3% -45.05% 38 / none Scotia Bond Index 69.7% -11.19% 9 / none HFRI Conservative FoF Index (HFRI CFI) 77.3% -6.62% 6 / none CSFB/Tremont Index 71.4% -13.81% 12 / none Why add Hedge Funds to a Portfolio? Drawdown & Recovery • Drawdown • Period of negative returns from peak to trough • Hedge Fund Indices • Less severe and faster recovery
Need for a Portfolio Approach Benefits of Portfolio Approach Annualized Standard Deviation of Various Equities 83.18% 90 80 70 55.59% 60 50 40 26.27% 30 16.40% 20 10 0 BCE Nortel Kinross TSX
Need for a Portfolio Approach Benefits of Portfolio Approach Annualized Standard Deviations of Hedge Funds 30% 25% 20% 13.72% 12.44% 15% 7.82% 10% 5.81% 5% 0% 10 Largest Canadian Hedge Funds 10 Largest Global Hedge Funds CSFB/Tremont Hedge Fund Index HFRI Fund of Funds Index
Need for a Portfolio Approach Risk of One Stock vs One Hedge Fund BCE - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Representative Canadian Hedge Fund - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Nortel Networks Corp. - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Kinross Gold Corp - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Need for a Portfolio Approach Risk of non-“Blue Chip” stocks Some extreme returns exceed scale and are lumped at +/- 50%
S&P 500 Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Credit Suisse / Tremont Hedge Fund Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Need for a Portfolio Approach Risk of Hedge Fund Index vs Equity Index
TSX Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Scotia Capital Universe Bond Total Return Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Need for a Portfolio Approach Risk of Hedge Fund Index vs Equity Index
The Merits of Low Volatility Hedge Funds
CSFB/Tremont Risk/Return - Since February 1997 - Annualized 17.8% 20% 15.0% 11.9% 12.4% 11.9% 15% 10.7% 10.7% 9.9% 9.8% 9.6% 9.4% 9.0% Tremont 10% 7.1% 5.9% Returns 5.4% 4.8% 2.7% 3.8% 3.6% Tremont Std 5% Deviation 0% -1.5% -5% Equity Market Neutral Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Emerging Dedicated Futures / CTA Markets Short Bias Merits of Low Volatility Hedge Funds Hedge Fund Strategy Risk Profiles Hedge Fund Strategies to the left are less volatile and have higher return per unit of risk (i.e. standard deviation).
CSFB/Tremont Strategy Betas vs. S&P 500 - Since February 1997 1.0 0.54 0.40 0.5 0.21 0.10 0.07 0.04 0.04 -0.01 -0.91 0.0 -0.13 -0.5 -1.0 Equity Market Multi Strategy Fixed Income Convertible Event Driven Global Macro Long / Short Managed Emerging Dedicated Short Bias Neutral Arbitrage Arbitrage Equity Futures / CTA Markets Merits of Low Volatility Hedge Funds Hedge Fund Strategy Betas Hedge Fund Strategies to the left have lower beta (i.e. sensitivity) to the S&P 500.
Globally $1.5 Trillion with 8,000 managers Canada approx. $60 Billion with 70+ managers (Canada Hedge Watch) Scotia HF Index CSFB/Tremont Index 27 Managers 341 Managers Strategies 39 Funds 410 Funds 56 % Equity L/S 28 % 11 % Multi - Strategy 11 % 10 % Market Neutral 4 % 9 % Event Driven 24 % 2 % Managed Futures 5 % 2 % Fixed Income 8 % 3 % Global Macro 11 % 0 % Emerging Markets 4 % 2 % Convertible Arbitrage 2 % 2 % Dedicated Short Bias 1 % 3 % Other 2 % Need for a Portfolio Approach Best Diversification includes Global HFs As of December, 2006
Applying an ‘Equity Investing Framework’ to Hedge Funds
Bottom Up Analysis Applying an ‘Equity Investing Framework’ U.S. Value Stock Selection Process 10,000+ US equities Quantitative Screens • Price-to-book • Price-to-earnings • Dividend-Yield • Create ‘Short list’ Quantitative Screens ‘Short list’ • Qualitative Analysis • Bottom-up company review • Core competencies and competitive advantages • Industry position • Diversified Portfolio • Reduces risk • Manager monitors holdings Diversified Mutual Fund
Bottom Up Analysis Applying an ‘Equity Investing Framework’ Hedge Fund Selection Process 8,000+ US and International hedge funds Quantitative Screens • Understand drivers of returns • Assessment of risks • Consistency of results with stated strategy • Quantitative fit with overall portfolio Quantitative Screens ‘Short list’ • Qualitative Assessment • Bottom-up manager review • Core competencies and competitive advantages • Qualitative fit with overall portfolio • Nature and extent of risk controls • Diversified Portfolio • Reduces risk • Manager monitors holdings Diversified Portfolio of Hedge Funds
Applying an ‘Equity Investing Framework’ Demands of Hedge Fund Investing • Successful hedge fund investing requires: • Expertise in analyzing trading strategies as businesses • Entry and exit discipline • Time commitment • Sufficient size of investment to allow diversification • Need more than a single manager multi-strategy • Decide between: • Self manage • Outsource • Custom portfolio • Funds of hedge funds • Combination
Based on 10 years Hedge Fund Investing experience AIMA Award-winning Research Proprietary Analytics Focus on risk reduction Objectives Low volatility Low correlations with traditional assets Tax-preferred deferred capital gains ‘Equity-like’ returns with ‘bond-like’ volatility Strategy Levered low-volatility KCS Approach Investment Strategy
CSFB/Tremont Weights vs. Current ACR Basket Weights 50% 40.8% 40% 29.6% Tremont 30% 23.1% Weights ACR Basket 20% 11.9% 11.3% 11.2% 10.9% 9.9% Weights 9.7% 5.1% 6.2% 6.3% 5.1% 7.0% 10% 2.5% 2.7% 0.5% 0.0% 0.0% 0.0% 0% Equity Market Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Emerging Dedicated Futures / CTA Markets Short Bias CSFB/Tremont Risk vs. Current ACR Basket Risk - Annualized 17.8% 20% 15.0% 15% 11.9% Tremont 10.7% 9.4% Std. Dev’n 10% ACR Basket 6.0% 5.9% 5.9% 2.7% 3.6% 3.8% 3.4% 4.8% 4.4% Std Dev’n 5% 2.8% 2.1% 2.3% 0.0% 0.0% 0.0% 0% Equity Market Multi Strategy Fixed Income Convertible Event Driven Global Macro Long / Short Managed Emerging Dedicated Neutral Arbitrage Arbitrage Equity Futures / CTA Markets Short Bias Notes: Weights are as at December 30, 2006. All risk/return measures are since February, 1997, and have been annualized. KCS Approach HF Strategy Risk Profiles & the ACRF
Performance + 15.7% for 2006 Ranked #1 Fund of Funds in 2006 on Canadian Hedge Watch
This presentation is confidential. The contents are not to be reproduced or distributed to the public orthe press.Securities legislation may prohibit such distribution. This presentation is a summary only andshould be used in conjunction with the detailed information in the Confidential Offering Memorandum.The information contained in this presentation is believed to be reliable, but is not guaranteed as to itsaccuracy or completeness. This presentation is for information purposes only and does not constitutean offer to sell or a solicitation to buy the securities referred to herein. No securities commission orsimilar regulatory authority has reviewed this document or has in any way passed on the merits of thesecurities describe and any representation to the contrary is an offence. Historical performance is not a guarantee future results. KCS Fund Strategies Inc. recommends consulting appropriate investment and financial advisors when considering any investment decision. KCS Fund Strategies Inc. 2150 – 555 West Hastings Street Vancouver, British Columbia V6B 4N6 Ph: 604-730-0729 x 225 www.kcsfunds.com