Alternative Investments Overview

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Alternative InvestmentsOverview
Michael Wilson Société Générale London Ph 44
(0) 20 7762 5970 Michael.Wilson_at_sgcib.com
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Disclaimer

• This document does not constitute an offer or an
  invitation to invest or purchase any financial
  instrument. Its purpose is simply to describe the
  approach set by Société Générale and Lyxor AM in
  the management of alternative investment
  products.
• The products herein described are subject to
  various legal or regulatory restrictions.
• Société Générale (SG) and Lyxor AM assume no
  fiduciary responsibility or liability for any
  consequences financial or otherwise arising from
  the subscription or acquisition of any instrument
  described in this document. The investor should
  make its own appraisal of the risks and should
  consult to the extent necessary its own legal,
  financial, tax, accounting and other professional
  advisors in this respect prior to any
  subscription or acquisition.

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Agenda

• Topic Pages
• Introduction 5-8
• Investment rationale 10-18
• A wide range of strategies 20-26

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Hedge FundsIntroduction
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IntroductionAbout Lyxor AM

• Asset Management company headquartered in Paris
  and incorporated under French law
• Approved by the French financial authorities, the
  AMF, in May 1998
• Created in 1998, wholly-owned subsidiary of the
  Société Générale group
• Ratings for long-term debt
• Moody's Aa2 / Standard Poor's AA- / Fitch AA-
• A team of 199 professionals experienced in their
  respective fields
• With 88 being fully dedicated to structured
  alternative investment products
• 3 main activities totaling USD 68.7 billion of
  AUM (as of April 30th, 2006)

Structured Funds 343 21.07
Index Tracking ETF 43 18.38
Structured Alternative Investments 994 29
.24
Number of Funds
Assets under Mgt
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Introduction A brief overview

• The first hedge fund was created in 1949 by
  Alfred Winslow Jones
• Jones long-short equity fund aimed at protecting
  against systemic equity market risk
• 1966 Jones innovative investment approach and
  successes are brought to light
• 1966 Fortune Magazines article outlined Jones
  unique investment strategy
• The fund outperformed the best mutual fund that
  year by 44 and the best 5-year performing mutual
  fund at the time by 85, net of all fees
• Over the past forty years the hedge fund industry
  has experienced ups and downs
• By 1968, approximately 200 hedge funds
• Industry losses following the 1973-74 bear market
  shrank the number of HFs significantly
• Industry revival in the early 1990s following
  remarkable achievements and HF strategy
  diversification, although it was hit again by the
  LTCM crisis in 1998
• Today, the hedge fund industry counts over 8,600
  hedge funds, managing USD 1,105bn across a wide
  range of strategies

Source Fortune Magazine, The Jones That Nobody
Can Keep Up With HFR Industry Report, 2005
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Investment rationale An expanding universe

• Hedge fund strategies are continually expanding
  to cover new grounds
• From Jones initial long/ short equity strategy,
  hedge funds have developed a large spectrum of
  new strategies with further sub-strategies
• Long/ Short Equity - CB Arbitrage
• Global Macro - Event Driven and Risk Arbitrage
• Currency - Fixed Income Arbitrage/ MBS
• CTA - Long/ Short Credit

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Introduction Improving portfolio characteristics

• Allocation to hedge funds is a great portfolio
  diversifier
• Low correlation to equity or bond markets
  compared to traditional investments
• Low volatility
• Allocation to hedge funds enhances the expected
  return
• Capacity to yield returns in either up or down
  markets
• Enhancement of the risk/return profile
• Potential drawbacks of investing in hedge funds
  can be controlled
• Managed accounts allow to mitigate typical
  industry drawbacks
• Transparency, liquidity, and regulation issues
  can be improved

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Introduction An expanding universe

• With institutional investors entering the
  landscape, the industry is growing at a rapid
  pace
• As of December 2005, total AUM amount to 1,105
  billion for 8,600 hedge funds

Hedge Funds AUM, Net Asset Flow Number of
Hedge Funds
Source HFR Industry Report, 2005
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Hedge FundsInvestment rationale
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Investment rationaleAttractive risk/return
profile

• An outperforming investment with a tamed
  volatility...
• 10.8 annualized RoR over the past 10 years
• 4.8 annualized standard deviation over the same
  period
• offering attractive risk/return ratios

An excellent combination of the two basic
principles of Portfolio Management low
volatility and high returns
Data Hedge Fund Index MSCI Hedge Fund Asset
Weighted Index
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Investment rationale Enhancement of the
efficient frontier

• The inclusion of alternative investments in a
  traditional portfolio enhances the efficient
  frontier
• By lowering the portfolio risk
• By enhancing the expected return

Lower risk Greater return
- Period January 1994 February 2006 - Balanced
Portfolio 60 MSCI World Index Local Currency/
40 JP Morgan JGB non hedge Index - Balanced
Portfolio 20 HF 48 MSCI World Index Local
Currency/ 32 JP Morgan JGB non hedge Index and
20 MSCI Hedge Fund Asset Weighted Index
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Investment rationale Historical performance
1994 2006

• By including HFs to the allocation, we obtain
• Higher return
• Lower volatility

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Investment rationale Low correlation

• A safe haven in sharply declining markets
• Low correlation to traditional asset classes
  makes Alternative Investments less sensitive to
  large market moves

Performance vs. 10 worst MSCI World months
Alternative Investments are resilient during
violent equity market shocks
Period Jan 1994 February 2006 Data Hedge Fund
Index MSCI Hedge Fund Asset Weighted
Index Equity Index MSCI World Index Local
Currency
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Investment rationale Low correlation

• Low correlation to traditional assets classes

The essence of the hedge fund industry is to be
emancipated from any type of market
environments
Data Hedge Fund Index MSCI Hedge Fund Asset
Weighted Index Equity Index MSCI World Index
Local Currency Bond Index JP Morgan JGB Index
non Hedged
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Investment rationaleRecent regulatory
developments

• In the US
• The SEC introduced mandatory registration of
  hedge fund advisers under the Investment Adviser
  Act late 2004.
• SEC authorisation depends on the number of US
  clients and asset size ( USd 30m) ? this
  captures UK-based managers for the first time
• In the UK
• The regulator acknowledges the increasing
  significance of hedge funds for the UK and global
  financial markets
• The UK is the leading European centre for hedge
  fund management with an estimated 70 market
  share of hedge funds managed by European-based
  managers (second only to the US in global terms)
• The FSA regulates the managers based in the UK
  but not the funds as they are offshore, as often
  are the administrators ? different from UTs and
  OEICs where manager, fund and administrator are
  onshore and not marketable to private customers
• Retail investors are getting more exposure to
  hedge-fund like structures through amendments in
  the UCITS Directive and new Qualified Investor
  Schemes.

Source FSA, Regulation and the hedge fund
industry An ongoing dialogue FSA, 2005
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Investment rationale Cutting-edge access with
Lyxor Managed Accounts

• Features of Managed Accounts
• Managed accounts are clones of hedge funds
• Deposited in the name of Lyxor with an
  independent Prime Broker
• Assets are fully segregated
• Lyxor AM gives a mandate to the manager to
  replicate its benchmark fund
• Investment guidelines and risks limits are
  specified in the mandate
• Lyxor Managed Accounts are
• Standalone funds established in the form of
  L.L.C.
• Registered and regulated by the Jersey Financial
  Services Commission
• Listed on the Irish Stock Exchange
• Weekly liquidity
• Other Routes
• Capital Guarantee
• Income
• Leverage

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Hedge FundsA wide range of strategies
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A wide range of strategiesEach strategy is unique

• Hedge fund strategies offer varying risk/return
  characteristics, providing investors with a wide
  range of investment possibilities

Risk/Return profiles since inception (July 15,
2003)
The figures presented in this graph are based on
the historical Index Levels of each MSCI Hedge
Invest Indices Strategy as of October 25th, 2005.
For Indices launched after July 15th, 2003
(Discretionary Trading, Fixed Income, and
Variable Bias), SG has made some simulations for
the period up to their official launch date. This
graph is provided for illustration purposes only
and may in no way be considered as a guarantee of
future characteristics or performances. Sources
MSCI
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A wide range of strategies Long/short equity

• Strategy description
• Long/ short equity consists of placing long and
  short positions on equities and equity
  derivatives to generate equity-like return with a
  lower volatility and focus on capital
  preservation (downside risk control)
• Source of performance
• Alpha generated by good stock selection and
  market timing, combined with efficient risk
  control
• Typology
• Investment oriented Research driven strategies
  focusing on stock selection with a bottom-up or
  top-down approach (or both)
• Trading oriented Technical analysis / news flow
  - based investment process
• Investment oriented with trading overlay
  combination of the two
• Multi-factor strategy Exploitation of medium
  term inefficiencies in stock valuations
• Statistical arbitrage Exploitation of short term
  inefficiencies in stock prices
• Mixed strategies Combination of exploitation of
  short and longer term inefficiencies
• Main sources of risks

Discretionary Strategies
Quantitative Strategies
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A wide range of strategies Event driven risk
arbitrage

• Strategy description
• This strategy consists of building a diversified
  portfolio of long and short positions on
  securities to exploit relevant publicly disclosed
  catalysts (corporate-specific usually)
• Source of performance
• Relevant fundamental research unlocking value
  from catalysts, while analyzing implied risk in
  each trade
• Typology
• Share Class Arbitrage
• Other Capital Structure Arbitrage
• Shareholding Arbitrage
• Corporate Reorganization Restructuring
• Capturing the spread between announced target
  price and actual price in merger acquisition
  transactions
• Main sources of risks
• Regulation, corporate events, directionality
  (beta), leverage, concentration, illiquidity,
  pricing

Event Driven

• Distressed Securities
• High Yield Securities
• Strategic Block/ Activist Investing
• Index or Basis Trade Arbitrage

Risk Arbitrage (or Merger Arbitrage)
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A wide range of strategies Convertible bond
arbitrage

• Strategy description
• Convertible bond arbitrage consists of buying
  cheap convertible bonds and delta hedging with
  equities to eliminate directional risk
• Source of performance
• Capture the realized volatility vs. the implied
  volatility of the CB, combined in some cases with
  directional play on credit spread
• Typology
• Play arbitrage implied volatility with realised
  volatility
• Play the manager uses a model to analyse
  fundamental corporate parameters and generate
  credit trading ideas
• Main sources of risks
• Volatility, credit, leverage

Volatility Arbitrage
Credit Arbitrage
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A wide range of strategies Fixed income arbitrage

• Strategy description
• This strategy is based upon a diversified
  portfolio of hedged positions in fixed income
  instruments
• Source of performance
• Exploitation of market inefficiencies
  (supply/demand imbalances) and directional trades
  intra and across market yield curves- Profits
  originate from carry, bid/offer spreads and price
  movements
• Typology
• Intermarket spreads The purchase and sale of
  different instruments when a correlation exists
  between instruments (ex swaps vs. Treasuries)
• Yield Curve Trading Yield changes of different
  maturities across the curve are highly
  correlated. Temporary dislocations may be
  exploited (flattening or steepening plays)
• Basis Trading The purchase or sale of a future
  contract and the offsetting purchase or sale of
  an instrument which is deliverable into the
  future contract
• Long MBS, CMO, ABS or CMB (carry)
• Hedge via short Treasuries, Agency debentures,
  other MBS or paying fixed on swaps
• Use Treasury/Eurodollar/Mortgage options to hedge
  convexity and vega.
• Main sources of risks

Investment Grade Arbitrage
MBS Arbitrage
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A wide range of strategies Global macro

• Strategy description
• Global Macro managers typically use a strategy
  based on a concentrated portfolio of large
  directional (unhedged) trades in fixed income,
  FX, equity and commodity indices based on
  top-down analysis of macroeconomic and financial
  conditions
• Source of performance
• Pertinent analysis of macro dynamics and
  appropriate definition and timing of trades
• Typology
• Performing extensive macroeconomic analysis to
  generate base case and other potential economic
  scenarios
• Performing market analysis to determine which
  scenarios are priced into the market
• Performing analysis on various financial
  instruments to evaluate how they are priced
  relative to similar stages in previous cycles and
  relative to other instruments
• The managers have developed models to analyse
  fundamental parameters (GDP, Commercial
  surplus,) and generate trading ideas
• Main sources of risks
• Directionality of the trades, leverage,
  valuation, illiquidity in some cases

Discretionary Strategies
Systematic Strategies
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A wide range of strategies CTA FX trading

• Strategy description
• The strategy consists of building a diversified
  portfolio of directional (long and short) trades
  on all asset classes (equities, interest rates,
  FX, commodities) based on technical/graphical
  analysis (discretionary and/or computerised)
• Source of performance
• Relevant identification of trades and portfolio
  construction combined with efficient risk control
• Typology
• Technical analysis, pattern recognition
• Implementation through sophisticated computer
  models supported by strong quantitative research
  teams
• Exploitation of short-term or long-term (trend
  following) moves, or combination of both
• Embedded risk control is of paramount performance
• Trades are based on fundamental and
  technical/graphical analysis
• Implementation through a pure discretionary
  process by the portfolio manager
• Main sources of risks

Systematic Strategies
Discretionary Strategies
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Alternative InvestmentsOverview
Michael Wilson Société Générale London Ph 44
(0) 207 762 5970 Michael.Wilson_at_sgcib.com