Alternative Investments

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Alternative Investments

• Hedge Funds

• Private Equity

• Real Estate

• Art

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Hedge Funds

• Definition there is not universally accepted
  definition of hedge funds. They can be broadly
  described as private investments vehicles where
  the manager has a significant stake in the fund
  and enjoys high level of flexibility to employ a
  broad spectrum of strategies.
• How Hedge Funds differ from traditional Asset
  manager

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Definition of Hedge Fund
An asset manager
That is less constrained than a traditional
investment manager
Accessing the same markets as others
Investing in their choice of Equities, Fixed
Income, Currencies and Commodities.
But who is un constrained
Can use leverage, short selling and derivatives
without a benchmark constraint
Relates compensation directly to performance
And is incentivised
To be a skill based investor
Allowing investors to access some of thebest
talent in money management
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Definition of Hedge Fund (2)
Can give exposure to different sources of return
from those which drive traditional asset classes
Have different return drivers
And pursue many different strategies
Hedge Funds comprise a large and growing set of
strategies
In a more lightly regulated environment
Require a higher level of initial due diligence
and ongoing monitoring than traidtional managers
And may perform differently
Offering different return distributions from
traditional managers
Offering diversification benefits
Generate returns with a low correlation to
traditional strategies
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Definition of Hedge Fund (3)
Portfolio return
Beta Dependant
Alpha generated
SourceGSAM
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Definition of a Hedge Fund (4)

• Not an asset class, closer to a normal business
  into the AM space
• In order to survive HFs need other agents acting
  on diverse target functions (central banks,
  indexed asset managers, liability managers,
  managers subject to regulatory changes)

SourceUBS
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Why using Hedge Funds

• Diversification

• Absolute Return

• Low Correlation

• Low Volatility

• Increase Return per units of Risk

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Benefits of Hedge Funds
Fonte Evaluation Assocation Capital Markets
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Hedge Fund Strategies

• Low Risk

• Relative Value
• Attempt to capitalize on inefficiencies between
  mispriced related securities. No correlated with
  market
• Event Driven
• They seek to generate positive return
  capitalizing on inefficiencies create by the
  dynamics of a particular corporate event (merger,
  bankruptcies, liquidation, buy back, etc). No
  correleted with market.
• Long / Short
• They seek to generate return limiting market risk
  (beta) and looking for alpha. LS managers use
  fundamental analysis.
• Global Macro
• They seek to generate return from an extremly
  wide variety of trading strategies and asset
  classes. They can take directional wiews, both
  long and short, on global interest rate,
  currencies, commodities, equity.

High Risk
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Hedge Fund Strategies
Market Indipendent
Directional
Relative Value
Event Driven
Equity Long/Short
Tactical Trading
Managed Futures Global Macro Quantitative
Macro Macro Relative Value
Diversified Geography Industry/Sector Concentrate
d Long Only
Fixed Income Relative Value Equity Market
Neutral Convertible Trading Credit Relative
Value Emerging Market Debt Relative Value
High Yield/ Didstressed debt Special
Situations Risk Arbitrage Hybrid Public ad
Private Investing Direct Lending Mezzanine
Financing Capital Structure Trading
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Relative Value Strategies

• Convertible arbitrage
• Managers buy convertible bond and generally hedge
  with short position in underlying stock.

Fixed income arbitrage Managers tray to
capitalize from temporary distorsions in the
relationships between similar fixed income
securities
Statistical arbitrage Managers analyze
statistical tradind pattern of pairs or groups of
secuirity (equities) that tend to follow similar
historical pattern. They tray to take profits
when these pattern become disjointed
Capital Structure arbitrage Profit from
inefficiencies found among the various securities
within a single firms capital structure.
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Event Driven Strategies

• Merger arbitrage
• The strategy seeks to generate returns from
  corporate merger and take over activity.

Distressed Securities Distressed fund invest in
the dept or equity of companies experiencing
financial or operational difficulty. These
secuirities typically trade at substantial
discount compare to fair value
Special Situations They can refer to a variety of
corporate event (liquidations, stock repurchase,
stock splits, spin - off
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Long/Short Strategies

• L/S Equity Market Neutral
• Fund are run with low net market exposure
• L/S Equity Long Biased
• Funds that have high degree of market exposure
  and high correlation with markets
• L/S Equity Short Biased
• Funds that have low degree of market exposure and
  low correlation with markets
• L/S Equity Sector Fund
• Funds that focus on one or a few industry sectors

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Macro Strategies

• Discretionary
• Managers analyze macroeconomic factors (GDP,
  trade Deficit, unemployment, monetary policiy) to
  formulate thei positions on fixed income,
  currency, equity, commodities, etc).
• Systematic (trend followers or CTA)
• Managers utilize computerized trading systems
  designed to capture the trading tendencies of
  global markets. Price movements and volatility
  are monitored in order to anticipate markets
  dynamic.

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Strategy Comparison
Quantitatvie Analysis January 1, 1990 to
December 31, 2005
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Risks
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Leverage
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Long- Short Equity Funds
Beta Long 0.96 Beta Short
1.14 Beta Portfolio 80 0.96 - 40 1.14
0.76 0.46 0.30 Theoretically, if the overall
equity market falls by 10, the portfolio should
only Lose approximatly 3, thus protecting
against 70 of the dowun side equity Market
movement.
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Private Equity

• Private Equity in defined as equity capital
  invested in private company through a negotiated
  process
• Potential profit are realized trhough various
  exit strategies initial pubblic offering (IPOs),
  trade sales, recapitalizations
• Categories of Private Equity
• Venture Capital
• Levereged Buyout
• Special Situations

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Categories of Private Equity
Venture Capital Levereged Buyout
Special Situation
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Value Drivers in LBO
Exit Price 120
Purchase Price 100
6 pa
33 pa
Exit Year 3
Acquisition Year 1
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Private Equity investment cycle the J Curve
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Private Equity performance
US 10-year returns
European 10-year returns
11.1
7.4

• Private equity has outperformed public equities
  benchmarks over the last ten years by approx.
  200-300 bps annually

• Top quartile managers have outperformed public
  benchmarks by approx. 3,000 bps annually

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Methods of investing in Private Equity

• Direct Co Investments into companies
• Investment into a private equity fund around
  3.000 funds
• (Blackstone, Carlyle, TPG, Apollo, Permira, BC
  Partners, etc)
• Investment into a Fund of Funds around 100 FoFs
• Partners, Goldman Sachs, LGT Capital, Lexington,
  Harbour Vest)
• ETF Privex investing in companies related to
  Private Equity

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Typical Terms and Conditions

• Legal Structure limited partnerships
• Investments period 3 5 years
• Management fees 1.5 - 2.5 of committed capital
• Carried interest 20 of capital gains
• Duration 5 10 years (extension 2 to 3 years)
• Minimum commitment Euro 3 to Euro 5 million
• Managers commitment 1 to 2 of the fund

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Allocation example The Yale Endowment