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Independent specialists in tailor-made portfolios of hedge funds since 1989International Asset Management Limited
Managing Risk in a Fund of Hedge Funds post 2008– A personal perspective two years on
Bernard Minsky
Head of Portfolio Analysis and Risk Management
June 2010
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Agenda
A chronology – 2006 to 2010
Risk management before 2008
Our view in December 2008
Fifteen minutes of fame
Brave New World or Animal Farm
Not just about risk management
Concluding thoughts
3
A chronology – 2006 to 2010
Jan Feb Jun Aug Sep Dec
2007
MarketSub prime
losses emergeBear Stearns
HF failQuant equity
lossesNorthern Rock
bailed out by HMG
IAMTCI writes toABN AMRO
Increase allocation to conviction picks
Consortium buysABN AMRO
IAM Managementstart negotiating
buy-out
Jan-Feb Mar Jul Aug Sep Oct-Dec Dec
2008
MarketPeloton and Carlyle
hedge funds failBear Stearns bailed by JP Morgan/Fed
Lehman bankruptcy, AIG, ML etc
Market turmoil,liquidity strike
Madoff fraud‘exposed’
IAMFIRV managers under spotlight
Employees buy- back from Fortis
Enhanced risk management
approved
Portfolio losses and redemptions
IAM never hadMadoff exposure.
Jan Mar Apr Oct Dec
2009
MarketEquity and credit
markets turn positiveAIFM draft published
Galleon insider trading
New Greek Govt austerity programme
IAMPortfolio rotation
programme startsPortfoliosbearish
Review risk aggregator products
First significant new client portfolio
Jan-Apr Apr May
2010
MarketContinuing fallout
from GreeceSEC sues Goldman
SachsEU bailout, Club Med
risk
IAMStart Risk
Aggregation project
Jan
2006 IAMABN AMRO
buys IAM
4
IAM risk management before 2008
Strong due diligence programmeCollegiate style of portfolio management
Issues with approach
Never invested in fraud or operational
blow ups
Tremendous network of contacts for
reference checking
Conservative approach, true due
diligence veto
Bespoke portfolios not
comingled funds
Manager driven
Subjective approach to sizing
Lack of detailed risk exposure
reporting by managers
Difficult to compare risk across
managers even within a strategy
Under-use of background
checking agencies
Research analysts assessed
manager’s investment risk profile
5
Our view in December 2008: Macro events
Credit crisis Policy shiftsEvent risks raise correlation levels dramatically
Financial system became too complex
for its own good
When banks are in trouble we are all
in trouble
2007’s year-end liquidity crisis did not
reverse in January as many
anticipated
Central banks concerned with inflation
through early 2008 (not Fed)
Targeted changes to short-selling in
July and September
Government providing capital to banks
Loose monetary policies
Credit crunch has spiraled into a
widespread liquidity and
confidence crisis
Question marks regarding bank
solvency triggered further redemptions
which has a knock-on effect
6
Our view in December 2008: Industry issues
Shorting Redemption risk Financing
Short selling regulatory changes
Pension fund stock lending shifts will
cause the largest risk
“Short-termism” in the hedge fund
investing community
– Money classed as long term
suddenly ‘hot’
– “Game Theoretic” pre-emptive
redemptions
Madoff devastates remaining
confidence in hedge funds credibility
Private bank redemptions expected to
be much greater than institutional
Significant number of financial
institutions reducing/withdrawing
credit lines to funds
Trade financing that is offered will be
more expensive
Longer duration trades financing will
continue to be problematic
Reduced range of securities financed
7
Our view in December 2008: IAM challenges
Manager selection Slow to sell Long/Short managers Difficult to rotate in and out of strategies
High profile blowups avoided such
as Madoff, Focus, Ospraie,
Peloton, Carlyle
Several IAM managers performed
poorly, but to a lesser extent
Sizing and asset allocation have been
a negative factor
Slow to react to differing views
amongst credit and equity managers
Increased risk outlook and reduced
allocation but not by enough
Too many of our managers remained
long bias or with high level of
gross exposure
Had not converted a positive outlook
on certain strategies to
investable opportunities
Perceived lack of suitable managers in
these strategies
8
Our view in December 2008: A changed industry
Less crowding Simplicity of strategy Less leverage
Fewer risk takers in the industry
Fewer funds
Simple equity long/short, trading, event
driven, credit arbitrage have the
greatest opportunities going forward;
Small Relative Value funds
(<US$1 billion) will be problematic, as
prime brokers will offer less attractive
credit lines
Smaller long/short equity funds will not
be impacted, as they are less reliant
on financing
Little appetite for path-
dependant strategies
Too much volatility
Investment bank model
has disappeared
Quality of risk/reward under
more scrutiny
There will still be attractive
opportunities on an unlevered basis,
with no threat of overcrowding
9
Our view in December 2008 – IAM Response
Macro events Industry issues IAM challenges Changed industry
Development
at IAM
Developed strategy
forecasting process
Emphasised top-down
asset allocation
Renewed focus on:
Redemption risk
Counterparty risk
New Corporate
Governance
Portfolio management
process review
Consolidation
of names
Risk budgeting
New opportunities:
CTA basket
Macro
Equity Long/Short
Long/Short Credit and
Distressed
10
Fifteen minutes of fame
Nobody thanks you for saying yes…
…but they know who to blame if it goes wrong
Risk management in bright focus
Conflicts in responsibility for manager liaison and risk
management
Everybody second guesses… with hindsight, but we did
make mistakes
Bespoke portfolios sheltered from “Game Theoretic”
redemptions
Strong operational due diligence meant no Madoff
A chance to make changes
Managers becoming more transparent
Framework for quantitative approach already in place
Profile of good risk control procedures raised to highest level
Every client and prospect wants to meet the risk team
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Brave New World or Animal Farm
Rewrote Risk Policy for new board to approve
Founded Risk and Compliance Committee as sub-committee of the Board
Changed reporting line for Head of Due Diligence
Introduced quantitative risk budgeting process
Subscribe to risk aggregation service, and background checking service
Revamped monitoring of existing managers to align with governance change
Overcoming scepticism within the firm
Finding resources to produce the analyses
Gaining manager support to increase portfolio transparency
Allowing portfolio managers to manage, yet
Justifying the controls as markets ease and avoiding pro-cyclicality
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New risk budgeting process
Objective Approach Output
To quantify worst-case losses without
diversification considerations
To set allocation limits for each
underlying manager
To ensure PMC decisions are made in
a risk aware framework
Use up-to-date readily available
data from managers: i.e. exposure;
maximum drawdown,
portfolio concentration
Each fund is rated according to how it
reacts to a battery of stresses, and
measured across four factors:
1. Directionality
2. Concentration
3. Leverage
4. Liquidity
The risk budget framework assigns a
maximum allocation (as a % of the
portfolio) to each approved manager
Risk budgets are mandatory and rules
for managing breaches are in the
firm’s policies
Risk budgets are specific to mandated
portfolio risk tolerance
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Risk budgets
Manager1. Credit
Fund
2. Event
Driven Fund
3. Equity
Market
Neutral
4. Long-
Biased
Equity Fund
5. Macro
Fund
6. Short-term
CTA
7. Generic
CTA
Market Risk Test (%) 0.5 9.0 3.0 12.8 28.2 4.7 7.6
Concentration Test (%) 4.9 4.5 2.0 2.8 0.0 0.0 8.9
Leverage Test (%) 10.0 4.3 3.1 3.6 32.1 3.6 5.0
Historic Max Drawdown (%) x 67% 1.2 2.5 2.3 21.5 5.4 6.7 17.2
Liquidity Rating 2 3 1 1 1 1 1
Worst Case Loss (%) 12.5 13.5 3.1 21.5 32.1 6.7 17.2
Low Risk Appetite (%) 4.0 3.7 16.1 2.3 1.6 7.5 2.9
Medium Risk Appetite (%) 6.0 5.6 24.2 3.5 2.3 11.2 4.4
High Risk Appetite (%) 8.0 7.4 32.3 4.6 3.1 14.9 5.8
Example – Proposed Allocation in
a High Risk Portfolio
(3–8% min/max allocation)
4.5 4 8 3 1 6 4
Source: IAM.
Portfolio Construction
Optimal strategy weights
Approved manager suitability
Portfolio Management Committee approval
Rigorous testing through IAM Software
14
Downside risk measurement rather than dispersion measurement
Co-drawdown is the probability of the column fund suffering a loss at the same time a row fund suffers a loss.Source: IAM.
High Correlation Medium Correlation Low Correlation
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
1 AlphaGen Crucis 100.0% 48.0% 56.2% -25.7% 18.8% 5.3% 70.3% 16.9% 50.3% 35.8% 42.9% 43.9% 55.2% 15.5% 64.3% 25.8% 1.2% 15.1% -20.5% -45.4% 23.4% -3.3% 23.2%
2 Alydar Capital 48.0% 100.0% 36.5% 6.1% 52.1% 26.1% 31.6% 41.8% 45.1% 60.0% 36.7% 31.9% 32.7% 33.9% 29.1% 30.7% -4.2% 11.3% -2.0% 7.0% -1.3% 22.5% -8.3%
3 Asian Credit Hedge 56.2% 36.5% 100.0% 12.4% 34.2% 43.9% 59.9% -21.3% 69.7% 61.7% 27.9% 69.8% 36.2% 9.2% 79.2% 61.5% 34.0% 13.2% -20.0% 11.0% 46.9% 3.5% 62.1%
4 BlueTrend -25.7% 6.1% 12.4% 100.0% 28.5% -3.2% -34.2% -3.8% 14.1% 5.3% 14.2% 19.7% -16.9% 30.1% -3.2% 40.6% 38.5% 46.1% 8.1% 69.8% 18.2% 44.5% 7.2%
5 Capula Global Relative Value 18.8% 52.1% 34.2% 28.5% 100.0% 31.9% 12.9% 11.2% 37.0% 46.7% 34.1% 38.3% 22.1% 38.4% 18.0% 32.9% -0.2% 20.7% -26.6% 14.1% -4.0% 51.7% 10.6%
6 Claren Road Credit 5.3% 26.1% 43.9% -3.2% 31.9% 100.0% 4.6% -24.9% 10.1% 67.2% 7.9% 21.5% -3.4% 17.2% 35.9% 32.9% 11.1% -38.6% 25.9% 36.1% 2.3% 36.2% 48.9%
7 Davidson Kempner International 70.3% 31.6% 59.9% -34.2% 12.9% 4.6% 100.0% 8.0% 70.5% 42.8% 5.6% 65.4% 36.6% -19.9% 77.6% 19.2% -5.0% 5.0% -29.2% -33.8% 45.3% -28.3% 29.3%
8 DB Equilibria J apan 16.9% 41.8% -21.3% -3.8% 11.2% -24.9% 8.0% 100.0% 17.0% 9.6% 22.0% 18.0% 15.3% -11.9% -4.0% -16.4% -33.3% 29.7% 26.4% -20.3% -14.2% 17.0% -40.9%
9 EB Asia Absolute Return 50.3% 45.1% 69.7% 14.1% 37.0% 10.1% 70.5% 17.0% 100.0% 63.5% 19.9% 74.5% 21.6% -1.8% 67.6% 47.7% 11.3% 24.5% -27.1% 3.6% 54.6% 5.9% 24.3%
10 Exane Templiers fund 35.8% 60.0% 61.7% 5.3% 46.7% 67.2% 42.8% 9.6% 63.5% 100.0% 4.9% 57.2% -8.4% -4.5% 62.6% 32.4% -9.5% 2.2% 17.3% 31.4% 45.9% 41.6% 26.5%
11 Horizon P ortfolio Ltd 42.9% 36.7% 27.9% 14.2% 34.1% 7.9% 5.6% 22.0% 19.9% 4.9% 100.0% 23.3% 72.5% 62.4% 22.2% 62.7% 51.5% -6.3% -28.4% -24.1% -38.2% 1.9% 34.4%
12 Karsch Capital 43.9% 31.9% 69.8% 19.7% 38.3% 21.5% 65.4% 18.0% 74.5% 57.2% 23.3% 100.0% 29.6% -5.7% 81.3% 48.5% 18.3% 37.7% -4.1% 7.0% 52.9% 12.5% 52.5%
13 M&G Episode Inc. 55.2% 32.7% 36.2% -16.9% 22.1% -3.4% 36.6% 15.3% 21.6% -8.4% 72.5% 29.6% 100.0% 48.0% 32.1% 48.5% 37.8% -13.8% -39.0% -45.6% -34.2% -28.8% 33.7%
14 New Star UK Gemini Hedge USD 15.5% 33.9% 9.2% 30.1% 38.4% 17.2% -19.9% -11.9% -1.8% -4.5% 62.4% -5.7% 48.0% 100.0% -11.1% 55.3% 48.5% -5.8% -26.3% 9.1% -39.8% 20.8% 19.8%
15 OZ Overseas II 64.3% 29.1% 79.2% -3.2% 18.0% 35.9% 77.6% -4.0% 67.6% 62.6% 22.2% 81.3% 32.1% -11.1% 100.0% 46.7% 20.1% 7.3% 0.9% -1.0% 58.8% -6.7% 61.2%
16 P FM Diversified Offshore 25.8% 30.7% 61.5% 40.6% 32.9% 32.9% 19.2% -16.4% 47.7% 32.4% 62.7% 48.5% 48.5% 55.3% 46.7% 100.0% 81.9% -5.4% -25.2% 22.3% 6.8% 2.9% 62.3%
17 SCP Ocean 1.2% -4.2% 34.0% 38.5% -0.2% 11.1% -5.0% -33.3% 11.3% -9.5% 51.5% 18.3% 37.8% 48.5% 20.1% 81.9% 100.0% -15.7% -22.9% 12.8% -1.9% -19.3% 62.4%
18 TT Mid-Cap Europe Long Short 15.1% 11.3% 13.2% 46.1% 20.7% -38.6% 5.0% 29.7% 24.5% 2.2% -6.3% 37.7% -13.8% -5.8% 7.3% -5.4% -15.7% 100.0% 5.7% 8.4% 45.1% 42.4% -10.0%
19 Tudor Tensor -20.5% -2.0% -20.0% 8.1% -26.6% 25.9% -29.2% 26.4% -27.1% 17.3% -28.4% -4.1% -39.0% -26.3% 0.9% -25.2% -22.9% 5.7% 100.0% 39.6% 21.7% 32.9% -3.0%
20 Winton Futures -45.4% 7.0% 11.0% 69.8% 14.1% 36.1% -33.8% -20.3% 3.6% 31.4% -24.1% 7.0% -45.6% 9.1% -1.0% 22.3% 12.8% 8.4% 39.6% 100.0% 23.4% 38.0% 2.1%
21 York European Opportunities 23.4% -1.3% 46.9% 18.2% -4.0% 2.3% 45.3% -14.2% 54.6% 45.9% -38.2% 52.9% -34.2% -39.8% 58.8% 6.8% -1.9% 45.1% 21.7% 23.4% 100.0% 17.4% 26.2%
22 COMAC Global Macro Fund -3.3% 22.5% 3.5% 44.5% 51.7% 36.2% -28.3% 17.0% 5.9% 41.6% 1.9% 12.5% -28.8% 20.8% -6.7% 2.9% -19.3% 42.4% 32.9% 38.0% 17.4% 100.0% -5.5%
23 Brigade Lvgd. Cap. Structures Fund 23.2% -8.3% 62.1% 7.2% 10.6% 48.9% 29.3% -40.9% 24.3% 26.5% 34.4% 52.5% 33.7% 19.8% 61.2% 62.3% 62.4% -10.0% -3.0% 2.1% 26.2% -5.5% 100.0%
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High Correlation Medium Correlation Low CorrelationHigh Correlation Medium Correlation Low Correlation
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
1 AlphaGen Crucis 100.0% 48.0% 56.2% -25.7% 18.8% 5.3% 70.3% 16.9% 50.3% 35.8% 42.9% 43.9% 55.2% 15.5% 64.3% 25.8% 1.2% 15.1% -20.5% -45.4% 23.4% -3.3% 23.2%
2 Alydar Capital 48.0% 100.0% 36.5% 6.1% 52.1% 26.1% 31.6% 41.8% 45.1% 60.0% 36.7% 31.9% 32.7% 33.9% 29.1% 30.7% -4.2% 11.3% -2.0% 7.0% -1.3% 22.5% -8.3%
3 Asian Credit Hedge 56.2% 36.5% 100.0% 12.4% 34.2% 43.9% 59.9% -21.3% 69.7% 61.7% 27.9% 69.8% 36.2% 9.2% 79.2% 61.5% 34.0% 13.2% -20.0% 11.0% 46.9% 3.5% 62.1%
4 BlueTrend -25.7% 6.1% 12.4% 100.0% 28.5% -3.2% -34.2% -3.8% 14.1% 5.3% 14.2% 19.7% -16.9% 30.1% -3.2% 40.6% 38.5% 46.1% 8.1% 69.8% 18.2% 44.5% 7.2%
5 Capula Global Relative Value 18.8% 52.1% 34.2% 28.5% 100.0% 31.9% 12.9% 11.2% 37.0% 46.7% 34.1% 38.3% 22.1% 38.4% 18.0% 32.9% -0.2% 20.7% -26.6% 14.1% -4.0% 51.7% 10.6%
6 Claren Road Credit 5.3% 26.1% 43.9% -3.2% 31.9% 100.0% 4.6% -24.9% 10.1% 67.2% 7.9% 21.5% -3.4% 17.2% 35.9% 32.9% 11.1% -38.6% 25.9% 36.1% 2.3% 36.2% 48.9%
7 Davidson Kempner International 70.3% 31.6% 59.9% -34.2% 12.9% 4.6% 100.0% 8.0% 70.5% 42.8% 5.6% 65.4% 36.6% -19.9% 77.6% 19.2% -5.0% 5.0% -29.2% -33.8% 45.3% -28.3% 29.3%
8 DB Equilibria J apan 16.9% 41.8% -21.3% -3.8% 11.2% -24.9% 8.0% 100.0% 17.0% 9.6% 22.0% 18.0% 15.3% -11.9% -4.0% -16.4% -33.3% 29.7% 26.4% -20.3% -14.2% 17.0% -40.9%
9 EB Asia Absolute Return 50.3% 45.1% 69.7% 14.1% 37.0% 10.1% 70.5% 17.0% 100.0% 63.5% 19.9% 74.5% 21.6% -1.8% 67.6% 47.7% 11.3% 24.5% -27.1% 3.6% 54.6% 5.9% 24.3%
10 Exane Templiers fund 35.8% 60.0% 61.7% 5.3% 46.7% 67.2% 42.8% 9.6% 63.5% 100.0% 4.9% 57.2% -8.4% -4.5% 62.6% 32.4% -9.5% 2.2% 17.3% 31.4% 45.9% 41.6% 26.5%
11 Horizon P ortfolio Ltd 42.9% 36.7% 27.9% 14.2% 34.1% 7.9% 5.6% 22.0% 19.9% 4.9% 100.0% 23.3% 72.5% 62.4% 22.2% 62.7% 51.5% -6.3% -28.4% -24.1% -38.2% 1.9% 34.4%
12 Karsch Capital 43.9% 31.9% 69.8% 19.7% 38.3% 21.5% 65.4% 18.0% 74.5% 57.2% 23.3% 100.0% 29.6% -5.7% 81.3% 48.5% 18.3% 37.7% -4.1% 7.0% 52.9% 12.5% 52.5%
13 M&G Episode Inc. 55.2% 32.7% 36.2% -16.9% 22.1% -3.4% 36.6% 15.3% 21.6% -8.4% 72.5% 29.6% 100.0% 48.0% 32.1% 48.5% 37.8% -13.8% -39.0% -45.6% -34.2% -28.8% 33.7%
14 New Star UK Gemini Hedge USD 15.5% 33.9% 9.2% 30.1% 38.4% 17.2% -19.9% -11.9% -1.8% -4.5% 62.4% -5.7% 48.0% 100.0% -11.1% 55.3% 48.5% -5.8% -26.3% 9.1% -39.8% 20.8% 19.8%
15 OZ Overseas II 64.3% 29.1% 79.2% -3.2% 18.0% 35.9% 77.6% -4.0% 67.6% 62.6% 22.2% 81.3% 32.1% -11.1% 100.0% 46.7% 20.1% 7.3% 0.9% -1.0% 58.8% -6.7% 61.2%
16 P FM Diversified Offshore 25.8% 30.7% 61.5% 40.6% 32.9% 32.9% 19.2% -16.4% 47.7% 32.4% 62.7% 48.5% 48.5% 55.3% 46.7% 100.0% 81.9% -5.4% -25.2% 22.3% 6.8% 2.9% 62.3%
17 SCP Ocean 1.2% -4.2% 34.0% 38.5% -0.2% 11.1% -5.0% -33.3% 11.3% -9.5% 51.5% 18.3% 37.8% 48.5% 20.1% 81.9% 100.0% -15.7% -22.9% 12.8% -1.9% -19.3% 62.4%
18 TT Mid-Cap Europe Long Short 15.1% 11.3% 13.2% 46.1% 20.7% -38.6% 5.0% 29.7% 24.5% 2.2% -6.3% 37.7% -13.8% -5.8% 7.3% -5.4% -15.7% 100.0% 5.7% 8.4% 45.1% 42.4% -10.0%
19 Tudor Tensor -20.5% -2.0% -20.0% 8.1% -26.6% 25.9% -29.2% 26.4% -27.1% 17.3% -28.4% -4.1% -39.0% -26.3% 0.9% -25.2% -22.9% 5.7% 100.0% 39.6% 21.7% 32.9% -3.0%
20 Winton Futures -45.4% 7.0% 11.0% 69.8% 14.1% 36.1% -33.8% -20.3% 3.6% 31.4% -24.1% 7.0% -45.6% 9.1% -1.0% 22.3% 12.8% 8.4% 39.6% 100.0% 23.4% 38.0% 2.1%
21 York European Opportunities 23.4% -1.3% 46.9% 18.2% -4.0% 2.3% 45.3% -14.2% 54.6% 45.9% -38.2% 52.9% -34.2% -39.8% 58.8% 6.8% -1.9% 45.1% 21.7% 23.4% 100.0% 17.4% 26.2%
22 COMAC Global Macro Fund -3.3% 22.5% 3.5% 44.5% 51.7% 36.2% -28.3% 17.0% 5.9% 41.6% 1.9% 12.5% -28.8% 20.8% -6.7% 2.9% -19.3% 42.4% 32.9% 38.0% 17.4% 100.0% -5.5%
23 Brigade Lvgd. Cap. Structures Fund 23.2% -8.3% 62.1% 7.2% 10.6% 48.9% 29.3% -40.9% 24.3% 26.5% 34.4% 52.5% 33.7% 19.8% 61.2% 62.3% 62.4% -10.0% -3.0% 2.1% 26.2% -5.5% 100.0%
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Correlation
Co-Drawdown
High Co-drawdown Medium Co-drawdown Low Co-drawdown
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
1 AlphaGen Crucis 100.0% 18.6% 19.0% 52.6% 29.3% 28.8% 26.5% 39.8% 20.5% 39.4% 37.9% 30.9% 41.9% 32.1% 19.9% 20.1% 30.9% 48.1% 20.5% 31.1% 30.9% 62.6% 39.1%
2 Alydar Capital 15.1% 100.0% 33.6% 49.2% 22.7% 24.1% 30.3% 25.3% 55.3% 36.4% 32.0% 61.8% 44.7% 37.2% 38.5% 44.5% 39.6% 23.5% 31.1% 46.2% 56.3% 50.0% 8.7%
3 Asian Credit Hedge 21.1% 45.9% 100.0% 60.6% 15.7% 33.4% 30.5% 20.2% 46.5% 40.3% 39.5% 53.0% 42.4% 40.6% 39.6% 18.8% 35.8% 45.9% 24.2% 55.3% 66.2% 39.5% 40.0%
4 BlueTrend 27.7% 31.8% 28.7% 100.0% 15.3% 27.7% 15.6% 35.5% 44.3% 25.3% 30.0% 51.7% 30.3% 33.0% 16.0% 34.2% 31.3% 33.2% 53.3% 86.7% 37.0% 43.3% 32.5%
5 Capula Global Relative Value 28.0% 26.7% 13.5% 27.8% 100.0% 24.5% 16.0% 25.1% 37.2% 40.0% 38.9% 51.7% 31.8% 13.1% 42.8% 35.3% 17.2% 47.0% 28.7% 42.1% 42.6% 42.5% 33.1%
6 Claren Road Credit 32.2% 33.1% 33.6% 58.8% 28.6% 100.0% 23.3% 34.1% 68.1% 51.0% 30.0% 67.6% 52.8% 41.9% 52.5% 32.1% 44.1% 32.3% 34.4% 46.8% 44.1% 52.1% 74.7%
7 Davidson Kempner International 35.7% 50.2% 37.0% 40.1% 22.5% 28.1% 100.0% 35.2% 52.8% 33.1% 7.9% 62.6% 62.9% 34.9% 77.5% 48.8% 42.2% 40.1% 52.4% 50.7% 64.8% 21.1% 21.1%
8 DB Equilibria J apan 32.7% 25.6% 15.0% 55.5% 21.5% 25.1% 21.5% 100.0% 46.7% 38.5% 58.3% 47.0% 43.4% 28.6% 30.7% 37.6% 42.9% 8.5% 43.6% 49.6% 39.8% 46.9% 38.4%
9 EB Asia Absolute Return 13.8% 45.9% 28.3% 56.9% 26.3% 41.2% 26.4% 38.4% 100.0% 37.3% 30.4% 61.5% 56.1% 31.3% 45.3% 60.2% 46.0% 21.7% 39.3% 54.1% 46.2% 32.6% 40.9%
10 Exane Templiers fund 33.2% 37.6% 30.6% 40.6% 35.2% 38.4% 20.7% 39.5% 46.4% 100.0% 45.0% 68.1% 58.8% 59.0% 35.8% 43.0% 48.6% 35.5% 22.8% 36.5% 62.6% 37.5% 45.5%
11 Horizon P ortfolio Ltd 26.9% 27.9% 25.2% 40.5% 28.8% 19.0% 4.2% 50.3% 31.9% 37.9% 100.0% 38.8% 59.8% 30.3% 22.8% 25.6% 40.4% 13.2% 30.2% 41.7% 39.4% 38.1% 30.3%
12 Karsch Capital 19.5% 47.9% 30.1% 62.0% 34.1% 38.1% 29.3% 36.1% 57.4% 51.0% 34.5% 100.0% 56.2% 41.9% 40.6% 47.9% 43.4% 39.7% 39.8% 67.7% 60.2% 40.9% 41.2%
13 M&G Episode Inc. 24.8% 32.6% 22.7% 34.2% 19.7% 28.0% 27.7% 31.3% 49.3% 41.4% 50.1% 52.9% 100.0% 41.8% 32.3% 43.0% 35.8% 12.7% 24.6% 39.4% 39.2% 32.4% 37.4%
14 New Star UK Gemini Hedge USD 30.9% 43.9% 35.2% 60.4% 13.2% 36.1% 24.9% 33.5% 44.6% 67.5% 41.1% 64.0% 67.8% 100.0% 32.4% 44.5% 47.1% 42.3% 15.1% 52.0% 52.8% 44.1% 33.5%
15 OZ Overseas II 20.8% 49.5% 37.4% 32.0% 46.9% 49.2% 60.1% 39.1% 70.3% 44.5% 33.6% 67.4% 57.0% 35.3% 100.0% 48.4% 51.6% 31.6% 41.5% 47.5% 69.1% 45.7% 35.5%
16 P FM Diversified Offshore 15.2% 41.2% 12.8% 48.9% 27.8% 21.6% 27.2% 34.5% 67.1% 38.5% 27.2% 57.2% 54.5% 34.8% 34.8% 100.0% 38.4% 23.6% 21.7% 55.8% 43.0% 34.2% 33.8%
17 SCP Ocean 35.0% 55.1% 36.6% 67.4% 20.3% 44.7% 35.5% 59.2% 77.2% 65.4% 64.5% 78.0% 68.3% 55.4% 55.8% 57.8% 100.0% 24.3% 30.9% 55.2% 79.8% 43.9% 35.0%
18 TT Mid-Cap Europe Long Short 39.2% 23.5% 33.6% 51.3% 40.0% 23.5% 24.2% 8.4% 26.2% 34.3% 15.2% 51.2% 17.5% 35.7% 24.6% 25.6% 17.5% 100.0% 25.6% 60.1% 43.2% 40.9% 32.0%
19 Tudor Tensor 16.0% 29.8% 17.0% 79.1% 23.4% 24.0% 30.3% 41.4% 45.3% 21.1% 33.2% 49.2% 32.3% 12.2% 30.9% 22.5% 21.3% 24.6% 100.0% 84.3% 30.5% 31.5% 31.8%
20 Winton Futures 15.2% 27.8% 24.3% 80.6% 21.5% 20.5% 18.4% 29.5% 39.1% 21.2% 28.8% 52.5% 32.5% 26.4% 22.2% 36.2% 23.8% 36.1% 52.9% 100.0% 37.3% 37.0% 27.9%
21 York European Opportunities 26.1% 58.4% 50.3% 59.4% 37.6% 33.3% 40.5% 40.9% 57.7% 62.8% 46.9% 80.5% 55.8% 46.3% 55.7% 48.3% 59.4% 44.8% 33.0% 64.4% 100.0% 55.0% 31.0%
22 COMAC Global Macro Fund 35.3% 34.6% 20.0% 46.4% 25.0% 26.3% 8.8% 32.2% 27.2% 25.1% 30.3% 36.5% 30.8% 25.8% 24.6% 25.6% 21.8% 28.3% 22.7% 42.7% 36.7% 100.0% 31.0%
23 Brigade Lvgd. Cap. Structures Fund 31.8% 8.7% 29.3% 50.3% 28.2% 54.3% 12.7% 38.0% 49.2% 44.0% 34.7% 53.0% 51.3% 28.3% 27.6% 36.5% 25.1% 32.0% 33.1% 46.3% 29.9% 44.7% 100.0%
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High Co-drawdown Medium Co-drawdown Low Co-drawdownHigh Co-drawdown Medium Co-drawdown Low Co-drawdown
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
1 AlphaGen Crucis 100.0% 18.6% 19.0% 52.6% 29.3% 28.8% 26.5% 39.8% 20.5% 39.4% 37.9% 30.9% 41.9% 32.1% 19.9% 20.1% 30.9% 48.1% 20.5% 31.1% 30.9% 62.6% 39.1%
2 Alydar Capital 15.1% 100.0% 33.6% 49.2% 22.7% 24.1% 30.3% 25.3% 55.3% 36.4% 32.0% 61.8% 44.7% 37.2% 38.5% 44.5% 39.6% 23.5% 31.1% 46.2% 56.3% 50.0% 8.7%
3 Asian Credit Hedge 21.1% 45.9% 100.0% 60.6% 15.7% 33.4% 30.5% 20.2% 46.5% 40.3% 39.5% 53.0% 42.4% 40.6% 39.6% 18.8% 35.8% 45.9% 24.2% 55.3% 66.2% 39.5% 40.0%
4 BlueTrend 27.7% 31.8% 28.7% 100.0% 15.3% 27.7% 15.6% 35.5% 44.3% 25.3% 30.0% 51.7% 30.3% 33.0% 16.0% 34.2% 31.3% 33.2% 53.3% 86.7% 37.0% 43.3% 32.5%
5 Capula Global Relative Value 28.0% 26.7% 13.5% 27.8% 100.0% 24.5% 16.0% 25.1% 37.2% 40.0% 38.9% 51.7% 31.8% 13.1% 42.8% 35.3% 17.2% 47.0% 28.7% 42.1% 42.6% 42.5% 33.1%
6 Claren Road Credit 32.2% 33.1% 33.6% 58.8% 28.6% 100.0% 23.3% 34.1% 68.1% 51.0% 30.0% 67.6% 52.8% 41.9% 52.5% 32.1% 44.1% 32.3% 34.4% 46.8% 44.1% 52.1% 74.7%
7 Davidson Kempner International 35.7% 50.2% 37.0% 40.1% 22.5% 28.1% 100.0% 35.2% 52.8% 33.1% 7.9% 62.6% 62.9% 34.9% 77.5% 48.8% 42.2% 40.1% 52.4% 50.7% 64.8% 21.1% 21.1%
8 DB Equilibria J apan 32.7% 25.6% 15.0% 55.5% 21.5% 25.1% 21.5% 100.0% 46.7% 38.5% 58.3% 47.0% 43.4% 28.6% 30.7% 37.6% 42.9% 8.5% 43.6% 49.6% 39.8% 46.9% 38.4%
9 EB Asia Absolute Return 13.8% 45.9% 28.3% 56.9% 26.3% 41.2% 26.4% 38.4% 100.0% 37.3% 30.4% 61.5% 56.1% 31.3% 45.3% 60.2% 46.0% 21.7% 39.3% 54.1% 46.2% 32.6% 40.9%
10 Exane Templiers fund 33.2% 37.6% 30.6% 40.6% 35.2% 38.4% 20.7% 39.5% 46.4% 100.0% 45.0% 68.1% 58.8% 59.0% 35.8% 43.0% 48.6% 35.5% 22.8% 36.5% 62.6% 37.5% 45.5%
11 Horizon P ortfolio Ltd 26.9% 27.9% 25.2% 40.5% 28.8% 19.0% 4.2% 50.3% 31.9% 37.9% 100.0% 38.8% 59.8% 30.3% 22.8% 25.6% 40.4% 13.2% 30.2% 41.7% 39.4% 38.1% 30.3%
12 Karsch Capital 19.5% 47.9% 30.1% 62.0% 34.1% 38.1% 29.3% 36.1% 57.4% 51.0% 34.5% 100.0% 56.2% 41.9% 40.6% 47.9% 43.4% 39.7% 39.8% 67.7% 60.2% 40.9% 41.2%
13 M&G Episode Inc. 24.8% 32.6% 22.7% 34.2% 19.7% 28.0% 27.7% 31.3% 49.3% 41.4% 50.1% 52.9% 100.0% 41.8% 32.3% 43.0% 35.8% 12.7% 24.6% 39.4% 39.2% 32.4% 37.4%
14 New Star UK Gemini Hedge USD 30.9% 43.9% 35.2% 60.4% 13.2% 36.1% 24.9% 33.5% 44.6% 67.5% 41.1% 64.0% 67.8% 100.0% 32.4% 44.5% 47.1% 42.3% 15.1% 52.0% 52.8% 44.1% 33.5%
15 OZ Overseas II 20.8% 49.5% 37.4% 32.0% 46.9% 49.2% 60.1% 39.1% 70.3% 44.5% 33.6% 67.4% 57.0% 35.3% 100.0% 48.4% 51.6% 31.6% 41.5% 47.5% 69.1% 45.7% 35.5%
16 P FM Diversified Offshore 15.2% 41.2% 12.8% 48.9% 27.8% 21.6% 27.2% 34.5% 67.1% 38.5% 27.2% 57.2% 54.5% 34.8% 34.8% 100.0% 38.4% 23.6% 21.7% 55.8% 43.0% 34.2% 33.8%
17 SCP Ocean 35.0% 55.1% 36.6% 67.4% 20.3% 44.7% 35.5% 59.2% 77.2% 65.4% 64.5% 78.0% 68.3% 55.4% 55.8% 57.8% 100.0% 24.3% 30.9% 55.2% 79.8% 43.9% 35.0%
18 TT Mid-Cap Europe Long Short 39.2% 23.5% 33.6% 51.3% 40.0% 23.5% 24.2% 8.4% 26.2% 34.3% 15.2% 51.2% 17.5% 35.7% 24.6% 25.6% 17.5% 100.0% 25.6% 60.1% 43.2% 40.9% 32.0%
19 Tudor Tensor 16.0% 29.8% 17.0% 79.1% 23.4% 24.0% 30.3% 41.4% 45.3% 21.1% 33.2% 49.2% 32.3% 12.2% 30.9% 22.5% 21.3% 24.6% 100.0% 84.3% 30.5% 31.5% 31.8%
20 Winton Futures 15.2% 27.8% 24.3% 80.6% 21.5% 20.5% 18.4% 29.5% 39.1% 21.2% 28.8% 52.5% 32.5% 26.4% 22.2% 36.2% 23.8% 36.1% 52.9% 100.0% 37.3% 37.0% 27.9%
21 York European Opportunities 26.1% 58.4% 50.3% 59.4% 37.6% 33.3% 40.5% 40.9% 57.7% 62.8% 46.9% 80.5% 55.8% 46.3% 55.7% 48.3% 59.4% 44.8% 33.0% 64.4% 100.0% 55.0% 31.0%
22 COMAC Global Macro Fund 35.3% 34.6% 20.0% 46.4% 25.0% 26.3% 8.8% 32.2% 27.2% 25.1% 30.3% 36.5% 30.8% 25.8% 24.6% 25.6% 21.8% 28.3% 22.7% 42.7% 36.7% 100.0% 31.0%
23 Brigade Lvgd. Cap. Structures Fund 31.8% 8.7% 29.3% 50.3% 28.2% 54.3% 12.7% 38.0% 49.2% 44.0% 34.7% 53.0% 51.3% 28.3% 27.6% 36.5% 25.1% 32.0% 33.1% 46.3% 29.9% 44.7% 100.0%
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15
Not just about risk management
New Board makes
its mark
New governance structure introduced
Emphasis needed for clear definition of philosophy, style and
processes
Confirmed commitment to Bespoke Portfolio product
Semi-annual review of progress with CEO
Improves portfolio
management
process
More use of top-down strategy analysis
Portfolio Manager responsibility allocated to committee members
Better quantitative tools and better use made of them
Investment Committee member linked to each manager relationship
16
Enhancing portfolio construction
Strategic Asset
Allocation
Manager Selection and
Risk Budgeting
Portfolio
Optimisation
Portfolio Scenarios
Simulations
Rigorous Testing Process
Forecasting
and Analysis
Maximum allocation
for a given risk appetite
Challenges
allocation
Evaluate performance
and risk characteristics
and validate allocations
Portfolio Construction
Optimal strategy weights
Approved manager suitability
Portfolio Management Committee approval
Rigorous testing through IAM Software
17
Backtests and forecasts
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Au
g-0
3
No
v-0
3
Fe
b-0
4
Ma
y-0
4
Au
g-0
4
No
v-0
4
Fe
b-0
5
Ma
y-0
5
Au
g-0
5
No
v-0
5
Fe
b-0
6
Ma
y-0
6
Au
g-0
6
No
v-0
6
Fe
b-0
7
Ma
y-0
7
Au
g-0
7
No
v-0
7
Fe
b-0
8
Ma
y-0
8
Mo
nth
ly R
etu
rn
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mu
lative
Re
turn
Monthly Portfolio Returns (LHS) MSCI World Index (US$) (RHS) Cumulative Portfolio Returns (RHS)
Historical backtest
Simulated forecast
-5%
0%
5%
10%
15%
20%
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Cum
ulat
ive
Ret
urns
95th Percentile
80th Percentile
Mean
Median
20th Percentile
5th Percentile
0%
1%
2%
3%
4%
5%
6%
7%
-20% -10% 0% 10% 20% 30% 40%
Future views and confidence
Neutral
Negative Positive
Mixed
Stress test
-4.0%Worst Case
Expected outcome
Scenario
3.1%+20%Equity
-3.1%-20%
0.1%+100bpFixed Income - Rates
-0.1%-100bp
0.1%DoubleFixed Income - Credit
-0.1%Halve
-0.5%-20%
0.5%+20%Commodities
-0.2%-10%
0.2%+10%Currencies
-4.0%Worst Case
Expected outcome
Scenario
3.1%+20%Equity
-3.1%-20%
0.1%+100bpFixed Income - Rates
-0.1%-100bp
0.1%DoubleFixed Income - Credit
-0.1%Halve
-0.5%-20%
0.5%+20%Commodities
-0.2%-10%
0.2%+10%Currencies
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Manager contribution
All-weather manager
Contribution to Positive Months Contribution to Negative Months
Bell-weathermanager
18
Concluding thoughts
Was this an Ancient Greek Tragedy?
- Hubris, Nemesis and Catharsis
Or a painful learning experience?
- Bespoke portfolios work
- Keynes was right about the long term
- Liquidity, transparency and simplicity
- Process, process and process
Maintain your own equilibrium
- Have a thick skin, but admit your failings
- Be part of the solution not the problem
- Stand up for what you believe
19
This document was prepared by IAM, a company authorised and regulated by the Financial Services Authority (FSA). The information contained herein is not for distribution and does not constitute or form part of any offer, recommendation or invitation to participate in any product. It does not take into account the investment objectives, financial situation and particular needs of any investor. Any investor or prospective investor should consider whether such investment is appropriate to their particular investment needs and financial circumstances and consult the offering memoranda of the product which are available upon request. Past performance is no indication or guarantee of future performance. The value of investments may fluctuate and prospective investors may not recover the full amount initially invested. The products described herein are not subject to approval or regulation by the FSA and as such the Financial Services Compensation Scheme will generally not apply.
This document has been prepared by IAM on information available to them and has not been independently verified. Accordingly, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information contained in this document. No liability whatsoever is accepted for any loss arising from any use of this document or its contents. This document is being supplied to you on the basis that you are an entity of a type falling within one of the approved categories described in the Financial Services and Markets Act 2000 and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose. By accepting receipt of this document, you agree to be bound by the limitations set out above.
IAM uses data from the following sources: Bloomberg, EurekaHedge, Hedge Fund Research Inc., Morgan Stanley Capital International Inc., Morningstar, IAM and the relevant Administrators.
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