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2
Ermitage profile
� Founded 1975 – 1st hedge fund investment 1984
� Owned by Management and Caledonia Investments
� $1.8bn assets under management
� 46 employees, offices in Jersey, London, New York
� Fund of hedge funds, single manager hedge funds &
wealth management absolute return portfolio
3
Hedge Fund strategy classification
Long Short Equity
� Traditional
� Market Neutral
� Systematic
� Quantitative
Relative Value
� Volatility Strategies
(Convertible Arbitrage &
Volatility Arbitrage
� Event Driven (e.g. Merger
Arbitrage)
� Distressed Debt
� Fixed Income & Credit
Arbitrage
� Multi-Strategy Arbitrage
Directional
� Macro & CTA:
- Discretionary
- Systematic Trend Following
- Systematic Non-Tend Following
� Commodities & Resources
4
What is Long Short Equity?
� A smart way to manage equity exposure, not a separate asset class
� Managers can buy shares – and sell shares short
� Profit from falling markets & relative value between shares
� Generate profit, irrespective of market direction (i.e. alpha)
� Flex market exposure (gross/net)
…adaptability to market opportunity and risks
5
Trade example 1 – index hedge
Long only (Traditional):
Buy 1 share Unilever
Rationale:
� Defensive/ undervalued,
should hold up in recession
Long Short (Hedged):
Buy 1 share Unilever
Short FTSE Futures
Rationale:
� High probability Unilever will
outperform FTSE index
6
Trade example 2 – relative hedge
Long only (Traditional):
Buy 1 share Unilever
Rationale:
� Defensive/ undervalued,
should hold up in recession
Long Short (Hedged):
Buy 1 share Unilever
Short Premier Foods
(debt-ridden rival)
Rationale:
� Unilever should outperform rival
� ‘Same sector’ hedge
� Potential ‘double alpha’ trade
7
Short trades
Short (Hedged):
Short Premier Foods
Buy FTSE
Rationale:
� Strong negative view on
Premier Foods vs. the market
Short (Hedged):
Short Premier Foods
Buy Unilever
Rationale:
� Strong negative view on Premier
Foods, hedged with Unilever
� Direction of market not important to make money
8
Gross and net exposure
Gross exposure:
� Sum of ‘longs’ and ‘shorts’…
+75% combined long positions
+50% combined short positions
+125% gross exposure
� Management of gross and net exposure key to effective risk management
� Net and gross levels reflect manager’s view on market
Net exposure:
� ‘Longs’ minus ‘shorts’…
+75% combined long positions
-50% combined short positions
+25% net exposure
9
Gross exposure
The sum of longs and shorts e.g....
+75% aggregated long positions
+50% aggregated short positions
+125% gross exposure
= Total market exposure if relative value trades
reverse (e.g. ‘08 deleveraging)
= Level of active trades (& confidence level)
� Manager benefits from leveraging idiosyncratic stock picking skill (i.e. active risk)
Gross exposure
� Manager has 25% leverage; if longs � and shorts �, he can lose at 1.25X the rate of a
long-only investor (with same longs)
… i.e. his hedges have also now become loss-making, adding to rate of loss
10
Net exposure
The sum of longs minus shorts e.g.
+75% aggregated long positions
-50% aggregated short positions
+25% net exposure
= Net adjusted exposure to market
= Overall trade direction (if correlation / relative
trade assumptions prove correct)
� Manager only has 25% net exposure – could be highly defensive in falling market
– i.e. short positions act as hedge to market beta in sell-off
Net exposure
� Low net managers provide lower volatility returns, over time
� In strong bull market, lower net exposure can mean lower performance vs. index
11
Long Short Equity
Manager Style
Traditional
(fundamental
stock-pickers)
Market Neutral /
Contrarian Top Down
DynamicNiche
Portfolio diversification – sub strategies
12
Gross Expsoures
0
25
50
75
100
125
150
175
200
225
250
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Gro
ss %
Gross L/S Traditional
Gross L/S Contrarian & MN
S&P NAV
Source: Ermitage Group and Bloomberg
Gross exposure management
- 1400
- 1300
- 1200
- 1100
- 1000
- 900
- 800
- 700
- 600
S&
P 5
00
13
Source: Ermitage Group and Bloomberg
Gross exposure management
Gross Expsoures
0
25
50
75
100
125
150
175
200
225
250
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Gro
ss %
Gross L/S Traditional
Gross L/S Contrarian & MN
Gross L/S Top-Down Dynamic
S&P NAV- 1400
- 1300
- 1200
- 1100
- 1000
- 900
- 800
- 700
- 600
S&
P 5
00
14
Source: Ermitage Group and Bloomberg
Net exposure management
-25
0
25
50
75
100
125
150
175
200
225
250
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Net
%
Net L/S Traditional
Net L/S Contrarian & MN
Net L/S Top-Down Dynamic
S&P NAV
S&
P 5
00
- 1400
- 1300
- 1200
- 1100
- 1000
- 900
- 800
- 700
- 600
15
Source: Ermitage Group and Bloomberg
Net exposure management
-25
0
25
50
75
100
125
150
175
200
225
250
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Net
%
Net L/S Traditional
Net L/S Contrarian & MN
Net L/S Top-Down Dynamic
S&P NAV
- 1400
- 1300
- 1200
- 1100
- 1000
- 900
- 800
- 700
- 600
S&
P 5
00
16
� Managers adjust net & gross through market cycle – adds value vs. long-only
� Most L/S managers are ‘traditional’ – and highly correlated
� Therefore, vital to blend mix of styles within portfolio
� Aim: create ‘all weather’ portfolio with significant downside protection
Long / Short Funds – Portfolio construction
17
Myth # 1: “I can time equity markets”
S&P 500 since 1994 – Capturing or missing 5 best equity months
Source: Ermitage Group and Bloomberg
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Jan-
94
Oct
-94
Jul-9
5
Apr
-96
Jan-
97
Oct
-97
Jul-9
8
Apr
-99
Jan-
00
Oct
-00
Jul-0
1
Apr
-02
Jan-
03
Oct
-03
Jul-0
4
Apr
-05
Jan-
06
Oct
-06
Jul-0
7
Apr
-08
Jan-
09
S&P 500
(fully invested)
S&P 500
(missing 5 best months)
18
Myth # 1: “I can time equity markets”
S&P 500 since 1994 – Capturing / missing 5 best or 5 worst equity months
Source: Ermitage Group and Bloomberg
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Jan-
94
Oct
-94
Jul-9
5
Apr
-96
Jan-
97
Oct
-97
Jul-9
8
Apr
-99
Jan-
00
Oct
-00
Jul-0
1
Apr
-02
Jan-
03
Oct
-03
Jul-0
4
Apr
-05
Jan-
06
Oct
-06
Jul-0
7
Apr
-08
Jan-
09
S&P 500
(fully invested)
S&P 500
(missing 5 best months)
S&P 500
(missing 5 worst months)
19
Myth # 2: Equities rise over time, so why hedge?
���� Nikkei same level as mid 1980’s
���� Same with S&P 500…a zero sum
game if invested since 1996
Nikkei performance since late 1970’s
S&P 500 performance since late 1995
Source: Bloomberg
Last 10265.98High on 12/29/89 38957.44Average 15989.90Low on 10/26/79 6207.89
Last 1044.38High on 10/12/07 1576.09Average 1118.35Low on 09/01/95 555.71
���� Long short is about accessing
absolute returns, not assuming
markets trend up!
20
Capital preservation in stressed equity markets
European Absolute Fund vs. MSCI Europe in 15 worst equity months: Dec 1999 – Aug 2009*
� Capital preservation in stressed equity markets is key
-20%
-15%
-10%
-5%
0%
5%
10%
Sep
-02
Oct
-08
Sep
-08
Jul-0
2
Jan-
08
Sep
-01
Jun-
08
Feb
-09
Jun-
02
Dec
-02
Feb
-01
Jan-
03
Jan-
09
Jan-
00
Aug
-01
Ermitage European Absolute Class B EUR MSCI Europe
(Av. return 0.33%) (Av return: -9.32%)
Source: Ermitage Group and Bloomberg. *August 2009 estimate – Ermitage European Absolute Fund Class B EUR
Performance figures for Class B EUR reflect the performance of the Class EUR shares adjusted for the effect of a performance fee and a different administration fee.
21Myth # 3: “Capital preservation isn’t essential…I can recapture my loss”
� Here’s how the maths works…
� Downside protection key to consistent long term capital appreciation
Client A – in Ermitage European
Absolute Fund Class EUR
Down 1.89% in 2008
Needs 1.93% to get back to flat
Client B – in MSCI Europe Total
Return Index EUR
Down 38.9% in 2008
Needs X%? to get back to flat
Answer: 63.7%
22
Myth: “FoHF’s charge high fees and are high risk”
400
600
800
1000
1200
1400
1600
1800
2000
2200
Nov
-99
Aug
-00
May
-01
Feb
-02
Nov
-02
Aug
-03
May
-04
Feb
-05
Nov
-05
Aug
-06
May
-07
Feb
-08
Nov
-08
Aug
-09
Ermitage European Absolute Fund Class B EUR
MSCI Europe Total Return Index
Euro Cash
Source: Ermitage Group and Bloomberg *Sept 2009 estimate – Ermitage European Absolute Fund Class B EUR
Performance figures for Class B EUR reflect Class EUR shares adjusted for the effect of a performance fee and a different administration fee.
Ermitage European Absolute Fund vs. MSCI Europe cumulative performance: Dec 99 - Sept 09*
European Absolute Fund B EUR: Av. return: 7.51% paStd. Dev: 4.83%
MSCI Europe TR Index EUR:Av. return: -0.13% paStd. Dev: 17.37%
Euro Cash
23
1. “Haven't hedge fund managers crowded themselves out of trades?”
2. “With liquidity falling, volatility rising and markets moving down, why should I
invest in equity long short?”
3. “Have the changes to legislation had a negative impact on equity long short funds
– and their ability to execute their strategy?”
4. “What about the risk of fraud – Madoff?”
Current questions
24
� Equity long short funds are not a separate asset class
� They are an essential tool for portfolio management
� Ability to adapt is key to success
� Capital preservation & power of compounding not to be underestimated
� Key to performance – portfolio construction / robust risk management
� Hedge fund industry suffered in 2008, but we believe many strategies will offer
outsized returns going forward
Summary – Equity Long Short
25
Company overview │ Investment approach │ Risk management & ODD │ Client solutions │ Summary
25
DISCLAIMER Ermitage Global Wealth Management Jersey Limited is registered with the Jersey Financial Services Commission under the Financial Services (Jersey) Law 1998 for the conduct of investment business and
fund services business and has issued this publication which is for private circulation only, is published solely for information purposes and does not constitute an offer to sell or an invitation to buy any of the securities or
funds mentioned herein or any other financial instruments. Subscriptions will only be received and units or shares issued on the basis of the current offering documents) for the fund and prospective investors should
carefully consider the risk warnings and disclosures for the fund set out therein. Investors should also consider any other factors that may be relevant to their circumstances. The investor must make an independent
assessment of any legal, credit, tax, regulatory and accounting issues and determine with his or her professional advisors any suitability or appropriateness implications of any transaction contemplated or referred to herein.
Units or shares in the fund are not for sale in any jurisdiction in which such sale would be prohibited. Whilst reasonable efforts have been made to ensure the accuracy of the information herein, which is based on proforma,
estimated or unaudited figures, the Ermitage Group accepts no responsibility for its accuracy, nor the reasonableness of the conclusions based upon such information. The contents of this document are believed to be
accurate at the date hereof but are subject to change without prior notification. Past performance is not a guarantee of future performance. The price of units or shares can go down as well as up and may be affected by
changes in rates of exchange. An investor may not receive back the amount invested. Important information for South African (SA) Residents: When issued in SA, issued by Ermitage Global Wealth Management Jersey
Limited, a representative of STANLIB Wealth Management Limited ("STANLIB"), an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act, 2002, with FSP No 26/10/590.
STANLIB's contact details are as follows: 17 Melrose Boulevard, Melrose Arch, 2169, P O Box 202, Melrose Arch, 2076, Tel +27 (0) 11 - 448 6000, Fax 0867 277 505, contact centre 0860 123 003, www.stanlib.com.
Ermitage Asset Management Jersey Ltd Ermitage
Global Wealth Management Jersey Ltd
47 The Esplanade, St Helier, Jersey
Channel Islands JE1 9LB
Tel: +44 (0) 1534 615500
Fax: +44 (0) 1534 615520
Ermitage UK Ltd
25 Savile Row, London, W1S 2ES
Tel: +44 (0) 207 333 0900
Fax: +44 (0) 207 333 0443
Ermitage Americas Inc
Suite 917, 9th Floor, 330 Madison Avenue
New York, NY 10017
Tel: +1 646 495 5665
www. ermitagegroup.com