FINANCIAL CONVERGENCE

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FINANCIAL CONVERGENCE

• PRESENTATION TO
• CADC 2005
• AUGUST 18, 2005
• PIERRE SAINT-LAURENT, CFA, CAIA

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Hedge fund TCI to launch long-only investment
fund By Norma Cohen Financial Times August 11
2005
The Children's Investment Fund (TCI), is to form
a long-only investment fund. The move is part
of a growing trend among hedge fund groups to
diversify their product mix, and signifies an
increasingly blurred distinction between hedge
funds, traditional fund managers and private
equity investors
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SOME ISSUES

• 21st CENTURY LOWER RISK PREMIA
• ACTUARIAL DEFICITS
• EVER-INCREASING
• (DOWN) MARKET SYNCHRONIZATION
• CHEAP (ER) BETA
• TALENT RARITY
• ?CHANGE IN OUTLOOK
• ?PARADIGM SHIFT?

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MARKET DRIVERS

• 21st CENTURY LOWER RISK PREMIA AND FI YIELDS
• ACADEMIC DEBATE AND RESEARCH
• OPERATIONAL CHALLENGE
• ACTUARIAL DEFICITS
• WAKEUP CALL
• NEW OUTLOOK ON ATTAINING OBJECTIVES
• INTEGRATION OF PORTFOLIO MANAGEMENT TO NEW ASSETS

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TECHNICALITIES

• EVER-INCREASING
• MARKET SYNCHRONIZATION
• CHAN, GETMANSKY, HAAS AND LO (2005) LOWER
  EXPECTED RETURNS, INCREASING SYSTEMIC RISK
• ASNESS (2005) HEDGE FUNDS INCREASE FINANCIAL
  BIODIVERSITY AND CONTRIBUTE TO FINANCIAL MARKETS
  STRENGTH
• RISK MANAGEMENT A SAFER WORLD?

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DR. HEDGE
ANOTHER LIGHT TRADING DAY
LITTLE do THEY KNOW
... WITH MY ORBITING DERIVATIVES gun, I can
destabilize ANY market I please.
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WHATS CHANGED

• CHEAP (ER) BETA
• CORE-SATELLITE APPROACH
• BREADTHDEPTH INDEX (SYNTHETIC)
• FOCUS ON ALPHA, ALPHA PORTING, ETC.
• HIGH ALPHA IS NOT CHEAP
• HIGH ALPHA IS NOT COMMON

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KPMG SAYS

• IT IS EVIDENT THE INDUSTRY CERTAINLY DOES NOT
  HAVE THE INFRASTRUCTURE TO SUPPORT THE WALL OF
  MONEY FROM INSTITUTIONAL CAPITAL.
• OPERATIONAL RISK BECOMES A KEY RISK IN FUTURE
• QUALITY CAPACITY TO BECOME SCARCE, ACCORDING TO
  FoHF MANAGERS SURVEYED
• FINDING ALPHA BECOMES DIFFICULT/EXPENSIVE (WHEN
  NOT CAPPED)

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CONVERGENCE ISSUES

• STREAMLINING THE ANALYTICS
• COMMINGLING ALTERNATIVE ASSETS IN LONG-ONLY
  PORTFOLIOS
• DIFFERENT ASSETS, DIFFERENT REPORTING, DIFFERENT
  METRICS
• OPTIMAL ALTS ALLOCATION BETWEEN 0 AND 100 (!?)
• STREAMLINING THE LANGUAGE
• COMMITTEE COMFORT ZONE
• FIDUCIARY ROLE AND RESPONSIBILITY

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CONVERGENCE ISSUES

• DOUBLE STANDARDS IN
• TRANSPARENCY
• LIQUIDITY
• LEVERAGE
• SHORT POSITION ACTIVITY
• LEGAL DOCUMENTATION
• ANALYTICS REQUIRED
• TANSTAAFL

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CONVERGENCE ISSUES

• REGULATORY CONCERNS
• HUGE DEBATE MORE REGULATION?
• IF SO, HOW?
• WHAT WILL REGULATION ACCOMPLISH?
• SEC REGISTRATION SEEN BY SEVERAL AS A THICKER
  STACK OF PAPER

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DR. HEDGE
QUICK, REGULATOR BOY- WE HAVE TO ACT
MEANWHILE, AT MARKET AUTHORITY HEADQUARTERS-
SENSORS INDICATE SUSPICIOUS ACTIVITY in
SECTOR 5.

After a spike in volatility, Markets QUICKLY
Stabilized TODAY...
While Equilibrium Man AND Regulator Boy are
diverted, I can unleash the real
threat.
My plan is WORKING
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AS A RESULT OF ALL THIS

• PRIVATE EQUITY PLAYERS MOVING INTO HEDGE FUNDS
  (e.g., Carlyle)
• HEDGE FUNDS INVESTING IN PRIVATE EQUITY (e.g., DE
  Shaw, Hamilton Lane)
• HEDGE FUNDS GOING INTO LONG-ONLY (e.g., TCI)
• HOWEVER- HENRY KRAVIS
• "HEDGE FUNDS KNOW HOW TO PICK STOCKS AND MAKE
  MONEY, BUT THAT IS NOT THE SAME THING AS CREATING
  VALUE THROUGH OWNERSHIP OF AN ASSET OVER THE LONG
  TERM IN A HANDS-ON WAY. THEY LACK THE RIGHT
  SKILLS OR EXPERIENCE TO MAKE A SUCCESS OF TURNING
  AROUND OR BUILDING PRIVATE COMPANIES."

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THANK YOU.

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