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The Hedge Fund Phenomena

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The first three years of the 21st century brought one of the worst bear markets ... ( Peters and Waterman -1992) Criteria for success. Skill ' ... – PowerPoint PPT presentation

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Title: The Hedge Fund Phenomena


1
The Hedge Fund Phenomena
  • Daniel Broby
  • Head of Hedge Funds

2
Background
  • Active versus passive management
  • Fees
  • Fund performance
  • Fund cost structure
  • Role of advisers, consultants and investment
    banks
  • Product differentiation

3
The bear outside.
4
The real bear.
The first three years of the 21st century brought
one of the worst bear markets in history with
equity markets falling by some 40 in real terms
5
The present
6
Savings continue to grow
  • European demographics make the asset management
    industry very attractive
  • Pension funds in continental Europe will have to
    seek alternative sources of return.
  • Flows into savings in Germany, France, Italy, and
    Spain alone could total 4.5 trillion or more.

7
Hedge funds are the current hot topic
8
Dramatic growth in alternatives
Kilde Financial Times
9
Where does double alpha come from?
Stock X (Cheap)
Direction of Movement
Direction of Movement
Required Return
Rf
Stock Y (Overpriced)
Systematic Risk (Beta)
10
Hældingen på denne linie udtrykker Sharpe Ratio
Hedge-fonde
x
100 aktier
Ingen diversifikationseffekt
100 obligationer
Risikofrit afkast
11
  • Alpha and beta are being seperated
  • Alpha and beta are being leveraged
  • Paying for beta is not economic

12
Also, the industry must change the way it views
forecasting.
Risk
Historic Corrolation
Information advantage
Ex post
Ex ante
Analysis
Skill and timing
Return
13
A failure in governance...
14
Aided by an abused reporting system
15
A variety of hedge fund strategies
16
Kilde CSFB/Tremont
17
BI Pension Hedge Stabil (PAL)
18
(No Transcript)
19
Criteria for success
Structure
Systems
Strategy
Hedge fund
Staff
Style

Skills
In search of excellence Lessons from Americas
best run companies. (Peters and Waterman -1992)
Skill
20
  • There is little to fear from the Hedge funds.
    They are strongly regulated by those who extend
    the loans to them and they are not all that
    significant a factor in the context of the system
    anyway.

21
The LTCM All Star Team
John Meriwether Founder 1994 Former SB
Myron Scholes
Robert Merton
David Mullins
Kilde Søren Plesner
22
Leverage has risk
23
Hedge funds have to focus onoperational risk and
business risk
24
BI Hedge Stabil (PAL)
BI Hedge Stabil
Intern risikostyring
Ekstern risikostyring
Fixed Income Arbitrage
Equity Market Neutral
Dansk realkredit G3 renter
Kredit obl.
Højrente obl.
Udviklede markeder
Emerging markeder
Nuværende teams
25
Market neutral via pair trades
  • Pair Trading is an arbitrage strategy. It is
    based on the simultaneous buying and selling of
    stocks/bonds constrained by a stable relationship
    and is implemented when there is a deviation in
    this relationship.
  • The arbitrage gain stricto sensu depends on the
    timing of the trade.
  • We want to have a mix of long term winners/losers
    versus opportunity trades
  • It is Bankinvest view that we want the long to be
    fundamentally on our side
  • It costs money to borrow stock.

26
Equity rules
  • Equity positions (other than arbitrage) over 5
    must have explanitory detail from the portfolio
    manager responsible for equities and approval
    from the Managing Director of BIAM.
  • Cross border or equity class arbitrage trades
    should not exceed 15 weight.
  • For Equities, maximum gearing shall be 400 of
    capital. BIM should seek explaination if it
    exceeds 250.
  • Rebalancing can be effected by the either the
    Head of Hedge Funds or Risk Control within the
    10 directional tollerance guidelines.

27
Bond rules
  • Corporate credit positions over 5 must have
    explanitory detail from the portfolio manager
    responsible for corporate bonds and approval from
    the Managing Director of BIAM.
  • Single investment grade government and Danish
    mortgage positions should not exceed 50 of
    capital of the fund.
  • For bonds, maximum gearing shall be 1250 of
    capital. BIM should seek explaination if it
    exceeds 600

28
Pre-approved success/failure criteria
  • Timed out e.g. I expect the stock to profit
    warn in the next month.
  • Event driven e.g. a clear breakdown in
    traditional relationship between the pair.
  • Price target competitive advantage trades based
    on DCF or HOLT analysis.
  • Stop loss
  • Stop profit

29
Monto Carlo
30
(No Transcript)
31
Bonds
32
Risk down to PM level
33
Conclusion
  • Hedge fund phenomena is a response to the failure
    of traditional asset management to deliver
    satisfactroy absolute returns.
  • Flow into asset class driven by desire for double
    alpha returns.
  • Risk control and systems critical to long term
    success.
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