Tactical Portfolios E-Book

Bailey McCann

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 385

Veröffentlichungsjahr: 2014

Beschreibung

Take an active management approach with liquid alternatives to increase R.O.I. Take advantage of inefficiencies in the market by investing in alternative assets. Hedge fund and private equity investment diversifies your portfolio and helps shield you from market volatility, allowing your more passive assets to work the long game. In Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives, author Bailey McCann guides you through the principles of hedge fund investment and the associated philosophies of risk management strategies. McCann's background in reporting and analyzing government policy and regulatory issues positions her as a valuable source of strategic investment advice. As Senior Editor of Opalesque's Alternative Market Briefing, her take on the market is read by every one of the top 100 hedge fund managers on a daily basis. In Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives, McCann goes in-depth on important topics. * Strategies for equities, managed futures and fixed income * What to expect and common misconceptions * Investment mechanics of specific strategies * Valuation, red flags, and regulatory changes If your passive approach has failed to produce the desired results, liquid alternative investment may be the answer. While long/short will always be around, external forces can change its impact on your portfolio and it may be time to expand your investment arsenal. Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives will help you get the most out of any market.

Leseprobe

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Tactical Portfolios

Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives

BAILEY McCANN

with contributions from Opalesque Editors

Cover image: top: © Fanatic Studio / Jupiter Images bottom: © Photodisc / Jupiter Images

Cover design: Wiley

Copyright © 2014 by Bailey McCann. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-118-73162-8 (Hardcover) ISBN 978-1-118-73158-1 (ePDF) ISBN 978-1-118-73163-5 (ePub)

Contents

Introduction

Preface

CHAPTER 1 Hedge Fund Strategies and How They Work

Investor Evolution

Major Fund Strategies

Summary

Notes

CHAPTER 2 Emerging Managers Benedicte Gravrand

What are Emerging Managers and Who Invests in Them?

Summary

Notes

CHAPTER 3 How to Approach Investing in Hedge Funds: Investment Structures

Allocation Types

Summary

Notes

CHAPTER 4 How to Approach Investing in Hedge Funds: Service Providers and Due Diligence

Meet the Service Providers

Moving Beyond the Checkbox Risk Assessment

Summary

Notes

CHAPTER 5 Regulatory Regime Changes and Impact

DODD-Frank Act

FATCA

Jobs Act

AIFMD

MiFID

EMIR

Summary

Notes

CHAPTER 6 Managed Futures Mark Melin

Exploring Different Ways to Trade Managed Futures

Strategy Risk Considerations

How to Evaluate a CTA

The P(A|B) Method to Analyze and Supervise a Managed Futures Investment

Uses of the P(A|B) Method in CTA Rankings/Risk Analysis

What about Managed Accounts?

Summary

Notes

CHAPTER 7 Investment Mechanics

Diversification: Real and Imagined

The Hedge is the EDGE’Types of Hedges

Tail Risk Hedges for Retail Investors

Derivatives

Summary

Notes

About the Author

About the Contributors

Additional Resources

Index

List of Tables

Chapter 1

Table 1.1

Chapter 2

Table 2.1

Table 2.2

Table 2.3

Table 2.4

Table 2.5

Table 2.6

Table 2.7

Table 2.8

Table 2.9

Table 2.10

Table 2.11

Table 2.12

Chapter 4

Table 4.1

Chapter 5

Table 5.1

Chapter 6

Table 6.1

List of Figure

Chapter 2

Figure 2.1

Figure 2.2

Figure 2.3

Figure 2.4

Chapter 4

Figure 4.1

Figure 4.2

Figure 4.3

Chapter 6

Figure 6.1

Chapter 7

Figure 7.1

Figure 7.2

Guide

Cover

Table of Contents

Introduction

Preface

Chapter

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Introduction

In just one decade, stocks have halved two times. After reaching a new high in the first quarter of 2000, the MSCI World stock index found a bottom in September 2002 following the dot.com crisis. The index, which captures large and mid-cap stocks, lost over 48 percent while hedge funds (as measured by the HFR Weighted Composite Index) were up net of fees 2.1 percent. When the global financial crisis took stocks down over 50 percent from their tops in early 2007 through October 2009, hedge fund investors were reaping over 6 percent during the same time.

Helped by floods of quantitative easing, many global stocks have reached new highs in 2013.1

You would think that investors would now “hedge their bets” and move to hedge funds to protect their assets and establish a meaningful diversification. The “smart” money has done this, maintaining a significant allocation to hedge funds.

INVESTORS EXIT HEDGE FUNDS AT FASTEST RATE IN FOUR YEARS

“Investors exit hedge funds at fastest rate in four years”, says a Reuters headline on January 13th, 2014. The article refers to the SS&C GlobeOp Capital Movement Index which calculates monthly hedge fund subscriptions (in-flows) less redemptions (out-flows). With −3.56 percent, December 2013 showed the biggest drop since September 2009. The article continues that “while the end of the year period usually sees a pick-up in redemptions as investors look to move money around their portfolio ahead of the New Year, December’s reading is notably high. In the same month last year the index measured minus 2.61 percent.”2

For 2013, SS&C GlobeOp’s Hedge Fund Performance Index was up 12.32 percent, which is about half of the return of the MSCI World Index. So, hedge funds have performed well, but maybe not good enough?

Today (January 14th, 2014), as I write this introduction, another interesting story: “Global stocks fall on concerns about earnings”—is angst coming back to the markets?3 Right now, we don’t know what will happen and may soon enter an environment where investors wish they had invested more in hedge funds and absolute return strategies than in long-only equity.

Alexander Ineichen, one of the most well-known researchers on hedge funds globally, offers the following advice: “Equity investors have been dancing on thin ice and might continue to do so. It’s difficult to say how long the ice holds. I’m quite certain though, that at one stage a hedged approach will reveal itself as more intelligent than a long-only approach. Again. To stick with the metaphor: A long-only investment style is like dancing on thin ice, while a long/short investment style is like dancing on thin ice wearing swimmies: it might look odd at times but it’s safer.”4

LEARNING FROM YALE: 51 PERCENT ALLOCATION TO ALTERNATIVE INVESTMENTS

Yale’s $20bn endowment has included alternative investment strategies for over 20 years now. The so-called “endowment model” aims to achieve superior returns by shifting a significant portion of investments away from traditional stocks and bonds into carefully selected alternative investments like private equity, hedge funds, real estate, and others.

While the global financial crisis also managed to drawdown the value of Yale’s endowment 24.6 percent in the fiscal year ending June 2009, the endowment model is still regarded the most viable proposition for long-term investors. How does Yale invest? For 2014, Yale’s investment targets include a massive 51 percent allocation to alternatives, while only 17 percent is reserved for international and domestic U.S. equities.5

Yale’s investment team, made up of 26 experts, are of course, not the only institutional investors who look to create tactical portfolios using alternative investments for both return and diversification goals. Ninety-four percent of institutional investors surveyed by Russell Investments said they already allocate to some form of alternatives, on average 22 percent of total assets. This already represents a significant allocation, which over time will only continue to go up. In the last three years, alternative mandates accounted for over 40 percent of all institutional hiring activity made during this period.

HEDGE FUNDS, EMERGING MANAGERS, LIQUID INVESTMENTS, AND MANAGED FUTURES

With an average allocation of probably in the single digits, private investors, together with a lot of their investment advisers, stand on the other side in this game of investing. There is a lot to catch up, and like in sports, a good start is always to look at the rules, and how the other players play the game.

When I started to research and publish about hedge funds and alternative investments in early 2003 under the umbrella of my company Opalesque, little did I know that hedge funds would grow from around $600 billion at that time to close to $3 trillion. Still, compared to endowments, family offices and foundations, hedge funds and alternative investment are largely underrepresented in the portfolios of insurance companies, private and public sector pension funds, sovereign wealth funds, and, of course, of private investors.

Liquid alternatives are one of the fastest growing sectors of the financial industry globally. Depending on the respective regulatory framework of the funds, liquid alternatives are mostly offered in a mutual fund format. They often have smaller minimum investment thresholds, making investments in alternative strategies easier for many investors. The investment options for professional and retail investors are growing rapidly, but still, the number one requirement when selecting any alternative investment is to understand the strategy.

In this respect, managed futures are probably among the least understood investment strategies, even for many institutional investors. On the other hand, managed futures have been around for decades, and many programs have been going for long periods during which they have proven their value of adding true diversification to a portfolio during periods of market stress and crisis.

We wrote this book to help you to better understand and utilize the new options tactical portfolios of alternative investments are offering you. Myself and the editorial team of Opalesque are at your disposal—you can email us any time your questions, suggestions and feedback at [email protected].

Matthias Knab

Founder and CEO of Opalesque

NOTES

1. MSCI World, www.msci.com/products/indices/performance.html.

2.www.reuters.com/article/2014/01/13/us-hedge-funds-data-idUSB REA0C1GK20140113.

3.www.livemint.com/Money/t9gCdLJUksAnPkDPca2EUP/Opening-Bell-14-January—Global-stocks-fall-on-concerns-abo.html.

4.www.opalesque.com/RT/ZurichRoundtable2014.html.

5.http://news.yale.edu/2013/09/24/endowment-earns-125-return.

Preface

Tactical Portfolios is a book designed to help investors, investment advisors, and anyone interested in alternative investments understand what hedge funds and liquid alternatives are and what they do. The book attempts to show different strategies hedge fund managers employ and how they work in a portfolio. We also walk the reader through the various service providers and regulations impacting the industry in the wake of the financial crisis.

The book closes with a discussion of what diversification and hedging really are in an effort to help investors avoid the potentially fatal flaw of exposure risk. I hope you find the text valuable and easy to read.

I would like to thank all of the managers who have been generous with their time and expertise, as well as the Opalesque editors, Opalesque Publisher Matthias Knab, and Olivier Blanchard, who gave me great starting advice for this book. Finally, I’d like to thank E’lona McCann for her advice and support.

Bailey McCann

January 2014

CHAPTER 1Hedge Fund Strategies and How They Work

Until recently, most investors maintained a traditional portfolio construction of 60 percent in stocks, 20 to 30 percent in bonds, and the rest in cash. That 60 percent was managed passively, using the buy and hold method, with bets placed only on the long side of the trade. That means that investors’ only hope was for equities to go up in perpetuity, which as we all know, never actually happens. Markets correct, outside events force sell offs, companies go bust. This is where alternatives come in, helping some of the biggest players in the market mitigate losses during those tough times.