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The Hilltop Decorrelated FundDelivering decorrelated returns in a highly correlated environment
The Hilltop Decorrelated Fund was down 0.2% in August, with half our sixteen managers up and half down. Theattributionofbothwasverysimilar(grossthefundwasflat)withcostscarryingusdown0.2%.Nofundsperformedoutsideofexpectations.AsmentionedinourJulyfactsheet,wearecurrentlyundertakingacomprehensivereviewofourentireshortlist,unsatisfiedaswearewithperformanceyeartodate.Thisprocesshashighlightedanumberofoutstandingmanagersexploitingnicheopportunitysets,whichwebelievewillcontinuetodeliverstronglyasymmetricreturns,quiteindependentofmarketconditions.Wehavestartedtoaddfourofthesefundstotheportfolio(twoinAugustandtwoinSeptember)andexpectacouplemoretofollowsuitshortly.Weareconfidentthatthesechanges,oncefinalised,willhelppushourmonthlyreturnsclosertoourtargetof+0.9%eachmonth(not,ofcourse,inastraightlinebutwithrelativelyfew(andminor)losingmonthsandwithnodiscerniblecorrelationtotraditionalbenchmarks.
Monthly perf (%)* Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD2013 -0.8 0.3 0.1 0.5 -1.0 -0.2 0.5 -0.2 -0.82012 1.3 1.2 1.3 1.2 0.5 1.0 0.8 -0.3 0.3 -0.1 -0.3 2.7 9.72011 2.6 0.0 0.7 2.8 2.0 1.2 2.2 -0.4 2.0 0.4 3.6 4.2 23.22010 0.1 2.7 0.6 1.7 1.5 0.1 0.5 3.1 1.0 2.5 0.8 1.7 17.52009 2.7 -0.3 1.4 2.3 2.6 0.3 1.8 0.2 1.9 2.1 3.6 1.1 21.72008 2.3 -0.3 -1.5 0.5 2.9 1.4 -0.3 0.3 -0.7 5.1 3.0 1.8 15.0*Proformaresultsareshadedingrey.Resultsareshownnetofallfeesandcostsassumingafundsizeof$20mexcludinganyredemptionfees.
2008 2009 2010 2011 2012-6%
0%
6%
2008 2009 2010 2011 2012The Hilltop Decorrelated Fund MSCI World IndexHFRI Fund Weighted Composite Index HFRI FoF Composite Index
$0
$250
$100
Risk metrics (January 2008 – August 2013)
0 to 2 2 to 4-2 to 0 4 to 6-4 to -2-6 to -4% returns
Num
ber o
f mon
ths
0
10
20
30
40
NAV impact per fund Profit/loss ratio = 1.0x
0%
-0.4%
0.4%8 funds down, avg contributionper fund -1.0%
8 funds up, avg contribution per fund +0.09%
FSP SAC
E E EE E
E E EE E
FJEWTH CBKCRA ATP TEM TCC RAB SEK COKIAH SUT LOPPGD
2010 2011 2012High correlation Medium correlation Low correlation
-1
0
1
Distribution of returns
Contribution analysis (August 2013)
Rolling 24-mth correlation with MSCI World
Historical performance
Growth of $100 since inception
Asset allocation Length of track record
Liquidity AUM ($m)
Portfolio characteristics (as at August 2013)Portfolio snapshot
Monthly (71%)
Quarterly (29%)
R
e d u c i ng
Lending (8%)
Bonds/FI (4%) Mortgages (4%)
Volatility (17%)
Equities (35%)
Commodities(10%)
Cash(8%)
Credit (14%)
>9yrs (27%)
>2yrs<5yrs (56%) >5yrs<9yrs (17%)
D
e c li n i ng
>1bn (12%)
<50 (24%)
>100<200 (5%)
>200<500(25%)
>500<1bn(15%)>50<100
(19%)
D
e c li n i ng
The pros and cons of ‘back-tests’
Never seen a bad ‘back-test’? Neither have we.Discountingproformaresultsissober–thatsaid,thisportfolioisclearlyabletodeliverexcellentreturnswith:alackofdownmonths,lowcorrelationandlow(c.5%)volatility, whichwe are confident can bemaintained.Seeoverleafformoreguidance.
Decor-related Fund*
HFR FoF Composite
HFR Fund Weighted
CompositeMSCI World
Total return 120.5% -4.7% 11.9% -7.3%
Compound annual 15.0% -0.8% 2.0% -1.3%
Annual volatility 4.6% 6.2% 7.4% 19.9%
Downside deviation¥ 1.3% 5.6% 5.8% 15.6%
Max drawdown -1.8% -21.4% -20.1% -52.7%
Sharpe ratio¥ 2.6 -0.6 -0.1 -0.2
Sortino ratio¥ 9.2 -0.7 -0.2 -0.3
% positive periods 79.4% 58.8% 60.3% 50.0%
Average gain 1.6% 1.1% 1.5% 4.5%
Average loss -0.5% -1.7% -1.8% -4.4%
Skewness 0.5 -1.4 -0.8 -0.7
¥Assumesminimumacceptablereturnof3%.
Usesactualfunddurationdata exceptfortwofundswhich use strategy duration.
August 2013 -0.2%eAnestimate,basedonactualresultsfrom 6/16fundsandanestimatefrom10/16funds
Distribution partnerThe Synergy Partnership +60323010930
Hilltop’s Portfolio Manager, RoryHills, started his career in financialmarkets in 1986 and for 27 yearshas maintained an on-going and detailed engagement with a great many fund managers employing awiderangeofinvestmentstrategies.
Since 2002, Rory has focusedon selecting hedge funds forpotential inclusion in fund ofhedge fund (FoHF) portfolios,
first atDexionCapital where he also held in the region of1,000meetingswith FoHFs and for thepast three years atHilltop. This has given him tremendous insight into the hedge fund industry. During this time Rory has demonstrated atalent for recognising exceptional investment managers andstrategies,forexample12ofthe13fundshewasassociated
with during the credit crisis (Jul ‘07 to Feb ‘09), either torepresentto investorsand/orforpersonal investment,wereupintheperiod-halfofthembymorethan30%.
This combination of long-standing experience in respect ofunderstanding asset management strategies; a real appreciation ofwhatdoesanddoesnotworkwithinFoHFs;togetherwithaprovenabilitytoidentifydistinctive,value-addedhedgefundstrategies, is the ideal grounding for managing the HilltopDecorrelated Fund.
Investment thesis
Investment approach
Who are Hilltop, and why listen?
Mostliquidinvestments(andplentythatareilliquidtoo)areheavilyinfluenced by how “risk assets” are performing (forwhich theMSCIWorldIndexisanexcellentproxy)andconsequentlytendto be highly correlated to one another. The obvious exception is ‘highlyrated’governmentbondsbuttheselookexpensive,yieldalmost nothing andwhat can be considered ‘highly rated’ is a
moveablefeastcreatinga‘credit’elementtoowninggovernmentbonds which previously did not exist.
By investing in a range of ‘low correlation’ strategies (thoseseekingtodeliverreturnsindependentofmarketdirectionality),the Hilltop Decorrelated Fund has been designed to deliver the stable,decorrelatedreturnprofilesoughtbysomanyinvestors.
To achieve its targets Hilltop adopts a multi-manager approach investing in ten to15hedge fundstrategies,across theglobe,which we are convinced can deliver decorrelated returns on a sustainablebasis.Itisanimportantfeatureofourapproachthatwearenotmakingany‘macrocalls’and–withrareexceptions–neitherarethemanagersweareinvestingwith.Thisispartlybecause we do not believe anyone has an edge in makingsuchcallsandpartlybecauseeveniftheydid,theywouldwishtobehighlycorrelatedinabullmarketwhichrunscounterto
our ambition of being decorrelated at all times (it is entirelypossible to be up in a bullmarketwithout being correlated).Our preference is for managers pursuing a clearly definedopportunitysetandwiththerequisiteinvestmentskillstoexploitit.Whilst,onoccasion,thiscouldincludemanagersoperatinginunconventionalareastheprimaryfocusisonmanagersoperatingin mainstream asset classes (equities, fixed income, FX andcommodities)but inunusualand/ordistinctiveways.Thefundwillnotinvestinmanagerswithlessthana2½yeartrackrecord.
27 yrs’dialogue
with fundmanagers
11 yrs’hedge fundexperience
c.1,800single
managersreviewed
c.1,000meetings
withFoHFs
Optimal background for a FoHF managerRory Hills’ key highlights
Target investor audience
The Hilltop Decorrelated Fund is targetedatinvestorsseekingconsistentreturnswithlowvolatility,verylimiteddrawdowns and which are genuinely decorrelatedtoequitymarketseveninmomentsoffinancialcrisis.
Whilst Hilltop believes this return profile is attractive at any point inthe investment cycle, the currentenvironmentoflowinterestratesandincreased correlations amongst asset classesmakesitparticularlycompelling.
Thepro formaresultspresentedoverleafneedtobeproperlyqualified because, although the results of the underlying fundsarerealandreflecttheactualmixthattheinvestedportfoliowillhaveatinception,theportfoliowasnotinexistencepriortoitslaunchon1October2012.Itsselectionisinevitablyinfluenced,at least to some degree, by past performance. Nonetheless,thereareusefulinterpretationswhichwecandrawfromthedatathoughitisimportanttounderstandwhichtypeofmetricsmayprovide a reasonable guide to future performance andwhichmaynot.Returnmetricsshouldbemostsignificantlydiscountedas it is thesewhicharemostheavily affectedby thebenefitofperformance hindsight and it is inevitable that some fundswillfailtodeliverinthefuturethereturnstheyhavedeliveredinthepast.However,wecansayfromthedatathatasacombination,
How to interpret the pro forma results in this document
Thisdocumentdoesnotconstituteorformpartof,andmaynotbeusedforthepurposeof,anofferorsolicitationtoanyoneinanyjurisdictioninwhichsuchofferor solicitation is not authorisedor to anyperson towhom it isunlawfultomakesuchofferorsolicitation.SharesintheHilltopDecorrelatedFund(the“Fund”)willnotbeofferedtothegeneralpublic.Thisdocumentmaynotbedistributed in any jurisdictionwhere it is unlawful todo so.AsubscriptionforsharesintheFundmayonlybemadeinrelianceontheprivateplacementmemorandum and relevant supplement of Hilltop Funds PCCLimited by persons who are eligible to subscribe as set out in such documents.While the information in this document has been prepared in good faith,norepresentationorwarranty,expressor implied, isorwillbemadeandno responsibility or liability is or will be accepted by the Fund or Hilltop FundManagementLLP (“Hilltop”)orby anyof their respectivemembers,officers,employeesoragentsinrelationtotheaccuracyorcompletenessoftheinformationcontainedinthisdocumentandanysuchliabilityisexpresslydisclaimed. In particular, but without prejudice to the generality of theforegoing,norepresentationorwarrantyisgivenastotheachievementorreasonablenessofanyfutureprojections,managementestimates,prospectsorreturnscontainedinthisdocument.Actualresultsmayvaryfromestimates.
Hilltopisnotactingforanyrecipientofthisdocument.HilltopisnotresponsibletosucharecipientforprovidingprotectionsaffordedtoclientsofHilltopandHilltopisnotadvisingsucharecipientinrespectofinvestinginHilltopFundsPCCLimited.Pastperformanceisnotaguidetofutureperformance.The ‘pro-forma’ results in this document are calculated by the retroactiveapplicationofamodelconstructedonthebasisofthehistoricaldataoftheintendedunderlyingfundinvestmentsutilisedbytheFundatitsinceptionandinthesamemixatthelaunchdateoftheFund.ThereisnoassurancethattheFundwillbeabletoinvestintheintendedunderlyingfundsatlaunchand/orat the level intended. There is also no assurance that the Fund would have achievedthereturnsshownpriortoAugust2012andthepro-formareturnsareshownforillustrativeandinformationalpurposesonlyandshouldnotbeconstruedasanindicatoroffutureperformanceoftheFundoranyotherfundmanagedbyHilltop.Pro-formareturnsdonotrepresentactualtradingandmaynotreflecttheimpactthatmaterialeconomicandmarketfactorsmighthavehadonanydecision-makingiftheportfoliowereactuallybeingmanaged.Thepro-formareturnsalsoassumethattheFundwouldhavebeenabletopurchase the securities recommendedby themodeland that themarketsweresufficientlyliquidtopermitthistrading.HilltophasclientsotherthantheFundandresultsacrossclientsmaydiffermaterially.