Managed Futures Presentation

Microsoft PowerPoint - Final Roland Austrup AIC 2008 Final.ppt

Finding Stable, Predictable Returns in Times of Extreme Stress

Roland P. AustrupPresident & Chief Investment OfficerIntegrated Managed Futures

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Important InformationPast Performance is not indicative of future results

This communication is not and under no circumstances is to be construed as an invitation to make an investment in the IMFC Global Investment Program nor does it constitute a public offering to sell the program. Applications for IMFC Global Investment Program will only be considered on the terms set out in the Disclosure Document (for U.S.

resident investors ) or Offering Documents (for Canada-resident investors). Terms defined in the Disclosure Document and Offering Documents shall have the same meaning in this material. Potential investors should note that alternative investments can involve significant risks and the value of the investment may go down as well as up. There is no

guarantee of trading performance and past performance is not indicative of future results. Investors should review the Disclosure Document and Offering Documents in their entirety for a complete description of IMFC Global Investment Program. An investment should only be made after consultation with independent qualified sources of investment and tax advice. The information contained in this material is subject to change without notice and IMFC will not be held

liable for any inaccuracies or misprints.

Risks of InvestingThere are risks associated with an investment in the Program, as a result of, among other considerations, the proposed nature and operations of the Program. An investment in the Program should only be made after consultation with independent qualified sources of investment and tax advice. An investment in the Program is speculative and

involves a high degree of risk and is not intended as a complete investment program. It should be borne in mind that risks involved in this type of investment are greater than those normally associated with other types of investments. There is a risk that an investment in the Program will be lost entirely or in part. Only investors who do not require immediate liquidity of their investment and who can reasonably afford a substantial impairment or loss of their entire

investment should consider investment in the Program. Capitalized terms not defined in this document are defined as set forth in the Disclosure Documents and Offering Documents.

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AIC 2003

Hedge funds do not provide protection in periods of equity market stress

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AIC 2003 Conclusions Revisited

Managed Futures are a better stand-alone diversifier than hedge funds over all timeframes

Managed Futures are a significantly better diversifier when S&P 500 monthly returns are up or down more than 3%

Hedge funds are a slightly better diversifier when S&P monthly returns are between 3% and +3%

Managed Futures and hedge funds together are a better diversifier than either asset class alone

Managed Futures are a regulated industry offering high liquidity, full transparency, minimal credit risk and daily mark-to-market

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AIC 2006

Passive long-only commodity indices do not necessarily profit in periods of equity market stress

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4th Quarter 1987 Iraq Invades Kuwait(June-Sep'90)

LTCM Mess July-Sep '98

South East Asian $Crisis Aug'97-

Aug98

Market Selloff Oct'00-Sep '02

Barclay CTA Index S&P 500 Total Return Index Gorton & Rouwenhorst

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AIC 2006 Conclusions RevisitedLong commodity indices are uncorrelated to equities, but

Passive long only commodity futures are not a good source of uncorrelated return

Limited protection against major market downturns Undesirable Skewness

Managed Futures have demonstrated alpha over long commodity indices for over 25 years

Over 500 bp per annum

History of solid protection against major market downturns

Desirable Skewness

Elimination of negative commodity skew

Commodity exposure better achieved through Managed Futures

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The Recent Environment

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The Recent Environment

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The Recent Environment

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The Recent Environment

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Returns from October 2007 (S&P 500 Peak) to Present

Asset Class Index ROR

S&P 500 Total Return Index - 36.1%

HFR Global Hedge Fund Index - 21.8%

Goldman Sachs Commodity Index (S&P GSCI) - 26.2%

Barclay CTA Index + 11.2%

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2008 Returns

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Updating Profits Under Stress Data

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Stable & Predictable Returns in General

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The Source of Stability and Predictability

Broad Diversification

Managed Futures trade futures on multiple uncorrelated asset classes

Industrial and agricultural commodities, currencies, fixed income instruments and equity indices

Average correlation of assets and markets traded is less than 0.10.

Active Long and Short Strategies

Potential for profit in both rising and falling markets

Managed futures managers have generally been long fixed income, USD and Yen, and short equities and, since August, commodities.

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The Source of Stability and Predictability

Controlled Volatility

Focus on managing as opposed to accepting market risk

Position sizes dynamically calibrated based on portfolio volatility and VaR targets, market correlations and market volatilities

Truly Uncorrelated Returns

Uncorrelated in general

Negative correlation to equity market returns during periods of equity market stress

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Controlled Volatility

Managed futures focused on targeting volatility as opposed to blindly accepting market volatility

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Correlation when you dont want it

Hedge funds exhibit high tail risk dependency with equity markets

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Uncorrelated but Bifurcated

Commodities hedge periods of inflation (negative correlation) Commodities are correlated to equities in periods of slowdown

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Uncorrelated and Negative Correlation when Needed

Managed futures are negatively correlated to equities in periods of equity market stress

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Sources of Return

Source of return to managed futures is market pricing of risk premia

Risk premia structures tend to persist

Causes autocorrelation of basis, carry and spot currency data

Risk premia by definition positive in fixed income and equity markets

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Risk Premia and Managed Futures

Managed futures strategies capture risk premia and shifts in risk premia

Need to understand how and where various assets price risk premia

Generally systematic, quantifiable and diversified

Objective is to capture persistent risk premiums and manage spotvolatility across a diversified portfolio of asset classes and markets, and NOT to speculate on specific markets

Often momentum or trend-based strategies because of underlying autocorrelation in and from the pricing of risk premia

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Pricing Risk Premia

Commodity markets price risk premia (convenience yield) in the futures market

Unlike futures, spot prices exhibit no autocorrelation or trending tendencies

Futures prices are rarely equal to spot prices plus known and quantifiable carry factors (cost of capital, storage and transportation costs)

The convenience yield of holding or not holding commodity inventories is also priced into futures prices

Difficult for investors to transact in spot commodity markets

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Risk Premia in Commodities

Convenience yield of holding or not holding commodity inventories

Shows up in the Basis or shape/slope of spot-futures price curve.

A measure of risk of supply shock (or glut) versus cost of carrying inventory

Existence of Basis creates Roll Yield and autocorrelation in futures prices

Excess returns from owning a portfolio of low inventory commodity futures and shorting a portfolio of high inventory commodity futures

Excess returns from owing a portfolio of high basis commodity futures and shorting a portfolio of low basis commodity futures

Excess returns from owing a portfolio of high momentum commodity futures and shorting a portfolio of low momentum commodity futures

Return Correlations of these strategies is 0.87

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Sources of Managed Futures Return

Backwardation Positive Roll Yield

Contango Negative