ABS Investment Management For institutional investors only. Confidential information herein. Please see the end of this presentation for important disclosure information. This presentation is intended for the sole use of the above named recipient and should not be relied upon by any other person. MAPERS One Day Seminar Hedge Funds March 6, 2020 Presenters: Sean White, CFA Partner and Head of Risk Management
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ABS Investment Management
For institutional investors only. Confidential information herein. Please see the end of this presentation for important disclosure information. This presentation is intended for the sole use of the above named recipient and should not be relied upon by any other person.
MAPERS One Day SeminarHedge Funds
March 6, 2020Presenters: Sean White, CFA
Partner and Head of Risk Management
ABS Investment Management LLC | January 2020 2
Table of Contents
Hedge Fund Industry Background 3
Hedge Fund Characteristics 11
Risks and Misconceptions 15
Expectations and Goals 19
Outlook 22
ABS Investment Management LLC | January 2020 3
Hedge Fund Industry Background
ABS Investment Management LLC | January 2020 4
Hedge Fund Evolution: The Early Years (1990-1999)
ABS Investment Management LLC | January 2020 5
0%
100%
200%
300%
400%
500%
600%
700%
800%
Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99
HFRI Equity Hedge Index
MSCI AC World Index
S&P 500 IndexHFRI Fund Weighted Index
Hedge Fund Evolution: The Early Years (1990-1999)Cumulative Performance: 1990-1999 Hedge Fund Assets in Billions: 1990-1999
$39 $58 $96 $168 $167 $186 $257$368 $375 $456
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Concentrated: 76% of funds classified as equity long/short and macro
Small: Average fund size less than $150M
Narrow Ownership: Primarily owned by high net worth individuals, endowments, and foundationsData as of 12/31/2019. Source: Bloomberg, HFRI Q4 2019 Global Industry Report, Please see the end of this presentation for important disclosure information.
ABS Investment Management LLC | January 2020 6
Hedge Fund Evolution: Adoption by Institutions (2000-2009)
ABS Investment Management LLC | January 2020 7
Hedge Fund Evolution: Adoption by Institutions (2000-2009)Cumulative Performance: 2000-2009 Hedge Fund Assets in Billions: 2000-2009
Data as of 12/31/2019. Source: Bloomberg, HFRI Q4 2019 Global Industry Report, Please see the end of this presentation for important disclosure information.
ABS Investment Management LLC | January 2020 8
Hedge Fund Evolution: Underperform the S&P 500 (2010-2019)
ABS Investment Management LLC | January 2020 9
Hedge Fund Evolution: Underperform the S&P 500 (2010-2019)Cumulative Performance: 2010-2019 Hedge Fund Assets in Billions: 2010-2019
Defensive: All strategies sensitive to drawdowns following the financial crisis
Composition Change: Big get bigger, quant takes market share, fees begin to fall
Institutionalization: Style box approach designed to fit larger asset allocation policy
Data as of 12/31/2019. Source: Bloomberg, HFRI Q4 2019 Global Industry Report, Please see the end of this presentation for important disclosure information.
Data as of 12/31/2019. Source: Bloomberg, Please see the end of this presentation for important disclosure information.
ABS Investment Management LLC | January 2020 11
Hedge Fund Characteristics
ABS Investment Management LLC | January 2020 12
Characteristics of a Hedge Fund
Please see the end of this presentation for important disclosure information.
Flexible
Ability to utilize variety of assets (equity, credit, currency, commodity, etc.)
Active use of short selling to hedge and protect downside risk
Use of leverage to enhance performance
Focused on alpha relative to beta
Selection of underlying assets drives majority of risk and return
Less exposure to traditional market risks
Incentive-based
Partnership structure where manager invests alongside investors
Incentive fees typically charged for positive/excess returns
Highly diverse and competitive
Individual funds have significant differences in risk and return levels
Intense focus on performance
High fees attract new entrants but lead to high attrition rates (many funds shut down each year)
ABS Investment Management LLC | January 2020 13
Strategy Classifications
Source: HFRI Q4 2019 Global Industry Report, Please see the end of this presentation for important disclosure information.
Equity Long/Short ($972B) Bottom-up strategies seeking to generate alpha
long and short relative to equities Low leverage, liquid securities, highly diverse
universe, comprises over 40% of total # of funds
Relative Value ($877B) Risk-managed strategies seeking steady
returns Heavy use of fixed income and derivatives
to exploit pricing anomalies
Event Driven ($874B) Risk-controlled approach to access alpha from
corporate events (mergers, turnarounds, etc.) Active use of leverage and company engagement
Macro ($600B) Trades all asset classes, wide range
of risk levels Systematic (quant) strategies
Benefits Risks
Liquid Less Predictable
Downside Protection Monitoring
Benefits Risks
Steady Returns Tail Risk - Leverage
Low Market Risk Complexity
Benefits Risks
Diversity of Styles Market/Factor Risk
Transparency Flexibility
Benefits Risks
Diversified Upside Event Risk
Asymmetric Risk/Return Complexity
ABS Investment Management LLC | January 2020 14
Roles in Institutional Portfolios
Source: 2020 Prequin Global Hedge Fund Report, Please see the end of this presentation for important disclosure information.
Diversification Differentiated risk relative to long-only with returns generated from security-specific factors
Risk buffer Focus on risk management typically leads to lower volatility than long-only Incentives designed to promote risk reductions in prolonged market drawdowns
Return enhancement Certain hedge fund strategies are more aggressive in nature and seek to deliver high upside Concentration, leverage, and activism are some of the tools used to enhance returns
Opportunistic allocations Special situation funds seek to take advantage of market dislocations
Prequin Survey: Reasons Investors Allocate to Hedge Funds63%
Market Performance by DecadeS&P 500 Annualized Returns by Decade
Data as of 12/31/2019. Source: Bloomberg, Robert Shiller U.S. Stock Markets 1871-Present http://www.econ.yale.edu/~shiller/data.htm. Please see the end of this presentation for important disclosure information.
Major Regional Indexes: Last 20 Years US stocks significantly outperformed non-US markets last decade due primarily to:
Tech earnings growth
Dynamic monetary policy
Safe haven status and dollar strength
The 2010s were a mirror image of the prior 10 years
Global equity markets have produced single digit gains with 15-20% volatility since 2000
-0.9%
13.6%
6.1%
1.2%
5.5%
3.3%
9.8%
3.7%
6.7%
-2%0%2%4%6%8%
10%12%14%16%
2000-2009 2010-2019 Last 20 YearsS&P 500 Index MSCI EAFE Index MSCI EM Index
ABS Investment Management LLC | January 2020 24
Positioning
Where We Are in the Current Equity Market Cycle: Fund Managers vs. Investors
5.0%
67.0%
7.0% 8.0%14.0%
10.0%
69.0%
6.0%2.0%
13.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Recovery / Expansion Peak Recession Trough Unsure
Fund Managers Investors
Source: 2020 Prequin Global Hedge Fund Report, Please see the end of this presentation for important disclosure information.
6%
51%
43%
More Aggressively -Asset Accumulationis a Priority
No Change
More Defensively -Asset Protection isa Priority
How are investors positioning their hedge fund portfolios in 2020?
ABS Investment Management LLC | January 2020 25
Conclusion
“Ignoring the risk and uncertainty in every decision might make us feel better in the short run, but the cost to the quality of our decision‐making can be immense.”― Annie Duke, Thinking in Bets
ABS Investment Management LLC | January 2020 26
This presentation has been provided for informational purposes only and shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at thetime a qualified investor receives a final confidential private offering memorandum (the “Fund Documents”) describing an opportunity to invest with ABS. This material is notintended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerningthe manner in which any client’s account should or would be handled, as appropriate strategies depend upon the client’s specific circumstances and investment objectives. Incases where estimates or other materials not originated by ABS have been used, they have been obtained from sources believed to be reliable but ABS has presented theseitems “as is” and has undertaken no independent verification and makes no warranties with regard to their accuracy. Past returns are not an indicator of future performance.
Although indices used in this presentation have been gathered using public and private sources and data we believe to be reliable, we make no representations as to theiraccuracy or completeness.
The HFRI Equity Hedge is composed of Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A widevariety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadlydiversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of marketcapitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in,equities, both long and short.
The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 1,400 single-manager funds that report to HFR Database. Constituent funds reportmonthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. TheHFRI Fund Weighted Composite Index does not include Funds of Hedge Funds.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks.Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The index is not managed and not subjectto management or brokerage commissions. Dividends are subject to reinvestment.
The MSCI All Country World Total Return Index (Local) includes the reinvestment of dividends net of foreign taxes, symbol NDLEACWF.
Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied upon as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance limitation, lost profits) or any other damages. (www.msci. analysis, forecast or prediction. The MSCI information is provided on an “as if” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, withoutcom)