How to select an Alternative Fund Manager under UCITS

Report
How to select an Alternative
Fund Manager under UCITS
Family Office Forum Wiesbaden 5-7 May 2014
Andrew Dreaneen
Head of Schroder GAIA
Product and Business Development
April 2014 | For professional investors or advisers only
How to select an Alternative Fund Manager under UCITS
Agenda





Hedge fund trends – how investors include hedge funds in portfolio construction/ how this has changed through time
Why liquid alternatives make sense now - a new tool in the tool kit, liquidity/ regulation, volatility management/
downside protection
Alternative UCITS trends – UCITS vs Offshore growth, largest UCITS funds/ largest platforms, very strong demand
from private banks and family offices
How to select Alternative UCITS Funds –
Alternative UCITS platforms – high level overview, example of the benefits of including alternatives UCITS vs equity
markets
Source: Schroders
1
Two Key Hedge
Fund Trends
1. Rationale for using hedge funds has changed through time
Investors now see hedge funds as "shock absorbers"
Downside Protection
Diversification & Risk-Adjusted Returns
Capture Excess Performance
Source: Citi Prime Finance analysis, MSCI, S&P, Bloomberg, HFR, as at December 2012
3
2. Hedge funds now included in clients ‘core’ portfolio
A risk aligned approach to portfolio construction, positioning strategies by directionality and liquidity
Illustrative Risk-Aligned Institutional Investor Portfolio
Source: Citi Prime Finance, as at November 2013
4
The Rise of Alternative
Mutual Funds
A new tool in the toolkit
for private banks and family offices
Overall Hedge Fund AUM Expected to Grow Strongly
Liquid alternatives expected to grow to 1/3rd of total hedge fund AUM
Source: Citi Prime Finance analysis, SEI, Strategic Insight, Federal Reserve Current Populations Survey, Cerulli Associates, Deloitte Center for Financial Services, as at August 2013
6
European Hedge Fund Industry
Evolution of AUM and Number of Funds
AUM bn
No. of Funds
4,500
$500
4,000
$450
$400
3,500
European
Hedge
Fund AUM
back to all
time peaks
$350
3,000
$300
2,500
$250
2,000
$200
1,500
$150
1,000
$100
500
$50
0
$0
2000
2001
2002
2003
2004
2005
2006
No. of Funds (LHS)
2007
2008
2009
2010
2011
2012
2013
2014
Feb
AUM (RHS)
Source: Eurekahedge, as at 28 February 2014
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European Hedge Fund Industry
Investors now clearly prefer UCITS hedge funds
Flows: Offshore hedge funds vs. UCITS hedge funds
120
300
100
280
80
300%
260
60
200%
240
40
220
20
200
0
900%
500%
400%
100%
Offshore European Hedge Funds (LHS)
UCITS European Hedge Funds (RHS)
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
0%
Jan-06
AuM ($Bn)
800%
Jan-14
Jul-13
320
Jan-13
140
Jul-12
340
Jan-12
600%
Jul-11
160
Jan-11
360
Jul-10
700%
Jan-10
180
Jul-09
380
Jan-09
200
Jul-08
400
Jan-08
220
Jul-07
420
Jan-07
240
Jul-06
440
Jan-06
AuM ($Bn)
AUM: Offshore hedge funds vs. UCITS hedge funds
UCITS European Hedge Funds
Offshore European Hedge Funds
Source: Eurekahedge based on head office location Europe plus geographical mandate Europe, to 28 February 2014
8
Alternative UCITS Growth
Evidence of strong investor demand

Alternative UCITS AUM has
increased substantially since
2009 and now stand at c.€200bn
(c.$290bn)

There are 768 single manager
alternative UCITS in the market
today, 75% of these have been
launched since 2009
Source: ALIX Capital, 28 February 2014
9
Similar Growth Dynamics in the US Mutual Fund (40Act)
The rise of the liquid alternatives market in the US

Offshore hedge funds 18x larger than 40 Act alternatives but only received 1.5x 12 month net flows

40 Act alternatives industry grown at CAGR 33% (vs. 14% for offshore hedge fund industry)

40 Act alternative funds managed by a hedge fund manager have grown even faster at 83% CAGR
Source: Strategic Insight, Morningstar, as at June 2013
10
2013 Hedge Fund AUM by Investor Segment
UCITS hedge fund growth fuelled by European Private Banks and Family Offices
Source: Towers Watson Global Pension Asset Study, Towers Watson Global Alternatives Survey, Swiss Re Sigma Report, NA CUBO-Common fund Institute Endowment study, Wharton Global Family Alliance Single
Family Office Study, Scorpio Partnership Global Private Banking Asset Allocator, OECD Sovereign Wealth and Pension Fund Issues, and strategic Consulting 2014 Market Sizing Model, as at December 2013
11
Will Liquid Alternatives Follow Same Trajectory as ETFs?
c.400 US40Act alternative mutual funds today – same as ETFs in 2006
Adoption by more advisors contribute to growth over
next 5-10 years – similar to ETF’s
"Retail Liquid Alternatives: the next frontier" is a US$ 2 trillion
AUM 5 to 10 years from now.
Goldman Sachs
Sources: Goldman Sachs, Simfund, Cerulli Associates, as at December 2013
12
Why Liquid
Alternatives now?
Liquid Alternatives have superior risk adjusted returns
HFI Alternative UCITS Index vs. traditional 60/40 portfolio
Source: Citi Prime Finance analysis, Hedge Fund Intelligence Alternative UCITS Composite Index, Bloomberg, MSCI
Note: Traditional Investment Portfolio comprised of 60% equity investment represented by the MSCI World Index and 40% fixed income investment represented by the Citigroup Big Bond Index, as at February 2013
14
Main reservations and typical alternative allocations
Fees, Liquidity, Education
Can retail allocations
to alternatives
increase with the
introduction of Liquid
Alternatives?
Sources: Goldman Sachs, Morningstar/Barron’s, McKinsey, Simfund, November 2013
15
Barbell Approach – Blending ETFs With Liquid Alternatives
Barbelling expected to help drive liquid alternatives growth
What is the “barbell”?
As investors are focussed on fees and increase allocations to ETFs for cheap beta these fee savings can support the
growth of the more expensive liquid alternative mutual funds and potentially see allocations increase from 4% currently
to 16% over the next 5-10 years
Source: Goldman Sachs Global Investment Research, as at November 2013
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How to select Alternative
UCITS Funds
Manager Selection Process and Monitoring
Overview
Strategy Selection
Investment Due Diligence
Operational Due Diligence
Ongoing Risk Management
Source: Schroders, April 2014
18
Strategy Selection
Search for products that fit within the UCITS framework
More
leverage

Fixed income
arbitrage
Macro & CTA

No
Leverage
Long short
credit
Long short equity
(trading)
Liquid
Event driven
(Equity)
Long short equity
(fundamental)
Long biased
convertible bonds
Convertible bond
arbitrage
Event driven
(credit)
Emerging Market
credit
Long short equity
(small cap)
Less Liquid
Source: Schroders as at 31 March 2014
Note: this chart is meant to be indicative only. There will be different types of funds within each of these strategies which may or may not be eligible for UCITS. Each hedge fund needs to be evaluated on a case by case
basis. Sophisticated UCITS funds can potentially permit high leverage, so long as VaR limits are respected
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Investment Manager Selection
Perform full due diligence based on key requirements for a given strategy
Investment Due Diligence

Experience

Track record and skill

Investment Process

Integrity

Size

Reputation
Operational Due Diligence



Initial review of available
regulatory, marketing, and
personnel materials
Full documentation review
covering all key business areas
Onsite visit including thorough
validation of all points and
processes raised in the
documentation review
Risk Due Diligence

Risk management capabilities

Fit with UCITS constraints
– Liquidity
– Eligible assets
– Leverage
– VaR
Source: Schroders, April 2014
20
Introducing Alternative
UCITS Platforms
Alternative UCITS Platforms
Investment Bank Platforms
Asset Manager Platforms
Independent/ Boutique Platforms
Merrill Lynch Investment Solutions
Schroder GAIA
Alceda UCITS Platform
Deutsche Bank
Luma Solutions Services
Alpha UCITS
Goldman Sachs
Lyxor Asset Management
Altex UCITS
JP Morgan Mansart Investments
E.I. Sturdza Strategic Management Ltd
Bryan Garnier
Morgan Stanley FundLogic
Independent UCITS
Nomura AIM
Montlake UCITS Platform
SEB Prime Solutions UCITS
Universal Investments
UBS Liquid Alpha
Source: Kepler Partners LLP as at December 2013
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Schroder GAIA is a Market Leading Platform
Largest alternative UCITS platforms by AUM
AUM USD(m)
6000
5000
4000
3000
2000
1000
Morgan Stanley
Deutsche Bank
Alceda
16
6
19
12
15
Lyxor
Schroder GAIA
No of
Funds
Merril Lynch
0
3
Source: Schroders and Bloomberg as at 31 March 2014
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Schroder GAIA
Dedicated platform for liquid alternative strategies

Offers access to leading hedge fund managers in a transparent format

The individual mutual funds on the platform are subject to ‘gold standard’ regulation

The funds are directly invested as opposed to a master feeder/index approach

Active risk management performed by managers and independently by Schroders

Schroders performs extensive due diligence on each external manager

There are no side pockets or investor lock ups
Source: Schroders
24
Schroder GAIA
Overview of sub-funds
Fund
Strategy
Geographic Focus
Portfolio Manager (External)
Launch Date
Schroder GAIA
Egerton Equity*
Equity long short
Europe & US
John Armitage, Egerton Capital
25 Nov 09
1,403m
Schroder GAIA
Sirios US Equity**
Equity long short
Predominantly US
John Brennan, Sirios Capital Management
27 Feb 13
2,873m
Schroder GAIA
Avoca Credit
Credit long short
Predominantly Europe
Simon Thorp, Avoca Capital Management
6 Nov 13
Schroder GAIA
Paulson Merger
Arbitrage***
Merger Arbitrage
US, Canada and Western
Europe
John Paulson, Paulson & Co.
TBC
Fund
Strategy
Geographic Focus
Portfolio Manager (Schroders)
Launch Date
Schroder GAIA
Global Macro
Fixed Income Macro
Global
Bob Jolly, Schroders
1 Oct 12
124m
Schroder GAIA
Cat Bond**
Catastrophe Bonds
Global
Daniel Ineichen, Schroders
21 Oct 13
701m
Total AUM
AUM (USD)
394m
25m
(seed capital)
AUM (USD)
5,520m
Source: Schroders as at 31 March 2014. *hard closed **scheduled hard closure *** subject to CSSF approval
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Schroder GAIA Alternative UCITS funds
Focus on well established managers with long track records
NGA
Paulson
Egerton
Avoca
Sirios
MSCI World
Egerton
Sirios
Avoca
Paulson
NGA
MSCI World
Source: Morningstar. Analysis shown from January 2002 (common inception date) to February 2014. CQS has been excluded given the strategy launched in 2008. The data shown for ‘Paulson’ and ‘NGA’ is the net
performance of existing offshore hedge fund strategies we plan to launch on Schroder GAIA during 2014. The performance is indicative only and the past performance of the offshore fund should not be taken as a guide
to future performance of the potential GAIA fund
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Schroder GAIA Alternative UCITS funds
All strategies have outperformed equity markets on a risk adjusted basis
Egerton
Sirios
Avoca
Paulson
NGA
MSCI World
Return
Std Dev
Sharpe Ratio
Schroder GAIA NGA Liquid Distressed*
13.1
12.2
0.9
Schroder GAIA Paulson Merger Arbitrage*
12.2
8.1
1.3
Schroder GAIA Avoca Credit Long Short
9.8
7.2
1.1
Schroder GAIA Egerton Equity Long Short
10.0
8.8
1.0
Schroder GAIA Sirios US Equity Long Short
8.1
9.0
0.7
MSCI World
4.9
14.6
0.3
Source: Morningstar. Analysis shown from January 2002 (common inception date) to February 2014. *Planned launches in 2014. The data shown for ‘Paulson’ and ‘NGA’ is the net performance of existing offshore hedge
fund strategies we plan to launch on Schroder GAIA during 2014. The performance is indicative only and the past performance of the offshore fund should not be taken as a guide to future performance of the potential
GAIA fund
27
Leading Alternative
Investment Managers
Combine Managers for Superior
Risk Adjusted Returns
Schroder GAIA Alternative UCITS funds
Combining alternative funds provides superior risk adjusted returns
Schroder GAIA Alternative UCITS*
MSCI World NR LCL
Return
Std Dev
Sharpe Ratio
Schroder GAIA Alternative UCITS*
10.8
6.3
1.4
MSCI World NR LCL
4.9
14.6
0.3
Source: Morningstar. Analysis shown from January 2002 (common inception date) to February 2014. * The data shown for ‘Schroder GAIA Alternative UCITS’ represents a 20% allocation to each of the existing Schroder
GAIA funds (Egerton, Sirios and Avoca) and a 20% allocation to each of the strategies we plan to launch on Schroder GAIA during 2014 (Paulson and NGA). This portfolio is a simulation and has been used for illustrative
purposes only
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Conclusion

Alternative mutual funds represent a new and rapidly growing asset class for investors

Long short strategies make sense now to help diversify client portfolios

Investors should consider blending long only strategies together with long short strategies and include
alternative funds within the core portfolio as opposed to an alternatives bucket

Family Offices and Private Banks should focus on established managers that have a proven track record of
producing consistent risk adjusted returns

Emphasis should be on strategies with uncorrelated returns streams, reduced volatility and proven
downside protection

The Schroder GAIA platform offers a select group of high quality alternative investment managers within the
safeguards of a liquid mutual fund format which is subject to ‘gold standard’ regulation.
Source: Schroders, April 2014
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Important information
This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder GAIA (the “Company”). Nothing in this
presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made
on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copied of which can
be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the
prospectus.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not
get back the amount originally invested. Schroders has expressed its own views and opinions in this document and these may change.
Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's
consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the
third party data. The Prospectus and/or www.schroders.lu contains additional disclaimers which apply to the third party data. Schroders has expressed its own views
and opinions in this presentation and these may change.
This presentation is issued by Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct
Authority. For your security, all telephone calls are recorded.
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