K2 ADVISORS Alternative Investment Case Studies ����������������������������� ������������ ���������������������������������
The Emergence of the Strategic Partner 1
The Emergence of the Strategic Partner A collaborative, interactive relationship in which responsibilities are shared with or delegated to the investment manager; with the goal of creating a more absolute return approach to investing and improving risk- adjusted returns 2
The “Real Value” of a Strategic Partnership U.S. Public Pension Fund “ We set up these partnerships with a real eye toward hiring managers with broad investment capabilities and lots of quantitative and qualitative talent, and then let them manage so we get their best ideas. The pension and consulting communities still are intent on dividing investments into tiny boxes. The ultimate iteration of this tendency is to hire talented managers and then keep them in the tiny boxes.” “They are very flexible and allow the manager to be very responsive to market conditions. Managers can make swift decisions about investment opportunities and take full advantage of opportunities when they come up.” 3 ��������������������������������������������������� ��������������������������������������� ��!�"#�$%���&'&'�&'�
Strategic Partnership: A Growing Trend Among Pension Funds � CalPERS “Investment committee adopted a formal investment policy for a new multi-class strategic partnership program that will invest up to a total of $8 billion with four investment managers.” � Texas Permanent School Fund, Austin “The $24 billion Texas Permanent School Fund, Austin, in April selected… strategic relationship managers who, together with internal staff, will co-manage portfolios of direct investments in hedge funds.” � New Jersey Division of Investment, Trenton “The $72.1 billion New Jersey Division of Investment, Trenton, in December (2011) began a $1.5 billion strategic relationship.” 4 !��()�*�����(�+������������������������ ������������������������������������������,�� ����!�"#�$%�&� ��--�,�����.������������.����/.����/���.��.������/��.���������
Risk Systems: Stress Tests, Correlation, and Risk Profile Sensitivity Analysis Sample Stage 1 Proxy Analysis Sample Stage 1 Proxy Analysis Data Source: MSCI; As Of: Sep, 2011 Portfolio vs Benchmark VaRs Portfolio Beta-Derived Performance [Beta x 2 x Index Standard Deviation] Portfolio -8.27% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% Portfolio S&P 500 -12.91% 64% 4.33% S&P 500 VaR as Barclays Agg TR -2.20% 376% 4.38% Russ 2000 % of MSCI World USD 7.32% GSCI Comm TR -12.08% 68% 7.52% Euro Stoxx 50 Index HFRI FOF -2.31% 357% 8.62% Emerg Mark ETF VaR 4.13% SPDR Financial 7.86% SPDR Technology 95% 1-Month VaRs (Value-at-Risk) Risk systems enable 4.02% SPDR Cons Disc 4.11% SPDR Cons Stap GSCI Comm -14% S&P 500 4.55% SPDR Energy TR 3.97% SPDR Health investors to measure -12% 4.12% SPDR Industrial 0.67% Russell Growth/Value Barclays Agg TR -10% -7.28% VIX Index Portfolio iShares Bar 7-10yr Treas -3.67% risk: stress tests, -8% HFRI FOF -2.80% Bar Gbl Treas TR -14.43% ML Euro Bond (EUR) -6% -2.73% Barclays Agg TR -2.90% -4% 2yr BBB Spread correlation analysis HY Bond 1.26% -3.24% -2% Aus Bond TR GSCI Comm TR 4.85% 0% -6.60% Dollar Index Portfolio Beta Profile Portfolio Beta Profile Stress Scenarios - Period Returns Stress Scenarios - Period Returns Benchmark Beta Std Dev -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 0.68 3.17% S&P 500 0.49 4.46% 1997 Asian Flu (FX) -1.68% Russ 2000 These tools are needed 0.64 5.71% MSCI World USD 1998 Credit Crunch -16.85% 0.35 10.83% Euro Stoxx 50 0.45 9.47% Emerg Mark ETF for active portfolio 2006 Energy Sell-Off -8.50% SPDR Financial 0.52 4.00% SPDR Technology 0.59 6.69% 2007 Sub Prime -7.16% management SPDR Cons Disc 0.56 3.56% SPDR Cons Stap 0.91 2.26% 2001 Correction -11.20% SPDR Energy 0.43 5.31% SPDR Health 0.67 2.98% 2001 Rally 10.02% 0.50 4.13% SPDR Industrial 0.24 1.37% 2004 Spring Hike -7.49% Russell Grow th/Value (0.12) 29.34% VIX Index 2008 Uh Oh January -8.38% (0.98) 1.87% iShares Bar 7-10yr Treas (2.36) 0.59% Bar Gbl Treas TR 2000 DotBomb -7.77% (2.49) 2.90% ML Euro Bond (EUR) (1.50) 0.91% Barclays Agg TR 2002 Summer -16.10% (0.28) 5.11% 2yr BBB Spread 1.36 0.46% HY Bond 1998 Fall Steepener 6.53% (1.33) 1.21% Aus Bond TR 0.50 4.89% GSCI Comm TR 2008 Lehman Fail Post-Bailout -27.74% (0.82) 4.01% Dollar Index ��������%����0��/��1����.����������������������*�������������(�*��������������������(��2�������������������������������(��(������(���2�����������/��(��/���2�����������������(����������(�2�����������/������������� ��������������������������������������������������������������������������������������������������������� 3�������������������������4��) 5 ���������������������*�������������(�*�������������(�*�2����������2���������������(�������(���������������������(��2�������������������������������(��(������(� ��2�����������/��(��/���2�����������������(����������(�2�����������/���������������2�
Dynamic Asset Allocation Framework – US$ 1 Billion Sample Portfolio Liquidity Asset Class Allocation Decision Domestic International Corporate Treasury Sovereign Commodities Alternatives Equity Equity Credit Bonds Debt 35% 20% 15% 10% 5% 5% 10% Passive Passive Passive Passive Passive Passive Passive Beta 20% Beta 5% Beta 5% Beta 8% Beta 5% Beta 2.5% Beta 0% T +1 Beta = 1.00 Beta = 1.00 Beta = 1.00 Beta = 1.00 Beta = 1.00 Beta = 1.00 Beta = 1.00 Hedge Fund Hedge Fund Hedge Fund Hedge Fund Hedge Fund Hedge Fund Hedge Fund 1 Day Active Long Active Long Active Long Active Long Active Long Active Long Active Long To 15% 10% 2% 0% 2.5% 15% 10% 2 Years Beta = 0.50 Beta = 0.50 Beta = 0.05 Beta = 0.10 Beta = 0.25 Beta = 0.45 Beta = 0 Real Estate PE PE Mezzanine Timber 5 – 10 Yrs. Venture Venture Debt Reinsurance Farmland Other Capital Capital Direct Loans Beta Beta Beta Beta Beta Completion T +2 Completion Completion Completion Completion or Hedge or Hedge or Hedge or Hedge or Hedge 3�������������������������4��) 6
Potential Benefits From a Strategic Partnership � Establishes a layer of fiduciary responsibility � Best thinking and ideas from managers � Increased investment flexibility � Ability of manager to reduce risk or seek best risk-adjusted investments � Increased ability to be more opportunistic � Improves staff productivity: � Improves staff productivity: 5 !�(������������������2�!3�6� 5 %���(�1�����/����������������(�72���������/����������������8 5 9����������������(����������������: 5 ;��0�������22��������(����������)<��/���(���������/ � Knowledge transfer – education of staff � Access to systems (risk, data, market information, etc.) 7
Contact Information K2 Advisors, L.L.C. David C. Saunders &���=���������������5 ,����3���� ��.3���(��/�1���/��/�*������� ����2��(���#��� -�, ;.����������(���?:��(���������� #���������� ��&.&'�.���� 3���������� ��&.&�-. & - ���������!�������������&.��'.,'�> ;.���������������������)?:��(����������� 8
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