Planning for the Uncertainty of the Future Hedge Fund World Middle East 2010 Dubai, UAE * It is an honor and pleasure to address such a knowledgeable group of interested professionals. I hope to provide you with a better understanding of the benefits of including Managed Futures in investment portfolios. Managers are always trying to position their portfolios to deliver attractive returns for their investors, but this is a very difficult task because it involves, among other things, anticipating and dealing with future market behavior and applying the best strategy to capture good returns. Investors are constantly seeking investment vehicles to deliver good returns, and they are probably mostly evaluating the past performance of prospective investments over a hopefully long past, some of which, again hopefully, included some difficult markets. The main problem with planning for the future is that we don’t know what it will be! This morning I’d like to review with you some particularly difficult markets of the past and ask if Managed Futures could have been helpful. __________________________________________________________________________________ * This is a summary of remarks given by Dr. William A. Dunn at the Hedge Fund World Middle East 2010 conference in Dubai, UAE on March 2 nd , 2010. Please refer to page 9 for Dr. Dunn’s bio. 1
S&P Correlation to Alternative Asset Classes S&P Correlation to Alternative Asset Classes Hedge Fund World Mid East 2010 – Hedge Fund World Mid East 2010 – Dubai, UAE Dubai, UAE Correlations with the S&P 500: 2001-2009 Managed Futures Futures Source: Source : The Center for Mortgage-Backed International Securities and Center for Int’l Securities & Derivatives Markets (CISDM) Global Macro Derivatives Markets (“CISDM”) CTA Index Full information may be found Equity Market Neutral www.casamhedge.com at www.casamhedge.com Convertible Arbitrage Fixed Income Arbitrage Distressed Securities Merger Arbitrage Technology Emerging Markets Event Driven Equal Weight Hedge Fund Equity Long/Short S&P 500 Past performance is NOT necessarily indicative of future results. 2 Let’s start by looking at how the performances of various asset classes correlates with the S&P. Please note that: • 7 of the 13 asset classes have correlations of 60% or greater, and the next three have correlations greater than 40%. • Managed Futures is in a class by itself with a negative correlation of 18%. • The data only goes back for the last 9 years which is as far back as the source could go given the limited history of several members of the alternative asset classes. Also note: • The source used for Managed Future’s performance is the Center for International Securities and Derivatives Markets (CISDM) CTA Index. • Information on the CISDM CTA Index can be found at www.casamhedge.com. • Throughout this presentation: • The S&P Index will serve as a proxy for a portfolio’s performance. • The CISDM CTA Index will serve as a proxy for a Managed Futures program’s performance. • The DUNN Composite performance is net of all pro forma fees and expenses. • The DUNN WMA Program is the current investable portion of the DUNN Composite. 2
Example #1 – – Tech Bubble Tech Bubble Example #1 Hedge Fund World Mid East 2010 – Hedge Fund World Mid East 2010 – Dubai, UAE Dubai, UAE January 1998 – December 2004 S&P 500 CISDM CTA Index DUNN WMA Past performance is NOT necessarily indicative of future results. 3 The previous chart took a broad look at performance correlation over the past nine years. However, it is interesting to note the performance correlation during difficult, i.e., negative periods for the S&P. Thus, let ’ s examine two relatively recent difficult periods. The first difficult period is the “ Tech Bubble ” that began in late 2000. This vicious bear market lasted about two years and devoured over 40% of the capital at the peak. This was a very upsetting experience, and no one could know how long it would take to recover … ASSUMING managers and investors had the confidence and courage to stay the course. During the plunge: • The S&P lost 43%. • Managed Futures delivered a return of +38%. • The DUNN WMA Program delivered a return of +209%. We know that Managed Futures are non-correlated to the S&P. However, when we begin to study S&P down markets, we find that Managed Futures become even more uncorrelated to the S&P in down markets and have historically provided investors with a true hedging opportunity. 3
Example #2 – – Sub Sub- -Prime Crisis Prime Crisis Example #2 Hedge Fund World Mid East 2010 Hedge Fund World Mid East 2010 – – Dubai, UAE Dubai, UAE December 2006 – December 2009 Past performance is NOT necessarily indicative of future results. 4 Our second example examines the more recent “ Sub-Prime Crisis ” . This plunge in the S&P was both shorter in duration and more painful as investors watched the S&P plummet over 50% from the peak in just 18 months. During the plunge: • The S&P lost 51%. • Managed Futures delivered a return of +18%, which more than compensated for lagging performance in the shoulder periods giving an overall return of +29% vs. a loss of 15%. • The DUNN WMA Program delivered a return of +81%. Before turning to another feature of Managed Futures it should be mentioned that: • These examples are generalizations of analysis that could be done to evaluate the benefits of Managed Futures with some other Alternative Asset Class. • To conduct a specific analysis, one would need to substitute the track record of the particular Hedge Fund and Managed Future program of interest, both of which are investable, in place of the index proxies we have used here, which are not investable. 4
S&P Correlations using All Months & Negative Months S&P Correlations using All Months & Negative Months Hedge Fund World Mid East 2010 Hedge Fund World Mid East 2010 – – Dubai, UAE Dubai, UAE Correlation with S&P 500 to Alternative Asset Classes From least to most correlated - 2001 through 2009 Managed Futures Futures Striped Bars = Negative S&P Months Global Macro Solid Bars = All S&P Months Mortgage Backed (Note: Negative months occurred in 42/108 or 39% of the time) Equity Market Neutral Convertible Arbitrage Convertible Arbitrage Merger Arbitrage Technology Fixed Income Arbitrage Equity Long/Short Event Driven Distressed Securities Emerging Markets Equal Weight Hedge Funds S&P 500 S&P 500 Past performance is NOT necessarily indicative of future results. 5 Now that we have examined two specific and significant examples of correlation in S&P down markets, let ’ s take a broader view of correlations in all markets vs. correlations during S&P down markets. For the purpose of this comparison, we are viewing correlations of various asset classes in all months (during the last nine years) vs. their same performance correlation in months in which the S&P suffered a loss. As we can see, the correlation for all asset classes decreased , while the performance correlation of Managed Futures became even more dramatic increasing from a negative correlation of 18% to a negative correlation of 44%. Again, the data confirms that Managed Futures serve as a true non-correlated investment alternative, and the empirical data shows the non-correlation benefits of Managed Futures become even more pronounced during S&P down months. 5
Correlation Comparisons – – All Alternative Asset Classes All Alternative Asset Classes Correlation Comparisons Hedge Fund World Mid East 2010 – Hedge Fund World Mid East 2010 – Dubai, UAE Dubai, UAE Past performance is NOT necessarily indicative of future results. 6 In the previous slides, we concentrated on the benefits of Managed Futures’ non-correlation to the S&P. However, it is highly unlikely that an institutional portfolio would include only one of the alternative asset options as a hedging tool. Thus, it is both appropriate and reasonable to consider how the performance of Managed Futures correlates with other alternative asset classes. Again, looking back over nine years (the longest period of time with sufficient data available to examine) we can view the data and see that against every other alternative asset class (with one exception) Managed Futures remains the least correlated asset, and is highlighted in green. In addition, the statistical study shows that the DUNN WMA Program, which is highlighted in blue, is even more uncorrelated. The most correlated alternative asset class is highlighted in red. 6
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