Alternatives 201: Practical Applications

Our PanelOur Panel

•Deborah Fields, Partner, KPMG LLC

•Allison Mortensen, CFA, Senior Investment Manager, Aberdeen Asset Management Inc.

•Jacqueline Rantanen, Principal in the Product Management Group, Hamilton Lane •Brian Vargo, Partner, Dechert, LLP

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© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Alternative Investments –A Nontraditional Asset Class

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Alternative Investment

© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Types of Alternative Investments

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© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Common Characteristics of Alternative Investments

Run by expert management Major investors in the funds they manage Paid both management and performance or incentive

fees Not publicly traded, however consider PTPs Use leverage to enhance returns Illiquid, however consider hedge funds Provide limited transparency to investors, but

improving Difficult to value May be unregistered

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What is a Hedge Fund?

• The first hedge fund was launched in 1949 by Alfred Winslow Jones, a Harvard-educated editor at Fortune magazine

• This was three years before Harry Markowitz published his first article on Modern Portfolio Theory, “Portfolio Selection” (Journal of Finance)

• Jones formed the fund, which invested in what he perceived to be successful (long) and unsuccessful (short) stocks and strategies, in order to seek profits regardless of market direction

• It was called a “hedge fund” because the original intent was to hedge against declines in certain stock prices

• Today, hedge funds have become more varied in style; in some cases, they are misnamed, as they do not attempt to hedge market risk

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Why invest in Hedge Funds?

Potential Advantages:

•Ability to short

•Lower correlation

•Volatility Management

•Less drawdown in down markets

•Diversified return characteristics

Risks:

•Can change risk profile of portfolio

•Lack of liquidity

•Lack of transparency

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Hedge fund strategy classifications

Source: Hedge Fund Research , October 2013

Equity Hedge Event Driven Macro Relative Value

Equity Market Neutral Activist Active Trading Fixed Income Asset Backed

Fundamental Growth Credit Arbitrage Commodity: Agriculture Fixed Income Convertible Arbitrage

Fundamental Value Distressed/Restructuring Commodity: Energy Fixed Income Corporate

Quantitative Directional Merger Arbitrage Commodity: Metals Fixed Income Sovereign

Sector: Energy/Basic Materials Private Issue/Regulation D Commodity: Multi Volatility

Sector: Technology/Healthcare Special Situations Currency: DiscretionaryYield Alternatives:

Energy Infrastructure

Short Bias Multi-Strategy Currency Systematic Yield Alternatives: Real Estate

Multi-Strategy   Discretionary Thematic Multi-Strategy

    Systematic Diversified  

    Multi-Strategy