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Hedge Fund Scoring
Hard and Soft Information
Disclaimer
This presentation is subject to amendment and revision. This presentation is issued for information purposes only on a strictly confidential basis. This presentation contains information about BSP Funds Ltd. (“The Company”), a private company. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. It is the responsibility of any person or persons in possession of this material to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile and which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. Investors should note that there can be no assurance that an investment will be successful, or that the objectives of the investment will be attained.
Hedge Funds are suitable for experienced long term investors able to risk the capital invested and not requiring income. Not suitable for inexperienced or short term investors. All information, graphs, data and reports contained in this presentation are based on information obtained from various sources. The accuracy of such information has not been verified and therefore cannot be guaranteed for its accuracy or completeness. The Company assumes no responsibility to any person for good faith errors or omissions in the calculation of any information and report. All the contents of this publication or attached files either in whole or in part may not be reproduced, stored in a data retrieval system, or transmitted, in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the written permission of The Company. Past performance is not indicative of future performance.
This presentation is private and confidential and its content or any part thereof may not to be forwarded or disclosed to any person or entity absent The Company’s consent.
About BSP
• Focus on the Hedge Fund Universe
• Provide Advisory services on Hedge
Fund Portfolios
• Combine quantitative and qualitative
analysis in the process of Hedge Fund
Scoring and portfolio construction
Rationale for seeking Alpha in the Hedge Fund universe
Rationale for seeking in the Hedge Fund Universe vs. the traditional Long only universe:
1. Freedom to express investment thesis
2. Potential larger compensation
3. Control on Flow of Funds/Level of Assets Under Management due to better alignment of interests between fund manager and investors
Hedge Funds
“Traditional”/
Long Only
Funds
1. Investment Universe
Source:
Bloomberg
2. Fee Structure
The fee structure in the Hedge Fund Universe typically consists of both Management & Performance based Fees (2% & 20%)
The potential higher compensation attracts talented managers to the Hedge Fund Universe
The higher fees create a higher Alpha threshold vs. Passive investment vehicles
Source:
Bloomberg
3. AUM Control
• It is not uncommon for Hedge Funds to
return capital to investors if they think
their AUM has grown too much
• It is even more common for Hedge
Funds to “close” for new investments in
order to sustain Excess performance
3. AUM Control
• It is not uncommon for Hedge Funds to
return capital to investors if they think
their AUM has grown too much
• It is even more common for Hedge
Funds to “close” for new investments in
order to sustain Excess performance
3. AUM Control
Source: FT
3. AUM Control
Source: NY Times
Long Short Equity Hedge Fund Indices vs. Peers
Long Short Equity Hedge Fund Indices vs. Peers
Equity Mutual Funds – US Large Cap Index
R2=0.96
Equity Mutual Funds – US Large Cap Index36 months Rolling ; vs. S&P 500
Equity Mutual Funds – US Index
R2=0.92
Equity Mutual Funds – US Index36 months Rolling ; vs. S&P 500
Equity Mutual Funds – US Index
R2=0.83
Equity Mutual Funds – US Index
R2=0.92
Long/Short Equity Hedge Fund Index
R2=0.64
Long/Short Equity Hedge Fund IndexDJ CS Long/Short Equity Index, 36 Months Rolling ; vs. S&P 500
Long/Short Equity Hedge Fund IndexHFRI Equity Hedge Index
R2=0.72
Long/Short Equity Hedge Fund IndexHFRI Equity Hedge Index, 36 Months Rolling ; vs. S&P 500
Long Short Equity Hedge Fund Indices vs. Peers
BSP empirical findings
• Talent is scarce (even in the HF universe…)
• Past performance is not necessarily indicative of future performance
• Consistent Statistically significant Alpha generation in the past (=investment skills) + robust risk management is indicative of Alpha generation in the future
• Combining Quantitative and Qualitative analysis enhances Hedge Fund Selection skills
Lessons from Four Hedge Funds:Analysis of Data/information pre 2008 crisisand outcome in 2008 & onwards (“post crisis”)
Fund I & Fund TPre-Crisis
• Both funds are classified as Multi-Strategy Funds
• Both funds are active since the early ‘90s
• Both funds Majority Gross exposure is in the Equity universe
• Both funds had 85%+ positive months in the 5 years prior to 2008 vs. 72% for S&P 500
• Both funds had an annualized standard deviation lower than 5.2% in the 5 years prior to 2008 vs. >8.5% for S&P 500
Funds I & T, Accumulated PerformancePre-Crisis
Funds I & T, Accumulated PerformancePre-Crisis
Funds I & T, Accumulated PerformancePost-Crisis
Fund I & Fund TPost-Crisis
• Both funds are classified as Multi-Strategy Funds
• Both funds are active since the early ‘90s
• Both funds Majority Gross exposure is in the Equity universe
• Fund I had 80%+ positive months post crisis. Fund T had 67% positive months post crisis vs. 59% for S&P 500
• Fund I had an annualized standard deviation lower than 5.2%. Fund T had an annualized standard deviation of 11.3% vs. 20% for S&P 500
Fund I & Fund T
Was there any indication in the available
data pre-crisis to indicate:
• The consistency in performance
between Fund I pre-crisis & Fund I
post-crisis
• The inconsistency in performance
between Fund T pre-crisis & Fund T
post-crisis
Fund T36 Months rolling MLR vs. Dow Jones Credit Suisse HF Indices
Risk Arbitrage
Long/Short Equity
Long/Short EquityEvent Driven
Distressed
Fund T - Pre-Crisis36 Months rolling MLR vs. Dow Jones Credit Suisse HF Indices
Risk Arbitrage
Long/Short Equity
Event Driven
Long/Short Equity
Dedicated Short
Distressed
Fund T - Post-Crisis36 Months rolling MLR vs. Dow Jones Credit Suisse HF Indices
Event
Driven
Distressed
Fund I36 Months rolling MLR vs. Dow Jones Credit Suisse HF Indices
Event Driven
Fund I - Pre-Crisis36 Months rolling MLR vs. Dow Jones Credit Suisse HF Indices
Event Driven
Macro
Fixed Income
Arbitrage
Fund I - Post-Crisis36 Months rolling MLR vs. Dow Jones Credit Suisse HF Indices
Event Driven
Fund I & Fund T
• Assessing investment management skills in the past in order to project on the future requires investment strategy consistency
• Fund I had a consistent investment strategy while in Fund T there was a strategy drift
BSP has advised a full redemption of fund Twhich was executed through mid 2007.
BSP has advised to continue holding Fund I Pre and Post 2008.
Fund R & Fund J - Pre-Crisis
• Both funds are classified as Long/Short Equity Funds
• Both funds are active since the late ‘90s
For the 5 years prior to 2008:
• Fund R:
Alpha: 1% (Statistically significant, monthly vs. S&P500)
Beta: 0.24
• Fund J:
Alpha: 0.8% (Statistically significant, monthly vs. S&P500)
Beta: 0.19
Accumulated PerformancePre-Crisis
Accumulated PerformancePost-Crisis
Fund R & Fund J - Post-Crisis
• Both funds are classified as Long/Short Equity Funds
• Both funds are active since the late ‘90s
Post Crisis:
• Fund R:
Alpha: 0.1% (Statistically non-significant, monthly vs. S&P500)
Beta: 0.32
• Fund J:
Alpha: 0.7% (Statistically significant, monthly vs. S&P500)
Beta: 0.18
Fund R & Fund J
Was there any indication in the available
data pre-crisis to indicate:
• The consistency in Alpha generation in
Fund J pre-crisis & Fund J post-crisis
• The inconsistency in Alpha generation
in Fund R pre-crisis & Fund R post-crisis
Fund JPre-Crisis, Rolling 36 Months vs. S&P 500
Fund JPost-Crisis, Rolling 36 Months vs. S&P 500
Fund RPre-Crisis, Rolling 36 Months vs. S&P 500
Fund RPost-Crisis, Rolling 36 Months vs. S&P 500
The answer is not in the quantitative analysis but rather in the qualitative analysis.
Fund R, characteristics:
• Buy and Hold
• Hold/Increase positions when markets go against your investment thesis
Fund J, characteristics:
• Trading oriented
• Decrease Gross/Net/Position concentration when markets go against your investment thesis
Fund R & Fund J
Pre & Post Crisis trading environment
During 2007 when the credit crisis
materialized BSP has advised shifting the
Long/Short Equity books from a blend of
“buy an Hold” and “trading oriented”
managers to solely “trading oriented”
managers. As the latter are more fit to a
Macro uncertain and volatile
environment.
Fund R & Fund J
Summary
• There is a rationale for excess returns in
the Hedge Fund Industry
• There is supportive evidence for excess
returns in the Hedge Fund Industry
• Quantitative analysis must be
combined with Qualitative analysis to
support better investment decisions