Post on 22-May-2020
Alternatives in Wealth Management Portfolios
Mads N. S. PedersenHead Asset Allocation, DiscretionaryCIO WM Global Investment Office
February 2013
CIO WM Global Investment Office For marketing purposes by UBS
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The Alternative Route…From a Distance it Looks Appealing
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The Use of Alternatives in UBS Wealth Management PortfoliosExecutive Summary and Overview:
• Strategic Asset Allocation (SAA) vs. Tactical Asset Allocation (TAA): why it is importantnot only to rely on history and optimizations
• Discretionary vs. advisory portfolios and the issue of who can invest in alternatives
- We use alternatives across most offerings
- But we use alternatives differently across market segments
- And not with the same approach for all sub-asset classes
• Most widely used are Hedge Funds, Real Estate and Commodities
• Private Equity is mainly used on the advisory side
• Everybody has a "portfolio", so we start with the SAA. But even asset classes, which are
not included in the SAA, are included in the advisory offering
3
Strategic Asset Allocation Approach – Why we do it…Objectives and Benefits
• Optimizing the long-term expected return for a given risk level of the portfolio
• Generating performance from asset class long-term expected returns and the positiveeffects of diversification
• Keeping the portfolio within predefined risk levels (expected volatility, drawdowns, etc.) –the investor can select a lower or higher risk/return
• The SAA and historic data can help clients to understand markets, illustrating the long-term benefit of a structured investment approach
• This helps preparing clients for instability and sticking to a beneficial long-term strategy
You can learn a lot from history, but do not focus too much on correlations andvolatility…
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SAA approach – Where to be careful with alternatives…Objectives and Benefits
• Don’t rely on historic data and optimization techniques as the final step in a portfolioconstruction process focus on expected return, draw downs, etc.
• Starting with Libor at +4% in 2007, you would have risked ending up substituting yourbonds with hedge funds…and other not so fortunate things…
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1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
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Global Hedge Funds Global Equit ies Global Bonds
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SAA approach … and how we do it… quant and more…
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Key Elements of Our SAA ConstructionsCombining quantitative and qualitative analysis
1. Defining the investment universe
2. Estimating multi business cycle "equilibrium" asset class returns and covariancematrices, including covariance matrices based on forward looking multifactor risk layerapproach
3. Estimating single business cycle (5-7 years) asset class returns – This is a valuationbased approach, which is built differently for each asset class
4. Consolidating asset class estimates within the described quantitative platform
5. Constructing SAAs based on optimal risk and return trade-off
HeaderMulti-BusinessCycle "equilibrium"Covariance Matrix& Returns
InvestmentUniverse -Definitionand Analysis
ConsolidationCovarianceMatrix & ReturnEstimates
Single BusinessCycle ExpectedReturns
Optimization& Final SAADecision
HeaderMulti-BusinessCycle "equilibrium"Covariance Matrix& Returns
InvestmentUniverse -Definitionand Analysis
ConsolidationCovarianceMatrix & ReturnEstimates
Single BusinessCycle ExpectedReturns
Optimization& Final SAADecision
1 2 3 4 5
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Interest Rates Unlikely to Reach Pre-crisis Levels in Next YearsUS central bank and 10-year interest rates
Source: UBS, Bloomberg, UBS CIO WM Global Investment Office as of 10.12.12
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The High Yield premium is Attractive – But for some investorsalso High Yield bonds Lacks LiquidityDecomposition of US HY total yield; expected defaults are based on model
Source: BoAML, UBS CIO WM Global Investment Office as of 10.12.2012
in%
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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Government bond yield
High yield premium
Default compensation(expected)
Total yield
Government bond yield
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"Illiquid" Funds Outperform more Liquid Hedge FundsHistorical performance
Source: HFR, UBS CIO WM Global Investment Office
50.0
100.0
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350.0
Dez02
Jun03
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US equities World equities ex US
US Government Bonds US Money Market (3-month)
Hedge Funds liquid (HFRX Global Index) Hedge Funds broad (HFRI Fund weighted composite)
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History and Projection Chart - CIO SAA "Yield" portfolio
Generated by QIS
The graph shows the historicalsimulated development of theportfolio and the value percentilesresulting from Monte-Carlosimulations.
The value percentiles show theprobability of the projectedportfolio values lying below agiven percentile.
The Allocation to alternatives isgenerally 10-20% for clientsbetween CHF/USD 100k –500mln.
Time horizon: +5 years, Initial amount: EUR 100
For illustrative purposes only. Markets are subject to change and returns may vary. See explanation under "Simulated Historical Performance", "Ex-Ante Estimates" and "Monte CarloSimulation" at the end of this document. Please note that this page is always to be read in conjunction with the risk information and explanations of terms appended to thispresentation.
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149.6
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2002 2004 2006 2008 2010 2012 2014 2016
EUR
Hist ory 5% 50% 95%
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Hedge Funds – Advisory OfferingStrategy and Manager Structure
Rel
ativ
eV
alu
e
35%
• Fund of hedge funds with a market neutral, non-directional investment style.
• Focused on credit and relative value strategies .
• Low annualized volatility profile.
Mu
lti-
Str
ateg
yM
acro
CTA
Eq
uity
Hed
geF
und
s
Manager 1
35% Manager 2
10% Manager 3
10% Manager 4
10% Manager 5
• Fund of hedge funds with a multi-strategy approach.
• Bottom-up allocation process with a focus on 3 key risks: Leverage, Liquidity & Concentration.
• Concentrated with 20 to 25 underlying positions of blue chip cornerstone positions.
• Single manager hedge fund invests in emerging currencies and local interest rates by takinglong and short positions, aiming to benefit from both rising and falling markets.
• Bottom-up macro analysis with position size moderated by top down input with a preference tohave in- depth focus on relatively small number of positions.
• Single manager hedge fund applying a systematic trend-following trading strategy, attempting totake advantage of the observable tendency of the markets to trend and to make exaggeratedmovements in both upward and downward directions.
• Mathematical & scientific research process to locate similarities between historical and currentdata.
• Single manager hedge fund with a fundamental bottom-up equity long/short investment strategybased on a research-intensive stock picking approach.
• Strong value bias and the investment process incorporates robust valuation disciplines in orderto identify stocks with the potential for growth.
Sat
ellit
eA
lloca
tion
30%
Cor
eA
lloca
tion
70%
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UBS Global DiversifiedAlternative (GDA)
Hedge Fund Capabilities for UBSUIS Hedge Fund Capabilities: Breakdown by underlying Hedge Fund Strategies
45%
15%
20%
15%
5%
Hedge Fund Capability - FocusMulti-Strategy
Hedge Fund Capability - FocusTrading Strategies
Equity HedgedTradingRelative Value
Event DrivenOther
31.2%
27.7%
23.7%
15.2%
2.2%
Equity HedgedTradingRelative Value
Event DrivenOther
Well diversified across the majorHedge Fund strategies
Strategy breakdown Strategy breakdown
31.2%
24.8%
36.0%
0.3%3.7%
Trading CommoditiesTrading Systematic CTATrading Global Macro
CashNiche
Strong focus on different tradingstrategies
Strategy breakdown
Well diversified Fund of HedgeFunds
For illustrative purposes only. The above allocation to strategies is indicative only and can be changed at any time at UBS' discretion.
Please always read in conjunction with the glossary and the risk information at the end of the document.
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-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
Jan-06Jun-06N
ov-06
Apr-07
Sep-07
Feb-08Jul-0
8
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May-09
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ov-11
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Monthly return Cumulative Return
UBS Stable Alpha (30%):Multi-Strategy FoHF particularly focused on non-directional, market neutral Creditand Relative Value strategies. Liquidity: Quarterly/37 days
XX (XX%):FoHF using a multi-manager investment strategy. The portfolio consists ofapproximately 22 - 27 managers utilizing L/S equity, global macro, multi-strategyand event driven strategies. Liquidity: Quarterly/65 days
UBS MMAC (XX%):FoHF investing in Hedge Funds managers operating in all global commoditiesmarkets including trading of commodity futures or forwards and physicalcommodities as well as equity and debt securities of companies engaged inextracting or producing commodities. Liquidity: Quarterly/65 days
XX (XX%):Single HF that employs an opportunistic strategy by dynamically allocating to acombination of various HF strategies; e.g. L/S equity, converts, credit, event driven.Liquidity: Quarterly/62 days
XX (x%):Single HF which opportunistically allocates capital across multiple strategies inEurope; namely Merger Arbitrage, Equity and Credit Special Situations, CapitalArbitrage, Convertible Arbitrage. Liquidity: Weekly +3days
Hedge Fund Capabilities for UBS Ultra Investment SolutionUIS Hedge Fund Capability - Focus Multi-Strategy
The simulated past performance is based on stable allocation and weightings of the underlying fundssince January 2006; similar to the starting weightings as illustrated above. No dynamic investmentprocess has been applied to reflect the simulated past performance.The above allocation to strategies and investment instruments are indicative only andcan be changed at any time at UBS' discretion.
In respect of the past performance of UCITS funds, the performance of the respectiveoffshore funds were included until the inception of the UCITS funds.
Description of Capability (segregated single positions)The Multi-Strategy capability may be used as complement to GDA fund or on astand-alone basis following a well-diversified Multi-Strategy approach. Thecapability is made up by two more concentrated Multi-Strategy FoHFs, acommodity trading FoHFs as well as two single HFs also employing a Multi-Strategy investment approach.
Overall, this Multi-Strategy capability is well diversified across most of the HFstrategies and markets on a global basis.
Description of Components
UBS Stable Alpha (30%)
XX. (XX%)
UBS XX (XX)
Moderate
XX (XX)
XX (XX%)
Annual return:
Annual volatility:
Risk Profile:
Historic6.3%
5.3%
Underlying funds:
For illustrative purposes only. Above performance refers to simulated past performance andpast performance is not a reliable indicator of future performance. See explanation under"Simulated Historical Performance" at the end of this document.
Performance in USD from Jan 2006 to Aug 2012
Source: UBS AG
The simulated past performance is calculated based on the monthly NAVs as provided bythe administrators of the underlying funds.
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-6.0%
-4.0%
-2.0%
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2.0%
4.0%
6.0%
Jan-06
Jun-06
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Sep-07Feb-08
Jul-08D
ec-08
May-09
Oct-09
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Jan-11Jun-11
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Apr-12
Sep-12
0.0%
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30.0%
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50.0%
60.0%
Monthly return Cumulative Return
Hedge Fund Capabilities for UBS Ultra Investment SolutionUIS Hedge Fund Capability - Focus Trading Strategies
Description of Capability (segregated single positions)The Trading capability may be used as complement to GDA fund or on a stand-alone basis following a diversified trading approach. The capability consists ofthree FoHF holdings mainly engaged in Global Macro, Commodities andSystematic CTA trading strategies, and one single UCITS Hedge Fund purelyfocusing on systematic CTA strategies.
Overall, the capability is focusing on trading strategies mainly made up bydiscretionary Global Macro and systematic CTA strategies.
Description of ComponentsXX (XX%):This FoHF provides participation in a dedicated selection of trading strategies (e.g.Global Macro, Systematic CTA’s).Liquidity: Monthly/48 days
XX (XX%):FoHF is focused on Global Macro and CTA trading strategies in equities, commodity,currencies and interest rate markets. Liquidity: Monthly/5 days
UBS MMAC (20%):FoHF investing in Hedge Funds managers operating in all global commoditiesmarkets including trading of commodity futures or forwards and physical commoditiesas well as equity and debt securities of companies engaged in extracting orproducing commodities. Liquidity: Quarterly/65 days
XX (XX%):Single Hedge Fund which employs a diversified trading program engaged in theopportunistic trading of futures, options, forwards, equities and CFDs on worldmarkets. Liquidity: Weekly/3 days
Annual return:
Annual volatility:
Risk Profile: Moderate
Historic6.1%
6.4%
XX (50%)XX (20%)UBS MMAC (20%)XX (10%)
Underlying funds:
1) The legal name of Winton Futures is 'DB Platinum IV dbX Systematic Alpha Index' fund which is theUCITS vehicle linked to the exposures and performance of the Winton Trading Strategy (launched on1st of January 2011).
Performance in USD from Jan 2006 to Aug 2012
Source: UBS AG
In respect of the past performance of UCITS funds, the performance of the respectiveoffshore funds were included until the inception of the UCITS funds.
The simulated past performance is calculated based on the monthly NAVs as provided bythe administrators of the underlying funds.
The simulated past performance is based on stable allocation and weightings of the underlying fundssince January 2006; similar to the starting weightings as illustrated above. No dynamic investmentprocess has been applied to reflect the simulated past performance.The above allocation to strategies and investment instruments are indicative only andcan be changed at any time at UBS' discretion.
For illustrative purposes only. Above performance refers to simulated past performance andpast performance is not a reliable indicator of future performance. See explanation under"Simulated Historical Performance" at the end of this document.
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Commodities in SAA
Commodities are highly volatile and can suffer from high draw downs
Single commodities are highly volatile – diversification or active management needed
Commodities lost diversification advantages
Price appreciation needed to compensate for future roll costs
Expected future returns are positive – but volatility will remain high(see page 19)
Commodities are not always attractive for buy and hold investors
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DJ-UBS Commodity Excess Return Index
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DJ-UBS Commodity Excess Return Index
Return p.a. 3.9%Volatility 15.7%Max DD -57%
In the long run, risk/return was not attractive
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Correlation between MSCI World on Commodities
-60%
-40%
-20%
0%
20%
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100%
12/92 12/97 12/02 12/07
DJUBSIndexCMCI IndexTrend Correlation to CMCI IndexTrend Correlation to DJUBSIndex
3 month rolling correlation MSCI World vs Commodities
Commodities lost a lot from diversification advantages
Dec 1992 until July 2012
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Volatility of commodities will remain highSupply and demand are price inelastic in the short run -> high volatility
Price
Quantity
Supply: price inelastic in the shortrun
Demand: price inelastic in the short run
Agriculture and Livestock:
• Supply determined by production,harvest and weather conditions
Energy and Industrial Metals:
• Supply shifts mostly determined bypolitical shocks/events
• Production is highly capital-intensive
• General commodity demanddetermined
by business cycle
• steady physical delivery is important
1919
CIO WM Global Investment Office Outlook for Commodities
2013-2017CMCI
WeightsExpected
spot returnRoll
yield CollateralExpected
Return
Energy 34.2% 10.5% -3.4% 2.1% 9.1%Precious Metals 5.5% 4.3% -2.2% 2.1% 4.2%Industrial Metals 27.1% 5.8% -1.5% 2.1% 6.4%Agriculture 33.2% 6.0% -4.0% 2.1% 4.1%Commodities 100.0% 7.4% -3.0% 2.1% 6.4%Commodities excl. Prec. Metals 7.6% -3.1% 2.1% 6.6%
Expected returns may be interesting, but with high uncertainty andcombined with high volatility:
• We therefore prefer a zero allocation across SAAs
• We include commodity managers in our Hedge Fund offering
• We maintain an active offering of TAA and thematic ideas, and acoverage in the Asset Allocation team
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The Use of Alternatives in UBS Wealth Management PortfoliosFinal remarks…and where we take from here…
• Not all Hedge Funds are created equal…
• Some approaches to Hedge Funds include total return investing and equalcontribution to risk
• Currently we are increasingly shifting in this direction
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Risk Information
This material is intended for information and UBS marketing purposes only.It is not to be regarded as investment research, a sales prospectus, an offer or solicitation of an offer to enter in any investment activity. Please note that UBSretains the right to change the range of services, the products and the prices at any time without prior notice and that all information and opinions indicated aresubject to change. Certain services and products are subject to legal provisions and cannot therefore be offered world-wide on an unrestricted basis. Assetclasses, asset allocation and investment instruments are indicative only.Some figures may refer to the past or simulated past performance and past performance is not a reliable indicator of future results. Some figuresmay be forecasts only and forecasts are not a reliable indicator of future performance.Some charts and/or performance figures may not be based on complete 12-month periods which may reduce their comparability and significance. If the currencyof a financial product or financial service is different from the currency of your home country, the return may increase or decrease as a result of currencyfluctuations. Fees may not be included and these will reduce future performance accordingly.Please be reminded that all investments carry a certain degree of risk. Your attention is hereby drawn to such risk (which can be substantial). Some investmentsmay not be readily realisable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposedmay be difficult. Some investments may be subject to sudden and large falls in value and on realisation you may receive back less than you invested. You shouldconsult your UBS client advisor on the nature of such investment and carefully consider whether such investment is appropriate for you.Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice andmakes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific client'scircumstances and needs. Clients should obtain independent legal and tax advice on the suitability of products, assets or instruments beforeinvesting and as they may consider appropriate.At any time UBS and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevantsecurities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer.This material is not intended for distribution into the US and / or to US persons or in jurisdictions where its distribution by us would be restricted. Source of allinformation is UBS unless otherwise stated. UBS specifically prohibits the redistribution of this material in whole or in part without the written permission of UBSand UBS accepts no liability whatsoever for the actions of third parties in this respect.Source of all information is UBS unless otherwise stated. Should you have any questions, please contact your UBS client advisor.© UBS 2013. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.