“The Uneven Hedge”
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Transcript of “The Uneven Hedge”
“The Uneven Hedge”
Presentation CIFPS Conference, June 20, 2005
Intelligent Investing
May 5, 2005 2
Miklos Nagy, CFA, CFP
CEO and co-founder of Quadrexx a leading hedge fund expert in Canada Founder and Chairman of Canadian Hedge Watch Inc. -
Canadian leader in hedge fund information / education (www.canadianhedgewatch.com)
Co-author of Canada’s first hedge fund book “Hedge Funds for Canadians”. This book was the number 5 best selling investment book in Canada. Updated second edition is published in June, 2005 by Wiley.
Co-author of CHAIP course (Chartered Alternative Investment Planner) for IFIC (www.ific.ca) and CIFPs (www.cifps.ca)
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The Global Hedge Fund Market
Hedge Funds globally: between US$1 and US$1.5 trillion
Fund of hedge funds represent over 35% of hedge funds in terms of AUM
Growth in FOHF is fastest within the hedge fund industry (40% per year since 2000)
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The US Hedge Fund Market
Still account to roughly 50% of global hedge fund market
SEC vs FED view of hedge funds Increased regulation on hedge funds in
the coming years
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Why Hedge FundsHedge Funds versus Equities/Bonds – Long-Term
Global Hedge Fund Net Returns*
January 1, 1988 - December 31, 2004
Style/StrategyAnnualReturn
StandardDeviatio
n
SharpeRatio
Van Global HFI 16.0% 8.8% 1.5
MSCI World Equity 6.6% 16.1% 0.3
S&P 500 12.4% 15.2% 0.7
Morningstar Average Equity Mutual Fund 10.0% 15.7% 0.6
Lehman Brothers Aggregate Bond Index 8.1% 4.4% 1.3
* Source: VanHedge
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Why Hedge Funds Hedge Funds versus Equities/Bonds – Snap ShotsJanuary, 1995 to March, 2000
BULL MARKETVAN Global Hedge Fund
Index
MSCI World Index
Annualized Return: 20.21% 19.86%
Annualized Standard Deviation:
8.51% 13.34%
Sharpe Ratio (4%):
1.90 1.19
April, 2000 to March, 2005DIFFICULT MARKET
VAN Global Hedge Fund
Index
MSCI World Index
Annualized Return: 6.29% -5.91%
Annualized Standard Deviation:
5.87% 13.68%
Sharpe Ratio (4%):
0.39 -0.72
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Low correlation to Major Markets:
During distressed market conditions, some Hedge Funds lose their diversifying properties; i.e. Concentration Risk
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Correlation switching
This is an example of how individual managers change correlations during distress.
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The Canadian Hedge Fund Market
Hedge Funds in Canada: AUM estimated to be between $26 billion ($16 billion retail)
Fund of hedge funds represent between 35% and 40% of hedge funds in terms of AUM
Fastest growing hedge fund type used to be (until Portus) in the Canadian hedge fund industry: Guaranteed Notes backed by major banks
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The Canadian Hedge Fund Market
Fagmented market depending on:1. Type of Product2. Province of Residence3. Investor Class:
Accredited Investor Eligible Investor Investor signing “Risk Acknowledgement
Form” Anybody else
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The Canadian Hedge Fund Market
The Effect of PORTUS Canada needs more level playing field for hedge funds
The growth in Principal Protected Notes will slow considerably
More regulation is likely
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The effect of Principal Protection(based on back-tested data bw. Jan, 1998 to Dec, 2004)
Type of Investm
ent
Percentage ofPrincipal in FOHF
Percentage of Principal in
Bonds
AnnualizedReturn
AnnualizedStandard Deviation
FOHF 100% 0% 8.82% 8.03%
PPN 25% (unleveraged) 75% 1.17% 1.74%
PPN 50% (100% leveraged) 75% 2.71% 3.84%
PPN 75% (200% leveraged) 75% 4.13% 5.80%
PPN 100% (300% leveraged) 75% 5.44% 7.64%
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Who is Quadrexx Asset Management Inc.: Toronto based asset management firm:
Managing unique and high quality alternative investment products.
The company was established in March, 2003 by the leaders of Canadian Hedge Funds to build a platform for a fund of hedge funds building on their relationship with Professor Luis Seco (Sigma)
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Quadrexx Market Neutral Performance Fund’s Back-Tested Return Statistics(as of February 28, 2005)
Performance QMNPF S&P 500 S&P/TSXSC
UniverseVan GlobalHF Index
1 year: 3.75% -1.09% 10.94% 5.26% 6.20%
3 year: 12.95% -4.17% 8.84% 7.53% 8.87%
5 year: 16.89% -4.17% 1.52% 7.90% 6.86%