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This document is delivered to you by AB Europe GmbH and is directed at Professional Clients only. It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed in this document are based on our internal forecasts and should not be relied upon as an indication of future market performance. Past performance is no guarantee of future returns. This document is not intended for public use.
©2015 AB Europe GmbH
EMERGING TRENDS IN ALTERNATIVE INVESTING
April 2015
Christine Johnson, CFA Managing Director, AB Alternatives
Trends in Alternative Investing | 2
Alternative Reality
Growth of Alternatives
Alternative UCITS
Benefits of Alternatives
Implementing a Solution
Evolution of Alternatives
Private Credit
AB Alternatives Platform
Q&A
Trends in Alternative Investing | 3
The Universe of Alternative Investments Is Expanding
HedgeFunds
Real Estate PrivateEquity
AlternativeUCITS
Mutual Funds
Liquid Evolution
DirectLending
Real EstateDebt &Equity
Infrastructure
Commodities
Liquid Alternatives and Private Credit are Two Emerging Themes
Private Credit
Trends in Alternative Investing | 4
Global Alternatives AUM Continues to Grow
As of December 31, 2014Source: BCG Global Asset Management Market Sizing Database, 2013 Includes hedge, private-equity, real estate, infrastructure, and commodity funds; Citi Prime Finance analysis based on Towers Watson Global Pension Studies, NACUBO & Commonfund Studies, Preqin, SWF Institute and Towers Watson
Alternative Assets ($ Trillions)
2003 2008 2013 2014
$1.9
$3.9
$6.0
$6.9
Trends in Alternative Investing | 5
Institutions are Allocating to Alternatives Globally
5
*Alternatives include private equity, growth-oriented fixed income, real assets, hedge funds, and multi-asset fundsLeft display: as of December 31, 2014; Right display: as of March 31, 2014Source: BNY Mellon U.S. Master Trust Universe; Mercer, Asset Allocation Survey, 2014
Strategic Allocations, Europe (%)Median Allocations by Asset Class, United States
2% Cash
49% Equity
30% Fixed Income
20% Alternatives
Germany Average
1 27 137
21
65
52
93
11 9
Cash Domestic Equity Non-Domestic Equity Bonds Property
Alternatives*
Trends in Alternative Investing | 6
Private Credit Strategies
Trends in Alternative Investing | 7
Changing Role of Banks: Impact of Regulatory Changes
Mortgage litigation
Qualified mortgage requirements
CLO risk retention
Leveraged lending guidance
Regulatory Changes/Litigation
Mortgage lending
Mortgage servicing
Middle market lending
Commercial finance
Businesses Impacted
Insurance companies and pension funds
Asset managers
Hedge funds
Specialty finance companies
Beneficiaries
Regulatory Changes Are Impacting Banks in Multiple Ways, Benefiting Alternative Credit Providers
Trends in Alternative Investing | 8
Private Credit: A New Opportunity Set for Investors
Investment Grade
High Yield
Securitized
EmergingMarkets
Public Credit
Residential Mortgages
Commercial Mortgages
Middle Market Corporate
Infrastructure
Asset-Backed
PrivateCredit
Source: AB
TimeBalance Sheet
Trends in Alternative Investing | 9
Case Study: The Market Opportunity for Infrastructure Debt
Global Infrastructure Investment Gap Through 2030 Constant 2010 Dollars (USD Trillion)Global Investment (2013–2030)
*OECD estimate as of January 16, 2014 Source: S&P Ratings Direct Global Infrastructure: How to Fill a $500 Billion Hole
Roads Rail Ports Airports Power Water Telecom Total
+16.6+4.5 +0.7
+2.0
+12.2
+11.7
+9.5 57.3
Trends in Alternative Investing | 10
Market Trends in Infrastructure Debt
As of December 2014Source: Preqin Investor Outlook, Alternative Assets, H1 2015
Preferred Route to MarketBy Route to Market, 2012-2014
Regions Targeted in the Next 12 MonthsBy Region, H1 2015
Europe North America
Asia Rest of World
Global Emerging Markets
0
10
20
30
40
50
60
49%
35%
15% 15%
36%
19%
Unlisted Funds Direct Investment Listed Funds0
10
20
30
40
50
60
70
80
90
65%
56%
6%
Trends in Alternative Investing | 11
Risk/Return Profile Correlations*
Infrastructure Debt: In the Context of Your Overall Portfolio Diversification
On a Risk-Adjusted Return Basis, Infrastructure Debt Can Serve as a Complementary Fit to a Broader Credit Portfolio
As of March 31, 2014. *10-year risk, return, and correlations. Public Infrastructure Debt: BofA ML Euro Single A Utilities Index EUR; Global Bonds: Barclays Global Aggregate TR EUR; US Gov't Bonds: Barclays US Treasury TR US; Cash: BofAML Euro LIBOR 1 Mon CM TR EUR; EU Gov't Bonds: BofAML European Union Govt TR Hdg EUR; Global HY: BofAML Gbl HY Constd TR EUR; EU Equities: MSCI Europe NR EUR; Global Equities: MSCI World NR EUR; Infrastructure Equities: S&P Global Infrastructure TR EUR. All indexes hedged to EUR.Source: AB
0 2 4 6 8 10 12 14 16
0
2
4
6
8
10
Infrastructure Debt
Public Infrastructure Debt
Infrastructure Equities
Global Equities
EU Equities
Global HY
EU Gov't Bonds
Cash
US Gov't Bonds
Global Bonds
Standard Deviation
Pe
rce
nt
Re
turn
EU Gov't Bonds
US Gov't Bonds
Global Bonds
Global HY
Infrastructure Equities
Global Equities
EU Equities
0.0 0.2 0.4 0.6 0.8
Correlation to Infrastructure Debt
Trends in Alternative Investing | 12
Alternatives UCITS
Trends in Alternative Investing | 13
Liquid Alternatives Growth: Mirror Image of the Hedge Fund Industry
Growth of Hedge Fund Industry AUM versus Alternative Mutual Funds and UCITS
Hedge Fund data: as of December 31, 1998; ’40 Act Mutual Fund data: as of March 31, 2014; UCITS data: as of December 31, 2014Source: Citi Investor Services analysis based on HFR and Morningstar data, Morningstar Direct
19902006
19912007
19922008
19932009
19942010
19952011
19962012
19972013
19982014
0
50
100
150
200
250
300
350
400
US
D B
illio
ns Hedge Fund Industry
1990 - 1998
Alternative Mutual Funds2006 - 1Q:2014
$374 Bil.
$352 Bil.
$2.7 Trillion (Current)
$2.4 Trillion (E2020)
Alternative UCITS2008 - 2014
$257 Bil.
Trends in Alternative Investing | 14
Growth Accelerated in the UCITS Market in 2014
As of December 31, 2014Source: Morningstar Direct
Assets Under Management
2008 2009 2010 2011 2012 2013 20140
50
100
150
200
250
49.3
79.0
115.7129.8
156.4
198.0
256.7
Bill
ion
s (E
UR
)
# of Strategies 878698539309235157 433
Trends in Alternative Investing | 15
Benefits of Alternative UCITS
Trends in Alternative Investing | 16
Potential Investment Benefits of Alternative UCITS
Benefits
Improved Risk-adjusted returns
Reduced downside
Lower sensitivity to
the market and interest rates
It is important to note that alternative UCITS products carry risk. Please refer to “Risks to Consider” in the Disclosures for more information.
Trends in Alternative Investing | 17
Annualized VolatilityAnnualized Returns
Alternatives Have Offered Attractive Risk-Adjusted Results
Past performance does not guarantee future results.As of December 31, 2014Alternatives represented by HFRI Fund-Weighted Composite Index; Stocks by MSCI World Index; Bonds by Barclays Global Aggregate Bond Index; Cash by ICE LIBOR 3 Month USD Index. An investor cannot invest directly in an index and its performance does not reflect the performance of any AllianceBernstein portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio.Source: Barclays, Hedge Fund Research, ICE Benchmark Administration and AB
Alternatives Stocks Bonds Cash
10.6%
6.4% 6.3%
3.8%
Alternatives Stocks Bonds Cash
6.8%
15.2%
5.4%
0.9%
Last 25 Years
Trends in Alternative Investing | 18
Downside Protection in Declining Equity Markets Peak to Trough Declines, January 1990 – December 2014
Alternatives Could Offer Attractive Downside Characteristics
Past performance does not guarantee future results.Through December 31, 2014Alternatives represented by HFRI Fund Weighted Composite Index; stocks by MSCI World Index. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio.Source: Barclays, HFR, MSCI and AB
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-60%
-50%
-40%
-30%
-20%
-10%
0%
Stocks Alternatives
Pe
rce
nt
Trends in Alternative Investing | 19
Benefit of an Alternatives Allocation
Growth of $1,000 (January 1990 – December 2014)
1990
2002
2014
$500
$1,500
$2,500
$3,500
$4,500
$5,500
$6,500
50% Stocks / 30% Bonds / 20% Alts 60% Stocks / 40% Bonds
$5,232
$6,289
Past performance does not guarantee future results.As of December 31, 2014. These returns are for illustrative purposes only and do not reflect the performance of any fund. Diversification does not eliminate the risk of loss. An investor cannot invest in an index. These figures do not include the sales charges or operating expenses associated with an investment in a mutual fund, which would reduce total returns.Stocks represented by Morningstar World Stock category; Bonds represented by Morningstar Intermediate Bond category; Alts represented by the HFRI Fund Weighted Composite Index.Source: HFR, Morningstar and AB
Trends in Alternative Investing | 20
Implementing a Solution
Trends in Alternative Investing | 21
A Framework for Implementing Alternative UCITS
Allocate Selection Criteria
Manager Selection
Define InvestmentObjective
Diversified Multi-Strategy
Individual manager
Manager dispersion
Strategy selection
Trends in Alternative Investing | 22
Diversified Multi-Strategy versus Individual Managers
Access to quality alternative funds which may
not be available as individual funds
Diversified across a number of managers and
strategies
Transparency position that allows robust risk-
management oversight
Diversified Multi-Strategy
Select an individual alternative managers
Control over selection and strategy
rebalancing decisions
Requires significant time and skill
Individual Manager
Trends in Alternative Investing | 23
No Alternative Strategy Always Wins
Returns Across Alternative Strategies FluctuateAnnual Percentage
Past performance does not guarantee future results.Through December 31, 2014Relative value represented by HFRI Relative Value; equity hedge by HFRI Equity Hedge; event driven by HFRI Event Driven; Multi-manager by HFRI Fund Weighted Composite USD; global macro by HFRI Macro; stocks by MSCI World; bonds by Barclays US Aggregate Bond.Source: Hedge Fund Research and AB
Relative Value
Long/Short
Event Driven
Multi-Manager
Global Macro
Stocks
Bonds
2000
13.41
9.09
6.74
4.98
1.97
–13.18
11.63
2001
12.18
8.92
6.87
4.62
0.40
–16.82
8.44
2002
7.44
5.44
–1.45
–4.30
–4.71
–19.89
10.26
2003
25.33
21.42
20.54
19.55
9.72
33.11
4.10
2004
15.01
9.03
7.68
5.58
4.63
14.72
4.34
2005
10.60
9.30
7.29
6.79
6.02
9.49
2.43
2006
15.33
12.89
12.37
11.71
8.15
20.07
4.33
2007
11.11
10.48
9.96
8.94
6.61
9.04
6.97
2008
4.83
–18.04
–19.03
–21.82
–26.65
–40.71
5.24
2009
25.81
25.04
24.57
19.98
4.34
29.99
5.93
2010
11.86
11.43
10.45
10.25
8.06
11.76
6.54
2011
0.15
–3.30
–4.16
–5.25
–8.38
–5.54
7.84
2012
10.59
8.89
7.41
6.36
–0.06
15.83
4.21
2013
14.28
12.51
9.13
7.07
–0.44
26.68
–2.02
6.17
4.20
3.35
2.05
1.38
2014
4.94
5.97
Trends in Alternative Investing | 24
Choosing the Right Manager Is Crucial
Past performance does not guarantee future results.Through December 31, 2014Equity hedge represented by HFRI Equity Hedge Index constituents; credit/relative value by HFRI Relative Value Index constituents; event driven/special situations by HFRI Event Driven Index; macro by HFRI Macro Index; multi-manager by HFRI Fund Weighted Composite Index constituents; stocks by active Morningstar category World Stock constituents; bonds by active Morningstar category Intermediate-Term Bond constituents; and world allocation by active Morningstar category World Allocation constituents.Source: HFR, Morningstar and AB
And Doing So Takes Experience
Range of Manager Returns (2010–2014)
Stocks Bonds WorldAllocation
Equity Hedge
Credit/ RelativeValue
Event Driven/
Opportunistic
Macro Alternatives-10
-5
0
5
10
15
20
25
Pe
rce
nt
Alternative StrategiesTraditional Asset Classes
Trends in Alternative Investing | 25
Key Considerations in Manager Selection
For illustrative purposes only.Source: AB
Experience
Track Record
Infrastructure
Do they have experience in the strategy offered?
How has the strategy or other related strategies done? How similar are the related strategies? What should I expect in different market conditions?
Compliance Risk Management
Trends in Alternative Investing | 26
Evolution of Alternatives UCITS
Trends in Alternative Investing | 27
Evolution of Alternative UCITS
For illustrative purposes only.Source: AB
First generation
Fund of individual Alternative UCITS
Internal or External or combination
Fund of Alternative UCITS
Diversified approach using hedge fund quality
sub-accounts
Flat fee with no incentive fee
Transparency of position level information
Risk management through managed accounts
Diversified Multi-Strategy
Trends in Alternative Investing | 28
Different Approaches to Multi-Strategy Alternatives
As of December 31, 2014Source: Morningstar Direct and AB
Diversified Multi-Strategy
Fund of Alternative UCITS Multi-Strategy
More Diversified Less Diversified
Many Investors Have Historically Allocated to a Less Diversified Approach
Trends in Alternative Investing | 29
AB Alternatives Platform
Trends in Alternative Investing | 30
Extensive Alternative Capabilities
Multi-Dimensional Strategies Tailored for Unique Client Challenges and Objectives
As of December 31, 2014. For illustrative purposes only. There can be no assurance that any alternative investment strategy will achieve its investment objectives.Investments in alternative strategies can be speculative and involve a high degree of risk and volatility. Alternative investment funds are typically unregistered and subject to reduced regulatory oversight. Performance compensation may create an incentive to make riskier investments. Alternative investments may involve higher fees and limit transferability and liquidity. AB and its affiliates have relationships and may engage in activities that may pose conflicts of interest. Please consult the applicable offering document(s) for more details. *Total AUM does not include committed capital; total AUM including committed capital is $23.0 billion. Liquid alternative AUM includes nontraditional equity, fixed income/private credit, multi-asset, and real estate liquid alternative products that are available; liquid alternative assets are included in the total AUM figure. †Includes hedge fund and private equity investments, including a custom portfolio of private equity funds managed by the Multi-Manager Team for an institutional investor. Source: AB
Why AB
AB manages over $22 billion in alternatives across traditional hedge fund, real estate, private credit, private equity and liquid strategies
A dedicated partner using innovative educational approaches to support advisors
Extensive relationships with quality hedge fund managers with strong pedigrees
Managing Alternatives Since 1996Total AUM: US$22.8 billion*Liquid Alternatives: US$7.7 billion
NontraditionalEquity$4.4
Real Estate$2.8
Fixed Income/Private Credit
$1.8
Nontraditional Multi-Asset
$1.6
Multi-Manager
Hedge Fund†
$12.1
Trends in Alternative Investing | 31
Q&A
Trends in Alternative Investing | 32
Risks to Consider
Market Risk: The market values of the portfolio’s holdings rise and fall from day to day, so investments may lose value.
Derivatives Risk: Investing in derivative instruments such as options, futures, forwards or swaps can be riskier than traditional investments, and may be more
volatile, especially in a down market.
Diversification Risk: Portfolios that hold a smaller number of securities may be more volatile than more diversified portfolios, since gains or losses from each
security will have a greater impact on the portfolio’s overall value.
Capitalization Size Risk (Small/Mid): Small- and mid-cap stocks are often more volatile than large-cap stocks—smaller companies generally face higher risks
due to their limited product lines, markets and financial resources.
Active Trading Risk: A higher rate of portfolio turnover increases transaction costs, which may negatively affect portfolio returns and may also result in substantial
short-term gains, which may result in adverse tax consequences for shareholders.
Short Sale Risk: The Strategy may not always be able to close out a short position on favorable terms. Short sales involve the risk that the Strategy will incur a
loss by subsequently buying a security at a higher price than the price at which it sold the security short. The amount of such loss is theoretically unlimited (since it
is limited only by the increase in value of the security sold short by the Strategy). In contrast, the risk of loss from a long position is limited to the Strategy's
investment in the long position, since its value cannot fall below zero. Short selling is a form of leverage. To mitigate leverage risk, the Strategy will always hold
liquid assets (including its long positions) that are at least equal to its short position exposure, marked-to-market daily.
Leverage Risk: Trying to enhance investment returns by borrowing money or using other leverage tools magnifies both gains and losses, resulting in greater
volatility.
Allocation and Management Risk: There is no assurance that the allocation decisions to various sub-advisers will result in the desired effects. The Fund’s
success is dependent on the trading and investing skills of the sub-advisers. The loss of one or more key individuals from a sub-adviser could have a materially
adverse effect on the performance of the Fund.
Trends in Alternative Investing | 33
Important Information and Disclosures
This material is provided for informational purposes onlyUnder no circumstances may any information contained herein be construed as investment advice. This material is not an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored or provided by AllianceBernstein L.P. The information contained herein reflects views of AB or its affiliates and sources it believes are reliable as of the date of this material. AB makes no representations or warranties concerning the accuracy of any third-party data. The views expressed herein may change at any time after the date of this material. Investors should discuss their individual circumstances with their appropriate investment professionals before making any investment decisions. AB and its affiliates may have positions in, and may effect transactions in, the markets, industry sectors and companies described herein. This material is not intended for public use or additional distribution.
This material will be superseded in its entirety by any information made available to you after the date hereof which should be read in its entirety.
Forward-looking information in this material is subject to inherent limitationsCertain information contained herein may constitute “forward-looking information,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “seek,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Forward-looking information is information that is not purely historical and includes, among other things, expected structural features, anticipated ratings, proposed diversification, specific investment strategies, and forecasts of future economic conditions. Any forward-looking information in this material is based on certain assumptions (whether or not stated herein), which may not be consistent with, and may differ materially from, actual events and conditions. In addition, not all relevant events or conditions may have been considered in developing such assumptions. Actual results will vary, and the variations may be material. Prospective investors should understand such assumptions and evaluate whether they are appropriate for their purposes.
Potential Conflicts of InterestAllianceBernstein, its affiliates and others associated with them (“AB Group”) engage in a broad spectrum of activities including, among other things, financial advisory services, investment management, broker-dealer activity and research publication. AB Group or accounts managed by it may also perform or seek to perform banking, credit or other financial services for accounts managed by AB Group or others. These relationships may pose a potential conflict of interest. The following represent a nonexclusive list of potential conflicts. Please consult the applicable offering document(s) for more details.
Accounts with overlapping investment strategies may invoke fiduciary obligations concerning the allocation of investment opportunities or restrictions on the nature and timing of investments made by a strategy.
Separate divisions within the AB Group may refer certain business and investment opportunities to each other or otherwise enter into arrangements with each other that could result in fee sharing or other forms of compensation. For instance, financial advisors employed by the AB group may receive a portion of the management fee for originating subscriptions to a strategy.
AllilanceBernstein may cross-trade securities between its clients to the extent permitted by applicable law. A Fund may invest in money-market funds or similar products managed by AB Group.
Confidential Material By accepting this document, you agree that you will not (a) provide any information to any person other than your legal, tax, financial and accounting advisors for the purposes of making an assessment of the transaction or (b) use (or allow any of your advisors to use) the information for any purpose other than to make an assessment of the transaction. Notwithstanding anything expressed or implied to the contrary herein or in any material referred to herein, you and each of your employees, representatives and agents may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated herein and all material of any kind (including opinions or other tax analyses) that are provided to any such person relating to such tax treatment and tax structure.
US Treasury Circular 230 NoticeAny US federal tax advice included in this material was not intended or written to be used, and cannot be used, for the purpose of avoiding US federal tax penalties.
Disclosures on investment examplesAny references to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AllianceBernstein. Any specific investments identified and described in this material do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.
©2015 AllianceBernstein L.P.IC2015144