Hedge Fund Return Sources...Fixed Income Arbitrage, Reg D) Spread risk, e.g. carry trades (Global...

1

Hedge Fund Return Sources

Alternative Beta Strategies:

A new paradigm to the hedge fund industry

Dr. Lars Jaeger, Partner

Partners Group

2

III The two essential approaches

Table of contents

IV Core – Satellite portfolios: A new

paradigm to hedge fund investing

II Implications: Why hedge fund replication

is interesting

I Alpha versus Beta in hedge fund returns

3

The hedge fund return puzzle

There is a widely held belief that hedge funds earn their returns through the identification

of market “inefficiencies” and by superior investment selection, i.e. by producing “alpha”.

However … since hedge funds generally trade in the most efficient markets:

Is it really plausible that remaining inefficiencies in these markets can provide a steady

stream of alpha to the USD 1,500+ billion hedge fund industry?

Are hedge fund managers really so much smarter than traditional managers?

There must be another, hidden source of returns driving a significant part of the performance of many hedge fund strategies

There must be another, hidden source of returns driving a significant part of the performance of many hedge fund strategies

Alpha versus beta in hedge fund returns

2

4

Discovering the “atomic structure” of hedge fund returns

α

αε

αε β

ε

α

ββ

α

The model of an atom in 1895 The model of an atom according to modern quantum physics

α

β2β3

β7

β4

β1

β5

β6

α

α

α

α

α

α

α

α

α

α

The emerging model of hedge fund return sources

The model of returns in a hedge fund portfolio until today

ε

ε

β


5

Understanding Hedge Fund Returns: A Simple Model

Hedge fundTraditional mutual fund

Hedge LeverageProclaimed alpha

“Alpha”

Market riskpremium

Levera

ged

pro

claim

ed

alp

ha

One of many investors’ most frequent mistakes is not looking deeper into a hedge fund’s proclaimed alpha.

Superior:- Security selection

- Market Timing

Equity Risk Premium

EmMa Risk Premium

Credit Risk Premium

Term Curve Risk Premium

Value Stocks Risk Premium

Small Cap Risk Premium

Liquidity Risk Premium

Short Vega Risk Premium

Complexity Risk Premium

Commodity Risk Premium

Currency Risk Premium

Event Risk Premium

Convergence Risk Premium

α

Alt-β

Mark

et-β


6

Traditional Beta vs.Hedge Fund Beta (Alternative Beta)

Traditional Beta

Exposure to:

Broad equity market

Interest rates (duration)

Credit risk

Emerging markets

Hedge Fund Beta (Alternative Beta)

Exposure to:

Style factors, such as small cap vs. large cap, value vs. growth, momentum (Long/Short Equity, Equity Market Neutral)

Event risk (Merger Arbitrage)

Volatility (Convertible Arbitrage, Volatility Arbitrage)

Risks of commercial hedgers in futures markets (Managed Futures)

Liquidity risk (Distressed Securities, Fixed Income Arbitrage, Reg D)

Spread risk, e.g. carry trades (Global Macro)

Exposure to Hedge Fund Beta requires special investment techniques including short selling, leverage, and the use of derivatives. Thus, hedge funds have exclusive access to these Alternative Betas.


3

7

Distinguish „alphas” and „betas” in hedge funds

Alpha and beta do not come separately.

Often hedge funds come with “phantom alphas” (i.e. beta is sold as alpha)

Phantom alphas are not persistent

Phantom alphas can even be related to unwanted and uncontrolled systematic risks

Unwanted and uncontrolled systematic risks often lead to DI-WORSE-IFICATION

History and common sense tells us:

The real risk from hedge funds comes from:

unwanted and unknown leveraged systematic risk

uncontrolled manager related risk (style drifts, faulty operations, fraud, etc.)

Some words of caution : Distinguish between alpha and beta


8

Table of contents





is interesting


9

Hedge Fund Alpha Is Diminishing …

Why hedge fund replication is interesting

Data source: HFR, Bloomberg. Calculation: Partners Group

Mo

nth

ly a

lph

a i

n p

erc

en

t

HFRI Index Replicating Factors

EH S&P 500 Russell 2000 BXM Buywrite Index AR(1)

ED S&P 500 Russell 2000 CS High Yield Index AR(1)

MA SMB Russell 3000 MERFX BXM Buywrite Index AR(1)

CA S&P 500Citigroup

Convertible IndexCS High Yield Index AR(1)

AR (1) = Autoregressive factor for tracking of stale pricing

MERFX = Merger fund index

SMB = Small minus Big (Small Cap Factor)

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

Jan

01

Apr 0

1

Jul 0

1

Okt 0

1

Jan 02

Apr 0

2

Jul 0

2

Okt 02

Jan

03

Apr 0

3

Jul 0

3

Okt 0

3

Jan 04

Apr 0

4

Jul 0

4

Okt 04

Jan

05

Apr 0

5

Jul 0

5

Okt 0

5

Jan 06

Apr 0

6

Jul 0

6

Okt 0

6

Jan 07

Apr 0

7

Jul 0

7

Okt 0

7

Equity HedgeEvent DrivenMerger ArbitrageConvertible Arbitrage

The development of alpha (excess return over a rolling linear factor regression) over a 60 month time window for various strategies :

4

10

Hedge fund returns: Yesterday, today and tomorrow

βeta = is a risk premia and a compensation for a risk taken

αlpha = is the result of a zero-sum game (one’s profit is another’s loss)

Average Hedge Fund Return Components over Time

0%

2%

4%

6%

8%

10%

12%

14%

19

95

-19

99

20

00

-2

00

7

20

08

-20

12

Exp

ect

ed

retu

rn

α

Alt-β αAlt-β

Alt-β

α

(35%)

(35%)

(15%)

(60%)

(48%)

(42%)

M-β (10%) M-β (30%) M-β (25%)

Hedge fund return sources

11

The traditional “Balanced Portfolio” does not include other risk premia that have favorable diversification qualities and generate attractive alternative returns.

Hedge funds in a global portfolio

Traditional investors benefit only from a few risk premia (blue) available in the market and miss multiple other sources of return!

Investors can access other uncorrelated alternative “risk premia” and thus return sources through hedge funds.

The real benefits from hedge funds do not necessarily come from accessing today’s star trader, but from the persistent benefits of alternative risk premiaThe real benefits from hedge funds do not necessarily come from accessing

today’s star trader, but from the persistent benefits of alternative risk premia


Convergence riskEmMa risk

Credit risk

Term risk

Volatility risk

Commodity hedging risk

Duration (Bond) risk

Equity risk

FX Carry risk

Event risk

Value risk

Momentum risk

Convergence risk

Roll Yield risk

Complexity/efficiency risk

12

The Issue of Hedge Fund Fees


Hed

ge f

un

d f

ees

Pay a lot (and even more in thefuture) for true alpha skill unavailable anywhere else

Don‘t pay hedge fund fees for traditional beta exposure (even when a few short positions are thrown in for credibility)

Pay less for systematic exposure to alternative betas, but more than regular stock market beta as extra skills are required

Hedge fund fee structure does not discriminate between skill based performance (alpha) and risk factor compensation (beta)

5

13

Fees I: How about saving the manager fee layer?

6.6% - 14.2%4.4% - 10.9%FoF Return Net of Fees0.2% - 0.9%Performance Fee FoF (10% above US LIBOR)

1.0%Management Fee FoF (1%)6.6% - 14.2%5.6% - 12.8%Hedge Fund Return Net of Fees

1.2% - 2.5%1.4% – 3.2%Performance Fee HF (20%) / PG ABS (15%)1.25%2.0%Management Fee HF (2%) / PG ABS (1.25%)

9% - 18%9% - 18%Hedge Fund Return Gross of FeesPG ABSFoF

Total fee savings potential: 220 bps – 330 bps p.a.

Share of Return Payed Off to Investor

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

4% 6% 8% 10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

Gross of Fees Return

FoF

PG ABS


14

Fees II: Do you really need to pay asymmetric performance fee in fund of funds?

The ABS performance fee is only paid on the netted performance. In contrast, for a portfolio of hedge funds the performance is not netted.


Gross Performance Hedge Fund 1

ABS:After 15% performance fees

Net Performance combined:After 20% performance fees

Gross Performance Hedge Fund 2

- 6%

+12%+9.6%

- 6%

+3.6%== +5.1%


15

Fees III: How can you avoid to pay prime brokers excess leverage financing fees

ABS typically employ instruments like futures and options that allow exposure to the desired market with only a fractional size of the underlying cash. Therefore cash can be employed several times.


HF A

Traditional Fund of funds:

No access to excess cash

Exp

osu

re

required collateral

excess cash

External borrowing

Average Exposure of Fund of funds

…

Hedge Fund Bpays Libor +45 bpsfor leverage

Hedge Fund A receives Libor -35 bps for excess cash

HF B HF n

ABSABSLeverage without external borrowing


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16

Table of contents





is interesting


17

Modeling Alternative Beta:Two Different Approaches

Identify FactorsReplication throughgeneric (linear) risk

exposure (Replicating Factor Strategies - RFS)

A. Top down: Linear Regression Approach (RFS)

B. Bottom up: Non-linear rule-based Approach (AltBeta Strategies)

Identify Risk Premia

Identify various HedgeFund Risk Premia by

analyzing the industry

Well known ideas

Identified Risk Premiabacked by academic

research

InvestWith rule-based

approach like Hedge Funds do

InvestDirect exposure

to explaining factors

The two essential approaches

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1. The Top Down Approach - Linear regressions

We compare the performance of the factor model to the performance of the hedge fund strategy indices (HFRI, HFRX, S&P, where available).

The “replicating factor strategy” (in the following referred to as “RFS”) returns are simply calculated based on the factor returns times the factor weights. The latter were obtained based on a rolling regression analysis of a five year window, i.e. no in-sample optimization.

Superior:-Security selection

-Market Timing

Equity Risk Premium

EmMa Risk Premium

Credit Risk Premium









Event Risk Premium


Hedge Fund

α

β

Re = α + Σ (βi* Fi)


7

19

Replicating Factor Strategies applied

Results of the regression using the HFR event driven index as a dependent variable:

Data: HFR, Bloomberg. Calculation: Partners Group

Comparison of the replicated strategy (factors above)with the HFR event driven

correlation: 93%

Wouldn‘t it be great if we could separate the return components and compensate them specifically and accordingly?

Good news: Fairly simple to calculate and invest!

Factor Beta/Alpha t-stat Adj. R-squared

S&P 500 21.3% 9.84 82.6%Russell Spread (Small - Large) 20.0% 9.36 CS High Yield 27.0% 5.52 AR (1) 20.7% 4.83

Constant (=Alpha) 0.4% 4.62

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Jan 0

0

Jan 0

1

Jan 0

2

Jan 0

3

Jan 0

4

Jan 0

5

Jan 0

6RFS

RFS


20

Trading RFS: Two Examples

Reference: L. Jaeger et al., “Modeling and Benchmarking of Hedge Funds: Can passive hedge fund strategies deliver?”, Journal of Alternative Investment, Winter 2005

Good replication Less good replicationLong/Short Equity Distressed

RFS worksRFS does not work as well

100

105

110

115

120

125

130

135

140

145

150

Mar-

03

Jul-03

Nov-0

3

Mar-

04

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4

Mar-

05

Jul-05

Nov-0

5

Mar-

06

Jul-06

Nov-0

6

Mar-

07

Jul-07

Nov-0

7

RFS HFRX DS

95

100

105

110

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135

140

145

Jul-03

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-03

Jan-0

4

Apr-

04

Jul-04

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-04

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5

Apr-

05

Jul-05

Oct

-05

Jan-0

6

Apr-

06

Jul-06

Oct

-06

Jan-0

7

Apr-

07

Jul-07

Oct

-07

RFS HFRX EH


21

Why Do RFS Not Always Work?

RFS

HF return

retu

rn o

f hed

ge

fund s

trat

egy

return of systematic risk factor (size of risk premium)

RFS are linear approximations of hedge fund returns. They do not consider non-linear payout profiles inherent in hedge fund strategies!

1. No nonlinearity 2. Backward looking

RFS is backward looking: In contrast to hedge fund managers who base their decisions on current data, RFS adjusts exposures with a significant time lag. This can be problematic in a fast changing environment!

Limitations of RFS


Bad news: RFS is not suitable to describe hedge fund returns in all market environments.

It mostly captures the part of hedge fund returns that investors find least attractive

3. Mostly equity exposure

RFS models and incorporates mostly the equity exposure of hedge funds, i.e. specifically that part that is least attractive to investors.

S&P 500

700

800

900

1000

1100

1200

1300

1400

1500

1600

8.28.99 8.27.00 8.27.01 8.27.02 8.27.03 8.26.04 8.26.05 8.26.06 8.26.07


8

22

B. Bottom up rule-based approach:the PG AltBeta model

Hedge FundsHedge Funds

Managed Futures(CTA)

Managed Futures(CTA)

Systematic - Technical(Trend Follower)

Systematic - Technical(Trend Follower)

Event-DrivenEvent-DrivenEquity HedgedEquity Hedged

Short SellersShort Sellers

ConvertibleArbitrage

ConvertibleArbitrage

Fixed IncomeArbitrage

Fixed IncomeArbitrage

Equity Market Neutral(Statistical Arbitrage)

Equity Market Neutral(Statistical Arbitrage)

Risk Arbitrage(Merger & Acquisition)

Risk Arbitrage(Merger & Acquisition)

Distressed Securities/High Yield

Distressed Securities/High Yield

Regulation D(Convertible Debenture)

Regulation D(Convertible Debenture)

Long/ShortEquities

Long/ShortEquities

Equity MarketTimer

Equity MarketTimer

Discretionary - Active(Fundamental/Spread)Discretionary - Active(Fundamental/Spread)

Relative ValueRelative Value

Derivative ArbitrageDerivative Arbitrage

Global Asset Allocator(Global Macro)

Global Asset Allocator(Global Macro)

OpportunisticOpportunistic

Systematic - Technical(Counter Trend)

Systematic - Technical(Counter Trend)

Special Situations(Spin-off, etc.)

Special Situations(Spin-off, etc.) Carry StrategiesCarry Strategies

++Observable hedge fund strategies

Supporting academic research

Hedge fund investment techniques

Alternative Beta Strategies(AltBeta)


PG AltBeta marries in-depth industry experience, academic risk premiaresearch and hedge fund investment technique

G:\Products\Hedge Funds\PG Alternative Beta Strategies\Presentations\2008\04 2008 – Partners Group Alternative Beta Strategies


23

2. The risk premium based approach – Bottom up

Instead of replicating of hedge fund indices gain direct exposure to individual hedge fund risk premia, i.e. alternative betas

Various risk premia in the global capital markets (alternative Betas) are the “atoms” of hedge fund returns. Note: Returns in single hedge fund strategy sectors are often already a composition of various risk premia

Modeling and investing in hedge fund risk premiums (i.e. alternative betas) requires alternative investment techniques (see before). Simple asset class exposures cannot do the job of extracting alternative betas.

Therefore, extracting alternative betas requires the definition and implementation of rule based trading strategies. We refer to these as “Alternative Beta Strategies”. Examples include trend following, spread trading and option strategies

The definition and extraction of alternative beta strategies is not a pure job of mathematical optimization. It also requires sound understanding of hedge funds themselves. Note: A fund of funds perspective can be extremely helpful here.


24

Bottom up - Rule-based Approach:Example I

Earning the “commodity hedging demand premium”: Involves taking the opposite position of commercial hedgers transferring their natural price risks.

Source: Bloomberg (SGFII <Index>, CISDM)See also L. Jaeger et al in “The sGFI – A case study”, Journal of Alternative Investments, Summer 2002.

Return: 11.8% p.a.Volatility: 11.5% p.a.


* volatility adjusted for the SGFII volatility

Rule-based strategy:Trend following on 25 most liquid US futures markets. Positive momentum leads to long positionegative momentum leads to short position.

100

150

200

250

300

350

400

450

06.9

4

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SGFII

CISDM Systematic*


9

25

Bottom up - Rule-based Approach:Example II

Rule-based strategy:Involves buying stocks and selling simultaneously (covered) call options.

Source: Bloomberg

Involves selling down-side protection to equity investors

70

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100

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150

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9

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12.0

6

12.0

7

BXM Index

Tremont Long/Short IndexReturn: 4.5% p.a.Volatility: 9.2% p.a.



26

Bottom up - Rule-based Approach:Example III

Rule-based strategy:Borrow from low yielding currencies, invest in high yielding currencies

Source: Bloomberg

Performance of the Deutsche Bank Carry IndexExcess Return (over risk free): 2.7% p.a.Volatility: 6.3% p.a.

95100105110115120125130135140


27

Integration of alternative risk premia: a simple example

How alternative risk premium play together – a simple example

Combination of trend following (SGFII), “buy-write” (BXM), and credit strategy

(CSFB HY index), equally weighted

Performance

Annualized Return: 7.7% p.a.

Annualized Volatility: 5.7% p.a.

Maximum Drawdown: -13.1%

Source: Bloomberg, CBOT

Performance

Annualized Return: 9.7% p.a.

Annualized Volatility: 5.4% p.a.

Maximum Drawdown: -9.8%


50

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S&P500TR HFR Composite HFR FoF Trilogy

10

28

History of Alternative Beta Strategies


1997: Publication of “Empirical Characteristics of Dynamic Trading Strategies: The case of hedge Funds” by Fung Hsieh

2003:

Introduction of the term “alternative beta” by Fung et al. in “The Risk in Hedge Fund Strategies: Alternative Alphas and Alternative Betas”, in L. Jaeger (ed): “The new generation of Risk management for Private Equity and HF Investments”.

Partners Group (PG) research published; “Hedge Fund Return sources” topic on annual PG round tables

Decision to launch replicating beta hedge fund strategies; Launch of ABS quant team

2004:

Extensive research at PG of making risk premia models investable

October: Inception of PGAS Green Vega Cell; starting point of ABS track record

2005:

End of 2005: First institutional interest in hedge fund replication

2006:

Tremendous institutional interest in hedge fund replication

November: FT article triggers wave of discussion of hedge fund replication in the global financial industry

Asset base of PG ABS program up to 580 Mio. USD

Partners Group launches its first core-satellite products

2007:

Asset base of PG ABS program exceeds 800 Mio. USD

Strategy set expanded to 40 strategies

2008:

Launch of “passive” fund of alternative betas

29

Alternative Beta: The real benefits of hedge funds

Dilemma for many hedge fund replicators: There is a lot of equity beta in current hedge fund returns. But: Clients want absolute and uncorrelated returns.

The large pack of currently available hedge fund replicators has chosen to follow a very simple path: Why not giving up on alternative beta and model hedge funds with traditional beta only?

This actually proved reasonably successful in the last four years (which is exactly the period most providers chose to display when they show their back-tested performance to attract investors) but would have failed miserably in the bear market from March 2000 to March 2003 - a period when hedge funds as an aggregate made money despite heavy losses in the equity markets.

More sophisticated investors would probably agree that this is not an acceptable concept to generate hedge fund exposure as it does not provide what investors want from hedge funds.

Alternative beta (risk premia beyond traditional equity (and bond) beta) can serve as a great diversifier and is ultimately the strongest rational to invest in hedge funds.


30

Alternative Beta kept up with equity beta in the bull market 2003-2007

Performance of a risk weighted average of simplified alternative beta returns compared to the Merrill Lynch factor model as a good proxy for the “equity component” in hedge fund return.

Alternative Beta factors: Deutsche Bank Carry Index, CDX High Yield Index, CRB Commodity Index, Value versus Growth Spread, Small cap versus large cap spread, BXM covered call writing (BXM Index- 0.5*SPX Index), the Merger Arbitrage Fund (MERFX Index), and the spread between emerging market equity returns and developed equity markets (MSCI Emerging Markets – MSCI World)

Source for ML factor model: Bloomberg, PG calculation prior to 2003

98

108

118

128

138

148

158

168

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4.2

003

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003

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ML Factor Index

Average Alternative Beta*

2003-2007YTD

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110

112

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006

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007

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Average Alternative Beta*

ML Factor Index


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31

The real benefits of Alternative Beta over the full investment cycle

Alternative Beta factors: Deutsche Bank Carry Index, CDX High Yield Index, CRB Commodity Index, Value versus Growth Spread, Small cap versus large cap spread, BXM covered call writing (BXM Index- 0.5*SPX Index), the Merger Arbitrage Fund (MERFX Index), and the spread between emerging market equity returns and developed equity markets (MSCI Emerging Markets – MSCI World)

Source for ML factor model: Bloomberg, PG calculation prior to 2003

90

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190

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7

ML Factors Average Alternative Beta*


32

Rolling correlation (60 days) of the risk weighted average of alternative beta returns to the MSCI World Equity Index are much lower than the 90-100% correlation regression based models display.

Alternative beta correlation are far more beneficial

-0.4

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8.0

6

10.1

0.0

6

10.1

2.0

6

10.0

2.0

7

10.0

4.0

7

10.0

6.0

7

10.0

8.0

7

10.1

0.0

7

10.1

2.0

7

Average Correlation of Alternative Beta Factors to MSCI World ML Factors


33

Two portfolios of alternative betas: Performance target parameters

AltBeta - Green Vega (goal: approximate global hedge fund industry)

Fee schedule: 1.25% management fee, 15% performance fee

Net performance Target: Libor plus 400-600,

Volatility Target: 6-8%

Long term sensitivity to equity markets: Beta of 0.5

AltBeta - Black Vega (passive allocation:

equally balanced across alternative risk premia)

Fee schedule: 1.25% management fee flat

Net performance Target Libor plus 200-400

Volatility Target: 4-6%

Long term sensitivity to equity markets: Beta of 0.2


12

34

Two portfolios of alternative betas: Asset Allocation

Long/Short I

Long/Short III

Event DrivenFixed Income

Arbitrage I

Merger Arbitrage

ILS

Volatility Arbitrage

CTA

Carry

GTAA

Min Var

Deep Value

Long/Short II

Fixed Income Arbitrage I

Long/Short I

Long/Short III

Event Driven


Merger ArbitrageILS

Volatility Arbitrage

CTA

Carry

GTAA

Min Var

Deep Value


Long/Short II

Green Vega (active HF industry proxy) Black Vega (equally weighted risk budgets)


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Two portfolios of alternative betas: Net performance

95

100

105

110

115

120

125

130

135

140

145

150

Feb

04

Apr

04

Jun

04

Au

g 0

4

Okt

04

Dez

04

Feb

05

Apr

05

Jun

05

Au

g 0

5

Okt

05

Dez

05

Feb

06

Apr

06

Jun

06

Au

g 0

6

Okt

06

Dez

06

Feb

07

Apr

07

Jun

07

Au

g 0

7

Okt

07

Dez

07

Feb

08

Apr

08

HFR Composite HFR FoF

Black Vega (risk equally-weighted) Green Vega (active HF Industry tracker)


36

Table of contents





is interesting


13

37

The Core - Satellite Investment Approach

Core - Satellite Approach

Limitations of the replicating approach

Some hedge fund strategies (such as Distressed Securities, Activist Event Driven) do not lend themselves as much to successful replication because they rely, by their very nature, more on skill/know-how or special market access rather than systematic exposure (e.g. variable bias, highly opportunistic or highly selective).

There are managers in any strategy that have demonstrated an ability to generate alpha over time also after taking into account the systematic risk exposure biases of their strategy.

Such hedge fund strategies can offer significant diversification benefits to ABS, thereby improving the overall risk/return properties of a combined portfolio.

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So what does that mean for multi-strategy multi-manager portfolios?

Equity Risk Premium

EmMa Risk Premium

Credit Risk Premium









Event Risk Premium


Alt-β

Market-β

Separate inexpensive Alternative Beta and skill-based Hedge Funds

ε

ε β

ε

ββ

β2β3

β7

β4

β1

β5

β6

The emerging model of hedge fund return sources

The model of returns in a hedge fund portfolio until yesterday

ε

ε

β

α α

α

α

αα

α

αα

α α

αβ

β

β

β

ββ

α

β

Similar to the long only investment industry, employ a Core–Satellite approach for hedge fund investing!

Superior:- Security selection

- Market Timingα

Core-satellite approach

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Complement PG ABS with Alpha Producing Managers

Exp

ecte

d r

eturn

of

core

/ s

atel

lite

pro

gra

m

Expected alpha generatedby selected HF managers

A core/satellite approach combines the generic exposure to hedge fund returns with significant alpha returns by satellite managers

4%-8%

2%-4%

Rangeof

Alpha

Average Performance of hedge fund industry as represented e.g. by average FoFs or “investable” hedge fund index

Outperformance of ABS due to a) lower feesb) favorable cross-financing

(notional)

1%-5%

Core - Satellite Approach

14

40

Summary and Conclusion

1. Hedge funds generate returns primarily through risk premia, and in addition also by exploiting inefficiencies in imperfect markets.

2. The concept of Alternative Beta Strategies goes further than factor based replication techniques in that it explicitly accounts for the non-linear dependency structure of hedge fund returns. It thus offers a valid, theoretically more sound, and cheaper alternative to the currently offered hedge fund index products.

3. Alternative Beta Strategies are based on a proven theoretical framework and have a proven track record more than three years.

4. Alpha and Beta do not come separate but in an uncontrolled and perhaps undesired (and cost-inefficient) combination. As in traditional investing a “core -satellite“ approach solves this.

5. A core - satellite approach to hedge fund investing emerges naturally:

cost efficient exposure to hedge fund (“alternative”) Betas with ABS as the core.

select Alpha generating managers as satellites.

Summary

41

Contacts

This material has been prepared solely for purposes of illustration and discussion. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. The information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and it should not be relied upon as such. All information, including performance information, has been prepared in good faith; however Partners Group makes no representation or warranty express or implied, as to the accuracy or completeness of the information, and nothing herein shall be relied upon as a promise or representation as to past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models and/or other analysis of Partners Group (which may not necessarily be described herein), no representation or warranty is made as to the reasonableness of any such assumptions, models or analysis. The information set forth herein was gathered from various sources which Partners Group believes, but does not guarantee, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to change at any time.

Dr. Lars Jaeger

Partners GroupZugerstrasse 576341 Baar-Zug

SwitzerlandT: +41 41 768 85 02F: +41 41 768 85 58

ZUG SAN FRANCISCO NEW YORK LONDON GUERNSEY LUXEMBOURG SINGAPORE BEIJING TOKYO SYDNEY

42

Disclaimer

This material has been prepared solely for purposes of illustration and discussion. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and it should not be relied upon as such. All information, including performance information, has been prepared in good faith; however Partners Group makes no representation or warranty express or implied, as to the accuracy or completeness of the information, and nothing herein shall be relied upon as a promise or representation as to past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models and/or other analysis of Partners Group (which may not necessarily be described herein), no representation or warranty is made as to the reasonableness of any such assumptions, models or analysis. The information set forth herein was gathered from various sources which Partners Group believes, but does not guarantee, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to change at any time.

Hedge Fund Return Sources...Fixed Income Arbitrage, Reg D) Spread risk, e.g. carry trades (Global...

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