Hedge Fund Replication inAsset Allocation& Risk Management
November 16th, 2007Vassilis Karavas, Ph.D.Head of Portfolio DesignCredit Agricole Structured Asset Management
Frontiers in Hedge Funds And Proprietary Trading Forum
CASAM Group Managed Account Platform
Disclaimers
THIS MATERIAL HAS BEEN PROVIDED FOR INFORMATIONAL AND ILLUSTRATION PURPOSES, IS FURNISHED ON A CONFIDENTIAL BASIS, IS INTENDED ONLY FOR THE USE OF THE AUTHORIZED RECIPIENT AND MAY NOT BE DISTRIBUTED TO ANY OTHER PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF CRÉDIT AGRICOLE STRUCTURED ASSET MANAGEMENT (“CASAM”), CRÉDIT AGRICOLE STRUCTURED ASSET MANAGEMENT ADVISERS LLC (“CASAM ADVISERS”), LYRA CAPITAL LLC (“LYRA”) AND CREDIT AGRICOLE STRUCTURED ASSET MANAGEMENT AMERICAS LLC (“CASAM AMERICAS”, AND TOGETHER WITH CASAM ADVISERS, CASAM, LYRA AND THEIR AFFILIATES, THE “CASAM GROUP”). THIS MATERIAL IS NEITHER ADVICE NOR A RECOMMENDATION TO ENTER INTO ANY TRANSACTION. THIS MATERIAL IS NOT AN OFFER TO BUY OR SELL, NOR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. ANY OFFER OR SOLICITATION OF AN INVESTMENT IN ANY FUND MANAGED BY ANY MEMBER OF THE CASAM GROUP NOW OR IN THE FUTURE (THE “FUNDS”) MAY BE MADE ONLY BY DELIVERY OF THE FUND’S CONFIDENTIAL OFFERING DOCUMENTS (COLLECTIVELY, THE “MEMORANDUM”) TO QUALIFIED INVESTORS. AN INVESTMENT IN A FUND IS NOT SUITABLE FOR ALL INVESTORS. BEFORE MAKING ANY INVESTMENT IN A FUND, YOU SHOULD THOROUGHLY REVIEW THE MEMORANDUM WITH YOUR LEGAL, FINANCIAL AND TAX ADVISORS TO DETERMINE WHETHER AN INVESTMENT IN THE FUND IS SUITABLE FOR YOU. YOU SHOULD NOT RELY IN ANY WAY ON THIS INFORMATION. CERTAIN INFORMATION PROVIDED HEREIN IS OBTAINED FROM SOURCES, INCLUDING PUBLICLY AND PRIVATELY AVAILABLE INFORMATION, THAT THE CASAM GROUP CONSIDERS TO BE RELIABLE; HOWEVER, WE CANNOT GUARANTEE AND MAKE NO REPRESENTATION AS TO, AND ACCEPT NO RESPONSIBILITY OR LIABILITY FOR, THE ACCURACY, FAIRNESS OR COMPLETENESS OF THIS INFORMATION. INFORMATION IS AS OF THE DATE(S) INDICATED AND IS SUBJECT TO CHANGE.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
THE FUNDS ARE UNREGISTERED PRIVATE FUNDS AND ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS. THERE ARE RESTRICTIONS ON TRANSFERRING FUND INVESTMENTS AND THERE IS NO SECONDARY MARKET NOR IS ONE EXPECTED TO DEVELOP FOR INVESTMENTS IN ANY FUND MANAGED BY THE CASAM GROUP. THE FUNDS HAVE HIGH FEES AND EXPENSES THAT WOULD REDUCE RETURNS AND OTHER SPECIFIC RISKS AS TO A PARTICULAR FUND’S INVESTMENTS AND STRATEGIES.
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CERTAIN INFORMATION CONTAINED IN THIS DOCUMENTS REFLECTS THE OPINIONS OF THE PRESENTER AND SHOULD NOT IN ANY WAY BE PERCEIVED TO BE THE OPINIONS OF CREDIT AGRICOLE STRUCTURED ASSET MANAGEMENT.
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CASAM - Corporate Structure
100% Crédit Agricole subsidiary
Founded on 1st September 2005, Crédit Agricole Structured Asset Management is a joint venture equally owned by Crédit Agricole Asset Management (CAAM) Group and Calyon
International presence strengthened through the purchase of CASAM Americas (formerly Ursa Capital), a US player recognized for its expertise in managed accounts
The CASAM Group managed account platform, and each constituent fund, is subject to the oversight of CASAM Advisers LLC and Lyra Capital LLC, registered investment advisers pursuant to the U.S. Investment Advisers Act of 1940.
CASAM Americas
100%
50%
Crédit Agricole S.A.
50%
100%
CAAM Financial Solutions
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CASAM – Key Figures at September 28th, 2007
Assets (Billion) EUR USD
Total 50.4 72.0
Structured Products* 36.3 51.7
“Vanilla” Employee Savings Schemes
8.1 11.6
Managed Accounts 3.9 5.6
ETF 2.1 3.1
Funds
Total 486
Structured Products 318
“Vanilla” Employee Savings Schemes
89
Managed Accounts 76
ETF 3
* Including Structured Employee Savings Schemes
Breakdown of Assets by Activity
StructuredProducts
72%
ManagedAccounts
8%
Exchange TradedFunds
4%
"Vanilla" Employee Savings
Schemes16%
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CASAM Group Alternative Investment Solutions
CASAM Group Managed Account Platform A customized solution for investors seeking the returns of alternative
investments in a risk-controlled environment while satisfying requirements such as transparency and liquidity
Dow Jones Hedge Fund Index Products Licensing agreement dating back to October 2003
Dow Jones Hedge Fund Indexes uses Lyra’s investment methodology and platform, as the basis for its hedge fund indexes
CASAM/CISDM Database Formerly the MARHedge database, the CASAM CISDM Database is the oldest
CTA and hedge fund database in the market, providing research data for the hedge fund universe
The sole source of data for Barron’s monthly hedge fund and CTA league tables
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Why Hedge Fund Replication
Hedge Fund Replication is: The ability to deliver the economic characteristics of a particular beta (traditional and/or
alternative)
True alpha is too idiosyncratic and often volatile to be meaningfully replicated
The asset allocation perspective Hedge fund performance is largely due to exposure to market factors (alternative betas)
The definition of alpha has changed to include less “beta”
Hedge fund replication allows for both asset allocation & portfolio risk management
Institutional Portfolios Equity & Fixed Income exposure as primary holdings
New betas as part of the new primary holdings Hedge Funds as a source of alternative betas
Institutional investors introduce or increase hedge fund exposure Primary concern remains the conservative approach to investing in hedge funds
Increased interest in transparency (managed accounts as a means of hf investing)
Hedge fund investing expertise is not always available in-house for institutional portfolios
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What hedge fund Replication does offer … or does not offer
Caution!
Hedge Fund Replication ≠ Duplication
Investors should NOT expect an exact replica of the asset
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What hedge fund Replication does offer … or does not offer
Caution!
Exposure to the same underlying economic factors
does not necessarily mean same
performance or risk
Performance: 174mph
Performance: 225mph
Performance differential: 29.31%
CASAM Group Managed Account Platform
What hedge fund Replication does offer … or does not offer
Caution!Replication of the certain statistics does not imply
exposure to same economic factors
and/or
same performance over short periods of time
Performance: 140mph
Performance: 140mph
Performance differential: 0%
0-60mph: 9.2’’
0-60mph: 7.1’’
Time differential (0-60mph) 2.1’’
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Investors Approach
Investors should be wary and examine the means of replication and what is actually offered through that investment vehicle
Important to understand what exactly needs to be replicated – different techniques offer different replicating attributes
Examine the fit to the entire portfolio, risk management, and cost
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Manager-based Hedge Fund Replication
Manager Based Replication via direct investment to hedge fund manager or managed accounts
Investable Indices – Dow Jones, HFR, CS/Tremont, FTSE, etc.
Benefits to Portfolio Management Low cost access to alternative betas
Liquidity
Daily NAV (when based on managed accounts)
Easy integration to the overall asset allocation model
In a core-satellite approach, alternative betas are often met in the core portfolio
Can be used as the Main allocation to hedge funds or as the Core hedge fund portfolio
Institutional type products that do not require the extensive expertise of hedge fund allocators
Greater flexibility to product creation
Structured Notes (CPPI’s, Options etc)
Participation in tax efficient structures/products
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Factor-based Hedge Fund Replication
Factor Based Replication of the alternative betas using factor models that replicate certain
economic factors and allow for exposure to them
In Portfolio Management Low cost access to alternative betas
Liquidity is dependent on the underlying assets
Particularly useful for asset allocation models based on macro-economic data and views – More difficult to incorporate in an active portfolio with many moving pieces
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Distribution-based Hedge Fund Replication
Distribution Based Emphasis on statistical behavior instead of sources of return
In Portfolio Management Low cost to modifying portfolio behavior over time
Time is important for replication
Liquidity depends on the underlying assets, but can be high
Can be used in asset allocation models with predetermined behavior over time
Market dislocations may affect the statistical behavior
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Security-based Hedge Fund Replication
Security Based Replication via direct investment to
liquid securities
Model driven allocations – quantitatively selected
Benefits to Portfolio Management Low cost access to alternative betas
Highly liquid investments
Easy to participate on the long and short side as stand alone investment or as a hedge
Alpha
Beta
80
90
100
110
120
130
140
150
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64
Alpha?
Alpha?
Beta
-170
-160
-150
-140
-130
-120
-110
-100
-90
-80
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64
Beta Hedge
Beta exposure
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Risk Management & Portfolio Selection
Risk Management Ability to take control of the portfolios exposure to economic factors &
adjust at a low cost
Addresses actively or passively the liquidity concerns
Direct investment to provide exposure
Overlay to hedge exposures during market dislocations
Ability to create “Look through” products – currently available only in managed account based investments
Particularly important to certain regions where Basel II has been implemented
CASAM Group Managed Account Platform
Conclusions
Facilitate access to hedge fund investing. Choice of
Strategy betas
Statistical properties
Economic factors
Combination
Lower cost of entry
A new era in
Hedge fund investing
Hedge fund based products
Ability to hedge Hedge Funds (hedge2 ?)
CASAM Group Managed Account Platform
Contact CASAM
CASAM Advisers LLCTwo Grand Central Tower
140 E. 45th Street, 16th Floor
New York, NY 10017
Tel : (212) 277-6440
Fax : (212) 277-6441
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