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PARADIGM Global Advisors, LLCFund of Hedge Funds
Table of Contents
I. Firm Overview
II. Our Differentiating Philosophy
III. Investment Process
IV. Biographies
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I. Firm OverviewParadigm Global Advisors was founded in 1989 by Dr. James Park.
Independent Firm with 28 Employees (14 of which are Dedicated to Due Diligence and Asset Allocation Teams)
SEC Registered Investment Advisor Since 1996 with Fourteen Year Track Record.
Exclusively Focused on Managing Hedge Funds
Unique Investment Process – Information Processors
- One of the Most Robust Hedge Fund Databases
Institutional and High Net Worth Focus
Global Presence, Reach and Capabilities
Consistent, Solid Risk Adjusted Performance and Alpha
Low Correlation to Traditional Asset Classes
Well Diversified Portfolios Across Strategies and Managers (Over 80 Managers in Master Fund)
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WHY IS PARADIGM THE BEST ALTERNATIVE?
14 YEAR TRACK RECORD
• Founded in 1989 and an SEC Registered Investment Advisor, PARADIGM has $1.6 billion in assets under management and advisory.
TRULY GLOBAL PRESENCE AND INVESTMENTS• Headquarters in New York City and representative offices in Los Angeles, Monte Carlo and Tokyo • Invested with over 90 hedge funds globally.
CAPACITY• Asset allocation methodology and unique ability to identify smaller and/or younger highly skilled managers
ensures capacity for its investors• Capacity with over 30 closed managers and capacity agreements with 24 managers with whom they
invested early .
PASS: PARADIGM’S PROPRIETARY QUANTITATIVE RANKING SYSTEM• Unique, proprietary technology developed by Dr. James Park, PARADIGM Chairman and CEO. • Contains track records for over 15,500 managers and is used to generate proprietary indices and ranking
and selection tools.
PERFORMANCE• Ranked as the number one performer for eight and nine year investment periods in 2004 and ranked sixth
for 2004 returns.
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I. Firm Overview – Paradigm’s Global Presence
Headquarters: New York
Representative Offices : Los Angeles, Monte Carlo, Tokyo
Distribution Agreements Worldwide: Banks, Insurance Companies, Broker Dealers
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James Park, JD, PhDChairman & CEO
Average experience in the Alt. Inv. Industry : 9 years
Average experience with PARADIGM : 6.25 years
14 people are involved in the investment process
Research/Asset Allocation
Information Technology Marketing & Client Services Business Administration
Shirley XianHedge Fund Analyst
Gordon KellyHedge Fund Analyst
Nikolay Fedorovskiy, PhDDirector of Research
Denis BychkovResearch Analyst
Matteo SolbiatiHead of European Branch
Gerald ToledanoVice President –Structuring
Jim Hirchak, CPADirector of Risk Mgt/Compliance
Angela McConicoAdministrative Assistant
Alla BabikovaDirector
Katherine HanAssociate- Client Services
Jeffrey SchneiderSenior Vice President
Stephen CovelloSenior Vice President - Operations
Rafael CastellanosVice President
Shinichi OnodaDirector
Kevin YoonComputer Graphics
28 (+1) employeesJonathan Guerbato
Associate
Seth MoskowitzAssociate – Client Services
Jean-Michel SavreSenior Vice President
Robin LiuHedge Fund Analyst
John PageSenior Vice President
Travis CameronAdministrative Assistant
Joint Venture with Cyril Finance in France
Philippe AlterSenior Analyst
Nick M. MarkolaSenior Vice President
Louis J. HannaSenior Vice President
Laurent BenzaquineVice President
Stephane FarouzePartner
Markus KarrPartner
Victor PopovResearch Analyst - Consultant
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I. Firm Overview - Paradigm’s Range of Products
Regulated Products
• US Futures Fund
• UK Structured Note
• Italian Structured Note
• Chilean Products
• French Alternative Fund
Domestic Funds of Funds ProductsDomestic Funds of Funds Products• Core Program (2)• Leveraged Program (2)• Sector Funds (1)
Off-shore Funds of Funds Products• Core Program (4)• Leveraged Programs (1)• Sector funds (4)• White Label Products (4)• Structured Products (2)
JP Morgan provides custodial services and leverage for PARADIGM’s Offshore Funds
PARADIGM has passed due diligence and has been approved for leverage & guaranteed products by:
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I. Firm Overview
Paradigm Global Advisors Does NOT:
Make Directional Market Bets
Take Outsized Risks to Achieve Higher Returns
Neglect to Analyze and Compare Manager Skill versus the Market
Invest with managers who are directional risk takers
Allocate to trend followers
Invest with Mangers with excessive lock-up provisions (exceeding 2 years)
Allocate to fixed Beta managers
Allocate to managers with multitude of strategies
Invest in Mortgage-Backed Securities, Dedicated Emerging Market Managers or Currencies
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II. Our Differentiating Philosophy
Treat Hedge funds as information processors rather than financial companies.
View the Fund of Funds as a conglomerate of superb information processors.
Bottom up (manager centric) investment approach.
Employ unique theoretical and statistical methodology which is based on Dr. Park’s PdDthesis that applies Modern Portfolio Theory to hedge funds – Park Ratio.
Paradigm owns proprietary patent-pending algorithms designed to identify exceptional hedge fund manager skill and predict probability of future performance.
Over the past 16 years, Paradigm has built proprietary , one of the most comprehensive and robust hedge fund databases globally. System Pass contains in excess of 15,000 track records, is fully customizable and models for numerous biases.
models for the following hedge fund biases: survivorship, self-selection, self-reporting, liquidation, Bull Market/Bear Market.
Utilize Park RatioTM (proprietary technique) which facilitates aggregate hedge fund analysis, style analysis, cluster analysis, and portfolio attribution analysis.
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Construct well diversified portfolios across strategies and managers (over 80 managers in master fund). Low average allocation per manager
Rank hedge fund managers by skill not by return.
Paradigm constructs hedge fund indices and sub indices in order to rank managers relative to their peers and to identify best in class managers.
Paradigm has the expertise and the technology to identify smaller and younger highly skilled managers and managers deploying novel, niche or unique strategies.
MAR/Hedge consistently ranks Paradigm’s multi-manager funds among the world’s top ten funds of hedge funds on a return and risk-adjusted return basis.
Paradigm’s approach generates consistent, solid risk adjusted returns, Alpha and a low correlation to traditional asset classes.
Volatility centric allocations, not dollar centric.
Investment team with significant experience in the identification, selection, due diligence and monitoring of hedge funds and strategies.
Access to top tier hedge funds as the firm is able to at times allocate to small, nimble and periodically closed hedge funds.
Alignment of interests – no conflict of interest.
II. Our Differentiating Philosophy
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III. INVESTMENT PROCESSParadigm Global Advisors LLC., employees a unique approach to fund of hedge funds investing by treating underlying hedge funds as information processors not just as financial companies and ranking them by skill not returns. The firm employs proprietary and theoretical and statistical methodology based on it’s founders research and doctoral studies.
The four pinnacles of Paradigm’s investment philosophy which take into account changing hedge fund and market conditions are:
a) Manager Selection, b) Quantitative Analysis, c) Due Diligence and d) Portfolio Allocation and Risk Management
Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
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Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Manager Selection
Paradigm Global Advisors LLC., sources hedge fund managers from:
Proprietary Sources
Public Sources
Other Sources
Proprietary
Strategic Investors
Institutional Allocators
Hedge Fund Managers
Consultants
Industry Contacts (developed over past 16 years)
Academics
Prime Brokers
Industry Conferences
Direct Submissions
Third Party Databases
Lawyers
Accountants
Administrators
Prime Broker Symposiums
Competitors/ Other Fund of Fund Managers
Publications
MAR/Hedge
Absolute Return
Asia Hedge
Barron’s
Hedge Fund Alert
Albourne Village
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Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Manager Selection
Database of 8,700 active managersQuantitative Filtering
Ranking by Skill
400 managersQualitative AnalysisInterview Process
Due-Diligence Process
100 managersApproved List
Inv. Committee ApprovalAllocation Process
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Statistical ranking using Paradigm's proprietary theoretical modeling filter, and identifying best of breed managers
Paradigm purchases monthly manager data from 8 different hedge fund data providers and such data is subsequently entered into system PASS.
PASS contains track records for over 15,500 managers (8,700 active managers and 6,800 inactive managers) and ranks them by skill (not returns)
Utilize System PASS to measure Hedge Fund AlphaTM , Hedge Fund BetaTM and Park RatioTM (aggregate analysis, style analysis, cluster analysis, portfolio contribution analysis)
In addition, the system conducts mean-variance and other standard statistical analysis.
Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Quantitative Analysis
14% = 0 + 1.4 (+10%)R = α + β (PARADIGM Hedge Fund Index) + ε
HF
9% = 2 + 0.7 (+10%)
Beta Measures Risk
Alpha Measures Skill
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Developed by Paradigm using patent-pending technology, Cluster Analysis groups hedge funds into certain discrete style categories.
Strategy correlations are unstable over time and could possibly diminish portfolio diversification. In order to display more stable correlation structures, Paradigm performs Cluster Analysis.
Discrete style categories used in Cluster Analysis could be perceived as equivalents of asset classes.
Discrete style categories have well defined but differentiated correlation, risk and return characteristics.
The Cluster Analysis process allows Paradigm to evaluate managers whose performance distinguishes them from peers in their cluster.
Outliers often require additional research and investigation, as they may indicate the presence of exceptionally skilled managers, fraudulent managers, or managers deviating from their stated styles.
Y
X
Z
Y
X
Z
Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Quantitative Cluster Analysis
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III. Investment Process – Quantitative Analysis Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
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Due Diligence - Qualitative Analysis
Initial interview with asset allocation team members
Interview with senior asset allocation team members
Determine manager’s level of skill/expertise
Information processing vs. market timing
Establish value added by potentially engaging the manger
Due Diligence - Manager Evaluation Process
Background check, confirm educational and employment history including personal and professional references
Manager developments and organizational changes
Confirm AUM with a prime broker and conduct fundamental portfolio analysis
Gather prospectus and audited financial statements
Check for violations/customer complaints with SEC
Manager office visit
PARADIGM proprietary manager questionnaire
Operational checklist including infrastructure, risk controls, trade execution and service providers
Leave no stone unturned – conduct comprehensive evaluation
Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Due Diligence
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Approved Manager Characteristics
Quantitative Analysis
Portfolio Allocation and Risk Management
Manager Selection
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Due DiligenceDue Diligence - Manager Approval Process
Set manager specific and style specific reward/risk parameters
Bottom up investment manager approach
Institute minimum test account
Analyze return stream against expectations
Monitor for discrepancies between past and actual performance
Conduct strategy and value added analysis
Cluster analyze historical manager performance
Commitment to being invested with only top tier information processors
Report to investment committee
Due Diligence – Approved Manager Characteristics
No fixed beta managers
Very little emerging market
No long term systematic trend followers
No directional risk takers
Marked to market securities
Average size: $50 to $150 million
Average track record: Three years
Single strategy focus (signals expertise)
Has a clearly defined investment process
Wealthy and invested in own fund
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Quantitative Analysis
Portfolio Allocation and Risk Management
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Portfolio Allocation and Risk Management
Portfolio Construction
Strategic and tactical approach
Maximization of Reward/Risk ratio
Bottom up (manager) versus top down (sector) approach
Equal Allocation by volatility and not by $
Sector Optimization
Portfolio liquidity
Credit Exposure
Leverage
Correlation analysis and economic driver analysis
Monthly portfolio rebalancing at the manager level and sector level
Broad diversification: 50 to 100 managers
Diversification benefit
Manager and strategy concentration
5% maximum allocation to a single manager
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Quantitative Analysis
Portfolio Allocation and Risk Management
Due Diligence
PARADIGM Global
Advisors
III. Investment Process – Portfolio Allocation and Risk Management
Risk Management
Ongoing quantitative analysis using actual returns Cross correlation analysis
Manager returns reviewed on a daily, weekly, monthly basis
Manager returns reviewed in context of other managers of similar style
Peer comparison and peer group rankings
Rolling returns and standard deviation trends
Continuous monitoring for red flags Style drift and strategy changes
Unusual drawdowns or profits
Returns inconsistent with strategy
Rapid asset growth, capital inflows and outflows
Regulatory concerns
Negative industry reputation
Loss of focus, personal life issues
Employee turnover
Unwillingness to share information
Manager diversifies personal assets away from the fund/partnership
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VI. Biographies
James Park, J.D., Ph.D., Chairman and Chief Investment Officer
Dr. Park is responsible for directing the overall management and investment activities of PARADIGM Global Advisors, LLC. He has 13 years of direct hedge fund investment experience. Between 1991 and 1998, Dr. Park was a professor of finance at Long Island University, where he founded the Center for Financial Markets Research. Dr. Park completed his Ph.D. in financial economics in 1995 at the Columbia Business School, where he also taught. His dissertation on hedge funds is the first of its kind. He is a recognized author of pioneering research on the behavior of hedge funds. Prior to launching his academic and financial careers, Dr. Park was an Assistant District Attorney in Massachusetts. From 2001 to 2003, he served as an elected member of the Nominating Committee for the National Futures Association. Dr. Park earned a B.S. in economics from the Wharton School of Finance, University of Pennsylvania, and a J.D. from Harvard and Columbia Law Schools.
Stephane Farouze, Managing DirectorStructured Products and Institutional Marketing
Mr. Farouze joined PARADIGM in early 2003 as Managing Director of Structured Products and Institutional Marketing. He has 11 years of experience in alternative investments and derivative products. Prior to joining PARADIGM, Mr. Farouze was the Global Head of Sales and Structuring at Societe Generale Asset Management’s Alternative Investments Group, where he grew assets under management from $3.4 billion to over $15 billion in less than three years. He has launched in excess of 100 capital-guaranteed products in Italy, Spain, France, Germany, Hong Kong, Singapore and Japan. Before joining SocGen, Mr. Farouze headed the foreign exchange derivatives desk for the Italian markets at BNP Paribas, Commerz Bank, and Smith Barney. He has a B.A. in finance and economics from San Diego State University.
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Markus Karr, Managing DirectorAsset AllocationMr. Karr is Managing Director of Asset Allocation at PARADIGM, where he and his team assist Dr. Park in implementing the company’s research in the areas of manager selection and portfolio allocation. He joined the firm in 1994 and has more than ten years of hedge fund investment experience. Mr. Karr earned a B.S. in computer science and engineering from the Massachusetts Institute of Technology, where he concentrated his studies on modeling and simulation design. He was a registered Commodity Trading Advisor from 1995 to 2002 and is currently a member of the National Futures Association.
P. James Hirchak, CPA, DirectorCompliance and Risk ManagementMr. Hirchak is responsible for compliance and risk management at PARADIGM. Before joining the firm in 2002, he was Treasurer and Senior Vice President of Gardner Capital Management, where he was part of an investment team focused on financial, administrative and due diligence issues. Prior to joining Gardner, Mr. Hirchak was Treasurer and Chief Operating Officer of Moran Group, LP, an investment partnership managing U.S. and foreign investments in excess of several hundred million dollars. Between 1990 and 1992, Mr. Hirchak was Treasurer and Chief Operating Officer of Structured Asset Management, a quantitative money manager and wholly owned subsidiary of Templeton International. Prior to 1990, he held various financial and administrative positions on the trading floors of Drexel Burnham Lambert and Kidder Peabody & Co. in New York. Mr. Hirchak holds a B.S. in accounting and a M.B.A. in finance from Utah State University.
Nikolay Fedorovskiy, Ph.D., Director ResearchMr. Fedorovskiy joined PARADIGM in 2000 as Director of Research responsible for designing and securing the online statistical reporting system used by PARADIGM’s asset allocation team. He also leads the research and development of various statistical algorithms used in PARADIGM’s quantitative analysis of hedge funds. He gained extensive experience in computer programming and engineering while working for Russia’s Institute of Electric Power, where he created a programming language for semantic networks. Mr. Fedorovskiy received his Ph.D. in mathematics from Moscow State University, where he majored in high algebra and computer modeling.
VI. Biographies
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Alla Babikova, DirectorMarketing and Client ServicesMs. Babikova joined PARADIGM in 2001 as the Director of Marketing and Client Services. She has more than seven years of experience in sales and marketing for the financial and hedge fund industries. Prior to joining PARADIGM, she was the Head of Marketing and Client Services for Waterford Partners, LLC, a global hedge fund manager. From 1996 to 1998, Ms. Babikova covered private and institutional domestic clients as an equity sales professional at Renaissance Capital, LLC, a major Russian investment bank. In 1995, she worked at Credit Suisse First Boston in Moscow. Prior to joining CSFB, she spent two years as an interpreter for a joint venture between Gulf Canada and British Gas. Ms. Babikova holds a B.A. in French and English from Novgorod University of Foreign Languages.
Matteo Solbiati, DirectorHead of European BranchMr. Solbiati joined PARADIGM in March 2003. From 1995 to 2003, he worked for Fineco Sim (Bipop Group), a leading Italian broker, where he expanded the derivatives desk and eventually became the Head of Trading and Structured Products, managing a team of 35 people. He developed innovative structured products on various underlying commodities for insurance, retail and institutional clients, as well as for fund managers. Mr. Solbiati graduated from Bocconi University in Milan with a Master’s degree in applied statistics.
VI. Biographies
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