liquid alternatives: diversifying beyond the traditional · − new launches were more muted last...
TRANSCRIPT
For professional investors only. Not for retail clients
Punta del Este 2019
April 2019Andrew Dreaneen, Head of Liquid Alternatives
Liquid alternatives: Diversifying beyond the traditional
1
The case for liquid alternatives2
1 Liquid alternative industry trends
Ideas for your clients portfolio: Multi-strategy3
Industry trendsLiquid alternatives
Performance in 2018
Current state of play: Hedge fund performance 2018 was a disappointing year for hedge fund investors – 2019 broadly positive save CTA
3
Source: Kepler (Absolute Hedge), HFR, February 2019
Strategy Absolute Hedge UCITS Index
HFRI Equivalent Indices Difference
Global -4.7% -4.6% -0.1%
Credit -2.7% -0.3% -2.5%
Event Driven -3.5% -1.0% -2.5%
L/S Equity -4.9% -6.9% 2.0%
Macro -3.8% -3.6% -0.2%
Managed Futures -9.3% -6.7% -2.6%
Market Neutral -3.1% -1.0% -2.1%
Performance for the alternative UCITS universe was negative in 2018, with the AH Global UCITS index falling -4.7%, the worst year since inception in 2010. This also marks the first time since Kepler have been calculating the AH Indices that all strategy groups finished the year in negative territory.
Performance in 2019 YTD
Strategy Absolute Hedge UCITS Index
HFRI Equivalent Indices Difference
Global 1.6% 3.5% -1.9%
Credit 1.6% 3.4% -1.8%
Event Driven 2.2% 4.8% -2.6%
L/S Equity 2.7% 7.0% -4.3%
Macro 1.5% 1.0% 0.5%
Managed Futures -1.6% -1.2% -0.4%
Market Neutral -0.1% 0.5% -0.6%
0
50
100
150
200
250
300
350
400
450
500
0
200
400
600
800
1000
1200
1400
1600
2003 2005 2008 2011 2014 2016 2018
AUM ($bn) # of Funds
AUM evolution and fund launchesHas the industry matured and is it showing some signs of fatigue?
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Source: LuxHedge Alternative UCITS overview February 2019
Number of new launches (RHS) & assets raised (LHS)
0
10
20
30
40
50
60
70
0
1000
2000
3000
4000
5000
6000
7000
2013 2014 2015 2016 2017 2018
AUM ($m) # of Funds
− New launches were more muted last year in both number and AUM
− 45 new funds last year, raising a total of $3.6bn versus 60 new funds in 2017 raising $5.3bn
− Investor appetite for new launches was certainly suppressed in 2018
− Number of funds declined by 3% from 590 to 572, whilst AUM saw more significant declines of 8.8% during the year
Number of funds (LHS) & AUM (RHS)
Compounded annual growth rate of AUM
Compounded annual growth rate of # funds
24%
28%
2003-2017
Decline in AUM -9%
2018
What is behind the slowdown?Main strategies well populated - many investors already have a liquid alts shelf of 10-30 managers
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Source: Morningstar & LuxHedge databases 2018.
LuxHedge – 1,441 Funds, 17 CategoriesMorningstar – 1,157 Funds, 19 Categories
260
221
177
131128
115
101
95
3734
29
2924
18
18 14 10
Fixed Income Arbitrage
Multi Strategy
Global Macro
Fund of Funds
Equity Long/Short Europe
Equity Market Neutral
Equity Long/Short Global
CTA / Managed Futures
Currency Arbitrage
Volatility Arbitrage
Equity Long/Short US
Event Driven incl. Merger Arbitrage
Equity Long/Short Asia incl. Japan
Convertibles Arbitrage
Merger Arbitrage
Equity Long/Short Emerging Markets
Commodity Arbitrage
290
118
104
10095
89
70
60
3736
3428232020
12
9
8 4
MultistrategyLong/Short DebtMarket Neutral - EquityFund of Funds - MultistrategyLong/Short Equity - GlobalLong/Short Equity - EuropeSystematic FuturesGlobal MacroLong/Short Equity - USCurrencyEvent DrivenVolatilityDebt ArbitrageLong/Short Equity - OtherLong/Short Equity - Emerging MarketsDiversified ArbitrageLong/Short Equity - UKOtherFund of Funds - Equity
Global liquid alternatives: Strategy composition
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Liquid alternatives by strategy, % of AUM
Source: Morningstar, Morgan Stanley Research. Liquid Alternatives includes all of the following Morningstar categories: Alternatives, Commodities, US Fund Bank Loan. Data as at 13 September 2018
Commodities; $52BnCurrency; $10Bn
Other; $15Bn
Multi-alternative; $309Bn
Other alternative; $237Bn
Long/short equity; $135Bn
Market neutral; $111Bn
US fund bank loan; $133Bn
Liquid Alternatives have a total AUM of $1.02 trillion but only accounts for 3.6% of global mutual fund AUM
Diversified arbitrageDebt arbitrage
Market neutral equity
Debt/currencies
Long/short debt
Event driven
Multi-strategy
Systematic futures
Volatility
Diversified strategies
Options based
The case for liquid alternativesLiquid alternatives
Liquid alternatives
− Providing genuine diversification with controlled risk and volatility, alongside positive returns*
− Alpha from diversified alternative investments is becoming more important
Insights
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True diversification
Prior to the financial crisis, investors could diversify equity
portfolios by allocating to bonds, real estate & commodities.
Since the crisis, correlations between these asset classes
have risen
Stretched valuations
As we approach the later stage of the cycle, with valuations
stretched and in amidst a record bull run, this strengthens the
argument for liquid alternatives
Potential for increased volatility
Short periods of heightened market volatility are becoming
increasingly frequent
Source: Schroders. *Positive returns are not guaranteed.
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Source: National Bureau of Economic Research (NBER), Schroders Economics Group, 28 February 2019.
Record long bull runUS expansions from trough to peak (years)
True diversification may be harder to come byCorrelation of asset classes and hedge fund strategies with the S&P 500
Source: Morningstar Direct, 2018. Proxies as follows; For International Stocks MSCI ACWI ex-US; for Investment Grade US Bonds: Barclays US Agg Bond TR; for US High Yield Bonds: Credit Suisse HY; for REITS: Wilshire US REIT TR; for Commodities: S&P GSCI TR. Equity Market Neutral Strategies: HFRX EH: Equity Market Neutral Index. CTA/Macro Strategies: HFRX Macro/CTA Index.
In the decades prior to the financial crisis, investors could diversify their equity portfolios by allocating to some of these asset classes. Since the crisis, correlations across these asset classes have risen
-0,2
0
0,2
0,4
0,6
0,8
1
International Stocks Investment Grade USBonds
US High Yield Bonds REITs Commodities Equity Market NeutralStrategies
CTA/Macro Strategies
1998-2007 2008-2017
Certain hedge fund strategiescontinue to be great diversifiers
Traditional asset classes:Increased correlations
Liquid Alternatives – not a beta solution in disguise
11
What are some of the key differentiating factors?
Source: Schroders
Active stock selection with outright short positions
Use of specialist tools and techniques
Exposure management (use of cash and leverage)
Focus on downside protection via active risk management techniques
Difficult to replicate through an ETF
Alternative portfolio construction framework
12
A simple but effective approach to diversification
Source: Mercers ‘The Role of Liquid Alternatives in Wealth Management’ September 2015. Estimate of the liquidity profit for illustrative purposes only; may differ at the individual strategy level.Source: Mercers ‘The Role of Liquid Alternatives in Wealth Management’ September 2015. Estimate of the liquidity profit for illustrative purposes only; may differ at the individual strategy level.
More liquid
Less liquid/ Illiquid
Growth Diversification Inflation protection
Core multi-asset
IdiosyncraticMulti-asset trading strategies
(fundamental macro/ managed futures/ active currency)
Liquid real assets (REITs/natural resource equity/commodities)
TIPS
Directional long/shortEquity directionalLong/short credit
Activist
Long/short equityLong/short credit
Equity market neutralDirectional long/short commodities
Event drivenDistressed
Multi-strategyCore real estate
Mezzanine debt secondaries
Buyouts distressed for control growth equity
Venture capital
Infrastructure/ energy/ PE/ Timber/ Agriculture/ Non-core real estate
Liquid alternatives
Ideas for your clients portfolio: Multi-strategyLiquid alternatives
14
Introduction to multi-strategy alternatives Typical characteristics of multi-strategy
Source: Schroders
Absolute return focused Alpha orientated long short approach
Diversified cross asset class exposure Dynamic strategy allocation
0% 25% 50% 75% 100%
CTA
Macro
Relative Value
Credit
Equity
Event Driven
Multi-strategy
Proportion of funds
Inflow
No change
Outflow
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Hedge funds
CTAs
Credit
Equity
Event Driven
Macro
Multi-strategy
Other
Relative Value
Fund of Fund
15
The multi-strategy landscapeGrowing demand for multi-strategy
$4.3 tn
Strategy breakdown
Multi-strategy hedge fund AUM is currently $485 bn
Source: Preqin (All Hedge Fund Universe). Data as at Jan 2018.
Asset flowsHedge fund asset flows over 2017 by core strategy
16
Source: Schroders.
Types of UCITS multi-strategyMulti-strategy broadly fits into three main buckets
Multi-asset absolute returnCovers a broad range of strategies that have an unconstrained approach to multi-asset
Multi-strategy multi-manager - externalSeveral distinct hedge fund that are managed on a day-to-day basis by external managers
Multi-strategy multi-manager – internalDraws on the best in-house capabilities of a firm. Funds allocate to sleeves run by specialist portfolio managers, drawing on their expertise and experience
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Source: Wellington, Schroders.
Why invest in multi-strategy?A valuable diversifier
Consistent return stream
Delivers downside protection
Low volatility relative to equity markets
Strong risk adjusted returns
1
2
3
4
Why invest in multi-strategy?
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A valuable diversifier
Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.Source: Bloomberg, Eurekahedge as at 31 January 2019. Data provided from 1 January 2000 to 31 January 2019.
-50%-40%-30%-20%-10%
0%10%20%30%40%
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Barclays Globalagg Total Return value USD HedgedEurekahedge Multi-Strategy Hedge Fund IndexMSCI World Net TR Index (Base)
Delivers downside protection
Drawdown on multi-strategy index vs. equity and bond markets
Consistent return stream1
Annual performance of multi-strategy index vs. equity and bond markets
2
-60%
-50%
-40%
-30%
-20%
-10%
0%
2000
2000
2001
2002
2003
2003
2004
2005
2006
2006
2007
2008
2009
2009
2010
2011
2012
2012
2013
2014
2015
2015
2016
2017
2018
2018
Barclays Globalagg Total Return value USD HedgedEurekahedge Multi-Strategy Hedge Fund IndexMSCI World Net TR Index (Base)
Why invest in multi-strategy?
19
A valuable diversifier
Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.Source: Bloomberg, Eurekahedge as at 31 January 2019. Data provided from 1 January 2000 to 31 January 2019.
Strong risk-adjusted returns
Sharpe ratio
Low volatility relative to equity markets 3
Rolling 12 month annualised volatility
4
0%
5%
10%
15%
20%
25%
30%
35%
40%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Barclays Globalagg Total Return value USD HedgedEurekahedge Multi-Strategy Hedge Fund IndexMSCI World Net TR Index (Base)
-
0,50
1,00
1,50
2,00
2,50
Barclays Globalagg TotalReturn value USD Hedged
Eurekahedge Multi-StrategyHedge Fund Index
MSCI World Net TR Index(Base)
3,5%
4,0%
4,5%
5,0%
5,5%
6,0%
6,5%
7,5% 8,0% 8,5% 9,0% 9,5%
Adding multi-strategy to portfoliosMulti-strategy has been shown to help improve risk adjusted returns
20
Source: Bloomberg, Eurekahedge as at 31 December 2018. Data provided from 1 January 2000 to 31 December 2018. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
60% equity + 40% bonds
+ 10% multi-strategy
+ 20% multi-strategy
Return
VolatilityBarclays Global Aggregate Bond Index
Eurekahedge Multi-Strategy Hedge Fund Index
MSCI World
AppendixLiquid alternatives
What type of strategies are available within UCITS?
22
Main constraints include liquidity, diversification, leverage and eligible assets
Source: Schroders.
More leverage
Noleverage
Less liquidLiquid
AIFMD
UCITS
Macro & CTA
Long short credit
Event drivenLong biased Convertible bonds
Long short equity(trading)
Long short equity(fundamental)
Long short equity(small cap)
Fixed income relative value
Activist & Distressed
Private Equity
EM credit
Global macroAlternative Credit
Insurance Linked SecuritiesCLO
Performance comparison UCITS vs. offshore hedge funds
UCITS vs Offshore
23
Source: HFR as of 28 February 2019. Annualised return, annualised volatility and drawdown from 01 January 2008 onwards.
HFRI HFRU
Number of funds 1,900 470
Regulatoryregime Flexible UCITS
Industry comparison
Index YTD 2019 F/Y 2018 F/Y 2017 F/Y 2016 F/Y 2015 F/Y2014 F/Y 2013 Annualised Return
Annualised Volatility
Drawdown (Financial
Crisis)Months to Recover
Correlation to S&P 500
HFRI Offshore 4.9% -4.1% 8.6% 5.4% -1.1% 3.0% 9.1% 2.8% 5.9% -20.1% 14 0.85
HFRU UCITS 2.5% -6.7% 4.7% 0.8% 1.5% 4.7% 4.0% 1.5% 3.3% -6.3% 10 0.68
Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
HFRI Fund Weighted Composite Index HFRU Hedge Fund Composite Index
UCITS vs OffshoreEvidence of strategies with low tracking error
24
1.000
1.250
1.500
1.750
feb.-13 nov.-13 ago.-14 may.-15 feb.-16 nov.-16 ago.-17 may.-18
US equity long short managerGlobal equity long short manager
CTA/Systematic macro manager Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Source: Schroders as at 28 February 2019. Performance data is net of all fees and charges. The GAIA C share class has been used for all UCITS funds. For Egerton European Equity from November 2009 to 31 December 2011 the B16 share class has been used. Please note, Egerton’s offshore hedge fund included a provision for potential tax liabilities at the end of March 2010 resulting in a 5.1% decrease in the NAV. These tax liabilities did not impact Schroder GAIA Egerton Equity. For illustrative purposes the data here ignores this provision and therefore shows the two strategies on a more like for like basis. No indicative weekly NAVs were produced for Egerton’s B16 share class during April 2010, therefore the B1 share class has been used as a proxy over this period. From 1 January 2012 to 31 December 2012 the B29 share class was used. From 1 January 2013 onwards the B share class is used. Sirios US equity long short UCITS strategy refers to Schroder GAIA Sirios US Equity C Acc USD. BlueTrend UCITS strategy refers to Schroder GAIA BlueTrend C Acc USD.
1000
1400
1800
2200
nov.-09 nov.-10 nov.-11 nov.-12 nov.-13 nov.-14 nov.-15 nov.-16 nov.-17 nov.-18
700
800
900
1000
1100
nov.-15 mar.-16 jul.-16 nov.-16 mar.-17 jul.-17 nov.-17 mar.-18 jul.-18 nov.-18
Correlation: 0.99 Correlation: 0.99
Correlation: 0.99
But certain strategies are clearly more difficult to replicateChallenges: eligible assets, concentration, liquidity and leverage
25
Merger arbitrage manager Event driven manager
CTA manager Multi-strategy manager
Source: Bloomberg, Albourne, Schroders as at 28 February 2019.
1000110012001300140015001600
2013 2014 2015 2016 2017 2018 2019
UCITS Offshore
9001000110012001300140015001600
2012 2013 2014 2015 2016 2017 2018
UCITS Offshore
900
1000
1100
1200
1300
1400
2012 2013 2014 2015 2016 2017 2018
UCITS Offshore
1000
1250
1500
1750
2000
2009 2011 2013 2015 2017
UCITS Offshore
Thank you
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Subscriptions for shares of the Company can only be made on the basis of its prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Europe) S.A.The distribution and promotion of the Company's units is restricted for the purpose of the 2013 Law, to professional investors who are supposed to have sufficient experience to judge themselves the concept of risk-spreading and the information they need to form their opinion. Accordingly, this material is targeted to institutional; professional; existing investors and newly accepted clients of the Schroder Group where reasonable steps have been taken to ensure that investment in the Company is suitable. This material should not be relied upon by persons of any other description.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.Andrew Dreaneen has expressed his own views and opinions in this presentation and these may change.
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Important information
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