montreal exchange canadian annual derivatives conference august 17-19, 2005
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Montreal Exchange Canadian Annual Derivatives Conference August 17-19, 2005 Fairmont Le Chateau Frontenac. Alternative Investment Management Association (AIMA). Global, not-for-profit trade association - PowerPoint PPT PresentationTRANSCRIPT
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Montreal Exchange Canadian Annual Derivatives
ConferenceAugust 17-19, 2005
Fairmont Le Chateau Frontenac
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Global, not-for-profit trade association
Corporate membership: Europe, Asia, Australia, North America (Chapters in
Australia, Canada, Hong Kong, Japan and South Africa)
Non-commercial communication with institutional investors, regulators, financial
media
Providing research, education, lobbyingenhancing understanding, sound
practices and industry growth
Alternative Investment Management Association (AIMA)
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Established in March, 2003 Over 70 corporate members across Canada Educational Initiatives
– March 2004 – Guide to Sound Practices for Canadian Hedge Fund Mangers
– June 2004 – AIMA Canada Primer – June 2005 – Guide to Sound Practices for Disclosure and
Promotion of Alternative Investments in Canada– June 2005 – AIMA Canada Research Award
Actively communicating with regulators, media and other participants in the hedge fund community
AIMA Canada - www.aima-canada.org
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Growth of Canadian Hedge Funds IndustryHedge Funds by Product Type
Assets in billions of dollars
Source: Investor Economics
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Growth of Canadian Hedge Funds IndustryPrincipal-protected Products by Type
December 2004
Source: Investor Economics
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Growth of Canadian Hedge Funds IndustryStand Alone Hedge Funds
Assets in billions of dollars
Source: Investor Economics
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Growth of Canadian Hedge Funds IndustryPure Fund of Hedge Funds
Assets in billions of dollars
Source: Investor Economics
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Portus Scandal/Norshield Liquidation IDA Report: Regulatory Analysis of Hedge Funds” (May
18/05) AIMA Canada’s Response
– Formal response to IDA in September– Senate Banking Committee Appearance– Guide to Sound Practices For Disclosure & Promotion– Investor Checklist
AIMA Canada is actively communicating with regulators, media and other participants in the hedge fund community
Canadian Hedge Fund Developments - 2005
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Performance Headwinds– Secular or Cyclical
Regulatory Developments– SEC (US)
– FSA (UK) Global Growth Continues
– Global assets exceed $1 trillion– Inflows are moderating– Number of hedge funds continues to
grow
Global Hedge Fund Developments - 2005
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Growth in Hedge Funds Since 1990
$38,910$58,370
$95,720
$185,750
$256,720
$456,430
$490,580
$539,060
$57,407
$91,431
$4,406
$55,340
$23,336$46,545
$99,436
$374,770$367,560
$625,554
$820,009
$972,608
$167,360$167,790
$73,585
$8,463
$70,635
$14,698
($1,141)
$36,918$27,861
($100,000)
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Ass
ets
(In
$M
M)
Estimated Assets Net Asset Flow
Source: HFR 2004 Annual Report
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Estimated Number of Hedge Funds 1990 - 2004
1,105
1,514
1,945
610
3,617
5,379
4,454
3,873
821
2,9902,781
3,325
2,383
6,297
7,436
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Nu
mb
er o
f F
un
ds
Source: HFR 2004 Annual Report
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Many researchers claim portfolios of hedge funds expose investors to risks that can be surprising to the downside – this is based on the higher kurtosis and negative skew found in hedge fund returns
However, the occurrence of extreme returns in hedge funds (negative or positive) is much less frequent for hedge fund indices then for equity indices - why??
The problem lies in the distribution of returns for hedge funds – they are not normal – and correcting for this demonstrates that “extreme events” in portfolios of hedge funds are surprisingly low!
AIMA Canada Research Award – 2005“Faulty Hypotheses and Hedge Funds”*
*Todd Brulhart & Peter Klein, KCS Fund Strategies (Vancouver)
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AIMA Canada Research Award - 2005
Higher Moments of Equity and Hedge Fund IndicesThis skew is calculated by dividing the third moment by the standard deviation, while the kurtosis is calculated by dividing the fourth moment by the standard deviation.
Index Standard Deviation
(%)
Skew KurtosisThird Moment (%)
Fourth Moment
(%)
Panel A – CSFB/Tremont (Jan. 1994 to Dec. 2004)
U.S. Equity Index
S&P 500 Total Return 4.402 -0.611 3.486 -52.15 1,309.11
Nasdaq 8.003 -0.373 3.664 -191.13 15,028.66
CSFB/Tremont Hedge Fund Indices
Hedge Fund Index 2.352 0.098 5.046 1.27 154.38
Panel B – HFRI (Jan. 1994 to Dec. 2004)
U.S. Equity Indices
S&P 500 Total Return 4.229 -0.470 3.644 -35.56 1,165.49
Nasdaq 7.390 -0.390 3.889 -157.52 11,596.31
HFRI Hedge Fund Indices
Fund Weighted Composite 2.001 -0.626 5.898 -5.02 94.47
Fund of Funds Composite 1.625 -0.257 7.305 -1.10 50.92
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Conclusions
A diversified portfolio of hedge funds is suitable for a broad range of risk tolerances and large allocations are justified
The use of leverage on a diversified portfolio of hedge funds is supportable
Allocating to hedge funds by applying mean-variance tools only may cause investors to overlook risks associated with higher moments
Caveat
“Past performance is not indicative of future results”
AIMA Canada Research Award – 2005“Faulty Hypotheses and Hedge Funds”*
*Todd Brulhart & Peter Klein, KCS Fund Strategies (Vancouver)
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Hedge Fund industry is alive and well and growing (albeit more slowly)
AIMA continues to:
– Work with regulators, the media and other interested parties to promote the proper use of alternatives
– Continues to promote due diligence, transparency and education
Summary Thoughts
Source: Investor Economics