opening keynote: mike diamond and josh charlson
DESCRIPTION
The Latest on Alternatives Mutual funds are looking more and more hedge funds and vice versa. Our keynote speaker will discuss the blurring of the lines between registered and private funds -- and what the investment industry of the future will look like.TRANSCRIPT
#NICSAGMM
Fidelity® Institutional – Alternative Investments
Platform
Presentation for NICSA
Michael Diamond, VP Product Management – Alternative Investments
September 11, 2014
1 Data as of December 31st, 2013.
3
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Management
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Fidelity Institutional Overview
Fidelity Financial Advisor Services
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Intermediary Fund Sales
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Execution Prime Services
W
orkplace
Investors
Institu
tions
PersonalInvestors
Distrib
utionA
sset
M
anagem
en
t
Operations and Services Group
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Data as of December 31st, 2013
Slide eReviewed under - 617610.3.0
Enhance
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Due Diligence
Capabilities
Provide
Education and
Thought
Leadership
Strengthen
Client
Experience and
Streamline
Processing
Expand Access
to Institutional
3rd Party Quality
Products
Expand the FI alternatives offering to support advisors with a comprehensive
solution that includes education, tools, research and expanded product access
via third parties as well as delivering the leading custody solutions provided today
Fidelity Institutional (FI) Alternative
Investment Offering Vision
5
Alternative Investment Product Center
6 For illustrative purposes only
AI Mutual Fund Sales make up 18% of long-
term mutual fund flows in FI
0%
5%
10%
15%
20%
25%
2011 2012 2013 Sep-2014
Multialternative
Nontraditional Bond
Multicurrency
Market Neutral
Managed Futures
Long/Short Equity
Bear Market
'% of Fund Flows'
Source- FundsNetwork.com
7
For broker-dealer use and investment professional use only. Not for distribution to the public as sales material in any form.
The third party service providers listed are independent companies and are not affiliated with Fidelity Investments. Listing them does not suggest a recommendation or
endorsement by Fidelity Investments. The third-party products mentioned herein are the property of their respective owners.
Third party marks are the property of their respective owners; all other marks are the property of FMR LLC.
The content provided in this presentation is general in nature and is for informational purposes only. This information is not individualized and is not intended to serve
as the primary or sole basis for your decisions as there may be other factors you should consider. Fidelity does not provide advice of any kind. You should conduct your
own due diligence and analysis based on your specific needs.
Fidelity Institutional serves banks, broker-dealers, insurers, registered investment advisors and other financial professionals. Fidelity Institutional comprises of National
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Services LLC. Member NYSE, SIPC.
Fidelity Institutional Wealth Services provides brokerage products and services and is a division of Fidelity Brokerage Services LLC. National Financial is a division of
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©2014 FMR LLC. All rights reserved.
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8
Disclosure
The Alternative Mutual Fund
Landscape
Josh Charlson, Director of Manager Research for Alternative Strategies
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
ALT MUTUAL FUNDS TRENDS
Section I
10 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
How Morningstar Defines an
Alternative Investment
• An investment can be defined as “alternative” if it falls
into one or more of the following three buckets:
1. Non-traditional asset classes (i.e. commodities,
currencies).
2. Non-traditional strategies (i.e. shorting, hedging, event
driven).
3. Illiquid assets (i.e. private equity, private debt).
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
What is an Alternative Investment?
• Dynamic classification.
– Once an investment becomes mainstream, it is no longer “alternative.”
– Emerging market stocks, listed REITs.
• Legal structure does not define the investment.
– Hedge funds aren’t necessarily alternative, and mutual funds
aren’t necessarily traditional.
• A good alternative investment is one that produces positive risk-
adjusted returns (over a reasonable time frame) and exhibits a low
correlation to traditional investments.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Growth of Hedge Fund Assets
0
100
200
300
400
500
600
700
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Single Manager Hedge Funds
Funds of Hedge Funds
Assets in Liquid Alternative Vehicles USD BilAssets in Liquid Alternative Vehicles USD Bil
Assets in Liquid Alternative Vehicles USD Bil
Assets in Morningstar’s Hedge Fund Database USD Bil
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Growth of Alternative ETF and Mutual
Fund Assets
Assets in Liquid Alternative Vehicles USD Bil
0
50
100
150
200
250
300
350
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Mutual Funds ETFs
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Flows into Liquid Alternatives: Mutual Funds
-10
10
30
50
70
90
110
2007 2008 2009 2010 2011 2012 2013
Bear Market Currency Long/Short Equity Managed Futures
Market Neutral Multialternative Nontraditional Bond
Flows Into Alternative Mutual Funds USD Bil
15 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Alternatives Category Growth, 2013
Morningstar Category Estimated Net Flow 2013 Organic Growth Rate % 2013
Nontraditional Bond 53,706,899,757 79
Long/Short Equity 20,624,967,875 81
Multialternative 9,841,500,717 57
Market Neutral 4,590,846,550 20
Bear Market 2,690,304,342 39
Managed Futures 2,654,739,560 32
Multicurrency (491,169,846) (4)
16 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Top Drivers of Investments in
Alternatives
17 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Institutions’ and Advisors’ Allocations to Alternative
Investments in 2014
18 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
ALT CATEGORIES
Section II
19
20
Classification Chart
Mutual Fund and ETF Categories
Multialternative
Equity-based
Categories
Bear Market
Long/Short Equity
Market
Neutral
Nontraditional Bond
Commodities Categories Currency
Derivatives
Categories
Managed Futures
Volatility Trading Inverse/ Leverag
ed
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Long-Short Equity
• These funds take a hedged, net-long exposure to the stock market.
• Must have at least 20% net short exposure
• Typical beta ranges between 0.3 and 0.8, averages 0.5.
• Several variations on the strategy:
– Long and short directional bets on individual stocks or indexes – Wasatch Long/Short FMLSX, Accuvest Global Long Short AGLS
– Long stock + short calls+ long puts. – Gateway GATEX, Schooner SCNAX
• Typical benchmark: Custom index of 50% S&P 500 and 50% cash
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Market Neutral
• These funds hedge out most equity market risk, and exhibit betas to stock indexes of between -0.3 to 0.3.
• Risk/return levels are similar to bond funds.
• Three major strategies:
– Equity market neutral, merger arbitrage, and convertible arbitrage.
– An emerging strategy of “event-driven” which is an extension of merger arbitrage into other corporate events.
• Equity Market Neutral:
– These funds take long and short positions in stocks such that the market risk in the long positions is virtually offset by the short positions.
– The goal is to isolate “alpha” from stock selection.
– Generally the most difficult strategy to execute.
– JPMorgan Research Market Neutral JMNAX
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Market Neutral (continued)
• Merger Arbitrage:
– These funds buy target stocks and short the acquirer
(stock-for-stock transaction) or short calls (cash transaction).
– The goal is to isolate the premium paid for the target.
– Collecting premium is selling insurance on the deal closing.
– Merger Fund MERFX, Arbitrage Fund ARBFX.
• Convertible Arbitrage:
– These funds buy convertible bonds and short the stocks of the same
issuer.
– The goal is to benefit from the mispricing of the convertible bond,
which includes an embedded option.
– Convertible bond holders are paid an illiquidity premium.
– Calamos Market Neutral Income CMNIX.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Nontraditional Bond
• The largest category in terms of assets ($140 billion as of 5/28)
• Lots of different flavors: Unconstrained, Opportunistic, Long/Short,
Tactical, Absolute Return
• These funds invest primarily in debt (all types) but can hedge
duration risk, credit risk, or both.
• Most, however, are reducing duration risk and focusing on credit
risk
• Category correlation to high yield bond funds since 2008: 0.95
• Typical benchmark: Barclays US Aggregate Bond Index
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Managed Futures
• These funds take long and short bets on futures contracts based
upon positive or negative price momentum, typically across various
asset classes.
• Systematic, automated strategies, which can range in volatility.
• Typical benchmark: Credit Suisse Managed Futures Liquid Total
Return Index
• Single-manager versus multi-CTA structures:
– Single manager structures can be less diversified in terms of strategy,
but are much cheaper.
– AQR Managed Futures AQMIX
– Multi-CTA structures charge underlying management and performance
fees which are not included in the expense ratio:
– Mutualhedge Frontier Legends MHFAX
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Multicurrency
• These funds invest in short-term foreign-currency government debt or
currency futures or forwards.
• Most funds are explicitly short the U.S. dollar, and a few are absolute
return (neutral to the direction of the dollar index)
• Risk/return profile similar to bond funds.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Category: Multialternative
• This is largest category in terms of options: 118 funds as of May
28, 2014.
• Must have at least 20% net short exposure and invest at least 50%
of assets in alternative strategies
• These funds offer a diversified mix of alternative strategies and
asset classes, accessed through separate accounts, ETFs, or
mutual funds.
• Typical benchmark: Morningstar Conservative Target-Risk Index
• Most, but not all, multialternative funds are also multimanager:
– Absolute Strategies ASFIX, Hatteras Alpha Hedged Strategies
ALPHX.
• There are a growing number of tactical funds in this category.
– JHancock2 Global Absolute Return JHAAX, UBS Dynamic Alpha
BNAAX.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Multialternative Category vs. Conservative
Portfolio
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
ALT RESEARCH PROCESS
Section III
29 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Morningstar Analyst Ratings for
Alternative Mutual Funds
• Debuted in June 2012.
– 69 funds and 71% of assets by Q2 2014.
– Global Fund Reports for all 69 funds.
• Same 5 Pillars: People, Parent, Process, Performance, Price.
• Same rating system: positive (Gold, Silver, Bronze); Neutral;
Negative.
• Customized application for alternative mutual funds.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Evolution of Fund Ratings
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
The Five Pillars
People Proces
s
Parent Performance Price
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Morningstar Analyst Ratings: 5 Pillars
People Hedge fund track records.
Experience with shorting and risk management.
Experience in managing alternative funds
Reasonable investment in mutual fund.
Parent Boutique shops.
Series trusts: some boards spread too thin with little or no investment in funds.
Close eye on product launches and capacity constraints.
Full look through on relative strength of entire alts product lineup.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Morningstar Analyst Ratings: 5 Pillars
Process Transparent and repeatable.
Shorting process should stand on its own merit.
Risk-management process is essential: top-down exposure limits; bottom-up position loss limits; steps to increase and reduce risk, etc.
Trading/transaction cost considerations.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Morningstar Analyst Ratings: 5 Pillars
Performance Analyze multiple track records. (hedge fund, long only, etc.)
Different risk/return profiles in different market environments.
Heterogeneous categories.
Lack of industry standard benchmarks.
Statistics such as alpha, beta, correlation, bear correlation, upside/downside capture, maximum drawdown.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Morningstar Analyst Ratings: 5 Pillars
Price More expensive than stock and bond funds.
Use annual or prospectus net expense ratio, examine fee layers.
Relative to category and distribution channel.
Managed futures funds charge fees not included in the
expense ratios.
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Distribution of Alternative Fund Analyst
Ratings
69 Mutual Funds, 71% of Alt Assets; Data as of
6/10/2013,
1
10
12
40
6
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.
Questions & Comments
312-696-6564
• Website:
http://advisors.morningstar.com/advisor/al
ternative-investments.htm
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,
in whole or in part, without the prior written consent of Morningstar, is prohibited.