ALTERNATIVE INVESTMENTS

Transcription

1 ALTERNATIVE INVESTMENTS A SPECIALTY OF ORBITEX ASSET MANAGEMENT DESIGNED FOR SOPHISTICATED INVESTORS

2 ORBITEX FINANCIAL CREATES SOLUTIONS FOR DISCERNING CLIENTS ORBITEX ISANESTABLISHED COMPANY WITH GLOBAL ASSET MANAGEMENT,DISTRIBUTION AND SERVICING CAPABILITIES. OUR CLIENTS ARE SOPHISTICATED INSTITUTIONS AND INDIVIDUALS FROM EVERY PART OF THE WORLD. A Dynamic Philosophy The ORBITEX philosophy is disciplined, constantly exploring world markets to identify new opportunities. As investors, we seek prudent exposure to a variety of sectors and regions, observing sound principles of quality and diversification. Across all our businesses, we leverage technology to provide more efficient, higher quality services to our customers. Diversified Financial Services We offer our clients a wide range of global, specialized investments that can be matched to their needs for liquidity, income and growth, as well as their tax situation. For financial institutions, we offer a full range of services to increase assets under management and to gain the highest levels of customer satisfaction. A Secure Relationship We have a tradition of service to clients who require a relationship based on trust, personal attention and performance. 2

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4 ASSET MANAGEMENT AND INDI ORBITEX IS A GLOBAL ASSET MANAGER PROVIDING CLIENTS WORLDWIDE WITH A FULL RANGE OF INVESTMENT OPPORTUNITIES, INCLUDING MUTUAL FUNDS, HEDGE FUNDS AND SEPARATE ACCOUNTS. 4

5 FOR INSTITUTIONS VIDUALS At ORBITEX,we understand that the investment requirements of institutions and sophisticated individuals can be complicated and diverse. Strategies for different investors may vary considerably depending on financial goals, country of residence and how other assets are invested. We offer a wide range of investment alternatives that are suitable to a variety of long-term financial objectives. These services are available in different structures and domiciles, so that ORBITEX can meet the tax reporting and privacy demands of investors of any nationality. Mutual Funds ORBITEX offers a wide range of specialized equity mutual funds, each focused on a specific sector, industry or geographic market. Separately Managed Accounts ORBITEX builds portfolios of individual securities that are managed according to guidelines established with each client. Sub-Advisory Services In certain cases where the primary financial relationship is well established, ORBITEX will act as investment advisor for a portion of an overall portfolio, including sector and small capitalization segments. 5

6 HEDGE FUNDS AN ASSET CLASS WITH FAST INCREASING IMPORTANCE AND PERFECT ADAPTATION TO THE CHANGED CAPITAL MARKET ENVIRONEMENT To enhance potential return while protecting against market volatility, ORBITEX offers a number of alternative investment vehicles that employ sophisticated portfolio management techniques. As response to the increased turbulences in the world economy and on the capital markets we want to draw your attention to one of the specialties of our house, the ALTERNATIVE INVESTMENT STRATEGIES. 6

7 EXECUTIVE SUMMARY INFLECTION POINT OF CHANGE It is our view that the hedge fund industry was in 1998/9 at a strategic inflection point in its life and has been in a fully fledged uptrend since the beginning of the new century. Strategic inflection points can be defined as a fundamental change in any business. Mathematically, inflection points occur when the rate of change of the slope of any curve changes. The inflection point of change of the hedge fund industry is based on the following factors: In the course of the ongoing globalization, alternative investments can add value to traditional portfolios by improving portfolio diversification. Adding various hedge fund strategies to a traditional equity and bond portfolio can increase return whilst reducing the overall risk. Structural and short-term inefficiencies will continue to exist in the global market place and have become even more accentuated after the terror attacks of September 11, The resulting imbalances offer the opportunity to achieve attractive returns. Hedge funds target superior risk-adjusted absolute returns (performance above zero) regardless of developments in equity and fixed income markets. The industry has not only attracted a lot of media attention but also some of the best people and most elite groups from the money management industry, e.g. George Soros, Michael Steinhardt, Julian Robertson or J.W. Henry. WHAT ARE HEDGE FUNDS? In spite of the name, hedge funds are not necessarily hedged against market risk. The term is used to categorize a broad range of funds which adopt a variety of techniques and invest in various asset classes, markets and strategies not covered by traditional managers. TYPICAL FEATURES OF HEDGE FUNDS Hedge funds are geared to absolute returns rather than relative returns vs. a benchmark. Hence, hedge funds target an absolute positive performance (performance above zero) even in adverse market environments. The rules and restrictions on the investments or strategies which hedge funds may engage are defined much broader. The fund managers may use e.g. derivative instruments or borrowing to achieve leverage, both for investment and speculative purposes. The managers usually invest a significant portion of their own wealth in the funds they manage. Therefore, they share the rewards as well as the risks with the investor. Hedge funds accessed by non-us investors are generally domiciled in an offshore financial center and are organized under the prevailing laws. There are trends towards better governmental regulation and self-regulation of hedge funds. 7

8 HISTORY / BACKGROUND OF HEDGE FUNDS INTRODUCTION Hedge funds, in contrast to traditional asset class based long-only investment funds, focus on investment strategies. The term hedge funds, an often misleading name, stands for a very heterogeneous assortment of non-traditional investment funds investing in cash, equity, interest rate, currency, commodity products and in their derivatives. They are leveraged through the use of derivative financial instruments, shortselling and borrowing. Hedge funds have received widespread press attention in the last few years, partly due to the spectacular performance records of big players such as George Soros, Michael Steinhardt, Julian Robertson or J.W. Henry in , partly due to large losses in 1994 which resulted in the bankruptcies of hedge funds like Partners L.P. and partly due to the bankruptcy of the Long Term Capital Management in 1998 which even endangered the global financial stability. Unfortunately, this has led to a very distorted view of hedge funds, particularly with respect to their risks, strategies and performance. Especially in Continental Europe, public knowledge about hedge funds remains limited. Many professional client advisors, asset managers, private and institutional investors still seem to be misinformed even about the most basic facts of this promising industry. DEFINITION OF THE TERM HEDGE FUND Hedge funds can be defined as all forms of investment funds, companies and private partnerships that use derivatives for directional investing and/or are allowed to sell short and/or use significant leverage through borrowing. KEY CHARACTERISTICS OF HEDGE FUNDS Today, the term hedge fund is viewed in a much broader context, since many of the hedge funds control their risk exposure by hedging with one or more methods. Hedge funds should be broadly defined by their structural characteristics, rather than by their hedge characteristics. There are several characteristics common to most hedge funds. Cottier 2 has given a short and concise definition: Free choice of asset classes: Hedge funds are not by definition restricted to one specific asset class. Whereas some hedge funds may restrict their investment policy to one asset class (e.g. equities, interest rates, currencies, commodities), others enjoy greater freedom (e.g. macro hedge funds). 1 Cottier, Hedge Funds and Managed Futures, Berne Cottier, Hedge Funds and Managed Futures, Berne

9 History/Background Free choice of markets: Many hedge funds do not focus on one specific market but invest according to available opportunities in all kinds of geographic locations (US, Europe, Japan, Emerging Markets). Free choice of trading style: Whereas some hedge funds confine themselves to one specific trading style, others apply whichever is most convenient. Examples of trading strategies commonly used include: discretionary, systematic, technical trendfollowing, contrarian, top down, bottom up. Some of these strategies are based on macro or micro economic research, others are more statistically or technically oriented. Free choice of instruments: Most hedge funds invest in both, cash and derivative products. Instruments may be exchange or over-the-counter (OTC) traded and securitized or non-securitized. Since most hedge funds are sold on a private basis and many are incorporated offshore, their transparency is very restricted. Even basic data concerning monthly performance, asset size or investment policy is often disclosed exclusively to investors. For regulatory and administrative reasons, high minimum investment levels are often required. Infrequent subscription and redemption possibilities with long notification periods have become standard for the industry.. A common feature is the performance oriented incentive fee. Also, due to the nature of the business, high total fee and cost loads are charged. Many managers invest their own capital in their fund. Hedge funds are marketed as being oriented towards absolute performance (performance above zero) instead of performance relative to a certain benchmark or reference index. This is explained by the lack of meaningful benchmarks resulting from the flexibility of the funds and the possibility of going long and short. Most hedge funds show low correlation to traditional markets. 9

10 History/Background HEDGE FUNDS - THE GROWTH SECTOR PAR EXCELLENCE WITHIN THE FINANCIAL SERVICES AREA Besides the fast extension of the product range, the hedge fund industry witnessed an enormous deepening and expansion of the market since the mid 90s and as a consequence of this trend among others an explosive growth. The worldwide assets managed by hedge funds amounted to approx. USD 40 billion in the year 1990, grew to USD 200 billion as per 1995 and tripled to USD 600 billion (depending on the source) as per The capital invested into hedge funds represents approx. 1.5% of the global stock market capitalization; this is still an infinitesimal dimension. Therefore, the often heard fears of a dangerously ballooned hedge fund volume can not be confirmed at all. The flow of new money into the hedge fund industry in the upcoming five years is expected to amount to 25% p.a.; assuming an annual capital gain of 12% p.a., the overall capital invested in hedge funds will increase to more than 3% of the global stock market capitalization by Growth of Alternative Assets USD billions Funds Source: VAN Hedge Fund Advisors Funds The impressive growth of this industry can be attributed among others to the fast extension and deepening of the market during the past five years. Historically, the most important and almost only hedge fund investors were private high net worth individuals. With the growing degree of familiarity and the convincing track record of these investment vehicles together with the resulting positive publicity hedge funds became popular within a larger universe of private investors in the USA and in Europe in the second half of the 90s; with the bursting of the technology bubble at the latest, also institutional investors appeared on the scene in a growing number. The institutional capital flow into the hedge fund industry during the coming five years is expected to grow by 40% annually, twice as fast as the private capital flow. The capital invested into hedge funds might then be distributed evenly among private and institutional investors and amount to more than USD 2'100 billion by Estimated Asset Growth of the Hedge Fund Industry Estimated Estimated CAGR Estimated Origin of Demand Market Size Market Size by Geography (2001) (2006) Private 70% CAGR Performance: 12% 50% US, Demand = USD 315bn CAGR New Assets: 15% = USD 1 050bn Switzerland Institutional 30% CAGR Performance: 12% 50% US, Japan, Switzerland Demand = USD 135bn CAGR New Assets: 40% = USD 1 100bn (soon Europe & Australia) Total 100% CAGR Performance: 12% 100% Demand = USD 450bn CAGR New Assets: 25% = USD 2 150bn Global Stock USD bn CAGR Performance: 5% USD bn Markets (1.0%)* CAGR New Assets: 5% (3.2%)* * Hedge fund assets in % of global market capitalization Source: Harcourt Investment Consulting Further growth factors are the hedge fund managers convincing competence and professionalism. In order to create demandand investor-oriented financial services, they are permanently extending and enlarging the range of highly specialized, innovative hedge fund products with the help of the newest technologies in software, hardware, telecommunication, Internet, data storage and data management. Meanwhile, heterogenity became an outstanding feature of the hedge fund industry, and this great variety applies not only to investment strategies and styles, but also to investment objectives and targets as well as to investment regions and sectors. This leads to risk/reward-profiles of hedge funds which are different from the ones of traditional investment categories such as money market instruments, bonds and stocks in most cases. There is now the consensus opinion in the financial industry that alternative investments (hedge funds and private equity, real estate and commodity funds) represent an investment class per se. 10

11 Why Alternative Investments? WHY ALTERNATIVE INVESTMENTS? DIFFICULT MARKET ENVIRONMENT The market environment, which became very difficult since the burst of the technology bubble at the beginning of 2000 and the terror attacks in New York and Washington on September 11, 2001, is also paradoxically it may sound an important growth factor for the hedge fund industry. The capital markets of the last couple of years can be characterized by the following observations: Stocks became more risky as the price volatility has remarkably increased. Stocks may have low or negative performance over a longer period of time. Source: Bank Leu Source: Micropal (December 1999 March 2003) The correlation between the major stock and bond markets became very high resulting in diminishing benefits of the geographical diversification of the portfolios. Stock Market Correlation (Europe USA) Bond Market Correlation (Europe USA) Source: Bank Leu Source: Bank Leu Therefore, a growing number of investors see in specific alternative investments such as hedge funds an efficient solution to mitigate and overcome above capital market problems. 11

12 Why Alternative Investments? OBJECTIVES OF THE ALTERNATIVE STRATEGIES Most alternative investment strategies are designed... to generate pure alpha (returns independent on market directions, zero-beta), to exploit mispricings and inefficiencies in global capital markets and to generate high risk-adjusted returns with low correlation to traditional asset classes. The main types of investments regarded as alternative to the traditional asset classes are hedge funds and private equity, real estate and commodity funds. Long-only Funds with Market Exposure ß = Performance Contribution from Market Direction Portfolio Return 30% 20% 10% } ß = Skill-Based Returns 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% -10% -20% } Return of Market Index Source: Orbitex Financial Services Group CHARACTERISTICS OF THE HEDGE FUND STRATEGIES Many hedge funds are designed to generate pure alpha by hedging the primary risk (e.g. stock market and interest rate risk) that drives return in the traditional asset classes.these so called zero-beta strategies seek to exploit mispricings, price anomalies and inefficiencies in global capital markets by accepting strategy-specific risk in return for generating high risk-adjusted returns with low correlation to traditional assets. There is a single most important attribute of the hedge fund industry, it is heterogenity. The various hedge fund strategies are conceptually different. Traditional investment funds are normally long an asset class and unleveraged. Hedge funds can range from leveraged short to leveraged long; consequently, the market dependence in terms of beta varies between a multiple of +1 (long-biased fund using leverage) and a multiple of 1 (short seller using leverage). However, it is the middle section the zero-beta strategies which deserve in the current market environment most attention. Zero-Beta Strategies Hedge Fund Return 30% 20% ß = 0 } 10% = Skill-Based Returns 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% The Zero-Beta Strategies being independent on the -10% direction of the underlying market are also called Market Neutral Strategies or Non-Directional Strategies ;as -20% they intend to generate a positive return in bull and bear markets, they are also named Absolute Return Strategies. Source: Orbitex Financial Services Group Since the performance of these funds depends entirely on the expertise, knowledge and experience of the fund managers and on their electronic tools, the term Skill-Based Strategies is also used. We use these terms as synonyms, although each one describes only a specific characteristic of this category of funds. Market neutral hedge funds most perfectly fulfill the highly appreciated performance criteria of hedge funds such as: Return of Market Index 12 Consistent above-average, positive price performance Low price volatility Low performance correlation with traditional asset categories

13 Classification CLASSIFICATION OF THE HEDGE INVESTMENT STRATEGIES (Criterion: Exposure [and therefore correlation] to underlying markets) Hedge Fund Investment Strategies Relative-Value Market Neutral Non-Directional Event-Driven Opportunistic Directional Convertible Arbitrage Merger Arbitrage (Risk Arbitrage) Macro Warrant Arbitrage Distressed Securities Short Sellers (Short-only Funds) Fixed-Income Arbitrage Emerging Markets Equity Market Neutral Long/Short Equity Statistical Arbitrage Commodity Trading Advisors (CTAs) Low Market Exposure High 15 13

14 Classification Relative-Value Non-Directional Relying and capitalizing on mispricings of two or more interrelated instruments. These strategies have low or no correlation to the underlying markets; they are therefore also called market neutral or non-directional. Convertible Arbitrage E.g. long underpriced convertible bonds and short the underlying stocks; long underpricedconvertibles and short overpriced convertibles of the same underlying stocks. Warrant Arbitrage E.g. long underpriced warrants and short the underlying stocks; long underpriced warrants and short overpriced warrants of the same underlying stocks. Fixed-Income Arbitrage Capitalizing on pricing anomalies within and across global fixed-income markets and their derivatives. Example: Buying underpriced fixed-income instruments and selling short expensive securities. Equity Market Neutral Exploiting equity market inefficiencies by being involved simultaneously in long and short matched equity positions. One of the greatest advantages is the doubling of the alpha. Statistical Arbitrage Mean Reversion Momentum Most of these strategies are proprietary quantitative styles that are developed using sophisticated mathematical and statistical tools to identify non-random price behavior. Statistical arbitrage can be broadly characterized into three sub-styles: 1) Mean Reversion, 2) Momentum and 3) Multi-Factor Models. In most cases these strategies trade large liquid equities, maintain equally balanced long/short market exposure and capitalize on the statistically proven price distortions. Mean Reversion Strategies exploit a tendency between two assets with a quantifiable sympathetic price relationship. For example, let s take a pair of automobile stocks such as GM and Ford. A mean reversion statistical arbitrage program will have defined a mean price and a probability distribution for the price difference between the two stocks over a specific time horizon. When the price differential between GM and Ford spreads a standard deviation measurement from the mean within this specific time horizon, the computer sells one stock and buys the other, expecting the price differential to revert back to the mean. Sophisticated mathematical formulas measure the momentum (speed) of market movement and seek to exploit differences in the structures of individual sector momentums. Multi-Factor Models Multiple fundamental factors drive this strategy that seeks to exploit relative values between equities based on these factors. The holding time in this strategy is substantially longer than the one of the short-term Mean Reversion and Momentum Strategy. 14

15 Classification Event-Driven This strategy class focuses on identifying and analyzing securities that can benefit from the occurence of extraordinary transactions and events. It has a variable, rather low degree of market exposure. Merger Arbitrage (Risk Arbitrage) Distressed Securities Investing in securities of companies which are or may be the subject of publicly announced mergers or acquisitions, in anticipation of earning the spread between prevailing market prices and the prices of the value of the securities or cash to be received upon consumption of the particular corporate event or transaction. This strategy intends to buy the target company s shares and simultaneously sell short the proper ratio of the acquiring company s shares. An example is the acquisition proposal of GE for Honeywell announced in spring Taking long and, to some extent, short positions in equities and debts of companies which are in financial distress, in a bankruptcy procedure or in a major reorganization. Opportunistic Directional This strategy class has a variable, rather high degree of market exposure and, therefore, is also called directional.it capitalizes on an identified expected price trend on a specific market. Macro This strategy employs an opportunistic top-down approach to invest in a leveraged base across multiple sectors, markets and instruments. The investment process is based on macro-economic analyses and forecasts of shifts in global interest rates, currency markets, equity markets and policy changes. Example: Soros Quantum Fund Short Sellers (Short-only funds) Profitable in a bearish market environment. Short sellers borrow stocks and sell them on the market with the intention of buying them back at a lower price; the portfolio holds usually only short positions. Emerging Markets Taking long and short positions of equity and/or debt and derivative products in emerging markets. Long/Short Equity Long/Short strategies combine both long as well as short equity positions. A long/short equity manager can add value by buying winners and selling losers in one and the same industrial sector. The long and short positions are usually not balanced. Commodity Trading Advisors (CTAs) Market specialists buying and selling index, interest, currency or commodity futures and the respective options in order to capitalize on the expected market trends. 15

16 FORMS OF STRUCTURE ORBITEX involvement in pursuing hedge investment strategies for its clients may be located depending on the specific needs of the investor on one of the three levels outlined below: Single Hedge Funds Strategy A Strategy B Strategy Z Master Fund Master Fund (Multi-Strategy/Multi-Manager Fund o Funds) Feeder Funds Feeder Fund Feeder Fund Feeder Fund Each hedge fund strategy comprises its specific risks. In order to reach the best possible performance and to reduce the associated risk, each portfolio pursuing a specific hedge strategy diversifies the investments by assembling a reasonable number of deals in the portfolio, e.g. a merger arbitrage fund holds at least 10 to 20 merger deals in the portfolio. Another way to control the risks associated with this type of investing is to create a portfolio of hedge funds also known as fund of funds. A fund of hedge funds is a collection of a carefully selected diverse group of managers with different but complementary strategies. While reliance on a single hedge fund manager or investment approach may be risky, a properly structured fund of hedge funds such as a multi-strategy/multi-manager fund mitigates that risk. When one or more third party funds invest in a fund of funds, then the fund of funds is known as Master Fund and the third party fund as Feeder Fund. 16

17 THE BENEFITS OF HEDGE FUNDS IN EQUITY PORTFOLIOS With the establishment of the Modern Portfolio Theory by the Nobel Price Winner Harry Markowitz in the 1950s, the idea became second nature to each and every portfolio manager that by adding a value increasing investment to an equity portfolio, the overall risk of the portfolio can be reduced and its overall return increased, provided the return stream of the added investments does not correlate with the return stream of the other portfolio holdings; these are the benefits of an efficient portfolio diversification. But given the ongoing globalization and synchronization of the world economy, the correlation among international equity and bond markets has increased substantially; hence, the benefits of diversification of an equity portfolio by countries and industries have diminished. Therefore, private and institutional investors are keen on finding investment opportunities with risk/reward profiles different from the traditional asset classes and with minimal correlation to the performance of equities and bonds. By adding alternative investments to a portfolio these requirements can perfectly be fulfilled. Therefore, particularly hedge funds with their diversity of styles and strategies have been enjoying with good reason growing popularity during the last three to five years. Various empiric academic studies have proven that the addition of hedge funds in traditional portfolios moves the portfolio s efficient frontier upwards, that means it does increase the overall return of the portfolio and simultaneously reduce the overall risk. Moving-up of the Efficient Frontier of a Portfolio by Adding Alternative Investments Investor s return/risk profile Return Alternative Investments Stocks USA Stocks Japan Stocks Europe Money Market Bonds Europe Risk Bonds USA Source: Bank Leu Benefits of Hedge Funds in Equity Portfolios Both, investors with high risk tolerance level as well as investors with low risk tolerance level capitalize on these benefits alike; market neutral, non-directional funds are suitable for all kinds of investors, regardless of their risk tolerance level, whereas opportunistic, directional funds require a higher risk tolerance because of their higher correlation with the underlying markets. Since some time ago, the market trend goes towards guaranteed products which may additionally offer depending on the structure full or partial principal protection and/or a guarantee of a minimal return. The hedge fund industry s heterogenity and the great freedom of action of the product developers and fund managers allow also the creation of tailor-made fund products. 17

18 SUMMARY Hedge Funds are ideal instruments as addition in traditional portfolios for investors who... are seeking an investment vehicle which delivers superior risk-adjusted returns through all market conditions, want some exposure to market neutral alternative investments with consistently high returns, low downside volatility and low correlation to other asset classes, are seeking an investment instrument which targets alpha return streams, are seeking a contribution to the optimizing of a traditional equity portfolio and have a longer-term time horizon. 18

19 To learn more about ORBITEX Financial Services Group, visit us at: or call an ORBITEX representative at one of our locations. Nassau /7 19