Post on 30-May-2018
transcript
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 1/22
<#>
© 2006 Morningstar, Inc. All rights reserved.
Mainstreaming Alternative Investments
× Nadia Papagiannis, CFA
Alternative Investments Strategist
December 1, 2009
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 2/22
2
Morningstar’s Coverage of Alternative Investments
× Institutional database products:
× Morningstar® DirectSM
× Morningstar® Alternative Investment CenterSM
× 8000 hedge funds, including 3000 fund of funds.
× Alternative mutual funds, ETFs, closed end funds, andseparate accounts.
× 330 datapoints, including Form ADV and 13-F holdings.
× Proprietary Indexes:× 27 Morningstar Hedge Fund Indexes and 190 Morningstar
MSCI Hedge Fund Indexes.
× 5 Morningstar Commodity Indexes.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 3/22
3
Morningstar’s Coverage of Alternative Investments (continued)
× Morningstar RatingsTM:
× Hedge funds with 38 months of data.
× Mutual funds and ETFs with 36 months of data.
× New Operational Risk Indicator for hedge funds.
× Alternative Investments Observer quarterly newsletter.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 4/22
4
Flood of New Alternative Investments
× New “alternative” funds have flooded the US market place in the last decade, inboth mutual fund and ETF form.
× Morningstar tracks 346 such funds, 141 mutual funds and 205 ETFs.
New Alternative Funds
0
20
40
60
80
100
120
1 9 7 7
1 9 7 8
1 9 8 5
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 4
1 9 9 5
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
Number of New Alternative Funds
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 5/22
5
Investors Appetite for Alternative Mutual Funds
× Flows in to alternative mutual funds have grown rapidly in 2009, especially inthe Long-Short category.
US Alternative Mutual Fund Flows
-4,000
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
YTD
$ m i l l i o n s
Bear Market Currency US Long-Short
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 6/22
6
Investors Appetite for Alternative Mutual Funds
× Long-Short mutual funds are also the fastest growing alternative category.
Long-Short Mutual Fund Launches
0
5
10
15
20
25
1 9 7 7
1 9 8 9
1 9 9 1
1 9 9 7
2 0 0 0
2 0 0 2
2 0 0 4
2 0 0 6
2 0 0 8
New Long-Short Mutual Funds
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 7/22
7
Morningstar’s Alternative Mutual Fund Categories
× Long-Short, Bear Market, and Currency:
× Long-Short funds use shorting, but remain net-long or neutralin exposure.
× Bear Market funds take a net-short equity exposure, and can
be leveraged.× Currency funds trade spot currency, forward or future
contracts, ETFs, or money market instruments.
× The Long-Short category exhibits the greatest diversity.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 8/22
8
Breakdown of Long-Short Category
× Option/Buy-write strategies
× Gateway, Calamos Market Neutral, The Collar funds.
× Non-directional strategies
× Arbitrage strategies:
× Arbitrage, Merger, and AQR Diversified Arbitrage.
× Equity market neutral strategies:
× Highbridge Statistical Market Neutral, JP MorganMarket Neutral, TFS Market Neutral.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 9/22
9
Breakdown of the Long-Short Category (continued)
× Long-short equity funds
× Directional shorts: Diamond Hill Long-Short.
× Hedgers: Hussman Strategic Growth.
× Credit strategies
× Forward Long/Short Credit Analysis.
× Commodity or diversified managed futures strategies
× Rydex/SGI Managed Futures Strategy, Direxion CommodityTrends Strategy.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 10/22
10
Breakdown of the Long-Short Category (continued)
× Multi-Strategy
× Van Eck Multi-Manager Alternatives, Aston/Lake PartnersLasso Alternatives, Absolute Strategies.
× Absolute return is neither a category nor a way to distinguishinvestments.
× Alternative funds act differently based on asset class/instrumentsused and trading strategy.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 11/22
11
Morningstar’s Definition of Alternative Investments
× Alternative Investments should provide:
× Positive risk-adjusted returns over time.
× Lower correlation to traditional stock and bond portfolios.
× How do investments meet this criteria?
× Investing in different asset classes/instruments.
× Shorting or hedging.
× What we do not consider alternative:
× Equities with commodity exposure.
× REITS.
× 130/30 strategies.
× Emerging market stocks or bonds.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 12/22
12
Correlation of Various Investments to a 60/40 portfolio
× A 60/40 portfolio comprised of the I-shares S&P 500 Index and the BarclaysAggregate Bond ETF incepted in October 2003 and rebalanced quarterly.
1 2 3 4 5
1 60-40 Portfolio
2 Vanguard Precious Metals and Mining 0.71
3 Vanguard REIT Index Inst 0.78 0.56
4 S&P 500 130/30 Strategy TR 0.97 0.71 0.74
5 Vanguard Emerging Mkts Stock Idx 0.84 0.86 0.60 0.83
6 JPM EMBI Global Diversified TR USD 0.72 0.68 0.60 0.66 0.69
Date: 10/1/03-9/30/09 1.00 to 0.60 0.60 to 0.20
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 13/22
13
Drawdowns Relative to a 60/40 portfolio
Maximum Drawdown Oct. 2003 to Sep. 2009Max
Drawdown
# of
Periods Peak Date Valley Date
60-40 Portfolio -31.86 16.00 11/1/2007 2/28/2009
Vanguard Precious Metals and Mining -68.86 6.00 6/1/2008 11/30/2008
Vanguard REIT Index Inst -66.59 23.00 4/1/2007 2/28/2009
S&P 500 130/30 Strategy TR -47.56 16.00 11/1/2007 2/28/2009
Vanguard Emerging Mkts Stock Idx -62.70 16.00 11/1/2007 2/28/2009
JPM EMBI Global Diversified TR USD -21.81 5.00 6/1/2008 10/31/2008
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 14/22
14
Commodities as Alternative Investments
× Commodities are a trading strategy rather than an asset class or a“beta.”
× Investors access commodities primarily through exchange-traded futures contracts.
× Futures contracts have a net supply of zero, and therefore
there is no “market portfolio” as there is in stocks and bonds.× The S&P GSCI and the Dow Jones UBS indexes exhibited high
correlations to stocks and bonds in 2008.
×
Better “alternatives” to commodity investing:× Long-short commodity or diversified managed futures trading
strategies.
× An active approach using ETFs/ETNs.
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 15/22
15
No Such Thing as a Commodity Beta
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 16/22
16
How to Invest in Alternative Mutual Funds--Do Your Homework!
× Not all alternatives are createdequal.
× The average long-short mutualfund is highly correlated tostocks.
× Bear market funds show poorrisk-adjusted returns onaverage.
× Long/short commodity works,but the few funds that exist donot have long track records.
Correlations (monthly) Oct. 2003 to
Sep. 2009 1 2 3 4
1 60-40 Portfolio
2 US OE Bear Market -0.96
3 US OE Currency 0.31 -0.26
4 US OE Long-Short 0.91 -0.88 0.32
5 Morningstar Long/Short Commodity TR -0.24 0.20 0.04 -0.06
Sortino Ratio (monthly) Oct. 2003 to
Sep. 2009
60-40 Portfolio 0.24
US OE Bear Market -0.85
US OE Currency 0.45
US OE Long-Short -0.10
Morningstar Long/Short Commodity TR 0.96
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 17/22
17
Addition of Select Long-Short Mutual Funds to a 60-40 Portfolio
× Example of a 20% allocation to long-short hedged equity fund, market-neutral fund,and a managed futures fund.
× Both the returns and the downside deviations were improved in all three portfolios.
Inception
Date
Max
Drawdown
Sortino Ratio
Oct. 03 to
Sep. 09
Sortino Ratio
Apr. 07 to
Sep. 09
60-40 Portfolio 10/1/2003 -31.86 0.24 -0.33
40-20-40 Hedged Equity Portfolio 10/1/2003 -22.52 0.31 -0.28
40-20-40 Managed Futures Portfolio 4/1/2007 -19.71 N/A -0.18
40-20-40 Market Neutral Portfolio 10/1/2003 -9.39 0.67 0.32
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 18/22
18
Biggest Obstacles to Alternatives becoming Mainstream
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 19/22
19
Increased Importance of Alternative Investments
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 20/22
20
Convergence of Hedge Funds and Alternative Mutual Funds
× “Gartmore Group Ltd., a British manager of about 21.8 billion pounds($36 billion) that announced plans for an initial public offering lastweek, said it’s aiming for a ‘convergence’ of hedge-fund and mutual-
fund investments.” Bloomberg.com November 24th
× “Competition and Convergence: The Evolving Landscape for Hedge
Funds,” study commissioned by Pershing LLC May 2009× “The projection of growth in equity long/short investing by
[traditional] investment managers shows the sector reaching$345 billion in assets by 2012, up from $204 billion today.”
× Hedge fund companies venturing into mutual fund land:
× AQR, AlphaSimplex, Bull Path, Highbridge
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 21/22
21
Questions & Comments
× Nadia Papagiannis
× nadia.papagiannis@morningstar.com
× 312-384-4100× Scott Burns, Director of Alternative Investments
× scott.burns@morningstar.com
× 312-696-6586
8/14/2019 Morning Star Mainstreaming Alternative Investments December 2009
http://slidepdf.com/reader/full/morning-star-mainstreaming-alternative-investments-december-2009 22/22
22