Stradivari Technical Perspective on Hedge Fund Allocation Jan 2010

STRADIVARI Technical Perspective,

„STP“, is a free monthly research note with views

and ideas on strategic Hedge Funds allocation.

While Quantitative and Technical Analysis are

common tools for traders and investment

managers, we believe that it could be very

interesting to apply these tools to strategic Hedge

Funds allocation in order to have an assessment

from a different analytical point of view.

The complete universe of charts we are analyzing

can be found in our free monthly chartbooks,

showing how single hedge fund strategies have

behaved in the past, with historical volatility,

performance, Sharpe ratios, relative performance

& correlation versus equities, bonds, commodities

and global hedge funds index.

STRADIVARI’s Technical Perspective only covers

the most interesting and rewarding charts from

our view.

It is of critical importance to understand that our

approach and model portfolio is driven ex-

clusively by quantitative and technical analysis.

About STRADIVARI Advisors S.A. STRADIVARI Advisors S.A. is a consulting firm

specialized on marketing Alternative Investments

to the German and French speaking investors, with

a particular focus on hedge funds and fund of

hedge funds.

We also support alternative asset managers

improving their communication strategies,

creating new brand identities and developing as

well as implementing effective new marketing

strategies to differentiate from their competitors.

Régis Weiler

+352 691 256 256

[email protected]

Uwe Truppel

+352 691 257 257

[email protected]

Research can be downloaded:

www.stradivari-cm.com

STRADIVARI TECHNICAL PERSPECTIVE

« technical driven ideas on

strategical Hedge Fund allocation »

JANUARY 2010

STRADIVARI TECHNICALtechnical driven ideas on strategical Hedge Funds allocation

January 2010

STRADIVARI Advisors S.A. Régis Weiler +352 691 256 256 [email protected]

Uwe Truppel +352 691 257 257 [email protected]

Market Comments: 2009 was a very interesting year in many aspects:

performance, industry trends , fraud, legal

environment, liquidity, assets under management.

Looking back at all these aspects, we think that the

industry has successfully gone through a difficult but

necessary purification process that will provide a

robust base for future developments.

We noted with interest that 2009, in terms of

performance, has been symmetrically opposed to

2008. Strategies that were positive in 2008 were

negative in 2009, and vice versa.

Managers are also surfing on the trend of regulation

and there are already a lot of strategies available as

UCITS 3: more than 75% of the managers are

considering launching their strategies as UCITS 3.

Combined with lower entry levels, this builds a strong

foundation of an inevitable „democratisation“

process that is needed for the industry to find new

sources of capital across all types of asset allocators.

Regrettably, frauds of different nature and size came

also to light in 2009 and gave a feeling of „déjà vu“

investors. While one could have avoided some of

them with a better operational due diligence process,

investors can hardly be blamed when a fraud is about

insider trading.

Liquidity terms are improving: almost 2/3 of the fund

that had liquidity issues have now returne

standard liquidity: 5% (or USD 70 bn) of the USD 1.5

trn total estimated current AUM have not returned to

standard liquidity.

We remain convinced that the ability and flexibility of

the alternative investments industry to react and

adapt to new market environment and investors

demand is one of its major asset.

Outlook: It is too early to appraise the consequences of the

recent Obama’s proposal, but it gives a good idea

about the kind of unexpected external factors that

could impact the hedge fund industry in 2010.

We expect significant inflows as strong performance

is generally followed by more risk appetite, but we

STRADIVARI TECHNICAL PERSPECTIVE: technical driven ideas on strategical Hedge Funds allocation

cm.com

cm.com

ar in many aspects:

, fraud, legal

environment, liquidity, assets under management.

Looking back at all these aspects, we think that the

industry has successfully gone through a difficult but

will provide a

We noted with interest that 2009, in terms of

been symmetrically opposed to

2008. Strategies that were positive in 2008 were

on the trend of regulation

and there are already a lot of strategies available as

UCITS 3: more than 75% of the managers are

considering launching their strategies as UCITS 3.

Combined with lower entry levels, this builds a strong

ble „democratisation“

process that is needed for the industry to find new

sources of capital across all types of asset allocators.

, frauds of different nature and size came

n 2009 and gave a feeling of „déjà vu“ to

le one could have avoided some of

them with a better operational due diligence process,

investors can hardly be blamed when a fraud is about

Liquidity terms are improving: almost 2/3 of the fund

that had liquidity issues have now returned to

: 5% (or USD 70 bn) of the USD 1.5

trn total estimated current AUM have not returned to

We remain convinced that the ability and flexibility of

the alternative investments industry to react and

environment and investors

It is too early to appraise the consequences of the

recent Obama’s proposal, but it gives a good idea

about the kind of unexpected external factors that

stry in 2010.

We expect significant inflows as strong performance

is generally followed by more risk appetite, but we

remain very cautious on the economic front and

therefore equity markets.

We believe that Event Driven strategies, especially

Special Situations and Distressed Securities will offer

the best chances for the coming months

Our Allocation: summary-3 -2 -1

Equity Market Neutral

Distressed Securities

Merger Arbitrage

Special Situations

Convertible Arbitrage

Fixed Income Arbitrage

Other Arbitrage

Statistical Arbitrage

Growth

Opportunistic

Short Selling

Value

Managed Futures

Global Macro

Market Timing

Emerging Markets

Fixed Income

Multi-Strategy

Chart 1: Percentage of strategies with positive

performance: 3-months average

(based on Greenwich Alternative Investments Indices)

0%

20%

40%

60%

80%

100%

The current percentage of strategi

performance is currently at 72%

It is worth to note that December

consecutive month staying

This has only happened four times before

beginning of the index in 1995.

remain very cautious on the economic front and

We believe that Event Driven strategies, especially

ations and Distressed Securities will offer

the best chances for the coming months

summary 0 1 2 3

Chart 1: Percentage of strategies with positive

months average

Greenwich Alternative Investments Indices)

The current percentage of strategies with a positive

tly at 72% .

December was the eighth

consecutive month staying above its average (70%)

This has only happened four times before since the

beginning of the index in 1995.


January 2010



Global Hedge Funds and Balanced

Portfolio Analysis:

The 12-months rolling performance of a balanced

Bond–Equity–Commodity portfolio (17.27%), is

almost 2% below the performance of a portfolio

invested in Global Hedge Funds (19.44%).(Chart 2)

The 12-Months rolling volatility of a balanced

Bond–Equity–Commodity portfolio (11.3%) is still

almost 2 times higher than a portfolio invested in

Global Hedge Funds (5.83%) (Chart 4).

Chart 2: 12-months rolling returns for Greenwich Global

HF Index (P4) and a Bond-Equity-Commodity portfolio

weighted 45%/45%/10% (P1)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

P1 P4

Chart 3: Total return for Greenwich Global HF Index (P4)

and a Bond-Equity-Commodity portfolio weighted

45%/45%/10% (P1)

0%

50%

100%

150%

200%

250%

300%

350%

400%

450% P1 P4

Chart 4: 12-months rolling volatility for Greenwich Global

HF Index (P4) and a Bond-Equity-Commodity portfolio

weighted 45%/45%/10% (P1)

0%

5%

10%

15%

20%

25% P1 P4

Chart 5: High Water Mark (green line) and Total Return

(red line) for Greenwich Global HF Index

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

Chart 6: High Water Mark (green line) and Total Return

(blue line) for a Bond-Equity-Commodity portfolio (P1)

0%

20%

40%

60%

80%

100%

120%

140%

160%

It is worth noting that a portfolio invested in Global

Hedge Funds has reached its high water mark

again in December 2009. The drawdown period

started in May 2008, touched a low in February

2009 and lasted 19 months. It took 10 months to

reach a new high after the low (Chart 5).

A balanced Bond–Equity–Commodity portfolio

should produce a performance of 21% in order to


January 2010



reach its old high water mark. The drawdown

period started in October 2007, touched a low in

February 2009 and is on its way to new highs for

27 months now. (Chart 6)

Chart 7: 12-months rolling returns for a Bond-Equity- HF

portfolio weighted 45%-35%-20% (P3) and a Bond-Equity-

Commodity portfolio weighted 45%/45%/10% (P1)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

P3 P1

Chart 8: Total return for a Bond-Equity- HF portfolio 45%-

35%-20% (P3) and a Bond-Equity-Commodity portfolio

weighted 45%/45%/10% (P1)

0%

50%

100%

150%

200%

250% P3 P1

Chart 9: Volatility since Inception of a Bond-Equity- HF

portfolio 45%-35%-20% (P3) and a Bond-Equity-

Commodity portfolio weighted 45%/45%/10% (P1)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9% P3 P1

Charts 7, 8, 9 show a comparison of two different

balanced portfolios:

P1 being invested in Bond-Equity-Commodity

45%-45%-10% (Red Line) and P3 being invested

in Bond-Equity-HF 45%-35%-20%.

On Chart 7, one can see that the 12-months rolling

return structure seems to be very similar, with a

small advantage for P3.

On Chart 8, one can realize the effect of this small

advantage when it is compounded since 1995.

The performance of P3 is 180% while P1 is at

124%.

Chart 9 shows the volatility since inception of both

portfolios.

P1: 8,02%

P3: 6,97%

All these numbers show that including hedge funds

in an allocation mix can add a lot of value (more

performance, less volatility), especially on a mid to

long term basis.


January 2010



STRADIVARI HEAT MAP

The goal of our heat map is to provide a visual and

easy to understand map showing the current state

of different technical and quantitative factors.

Green is good, red is bad.

Explanations of factors:

Distance to HWM (high water mark):

Absolute performance in % that the strategy has to

realize to reach the precedent high.

High distance to HWM is bad.

0 means that the strategy is currently at its all time

high.

Table 1: STRADIVARI Heat Map (Part 1)

Expected Recovery Period:

This number gives an idea about the average time

in years needed to reach the precedent high. It is

based on the annualized performance of each

strategy since 1995.

High Expected Recovery period is bad.

No number when annualized performance since

1995 has been negative.

Technicals relative to Global Hedge Funds:

Approach based on pure technical analysis.

Values range from -3 to 3.

“3” implies a very good technical situation.

“-3” implies a very bad technical situation.

Per f .

D ec 0 9

Pe r f .

1Y ea r

A nnua l i z ed

P e r f . s i nce

I ncep t i o n

P er f . r e l .

t o G lo b a l

HF Ind ex

C o r r . t o

G lo b a l HF

I nd ex

C o r r . t o

M SC I

W o r ld

C o r r . t o

G lo b a l

B o nd

C o r r . t o

C R B

Ind ex

T ech. r e l .

t o G lo b a l

HF

G lo ba l H e dge F und Inde x 1,0% 19,4% 11,2% 0,0% 1,00 0,84 0,44 0,75 0

M a rk e t N e ut ra l G ro up 1,7% 18,4% 10,6% -1,1% 0,97 0,68 0,20 0,63 1

E qu it y M a rk e t N e ut ra l 0,6% 3,6% 10,5% -15,8% 0,86 0,31 0,03 0,48 0

E v e nt D r iv e n ( S ub-G ro up) 3,0% 26,4% 11,8% 6,9% 0,95 0,69 0,17 0,59 -1

D is t re s s e d S e c urit ie s 3,0% 24,8% 11,2% 5,4% 0,94 0,42 0,04 0,48 2

M e rge r A rb it ra ge 1,0% 8,5% 7,9% -11,0% 0,78 0,27 0,10 0,14 0

S pe c ia l S it ua t io ns 4,2% 33,4% 12,2% 13,9% 0,97 0,76 0,12 0,59 3

A rb it ra ge ( S ub-G ro up ) 1,3% 22,1% 9,7% 2,7% 0,93 0,69 0,29 0,62 1

C o nv e rt ib le A rb it ra ge 2,2% 49,4% 9,4% 30,0% 0,79 0,50 0,21 0,42 0

F ixe d Inc o m e A rb it ra ge 1,1% 22,3% 9,7% 2,8% 0,73 0,70 0,47 0,63 -1

O the r A rb it ra ge 0,5% 15,8% 6,7% -3,6% 0,89 0,65 0,33 0,55 0

S t a t is t ic a l A rb it ra ge 0,8% 5,6% 8,2% -13,9% 0,83 0,27 0,10 0,14 0

Lo ng/ S ho rt E qu it y G ro up 2,3% 23,4% 12,6% 4,0% 0,98 0,90 0,37 0,69 -1

G ro wt h 3,3% 29,0% 12,4% 9,5% 0,96 0,89 0,38 0,68 1

O ppo rt un is t ic 1,7% 16,8% 13,8% -2,7% 0,98 0,81 0,29 0,66 -1

S ho rt S e l ling -1,3% -14,9% -2,0% -34,3% -0,47 -0,83 -0,47 -0,17 0

V a lue 2,2% 24,9% 13,5% 5,4% 0,96 0,91 0,37 0,67 1

D ire c t io na l T ra d ing G ro up -2,0% 2,5% 10,5% -16,9% 0,77 0,31 0,50 0,49 1

F ut u re s -2,7% -1,0% 11,4% -20,4% 0,61 0,12 0,43 0,30 -1

M a c ro -0,4% 9,3% 7,2% -10,1% 0,94 0,66 0,45 0,80 0

M a rk e t T im ing 0,5% 16,6% 10,7% -2,9% 0,73 0,60 0,40 0,54 0

S pe c ia lt y S t ra t e g ie s G ro up 1,6% 31,8% 9,1% 12,3% 0,99 0,82 0,41 0,82 -1

Em e rg ing M a rk e t s 2,1% 42,5% 9,3% 23,1% 0,97 0,84 0,44 0,82 1

F ixe d Inc o m e ( inc l. A B L) 2,3% 25,7% 7,6% 6,3% 0,69 0,61 0,07 0,59 2

M ult i- S t ra t e gy 0,1% 17,1% 11,4% -2,3% 0,97 0,39 0,29 0,53 -1

Glo bal B o nd Index -1,6% 5,9% 6,8% -13,5% -0,13 0,60 1,00 0,35 1

M SCI Wo rld 1,7% 26,8% 4,4% 7,4% 0,41 1,00 0,60 0,64 0

CRB Index 2,2% 23,3% 1,1% 3,9% 0,43 0,64 0,35 1,00 0


January 2010



Performance 1 Year

2009 is diametrically opposed to 2008. Whereas

2008 was completely in the red with most strategies

showing double digit negative performance numbers

except for Short Selling and Managed Futures, 2009 is

except for the same strategies in green territory.

Once again it proves true, that the winners of the

past are not automatically the winners of today.

Although an extreme situation as in 2008/2009 is

rather unusual. Nevertheless we have seen strong

rebounds in the performance of last year’s losers.

Convertible Arbitrage losing 38% and Emerging

Markets losing 36% last year gained 49% respectively

42% in 2009. On the other side last year’s top


performer “Short Selling “ with a positive

performance of 30% lost 15% in 09. On average all

hedge fund strategies gained nearly 20%, more than

offsetting the negative numbers of 2008.

Correlation Numbers

Compared to the end of 2008, correlation numbers to

the MSCI have moved to more common levels.

Except for the strategies with an equity long bias, all

HF-strategies have on average a correlation of 0.48 to

the MSCI World. The average correlation against

Bonds and Commodities is 0.23 respectively 0.49,

again showing the good diversification effect of

hedge funds in a portfolio context.

V o lat i l i t y

2 4

M o nt hs

V o lat i l i t y

Incep t io n

D ownsid e

D eviat io n

2 4 M o nt hs

D ownsid e

D eviat io n

Incep t io n

Skew -

ness

Kur t o -

sis

M aximum

D rawD own

D ist ance

t o HW M

Exp ect ed

R eco very

Per io d

G lo ba l H edge F und Index 9,2% 7,4% 7,8% 4,6% -0,08 3,04 17,2% 0,0% 0,0

M a rke t N eut ra l G ro up 7,4% 4,5% 6,4% 2,9% -1,05 5,79 13,2% 0,0% 0,0

Equit y M a rke t N eut ra l 3,8% 4,2% 3,9% 2,0% 0,82 4,47 6,6% 3,3% 0,3

Event D riv en (S ub-G ro up) 9,4% 6,3% 7,7% 4,1% -0,79 4,31 17,1% 0,0% 0,0

D is t re s s ed Securit ies 10,8% 5,9% 9,3% 4,1% -1,29 5,49 24,3% 5,5% 0,5

M e rge r A rbit ra ge 4,4% 3,6% 4,1% 2,6% -1,65 6,01 5,5% 0,0% 0,0

Spec ia l S it ua t io ns 10,7% 7,3% 8,1% 4,6% -0,54 3,73 17,6% 0,0% 0,0

A rbit ra ge (Sub-G ro up) 9,0% 4,3% 7,7% 3,1% -2,64 17,47 14,8% 0,0% 0,0

C o nve rt ible A rbit ra ge 22,0% 8,6% 19,4% 7,4% -5,78 45,48 38,3% 6,7% 0,7

F ixed Inco m e A rbit ra ge 8,8% 4,3% 7,4% 3,5% -4,28 26,67 13,6% 0,0% 0,0

O the r A rbit ra ge 6,1% 3,7% 4,8% 2,8% -2,39 10,20 8,5% 0,0% 0,0

S ta t is t ic a l A rbit ra ge 3,9% 4,6% 3,3% 2,3% 1,47 5,26 4,6% 0,0% 0,0

Lo ng/ Sho rt E quit y G ro up 12,0% 9,4% 10,3% 5,9% 0,03 2,56 23,9% 3,9% 0,3

G ro wth 15,2% 14,6% 13,3% 9,2% 0,48 2,58 34,8% 8,3% 0,7

Oppo rtunis t ic 9,4% 9,5% 8,5% 5,2% 1,42 9,33 17,8% 3,0% 0,2

Sho rt S e lling 14,0% 20,0% 8,4% 15,5% 0,10 3,27 60,4% 39,1% Perf.neg.

Va lue 12,8% 10,3% 11,0% 6,8% -0,48 1,60 25,4% 4,3% 0,3

D irec t io na l T rading G ro up 6,1% 7,4% 3,7% 4,2% 0,26 -0,32 8,3% 2,0% 0,2

F uture s 8,5% 11,1% 4,7% 6,5% 0,31 0,09 12,3% 2,8% 0,3

M acro 5,8% 8,6% 4,5% 5,6% 0,40 3,43 20,3% 0,4% 0,1

M a rke t T im ing 8,0% 8,2% 5,6% 4,4% 0,99 3,44 12,3% 0,0% 0,0

Spec ia lt y S t ra t e gie s G ro up 13,7% 12,0% 11,4% 8,8% -0,75 4,00 34,1% 2,3% 0,3

Emerging M a rk e ts 19,3% 16,8% 16,0% 12,3% -0,35 3,08 47,5% 9,4% 1,0

F ixed Inco me ( inc l. A B L) 7,6% 4,5% 5,8% 3,4% -2,24 10,80 14,3% 0,0% 0,0

M ult i-S t ra t egy 7,8% 7,5% 6,6% 4,9% -0,47 1,95 13,8% 0,0% 0,0

Glo bal B o nd Index 4,8% 3,8% 3,1% 2,5% -0,21 1,05 3,8% 1,6% 0,2

M SCI Wo rld 26,7% 15,9% 23,4% 12,7% -1,05 2,07 55,6% 44,8% 8,6

CRB Index 29,8% 14,3% 25,1% 11,6% -1,14 5,77 54,8% 65,4% 45,2


January 2010



Volatility and Downside Deviation

As expected Volatility and Downside Deviation

numbers have decreased after the turbulences in

2008. As a lot of HF-strategies did not have any

negative month in 2009, what means zero Downside

Deviation, we have increased the period to compute

this numbers from 12 to 24 months. This will give

more realistic and statistically significant results with

less variation.

Distance to High Water Mark

More than 90% of all strategies are near or have

reached their High Water Marks. Even those

strategies that have been away more than 60% from


their tops are within reach and all expected recovery

periods are less than one year. Nevertheless, as

expected, a lot of funds have gone out of business

due to the fact that they would not be able to charge

performance fees for a long time. Currently the

threat from this side, which existed a year ago has

disappeared. Once again hedge funds have shown

their clear superiority over equities and commodities,

whose High Water Marks are still 45% respectively

65% away from current levels. Hedge Funds are able

to recover much faster than plain vanilla long only

funds due to their higher flexibility and shorter

reaction time.

Sharp e

R at io 2 4

M o nt hs

Sharp e

R a t io

Incep t io n

So r t ino

R a t io 2 4

M o nt hs

So r t i no

R a t io

Incep t io n

Omeg a

2 4

M o nt hs

Omeg a

Incep t io n

Kap p a3

2 4

M o nt hs

Kap p a3

Incep t io n

G lo ba l H e dge F und Inde x 0,32 1,04 -0,61 1,25 2,34 6,34 -0,46 0,81

M a rk e t N e ut ra l G ro up 0,63 1,59 -0,50 1,83 2,42 8,96 -0,36 1,06

Equ it y M a rk e t N e ut ra l 0,05 1,66 -1,41 2,49 1,05 9,34 -1,06 1,64

Ev e nt D riv e n (S ub-G ro up) 0,77 1,31 -0,33 1,53 2,83 7,47 -0,25 0,94

D is t re s s e d S e c ur it ie s -0,16 1,29 -0,73 1,41 2,13 7,41 -0,55 0,85

M e rge r A rbit ra ge 1,94 1,21 -0,45 1,05 2,45 6,42 -0,32 0,63

S pe c ia l S it ua t io ns 1,27 1,19 0,02 1,44 3,50 7,00 0,01 0,90

A rbit ra ge (S ub-G ro up) 0,70 1,43 -0,26 1,43 2,81 8,55 -0,18 0,74

C o nv e rt ib le A rb it ra ge -0,19 0,69 -0,36 0,56 2,52 5,88 -0,24 0,28

F ixe d Inc o m e A rbit ra ge 0,79 1,41 -0,18 1,25 3,02 9,29 -0,12 0,65

O the r A rbit ra ge 1,43 0,86 -0,20 0,59 3,04 5,05 -0,13 0,35

S ta t is t ic a l A rb it ra ge 1,91 1,01 -0,60 1,28 2,38 6,09 -0,44 0,91

Lo ng/ S ho rt E quit y G ro up 0,06 0,97 -0,65 1,19 2,29 6,06 -0,50 0,81

G ro wth -0,10 0,61 -0,67 0,74 2,27 4,98 -0,50 0,52

Oppo rt unis t ic 0,29 1,09 -0,69 1,56 2,23 6,95 -0,52 1,05

Sho rt S e ll ing 0,49 -0,28 0,00 -0,45 3,46 2,62 0,00 -0,31

Va lue -0,02 0,97 -0,64 1,16 2,29 6,11 -0,48 0,77

D ire c t io na l T ra d ing G ro up 1,81 0,93 0,19 1,21 3,78 5,67 0,15 0,92

F uture s 1,88 0,71 0,78 0,91 4,75 5,13 0,62 0,68

M ac ro 0,87 0,42 -0,64 0,37 2,39 4,22 -0,48 0,25

M a rk e t T im ing 1,59 0,87 0,06 1,19 3,56 5,82 0,04 0,85

Spe c ia lt y S t ra t e g ie s G ro up 0,11 0,47 -0,53 0,44 2,44 4,49 -0,39 0,28

Em e rging M a rk e t s -0,14 0,35 -0,59 0,33 2,37 4,20 -0,44 0,22

F ixe d Inc o m e ( inc l. A B L) 1,40 0,89 0,06 0,70 3,60 5,45 0,04 0,41

M ult i- S t ra t e gy 0,60 1,04 -0,52 1,21 2,41 6,26 -0,38 0,79

Glo bal B o nd Index 1,91 0,86 0,19 0,67 3,82 4,83 0,15 0,48

M SCI Wo rld -1,25 0,06 -0,88 -0,04 1,92 3,37 -0,67 -0,03

CRB Index -1,33 -0,17 -0,69 -0,32 2,18 2,79 -0,51 -0,20


January 2010



Performance Indicators

As described earlier, we have changed the

computation periods from 12 to 24 months, because

there were too many strategies with no or very small

Downside Deviations based on a 12 month horizon.

This would have lead to not defined or huge Sortino-,

Omega- and Kappa3-Ratios. With ratios based on a

24 months period, numbers are less volatile.

Anyway, short term performance indicators have

improved across the board, while long term

indicators have not changed that much.

Table 4: Strategy-Rankings based on Performance

Indicators since inception

Sharpe Sort ino Omega Kappa3

Global H edge Fund Index 11 9 10 10

M arket Neutra l Group 2 2 3 2

Equity M arket Neutral 1 1 1 1

Event D riven (Sub-Group) 5 4 5 4

D istressed Securit ies 6 7 6 8

M erger A rbit rage 7 16 9 17

Special Situat io ns 8 5 7 7

A rbit rage (Sub-Group) 3 6 4 14

Convertible A rbit rage 21 22 15 23

F ixed Income A rbit rage 4 10 2 16

Other A rbit rage 19 21 20 21

Stat is tica l A rbit rage 12 8 13 6

Long/Sho rt Equity Group 14 14 14 11

Growth 22 18 21 18

Oppo rtunistic 9 3 8 3

Sho rt Selling 28 28 28 28

Value 13 15 12 13

D irectio nal T rading Group 15 11 17 5

Futures 20 17 19 15

M acro 24 24 24 24

M arket T iming 17 13 16 9

Specia lty Strategies Group 23 23 23 22

Emerging M arkets 25 25 25 25

F ixed Income (incl. ABL) 16 19 18 20

M ult i-Strategy 10 12 11 12

Global Bond Index 18 20 22 19

MSCI World 26 26 26 26

CRB Index 27 27 27 27

Strategy Rankings

Despite the relatively poor performance in 2009

Equity Market Neutral is still the dominating strategy

across all performance indicators on a long term

basis, followed by the whole Event Driven Group,

Opportunistic and Fixed Income Arbitrage.

All strategies with a high correlation to long equities,

the MSCI World itself and the CRB Index are still

lagging behind. Due to the very high volatility

respectively downside deviation of all these

strategies, it will hardly be possible to ever climb into

the highest quartile of the rankings.

Table 5: Strategy-Rankings based on 24 months

Performance Indicators

Sharp e So r t ino Omeg a Kap p a3

G lo ba l H edge F und Index 17 19 20 19

M ark e t N eut ra l G ro up 14 14 15 14

Equit y M a rk e t N eut ra l 2 1 28 28 28

Ev ent D riv en (Sub-G ro up) 12 11 10 12

D is t re ss ed S ecurit ie s 2 5 26 26 26

M e rge r A rbit ra ge 1 13 13 13

Spec ia l S it ua t io ns 9 6 6 6

A rbit rage (S ub-G ro up) 13 10 11 10

C o nv e rt ib le A rbit ra ge 2 6 12 12 11

F ixed Inco m e A rbit ra ge 11 8 9 8

O the r A rbit ra ge 7 9 8 9

S ta t is t ic a l A rbit ra ge 2 18 18 18

Lo ng/ Sho rt E quit y G ro up 2 0 22 22 22

G ro wth 2 3 23 23 23

Oppo rtunis t ic 18 24 24 25

Sho rt S e lling 16 7 7 7

Va lue 2 2 21 21 20

D ire c t io na l T ra ding G ro up 5 2 3 2

F uture s 4 1 1 1

M ac ro 10 20 17 21

M a rk e t T im ing 6 5 5 5

Spec ia lt y S t ra t e gie s G ro up 19 16 14 16

Eme rging M a rk e ts 2 4 17 19 17

F ixe d Inc o m e ( inc l. A B L) 8 4 4 4

M ult i-S t ra t e gy 15 15 16 15

Global B ond Index 3 3 2 3

M SCI Wo rld 2 7 27 27 27

CRB Index 2 8 25 25 24


January 2010



On a shorter time horizon the picture has changed

compared to 2008. If we had still used 12 months

numbers, it would have been the complete opposite

to the year before. On a 24 months basis, last year’s

favorite “Short Selling” has logically lost this position,

whereas Managed Futures are still in front, despite

the disappointing one percent loss in 2009. The tail of

the ranking is again taken by worldwide equities and

commodities. Surprisingly a pure bond investment is

in second place directly behind the best hedge fund

strategy.

Although there is still a high rank-correlation

between the different indicators, Merger- and

Statistical Arbitrage are worth to note. Both

strategies in front based on the Sharpe-Ratio (1 resp.

2) are in the last quartile (13 resp. 18) based on the

indicators that are calculated from the downside

deviation. Simple explanation is, that concerning the

Sharpe-ratio both strategies profit from their

extremely low volatility, whereas the downside

deviation is not reduced that much compared to all

other strategies. With the result, that those strategies

with high volatility but few negative months are able

to increase their rankings and strategies with low

volatility and few negative months fall back.

STRATEGIC ALLOCATION

From a technical point of view our main

overweightings are Distressed Securities and still

Fixed Income and Special Situations.

After the breakout of the symmetric triangle in the

mid of last year, Special Situations had a nice run

against the Global HF Index. At the moment the end

of this trend is not foreseeable.

After the buy-signal generated exactly 1 year ago

Fixed Income is slightly outperforming the market,

unfortunately without gaining momentum. The

strategy stays on our watch list for a small

downgrade.

We have upgraded Distressed Securities as the

strategy seems to be on the way for new highs

against the Global HF Index after correcting nearly

half of the former uptrend.

At the moment we have no major underweighting’s

but have further downgraded Global Macro to

neutral, as the correction of the uptrend takes

longer than expected.

Managed Futures and Equity Market Neutral, the

strategies we like most from a long term portfolio

view, are either in a downtrend or in a correction

mode against the Global HF-market.

Table 6: Recommended Allocation

Benchmark

W eight

St rad ivar i

Rat ing

St rad ivar i

W eight ing

M arket N eutral Group 22,90% 25,8%

Equity M arket N eutral 5 ,70% o 5,7%

Event D riven (Sub-Group) 9 ,00% 12,9%

D istressed Securit ies 2,90% ++ 3,9%

M erger A rbitrage 1,30% o 1,3%

Special Situat io ns 4,80% +++ 8,1%

A rbitrage (Sub-Group) 8 ,20% 7,1%

Convert ible A rbitrage 1,50% o 1,5%

F ixed Income A rbitrage 2,90% - 1,8%

Other A rbitrage 2,60% o 2,6%

Stat ist ical A rbitrage 1,20% o 1,2%

Long/ Sho rt Equity Group 38,50% 37,8%

Growth 8,70% + 9,4%

Oppo rtunist ic 8,10% - 4,9%

Sho rt Selling 0 ,50% o 0,6%

Value 21,20% + 22,9%

D irect io nal T rading Group 18,50% 14,3%

M anaged F utures 11,40% - 7,2%

Global M acro 6,50% o 6,5%

M arket T iming 0 ,60% o 0,6%

Specia lty Strategies Group 20,40% 21,7%

Emerging M arkets 11,70% + 12,6%

F ixed Income 2,50% ++ 4,5%

M ult i-Strategy 6 ,20% - 4,7%

100% 100,0%

The recommended allocation is based on the weighting of each

strategy within the "Greenwich Global Hedge Fund Index". Each

strategy is analyzed and rated on a technical basis. These Ratings

reach from “+++” Strong Overweight to “---“ Strong Underweight.

Weightings for our model-portfolio are calculated based on our

technical ratings, correlations to the Global HF Index and current

volatilities.


January 2010



Except for the Directional Trading Group, which

was the only group with a positive performance in

2008, we have seen a strong recovery in all

strategies. The stronger the underperformance in

08, the better the performance in 09. We have to

admit, that we have underestimated the trend in

equity markets, why we did not raise the ratings as

aggressively as has been desirable. Nevertheless

we had a small overweight in strategies with an

equity long bias like Emerging Markets, Value and

Growth. For the next months we are still cautious,

in anticipation of a stock market correction. If this

will happen the Directional Trading Group with

Managed Futures and the Equity Market Neutral

strategy will be on our watch-list as strong

overweight’s.

Chart 10: Strategy Allocation

0% 5% 10% 15% 20% 25%

Equity Market Neutral

Distressed Securities

Merger Arbitrage

Special Situations

Convertible Arbitrage

Fixed Income Arbitrage

Other Arbitrage

Statistical Arbitrage

Growth

Opportunistic

Short Selling

Value

Managed Futures

Global Macro

Market Timing

Emerging Markets

Fixed Income

Multi-Strategy

BENCHMARK Weight STRADIVARI Weighting

Chart 11: Group Allocation

0% 10% 20% 30% 40% 50%

Market Neutral Group

Event Driven (Sub-Group)

Arbitrage (Sub-Group)

Long/Short Equity Group

Directional Trading Group

Specialty Strategies Group

BENCHMARK Weight STRADIVARI Weighting

Selected Charts from our Chartbooks

Chart 12: Special Situations - relative performance

to Global Hedge Fund Index - MACD

One of our favorites of the past has shown a very

nice outperformance against the Global HF-Index

after the breakout of the symmetric triangle.

Although the chart is a little overbought, the target

should be the old high around 115.


January 2010



Chart 13: Long-Short-Equity-Group - relative

performance to Global HF- Index – Stochastic

The whole Long-Short-Equity Group, has, after

reversing sharply, broken through the short term

downward trend line and is now heading towards

the 61,8% retracement of the past downtrend and

then to the old high. As this group normally has a

equity long bias with a high correlation to the MSCI

World, this could indicate a potential continuation

of the equity markets rally, at least for some

months.

Chart 14: Value - relative performance to Global HF-

Index – Stochastic

Value, one of the sub-strategies in the Long-Short-

Equity Group and mentioned in one of our last

issues shows the same pattern as the whole group

and is targeting its old high. This is supported by

the strong reversal and the momentum breakout of

the triangle in the 12M rolling performance (Chart

15).

Chart 15: Value - 12Month rolling Performance

Chart 16: Futures – relative performance to Global

HF- Index – Stochastic

Managed Futures as indicated mid last year is

about to reach our target area around the 61%

retracement and the supporting line. This is

supported by a Stochastic-Oscillator, which has

just reached the oversold area and the 12M rolling

performance (Chart 17), that is creating a

bottoming pattern in a zone, where it has reversed

four times before. Any failure to break the support

line in the 12 Month rolling performance should

be followed by a strong rebound.


January 2010



Chart 17: Futures - 12Month rolling Performance

Chart 18: Perf. MSCI (upper Chart) vs. Relative Perf.

Futures to MSCI (lower Chart)

As we can see that the relative performance of

Managed Futures against the MSCI is nearly

perfectly negative correlated to the absolute

performance of the MSCI, the before mentioned

potential outperformance of Futures could be a

warning signal for global equities.

Chart 19: Multi Strategy - relative performance to

Global Hedge Fund Index - Oscillator

After breaking through the supporting line, shown

in our June issue, Multi-Strategy has now also

broken the upwards trend line with the risk of

falling to the 61.8%-retracement resp. the longer

term uptrend-line.

Chart 20: Distressed Securities – relative

performance to Global HF- Index – Stochastic

The chart exactly bounced at the 50%-retracement

of the up-move beginning in 2000. If the chart is

able to break the resistance at 98.5 which is also

the 61,8% retracement of the downward move, the

next target will be the old high and then the zone

around 108/109.

Chart 21: Income - performance since inception -

Stochastics

As promised, after breaking through its mid-term

down trend line, we have now reached our target at

the upper line of the trend channel with the chart

being strongly overbought. This means, that we

should be a little bit cautious here. Nevertheless the

past has shown, that a situation like this could last for

a very long time.


January 2010



Chart 22: Income – relative performance to Global

HF- Index – Stochastic

The situation mentioned before, also describes the

risk in the relative chart. The break of the

downward trend was not followed, as expected, by

a strong move with a lot of momentum. Therefore

the chart bears the risk of a correction, what would

match a correction in the absolute performance.

On the other side a dynamic move to further new

highs in the absolute chart could lead to the

momentum we are looking for in the relative

performance.

Chart 23: Hedge Fund Index - performance since

inception

After breaking through the long-term upward

channel and correcting 25% of the move from 1998,

the Global Hedge Fund Index could reenter this

channel and is about to resume its long term upward

trend.

Chart 24: Macro - 12Month rolling Performance

Although our promised scenario came true and the

1 year-performance has increased significantly,

reaching an annualized performance of more than

10%, the relative performance of Global Macro

against the Global HF-Index was very poor.

Chart 25: Relative Perf. Statistical Arb. to Global

Hedge Fund Index (upper Chart) vs. 12M rolling Perf.

Statistical Arbitrage (lower Chart)

In this chart we exemplarily show, that the rolling

12M performance is no good indication for the

relative Performance to the Global HF-Index. Our

expectation that the reversal in the 12M rolling

performance of Statistical Arbitrage and the support

at the 50%-Retracement in the relative chart could

lead to a resuming of the upward-trend did not come

true. Nevertheless it is a good indication regarding

the absolute performance of the strategy.


January 2010



Chart 26: Perf. MSCI (upper Chart) vs. Correlation

Equity Market Neutral to MSCI (lower Chart)

One of our favorite charts is currently not easy to

interpret. As the correlation between Equity Market

Neutral and the MSCI World does not show a clear

trend at the moment, it is difficult to give a distinct

view. However if the time lag in the turning points of

both charts is still 8-12 months, there should be at

least another 3 month of good equity performance in

front of us.

Important Information

This material is intended for informational

purposes only and should not be construed as an

offer or solicitation for the purchase or sale of any

financial instrument.

The information provided herein reflects current

market practices and is not intended to constitute

legal, tax, or accounting advice; clients should

consult their own advisors on such matters.

The market valuations, terms, and calculations

contained herein are estimates only and are

subject to change without notice.

The views, opinions and strategies described

herein, which are as well subject to change, may

not be suitable for all investors.

The information provided is believed to be reliable,

however the Company does not guarantee its

completeness or accuracy.

The performance data contained herein has been

obtained from fund administrators as well as other

outside sources and, although it is believed to be

accurate, no guarantee of completeness or

accuracy is being made.

Actual figures could be higher or lower subject to

market conditions. Clients should consider the

potential risks and further disclosure information

associated with this investment and the

appropriateness with their financial profile and

objectives.

An investment in an alternative investment carries

substantial risks. The nature and extent of some of

these risks differ from traditional investments in

stocks and bonds. There can be no assurance that

the advice or information provided above will lead

to superior performance.

In particular, the performance of an alternative

investment may vary substantially over time.

Investors bear the risk of losing all or part of their

investment and thus should carefully consider the

appropriateness of such investments for their

portfolio. While the information contained in this

document has been obtained from sources deemed

reliable, no representation is made as to its

accuracy or completeness, and it should not be

relied on as such.

Past performance is not necessarily indicative of

future performance.

Sources for Hedge Fund Indices: Greenwich

Alternative Investments Indices

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Stradivari Technical Perspective on Hedge Fund Allocation Jan 2010

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