2_money for old hope

8/3/2019 2_money for Old Hope

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Structure of the presentation

Introduction

Growth of Hedge Fund and Private Equity

Fund Management Industry Problems

Changing Landscape-Asset Managing and Selling

Outlook of the industry

AMC in India

Fund Management Fees Debate


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Introduction

Growth of Hedge Fund and Private EquityFund Management Industry Problems

Changing Landscape-Asset Managing and

SellingOutlook of the industry

AMC in India



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Whenever individual/retail investors pool together theirresources and allow a professional fund manager toinvest it, the exercise is called Asset Management.

Reasons to Invest:

DiversificationExpert Management

ChoiceLiquidityAccess to New MarketsTax Benefits


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Broad types of Pooled Investment Structures:

Mutual Fund

Pension Fund

Hedge Fund


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Alpha

Beta

R Squared

Standard Deviation Sharpe ratio


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Introduction


Changing Landscape-Asset Managing and

SellingOutlook of the industry

AMC in India



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Entry of Hedge funds and Private Equity

The lessons of the 2000-02 equity bear market

When share prices fell, pension funds went into the

red

That opened the door to hedge funds, private equityand a whole school of investing known as alternative

assets.


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An aggressively managed portfolio ofinvestments that uses advanced investmentstrategies such as leveraged, long, short andderivative positions in both domestic andinternational markets with the goal ofgenerating high returns


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Estimates of industry size vary widely due tothe lack of central statistics, but as pervarious reports it is beyond $3 trillion

The 25 largest hedge fund managers had$519.7 billion in assets under management asof December 31, 2009

Largest is JP Morgan Chase followed by

Bridgewater Associates


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Management Fee

calculated as a percentage of the fund's net assetvalue

range from 1% to 4% per annum, with 2% beingthe standard figure

Performance Fee

calculated as a percentage of the fund's profits

Typical charge is 20% of returns, high of 45%


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Varied strategies based on: Market: commodity, equity, currency

Instrument: futures, options, swaps

Exposure

Sector: emerging market, technology etc.

Diversification: multi-manager, multi-strategy, multi-fund, multi-market

A hedge fund typically commits itself to a

particular strategy


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Global Macro - Global Macro funds attempt to anticipateglobal macroeconomic events, generally using all markets andinstruments to generate a return.

e.g. discretionary macro, systematic micro, multi strategy

Directional - Hedged investments with exposure to the equitymarket.

e.g. long/short equity, in emerging markets, sector funds

Event Driven - Exploit pricing inefficiencies caused byanticipated specific corporate events.

e.g. distressed securities, merger arbitrage

Relative Values -Exploit pricing inefficiencies between relatedassets that are mispriced.

e.g. fixed income arbitrage, equity market neutral,convertible arbitrage

Miscellaneous

e.g. fund of hedge funds, fund of fund of hedge funds, 130-30 funds


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The fund has no employees andno assets other than its investmentportfolio and cash.

Portfolio is managed by investmentmanager, which is the actual business andhas employees.

Service Providers:

Prime broker Administrator

Distributor


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Introduction


Changing Landscape-Asset Managing andSelling


AMC in India



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One of the industry's biggest problems is themarkets themselves

A particular asset class or investing style may

go out of fashion


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It stands to reason that the more moneyflowing to a particular investment strategy,the more likely returns will diminish.

By logical extension, fund managers shouldtherefore occasionally say no to new cash tokeep from hurting performance.

But in the money business, thats easier said

than done Take an example

T k f i t f d th t b d bt i d b


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Take for instance a fund that buys debt issued bytroubled companies, a mercifully finite universe ofinvestment opportunities. Say the manager limits thesize of the fund to $5 billion on the expectation of a 12

percent annual return. Management fees would reap$100 million. Hitting the performance target generatesan additional $120 million (though many investors insiston minimum hurdle rates). Still, add it up and thats

some $220 million of fees, with a 9.6 percent net returnfor investors. Not too shabby.

Now, consider a $10 billion fund with the samesecurities as its target, but with annual return

assumptions of 8 percent to reflect its larger size.Management fees would double. And a 20 percent sliceof the profit would bring in $160 million. Thats $360million for the fund manager, or nearly two-thirds morethan the smaller fund. But for investors, the total

return would be a third lower.


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Size

Expected

Return

MgtFee(2% of

fund size)

Performancefee (20% of

profit) Total

5 billion 12%

100

million 120 million

220

million

10 billion 8%

200

million 160 million

360

million


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This hypothetical calculation illustrates theconflicts fund managers face. True, performanceultimately determines the future flow of funds.But the incentives to scoop up new money, even

if it dilutes returns, are strong. Still, some fundmanagers are managing admirably to resist thetemptation.

One is Oaktree Capital, the Los Angeles-based

fund manager led by Howard Marks. The firm willsoon close its latest distressed debt fund at $4.5billion despite far higher demand from potentialinvestors. Its last fund had $11 billio


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Introduction




AMC in India



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IF FUND management is such an attractivebusiness, why would large banks such as MerrillLynch want to give it up?

Being a fund manager: you have to beat the

market. If you don't, intermediaries such asbrokers and private banks will not select yourfunds

Distributors still earn fees from fund

management, by charging investors for theoversight of their portfolios or by takingcommission on the funds they sell. At the sametime they cut out much of the cost.


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Introduction




AMC in India



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THE fund-management industry may have itsproblems, but it also has two enticingopportunities ahead of it. The two Estheemerging and the elderly


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Introduction




AMC in India



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Growth in Assets Management in India since1963


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Key Issues Revenue is directly linked to market valuations, so a

major fall in asset prices causes a precipitous declinein revenues relative to costs;

Above-average fund performance is difficult tosustain, and clients may not be patient during timesof poor performance;

Successful fund managers are expensive and may beheadhunted by competitors;

Above-average fund performance appears to bedependent on the unique skills of the fund

manager;


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Introduction




AMC in India



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Fees as high as 2% and 20% performance fees

High focus on Alpha,through widening the

asset base Higher research needed.

Greater flexibility likeshort-sell

Increasing Hedge fundshave led to high fees toinvestors but modest

returns for clients


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Investors Lured by Last Year's Winners.

Vying to Beat the Index Seldom Pays

BENCHMARKING.


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What the Statistics Say


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Historically, mutual fund investors in Indiabelong to the NAV returns variety. The firstand last question on their minds is what returnhas the fund given?

Rarely, if ever, do they ask questions like howmuch is the fund charging me?

What goes into the expenses?

Is it possible for the fund house to lower the

expenses?


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Source: Scheme Offer Document: DSP Blackrock


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** Percentage of returns greater or less (-ve) than the indices


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In recent years there has been a move to separatethe effect of alpha from that of beta, which is the

portion of an investor's return that comes straightfrom the market.

Thus, if the S&P 500 index rises 8% and an Americanequity-fund manager delivers a 10% return, the

investor gets eight percentage points of beta andtwo of alpha.

Arguably, the client should pay top dollar only forthe two additional points, not the eight he couldhave received even from a low-cost index-trackingfund. But alpha is quite hard to define.


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Group2:

Abhishek Agarwal

Akhil GuptaAnkur SinglaJitesh KejriwalHarish MittalAyush Gupta

2_money for old hope

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