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Lombard Odier Investment Managers
Citywire Pan European Fund Selectors Forum Zurich
Lombard Odier Investment ManagersMay 2010
LOF – Alternative Beta
A robust, transparent and liquid way to access hedge fund -like returns
Jérôme Teiletche, PhD, Head of Systematic & FoHF Portfolio ConstructionMay 2010
Please see important information at the end of the document
LOIM · May 2010 · 4
Contents
1. Opportunity
2. Investment thesis
3. Key investment beliefs
4. LO Funds – Alternative Beta
5. Key characteristics
6. Appendix
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LOIM · May 2010 · 6
1. Opportunity
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LOIM · May 2010 · 7
Opportunity
• Our proposal is based on key differentiating elements, including• Lead manager is one of the pioneers of the hedge fund
replication industry with a strong track record in managing hedge fund replication products since 2007
• Robust investment and replication process at the forefront of technology
• Close and complementary interaction with our hedge fund analysts and investment team
• It is delivered in a UCITS-III format
(i) targeting returns superior to investable hedge fund indices, with 90% correlation to the flagship HFRI Index and
(ii) offering daily liquidity
Lombard Odier has developed a robust, transparent and liquid way to access hedge fund-like returns
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LOIM · May 2010 · 8
2. Investment thesis
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LOIM · May 2010 · 9
Market context
• Hedge fund market is characterised by an important dispersion of performance returns and discrimination is necessary to select the best hedge funds
• But at the same time, it is interesting to invest in the hedge fund market average because:
• It offers an attractive risk-return profile over time• Hedge fund return average can now be delivered in a
passive, cheap, liquid and transparent way through large and diversified hedge fund exposure
Exposure to the hedge fund market average can be attractive to investors
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LOIM · May 2010 · 10
Passive investment alternatives
Two classes of passive products enable investors to get exposure to the hedge funds’ average returns
Large and diversified investable hedge fund indices
Replication funds(*)
Description Investment vehicle managed by an index provider or managed account platform investing in the underlying hedge funds
Investment vehicle replicating the average risk-return profile of hedge funds by systematically investing in liquid instruments only
Format ETFs, UCITS III, managed accounts UCITS III
Valuation Daily to Weekly Daily
Liquidity Monthly, weekly with possible gating Daily
Transparency Average High
Fees Index fees + underlying managers fees Fixed at fund level
Capacity constraints Medium Low
Access to closed funds None Indirect exposure
Minimum size threshold Low Low
Manager risk Low to medium None
(*) Based on LOF – Alternative Beta
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LOIM · May 2010 · 11
Risk/return profile
Replication delivers an attractive risk / return profile relative to investable hedge fund indices
Hedge Fund replication index is constructed as an equally weighted average of the largest providers of hedge fund replication vehicles (see hedgefundreplication.com) The HFR Index is a trademark of Hedge Fund Research, Inc. (“HFR”) and has been licensed for use by Lombard Odier in connection with its Hedge Fund Index
Replication Fund. HFR makes no recommendation or representation regarding the Hedge Fund Index Replication Fund or the advisability of investing in it HFRX Global Index is an investable index published daily with performance finalized at year-end with roughly 250 components HFRI Fund of Funds Composite is non-investable, representing the monthly returns of over 800 funds of hedge fund
Monthly cumulated returns (%)
Since Nov 2004 Hedge Fund replication index
HFRI FOF HFRX Global Index
Annualized Return 4.69% 3.67% 1.33%
Annualized Volatility 6.11% 6.53% 7.22%
-10%
0%
10%
20%
30%
40%
50%
10.0
412
.04
02.0
504
.05
06.0
508
.05
10.0
512
.05
02.0
604
.06
06.0
608
.06
10.0
612
.06
02.0
704
.07
06.0
708
.07
10.0
712
.07
02.0
804
.08
06.0
808
.08
10.0
812
.08
02.0
904
.09
06.0
908
.09
10.0
912
.09
02.1
004
.10
Hedge Fund Replication Index
HFRI FOF
HFRX Global Index
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LOIM · May 2010 · 12
Replication aim and methodology
Replication aims to replicate the risk-return profile of a diversified portfolio of hedge funds without investing in hedge funds
Bottom-up approach
• Systematic and quantitative replication of trading strategies employed by hedge funds
• Example: foreign exchange and volatility carry trade
Top-down approach
• Aim to replicate hedge fund returns using statistical techniques based on observable market factors, representative of hedge fund global exposure
• Suitable for broad index replication of hedge fund returns • Usually complex and not transparent replication
• In contradiction with delivering broad hedge fund returns
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LOIM · May 2010 · 13
Top-down replication approach
A top-down approach is suitable to broad hedge fund replication
• Choice of an index, typically monthly non-investable
• Choice of market factors based on liquidity and explanatory power
• Assessment of weight allocation to selected market factors based on systematic econometric model
• Weights allocation can be long or short
• Weights are re-estimated every month, at the time of release of the index
• Investments liquid instruments only (index futures, ETFs, options)
1. Index to replicate and investment universe
2. Estimation method 3. Rebalancing
Rationale • Diversified index to limit influence of manager idiosyncratic risk, thereby facilitating the replication of hedge fund average returns
• Market factors are representative of hedge funds’ global exposure: equity; bonds; foreign exchange; commodities; volatility
Advantages • Transparency, liquidity and low costs• Ability to replicate non-investable indices
Considerations • Time lag and stability of returns
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LOIM · May 2010 · 14
Replication facilitated by diversification
Diversification limits the influence of manager idiosyncratic risk, making the replication of hedge fund average returns possible
Source : Lombard Odier
• This graph represents the average correlation between the returns of increasingly large portfolios of single hedge funds and returns of a back-tested version of Lombard Odier top-down replication model
• The sample of single hedge funds is randomly drawn from HFR database (Active funds as of January 2010 denominated in USD), excluding funds of hedge fund and the period Jan. 2001-Jan. 2010
• Number of simulations is fixed to 5'000 for each hedge fund portfolio size threshold
Average correlation between returns of hedge fund portfolios and replication
0%
20%
40%
60%
80%
100%
1 2 3 4 5 10 15 20 30 40 50 60 70 80 90 100 200 300 400 500
Average correlation (%) over period Jan 2001- Jan 2010
Number of hedge funds
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LOIM · May 2010 · 15
Stability of replication model
Changes in allocation to selected market factors tend to be limited. Thisfacilitates the prediction and stability of the replication model and limits the time lag effect
-20%
-10%
0%
10%
20%
S&P 500 Russel 2000
MSCI EFEA
MSCI EM
UST 10 years
EUR/USD JPY/USD VIX GSCI
Range of month-on-month changes corresponding to 50% of the data Min, max, median
Changes in the allocation to market factors based on replication of a broad hedge fund index (*)
(*) Analysis from January 2001 and January 2010 using Lombard Odier top-down replication model applied to the non-investable HFRI Fund Weighted Composite (see description in appendix)
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LOIM · May 2010 · 16
3. Key investment beliefs
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LOIM · May 2010 · 17
Key investment beliefs
1
2
3
We believe in the “replicability” of hedge fund returns on the premise that hedge funds’ composition and allocation are on average relatively stable over time
We view alternative beta replication as a complementary rather than as replacement solution to investing in hedge funds
Our approach is systematic and transparent, using liquid and listed investment instruments only and managing cash in a conservative and passive way
Our quantitative approach allows us to replicate the returns of a diversified portfolio of hedge funds with all the advantages of a UCITS III vehicle
We believe in the differentiating quality of our proposition, combining our expertise in hedge fund investment management with our quantitative modeling skills
4
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LOIM · May 2010 · 18
4. LO Funds – Alternative Beta
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LOIM · May 2010 · 19
Overview
Investment universe
• Listed futures and options selected for their replication quality and liquidity
• Cash invested in short-term government bonds
Investment approach
• Top-down econometric multi-factor replication approach
Objective • Returns superior to investable hedge fund indices (HFRX)• 90% correlation to the HFRI Index and 3-5 % Tracking Error
for monthly returns over a 24 month rolling period
Key portfolio characteristics
• 10-15 market factors• Weights rebalanced on monthly basis
The LOF – Alternative Beta is a hedge fund replication UCITS-III vehicle offering daily liquidity
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LOIM · May 2010 · 20
Index selection
We put the bar high by choosing to track the top performing non-investable HFRI index in order to foster the likelihood of outperforming our benchmark (HFRX)
• HFRI Fund Weighted Composite is non-investable. It represents the monthly returns of a large portfolio of HF (~ 2000). It is published every month• HFRX is an investable index published daily with performance finalized at year-end with roughly 250 components
The non-investable index (HFRI) outperforms the investable index (HFRX) for two main reasons :• It includes closed funds • It is based on a voluntary mechanism leading to survivorship and self selection biases
Monthly cumulated returns (%)
HFRX Global IndexHFRI Fund Weighted Composite
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2003 2004 2005 2006 2007 2008 2009 2010
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LOIM · May 2010 · 21
Performance
LOF – Alternative Beta performance is in line with its target
(30.04.2010)
HFRI HFRXLOF – Alternative
Beta
Tracking error 2.3% 3.4% -
Correlation 91.2% 81.7% -
Volatility 5.4% 3.4% 5.5%
Returns (%)Since
02.2009Year-to-Date
2010
LOF – Alternative Beta (I USD) 15.61% 1.24%
HFRX Global Hedge Fund 15.35% 2.45%
HFRI Weighted Composite 26.17% 3.79%
Daily cumulated returns (100-based)(*)
(*) Monthly returns only for HFRI Weighted Composite
LOF – Alternative Beta (I USD)HFRX Global Hedge FundHFRI Fund Weighted Composite
95
100
105
110
115
120
125
130
02.0
9
03.0
9
03.0
9
04.0
9
04.0
9
05.0
9
05.0
9
06.0
9
06.0
9
07.0
9
07.0
9
07.0
9
08.0
9
08.0
9
09.0
9
09.0
9
10.0
9
10.0
9
11.0
9
11.0
9
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9
12.0
9
01.1
0
01.1
0
01.1
0
02.1
0
02.1
0
03.1
0
03.1
0
04.1
0
04.1
0
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LOIM · May 2010 · 22
Market factors
Market factors are selected on the basis of their explanatory power and liquidity
Liquidity filter:
• Listed futures, ETFs
• Listed derivatives
Statistical analysis
• Linear regression (24 month rolling)
• “out-of-sample” tracking error minimization(*)
• Maximum drawdown; Turning points
Fundamental analysis
• Leveraging hedge fund selection team expertise and experience
Market Factor universe screening (10-15) market factors
9 market factors currently:
• S&P 500
• MSCI EAFE
• Russell 2000
• MSCI Emerging
• US Treasuries 10-years
• EUR / USD
• JPY/USD
• GSCI
• VIX
(*) Annualized tracking-error taking into account the lag between the observation of the performance of hedge funds and the implementation of positions
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LOIM · May 2010 · 23
Estimation method and rebalancing
The allocations are revised each month at index publication date, based on a regression model
Trade-off • Being dynamic enough in order to reproduce the hedge fund return average• Being robust enough in order to minimize out-of-sample tracking error
Tracked index returns Factors returns
Optimization model
Monthly allocation
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LOIM · May 2010 · 24
Example of allocation to market factors(30.04.2010)
Monthly allocations (%)
-0.66%
-0.04%
-2.12%
-11.33%
18.35%
11.34%
8.62%
6.15%
-15%
-10%
-5%
0%
5%
10%
15%
20%
S&P 500 VIX US Treasuries
10 years
Russell 2000 JPY/USD GSCI MSCI EAFE MSCI Emerging Markets
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LOIM · May 2010 · 25
Team
LOF – Alternative Beta Lead Portfolio manager
Quant specialists• Alexandre Deruaz• Laurent Joué• Arnaud Néris• Marc Pellaud• Guillaume Sabouret
Hedge fund analysts• Frédéric Bezolles• Thomas Chladek• Michael Clark• Hugues Girard• Brian Hayes
Jérôme Teiletche
Marc Pellaud
Portfolio Manager
Laurent Joué
Portfolio Manager
• Lead manager is one of the pioneers of the hedge fund replication industry (first replicants launched in 2007)
• He has been managing successfully hedge fund replication products since 2007 and modelling hedge fund risk/returns since 2003
• He is also a regular publisher in leading academic reviews(*)
• Organization structure fosters a strong collaboration between the quantitative specialists and the hedge fund analyst team
(*): Journal of Portfolio Management; Journal of Empirical Finance; Journal of Alternative Instruments; Journal of Asset Management
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LOIM · May 2010 · 26
Risk metrics
Category Metric / Guideline Typical range / Measures / Limit
Concentration • Number of futures contracts 10 - 15
Asset classes • Equities • Bonds • Foreign exchange• Commodities• Volatility
---
+ / - 10 % specific to the GSCI index-
Geography • International and diversified indices -
Model The model and the process are monitored on an on-going basis by both quantitative and hedge fund teams
• Model risk is monitored through continuous analysis of tracking-error and research• Systematic algorithm (no judgmental bias) • Portfolio's market risk can be easily
estimated by any risk system
VaR Limits • Absolute VaR on 99% confidence interval and holding period of 20 days
20% max of net asset value
Liquidity • Daily (highly liquid instruments) -
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LOIM · May 2010 · 27
5. Key characteristics
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LOIM · May 2010 · 28
LOF – Alternative Beta – Why invest?
Why broad hedge fund returns?
• Broad exposure to hedge fund market offers an attractive risk-return profile over time• Diversification and stability of the allocation mix facilitates replication and delivery of hedge
fund-like returns
Why replication? • Replication delivers hedge fund average in a passive, cheap and liquid way• Replication eliminates any selection risk as no selection of managers is necessary • In addition, replication offers:
• Stricter defined passive and transparent investment rules• Indirect exposure to closed funds
Why the fund "LO Funds – Alternative Beta"?
• Strong investment team: lead manager is one of the pioneers of the replication industry• Robust replication methodology at the forefront of technology, based on top-down approach• Transparent investment process and fund positions• Close and complementary interaction with our hedge fund analysts and investment team• Solid track-record: performance and replication results in line with objectives • Benefits from UCITS III rules: liquidity, diversification, transparency
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LOIM · May 2010 · 29
LO Funds – Alternative Beta
Legal structure SICAV (Luxemburg)
Custodian bank CACEIS Bank Luxemburg SA
NAV calculating agency
Fastnet Luxemburg
Liquidity Daily
Subscriptions / redemption details
NAV Calculation : NSubscription deadline : 3 pm Luxembourg (T - 1)Payment : T + 3Europe / Asia / Americas price : T Close / T Close / T CloseFrequency : Daily
Launch date USD: 27.02.2009 / EUR: 21.09.2009 / CHF: 11.09.2009
Reference currency USD / EUR / CHF
Fee / performance fee
Class I : mgt 0.75 % p.a. Class P : mgt 0.75 % p.a. - dist 0.75 % p.a. No performance fee
ISIN number Class IA : LU0428700214 (USD) ; LU0428700131 (EUR) ; LU0428700057 (CHF)Class PA : LU0428700990 (USD) ; LU0428700727 (EUR) ; LU0428700644 (CHF)
Telekurs Class IA : 010166707 (USD) ; 010166800 (EUR) ; 010167560 (CHF)Class PA : 010166597 (USD) ; 010166740 (EUR) ; 010166908 (CHF)
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LOIM · May 2010 · 30
6. Appendix
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LOIM · May 2010 · 31
Track record since inception(30.04.2010)
LOF – Alternative Beta (I USD) 0.24% 2.85% 5.11% -0.13% 1.73% 0.09% 1.33% -0.23% 1.35% 1.13% -1.42% 1.39%
HFRX Global Hedge Fund -0.03% 1.61% 3.15% 0.04% 1.59% 1.25% 2.22% -0.06% 1.66% 0.55% -0.02% 0.26%
HFRI Fund Weighted Composite 1.66% 3.60% 5.15% 0.25% 2.50% 1.30% 2.79% -0.20% 1.52% 1.28% -0.76% 0.66%
HFRI Funds of Funds 0.03% 1.05% 3.32% 0.38% 1.54% 1.09% 1.74% -0.09% 0.80% 0.76% -0.36% 0.13%
Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10
1.42%
1.38%
2.57%
1.72%
Mar 10 Apr 10
-0.13%
0.80%
1.29%
0.98%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
03.09 04.09 05.09 06.09 07.09 08.09 09.09 10.09 11.09 12.09 01.10 02.10 03.10 04.10
LOF – Alternative Beta (I USD)HFRX Global Hedge FundHFRI Fund Weighted CompositeHFRI Funds of Funds
Since 02.09 Year-to-Date 2010
15.61% 1.24%
15.35% 2.45%
26.17% 3.79%
13.85% 2.48%
Returns (%)
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LOIM · May 2010 · 32
Overview of HFR indices : main differences
HFRI Fund Weighted Composite HFRI Fund of Funds Composite HFRX Global Hedge Fund Index
Inception date January 1990 January 1990 April 2003 (live)
Weighting Equal-weighted Equal-weighted Representative Optimization
Performance Time Series Available
Monthly Monthly Daily
Index calculated Three times per month Three times per month Daily
Index rebalanced Monthly Monthly Quarterly
Index performance finalized Trailing four months of performance are subject to revision
Trailing four months of performance are subject to revision
Performance finalized at month-end
Criteria for fund inclusion Listing in HFR Database; Reports monthly net of all fees monthly performance and assets in USD
Listing in HFR Database; Reports monthly net of all fees monthly performance and assets in USD
In addition to meeting HFRI criteria, fund must be open to new transparent investment and meet track record and minimum asset size requirements as listed below
Minimum Asset Size and/or Track Record for fund inclusion
$ 50 Million minimum or > 12-Month Track Record
$ 50 Million minimum or > 12-Month Track Record
$ 50 Million and 24-Month Track Record (typical)
Investable No No HFR Asset Management, LLC constructs investable products that track HFRX
Number of components Over 2000 Over 800 Over 250 in total constituent universe
Currency USD USD USDSource : HFR, https://www.hedgefundresearch.com/index.php ?fuse=indices-faq&1246877203.
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LOIM · May 2010 · 33
HFRI index breakdown by strategy(28.02.2010)
Equity Hedge47.9%
Event Driven9.8%
Macro24.0%
Relative Value18.4%
5.4
%
13.
3%
16.
9%
1.9
%
3.3
%
3.0
%
3.2
%
0.9
%
0.5
%
0.4
%
3.3
%
0.9
%
0.6
%
0.4
%
3.8
%
1.1
%
0.8
%
0.3
%
0.4
%
1.9
%
0.6
%
2.3
%
4.3
%
3.4
%
8.9
%
3.3
%
1.8
%
3.0
%
0.9
%
5.2
%
2.6
%
1.0
%
0.6
%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Equ
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LOIM · May 2010 · 34
HFRI index historical performance(31.03.2010)
HFRI Fund Weighted Composite (monthly NAV since January 1990)
0
2000
4000
6000
8000
10000
12000
dec.
89
dec.
90
dec.
91
dec.
92
dec.
93
dec.
94
dec.
95
dec.
96
dec.
97
dec.
98
dec.
99
dec.
00
dec.
01
dec.
02
dec.
03
dec.
04
dec.
05
dec.
06
dec.
07
dec.
08
dec.
09
Please see important information at the end of the document
LOIM · May 2010 · 35
HFRX index historical performance(31.03.2010)
1000
1050
1100
1150
1200
1250
1300
1350
1400
1450
Mar
.200
3
Mar
.200
4
Mar
.200
5
Mar
.200
6
Mar
.200
7
Mar
.200
8
Mar
.200
9
Mar
.201
0
HFRX Global Hedge Fund Index (daily NAV since April 2003)
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LOIM · May 2010 · 36
Hedge fund risk premium and market factors
Hedge fund risk premia Examples of representative market factors (futures, options, ETFs)
Core equity premia • S&P 500; Dow Jones Industrial
Small cap bias • Russell 2000
Growth versus Value premia • NASDAQ 100
Rest of the industrial world premia • MSCI EAFE
Emerging premia • MSCI Emerging
Fixed income carry • US T-note 10-years
Term premia • US T-note 10-years vs US T-note 2-years
Credit premia • Iboxx High Yield; Iboxx Investment Grade
Currencies carry • EUR/USD; JPY/USD; USD/basket of currencies (DXY)
Commodities premia • GSCI; ETFs Commodities (Agriculture, Industrial metals, Gold, Oil)
Volatility premia • VIX
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LOIM · May 2010 · 37
Investment team
Jérôme Teiletche, Lead portfolio manager10 years of financial market experienceJerôme Teiletche started his professional career in 1999 at the French Ministry of Finance as an economist. In 2001 he joined IXIS CIB as a senior quantitative analyst in charge of asset allocation, more specifically advising various institutional clients (pension funds, insurance companies, banks). From 2006 to mid-2008, he worked for Société Générale Alternative Investments where he was in charge of designing quantitative processes and hedge fund structuring. He joined Lombard Odier during the summer of 2008, where he is responsible for Systematic Investments Strategies. Jerôme holds a PhD in economics with a specialization in financial econometrics and is the author of numerous professional and academic publications Author of numerous professional and academic publications
Laurent Joué, Portfolio manager4 years of financial market experienceLaurent Joué started is professional career in 2005 at Géa in Paris, the ADI-LODH joint-venture specialized in Hedge Fund multi-management. He worked as a middle officer and assistant portfolio manager. He joined Lombard Odier in 2008 as a junior portfolio manager in the Fund of Hedge Funds team. In 2009 he joined the Systematic Investments Strategies Team as a quantitative analyst / portfolio manager. Laurent is graduated from the French business school l’Institut Supérieur Européen de Gestion.
Marc Pellaud, Portfolio manager3 years of investment experienceMarc Pellaud joined the Systematic Investments Strategies Team of Lombard Odier in 2007 as a quantitative analyst / portfolio manager after obtaining his Ph.D. in Numerical Ecology from the Swiss Institute of Technology – Lausanne
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LOIM · May 2010 · 38
Lombard Odier Investment Managers
Lombard Odier Investment ManagersMay 2010
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LOIM · May 2010 · 42
Contents
1. Introduction to LOIM
2. Our investment approach
3. Our alpha engines
4. Our asset allocation group
5. Your contacts
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LOIM · May 2010 · 44
1. Introduction to LOIM
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LOIM · May 2010 · 45
LOIM in a nutshell
Here to stay • More than 200 years of experience• Private ownership by 8 managing partners with unlimited liability• One of the largest “true” private bank in Europe
A real player in wealth management
• EUR 104 bn of AuM with EUR 27 bn for institutional clients• Global footprint with 23 offices in 18 countries• Nearly 1'900 professionals with 260 dedicated to the institutional
business• Pure player – no other business – thus no conflicts of interests
Close to our clients
• Long term relationships as the DNA inherited from our private banking culture
• Focused on delivery customized solutions• One core principle: “managing clients’ money as if it was ours”
Strong belief in our model
• Unique model at the heart of the convergence between traditional and alternative asset management
• Partners personally invested in our products
(31.03.2010)
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LOIM · May 2010 · 46
2. Our investment approach
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LOIM · May 2010 · 47
1
4
2
3
Our core investment beliefs
We have 4 key investment beliefs that have deeply influenced our organization
We are a fundamental active asset manager and we believe in the virtue of isolating alpha from beta generation
We believe that multi-asset portfolios need to be constructed using a risk-balanced approach and not the traditional capital allocation approach
We rely on 3 key ingredients for our alpha generation: (i) specialization of portfolio managers in narrowly defined areas of expertise, (ii) unconstrained long/short portfolio management and (iii) tight risk framework
We believe in a disciplined approach for all our processes and in providing maximum transparency across all our portfolios
Please see important information at the end of the document
LOIM · May 2010 · 48
Manufacturing of our single-asset solutions
Our single-asset solutions are directly provided by our alpha generation teams or by our asset allocation group when constructed using portable alpha technology
ALPHA ENGINES
Passive portfolios
1
DIRECTIONAL
BETA REPLICATION
Alpha portfolios
1
2
3
ABSOLUTE RETURN
• 1798 Relative Value• 1798 Convertible Opp.
ASSET ALLOCATION GROUP
Portable alpha portfolios
1
1
2
Traditional portfolios
1+1
• LOF Convertible Bond• LOF EU Small & Mid
• LOF Investment Grade• LOF US Equities
• LOF EMU Equities Tracker• LOF Swiss Equities Tracker
Please see important information at the end of the document
LOIM · May 2010 · 49
Manufacturing of our multi-asset solutions
We rely on the same approach to construct both traditional and alternative multi-asset portfolios Risk-driven portfolio construction
ALPHA ENGINESBETA REPLICATION
TRADITIONAL(VDA+Tactical alpha) ALTERNATIVE
Risk contrib. #1 Risk. contrib. #2 Risk. contrib. #3
• Balanced mandates :benchmarked or absolute return
• Balanced mandates• Multiadvisers FoHF
ASSET ALLOCATION GROUP
Please see important information at the end of the document
LOIM · May 2010 · 50
Our fund range
• Tactical • Alpha Strategies
Multi-asset
A B S O L U T E R E T U R N D I R E C T I O N A L
• Alternative Beta• Global Trading
Dynamic beta multi-asset
• Infrastructure• Private equity
Private equity
OTHERS
• Commodities• Gold Expertise
Commodities
• Distr. EU• Distr. US• Healthcare L/S• Convert. Arb.• Relative Value
Equities
• Alto• Generation• Selective• Global Equity L/S
Global
• Energy• Golden Age• Clean Tech• Technology• Life Sciences• Nutrition
Themes
• Systematic Europe• All caps• S&M• CH large• CH S&M
Europe
• Global• EMEA• Great. China• Pacific Rim
Emerging
• Global • Asia• Recovery
Convertibles
EQUITIES
• All caps• S&M
Japan
• CHF• EUR
Aggregate
• EUR 1-3 yrs• CHF 1-3 yrs• EUR all mat.• USD all mat.• EUR inflation• Systematic World
Government
• Global Hard• Global LC• EU convergence
Emerging
• EUR• USD• CHF• GBP
Money market
• Optimum Trend• Care
Fixed income
FIXED INCOME & CURRENCY
• EUR• EUR+• CHF• USD, EUR
short term
Credit
Please see important information at the end of the document
LOIM · May 2010 · 51
+ 14% in 2009
USD 207m
Performance of selected products
Our investment model enables us to provide products with attractive performance
A B S O L U T E R E T U R N D I R E C T I O N A L
+ 50.4% in 2009 + 20% since inc. (2) 15 positive months in a
row
1798 RELATIVE VALUE
1st decile 3y & 5y+ 18.0% in 2009+ 28.8% over 5y
CONVERTIBLE
ALTERNATIVE BETA
of + 50.4% in 2009+ 80% in 2009+ 36.8% over 3yTop quartile 3y
WORLD GOLD EXPERTISE
1st decile 2009+ 23.8% in 2009 of + 16.3% in 2009
ALPHA JAPAN
Global convertible
Japan equities all caps
Hedge funds replicator
Gold mine equities
Multi-strategy
of + 1.4% in 2009+ 23.2% in 2009
CONVERTIBLE ASIA
USD 110m
USD 136m
USD 4'040m USD 697mUSD 246m
+ 34.9% since 12.2008No negative month
1798 CONVERTIBLE OPPORTUNITY
Convert arbitrage USD 47m
+ 8.6% p.a. with 8.7% vol. since inc. (3)
+ 12.5% in 2009
GLOBAL EQUITY L/S
Fund of hedge funds
+ 40.3% in 2009
EUROZONE S&MC
Europe ex-UK small and mid USD 214m USD 167m
+ 13.2% since inc.(1)
CONVERTIBLE RECOVERY
High-yieldconvertible USD 209m
of + 2.4% in 2009+ 17.7% in 20092nd quartile 2009
INVESTMENT GRADE
EUR credit USD 540m
+ 138% in 2009
1798 CREDIT OPPORTUNITY
High yield and distressed
Asiaconvertible
* AuM and performance as of end year 2009 (1) Inception date: 13.07.2009 (2) Inception date: 15.11.2007 (3) Inception date: 31.12.1995
Please see important information at the end of the document
LOIM · May 2010 · 52
3. Our alpha engines
Please see important information at the end of the document
LOIM · May 2010 · 53
1
4
2
3
6
5
Key principles of our alpha engines
Our alpha engines are specialized teams to generate a wide set of uncorrelated returns under strict risk oversight
Specialists – The teams are composed of specialist managers each focused on a particular alpha source under the leadership of experienced CIOs with a proven track record
Strict risk oversight – We apply the same systematic and real-time independent risk monitoring across all strategies
Unconstrained – Managers use robust long/short asset management tools, techniques and instruments
Accountability – Each manager is accountable for his/her own P&L within the well-defined limits of his/her assigned risk budget
Selected partnerships – We also team up with a few leading-edge third-party managers for niche strategies we do not manage ourselves
Transparency – We offer to our investors full transparency on underlying positions as well as on investment thesis
Please see important information at the end of the document
LOIM · May 2010 · 54
Investment strategies
EQUITIESA. Nahas
FIXED INCOME & CURRENCIESS. Monier
Equity long/short strategies
Global healthcare
Global industrials
Global TMT
Emerging markets Europe
US consumer
Non-US financials
Equity high conviction long-only strategies
Global Europe
Technology & CleanTechHealthcareEnergy
Convertible strategiesConvertible long-only Convertible arbitrage
Distressed/credit strategiesDistressed EU Distressed US
US financials
Merger arbitrage
Nutrition
Emerging market equity strategies
Themes/sectors
We are offering today more than 30 performing and uncorrelated investment strategies
Switzerland
Macro strategies
Inflation
Volatility
Sectors
EMEA
Rates & currencies
Asia
LATAM
Developed Markets Emerging Markets
Quantitative strategies
Trend following Mean reverting
Carry
Credit strategies
Top-down Bottom-up
Please see important information at the end of the document
LOIM · May 2010 · 55
Experienced senior investment professionals
Aziz Nahas, Chief Investment Officer EquitiesExperience2007 to date Lombard Odier Investment Managers2006-2007 Dillon Read Capital Management, Global Head of Equities2005-2006 JP Morgan, Global Head Proprietary Equities1996-2004 Credit Suisse First Boston, Head of Equity Derivatives1994-1996 Banque Paribas, Convertible Trader
Stéphane Monier, Chief Investment Officer Fixed Income & CurrenciesExperience2009 to date Lombard Odier Investment Managers2006-2009 Fortis Investments, Global Head of Fixed Income
& Currencies1998-2006 Abu Dhabi Investment Authority, Head of Fixed Income
& Currencies1991-1998 JP Morgan, Fixed Income Portfolio Manager
Stephen Grobman, Chief Risk OfficerExperience2008 to date Lombard Odier Investment Managers2008 Diamond Lake Investment Group, Senior Risk Officer2004-2008 Société Générale, Aarxis Capital, Principal2003-2004 Forstmann Asset Management, Head of Risk & Research2000-2003 EIM, Senior Hedge Fund Analyst1997-2000 Gollyhott Trading, System Trader, Risk Manager1992-1997 Moore Capital, System Trader Risk Manager
Education• Thesis on stochastic volatility, ESCP• Law Degree, Sorbonne
Education• Chartered Financial Analyst (CFA)• M.S. in International Finance, HEC• Engineering degree, Institut National
Agronomique
Education• B.A. Physics, Binghampton University
Please see important information at the end of the document
LOIM · May 2010 · 56
Our risk framework
We are using leading-edge tools and techniques coming from the proprietary trading and hedge fund world to manage risks carefully
% $ Event Code % $ Event CodePortfolio Loss LimitsYearly Loss 8.4% 6,216,000 S 12.0% 8,880,000 H1 Yearly loss as a % of AAUMMonthly Loss 4.2% 3,108,000 S 6% 4,440,000 H1 Monthly loss as a % of AAUMDaily Loss 1.8% 1,295,000 S 3% 1,850,000 S Daily Loss as a % of AAUMLoss per Name 1.8% 1,295,000 S 3% 1,850,000 H1 Largest loss in a name, where a position exists as a % of AAUM
Portfolio ExposuresNMV Long 35.0% 25,900,000 S 50% 37,000,000 H2 Net
‐market
‐value Long of Equities/ Beta
NMV Short 14.0% 10,360,000 S 20% 14,800,000 H2 Net
‐market
‐value Short of Equities/ Beta
GMV 140.0% 103,600,000 S 200% 148,000,000 H2 Gross
‐market
‐value of Equities
NMVo 0.0% - S 0% - H2 NMV of FI positions (CB is min of bond floor and price)GMVo 0.0% - S 0% - H2 GMV of Fixed Income positions
Portfolio Value at RiskVaR 1.1% 777,000 S 2% 1,110,000 H2 Standard Deviation, 1 day, 20 day look
‐back
Portfolio SensitivitiesTheta 0.2% 129,500 S 0% 185,000 H2 P&L from a 1 day of decay (Theta) as a % of AAUMVega 0.7% 518,000 S 1% 740,000 H2 P&L from a 10 volatility point (Vega) up move as a % of AAUMDV01 0.0% - S 0% - H2 P&L from a 100bps up move in yield as a % of AAUMCS01 0.0% - S 0% - H2 P%L from a 100 bps widening of credit as a % of AAUMDelta
‐10% 3.5% 2,590,000 S 5% 3,700,000 H2 P&L from a 10% decrease in the S&P 500, using beta
Stress 3.5% 2,590,000 S 5% 3,700,000 H2 Sum of Theta, Vega, DV01, CS01 and Delta
‐10%
Single Position LiquidityLargest Equity Long 7.0% 5,180,000 S 10% 7,400,000 H2 Largest equity long position as % of AAUM excluding IndexesLargest Equity Short 5.3% 3,885,000 SLargest Fixed Income 0.0% - SOutstanding Shares 1.4% 1,036,000 SDays Ownership 3.5 4 S
Sector 14.0% 10,360,000 SIndustry 7.0% 5,180,000 SSingle Issuer 5.6% 4,144,000 SETFs 10.5% 7,770,000 S
Soft Stop Limits Hard Stop Limits
Risk charts
Major factor analysis Live risk tool
Risk mandate / limits
Please see important information at the end of the document
LOIM · May 2010 · 57
Illustration of our alpha generation capabilities
* Inception date : 15.11.2007 ** Estimated
(31.01.2009)
Our flagship absolute return fund is combining 13 strategies within the equities alpha engine and has delivered highly attractive results
* Inception date : 15.11.2007 ** Estimated performance for the A-1 USD (new issue) share class, net of fees
Performance since inception*
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2007 - - - - - - - - - - - -6.20 -6.20
2008 -1.34 1.29 0.56 1.74 0.48 -0.85 -0.52 0.67 -6.32 -7.75 -4.46 0.71 -15.19
2009 4.74 0.81 5.90 4.28 7.55 2.46 2.94 4.07 5.82 0.39 1.01 1.77 50.31
2010 0.98** 0.98
Performance since inception – monthly figures in %*
Annualized return since inception + 9.3%
Annualized volatility since inception 13.1%
Maximum drawdown - 21.0%
Annual Sharpe Ratio (RF=1.5%) 0.6
% positive months 73%
Normal monthly VaR 95% - 5.4%
Bear beta to S&P500 Index 0.3
Bull beta to S&P500 Index 0.4
Please see important information at the end of the document
LOIM · May 2010 · 58
4. Our asset allocation group
Please see important information at the end of the document
LOIM · May 2010 · 59
Asset allocation group
ASSET ALLOCATIONJ. L. Nakamura
Our asset allocation group uses a risk-balanced asset allocation process to combine alpha and beta in a liquid and effective format
BETA REPLICATIONRISK-BALANCED PORTFOLIO CONSTRUCTION TACTICAL ASSET ALLOCATION
Equity replication
Fixed income replication
Alternativereplication
Judgmental macro
Long term carry
Flow / sentiment analysis
Technical analysis
Tradi-tional
Alter-native
Risk contrib. #1 Risk. contrib. #2 Risk. contrib. #3
Multi-beta
Please see important information at the end of the document
LOIM · May 2010 · 60
Experienced senior investment professionals
Christophe Morel, PhD, Head of Tactical Asset AllocationExperience2008 to date Lombard Odier Investment Managers2006-2008 Natixis AM, Head of TAA & Overlay2004-2006 French Pension Reserve Fund, Head of TAA2001-2004 Ixis Asset Management, Strategist1998-2001 Ministry of Finance
Jérôme Teiletche, PhD, Head of Systematic InvestmentsExperience2008 to date Lombard Odier Investment Managers2006-2008 SGAM, Quantitative Alternative Investments2001-2008 IXIS CIB, Quantitative Analyst1999-2001 Ministry of Finance, Economist
Education• M.A. in Political Sciences, ENA • Lecturer in Economics at Sciences Po Paris
and ENA
Education• M.A. in econometrics & PhD in Finance• Affiliated researcher in Finance, Dauphine
University, Paris
Education• PhD in econometrics• Author of numerous professional and academic
publications
Jean-Louis Nakamura, Chief Investment Officer Asset Allocation GroupExperience2008 to date Lombard Odier Investment Managers2007-2008 French Civil Service Pension Plan, CEO2002-2007 French Pension Reserve Fund, CIO1999-2001 Council of the European Union, Counselor1995-1999 Ministry of Finance, Head of Int'l forecasts
Please see important information at the end of the document
LOIM · May 2010 · 61
Key principles of our portfolio construction
Risk-balanced portfolio construction is an innovative approach going beyond traditional risk budgeting
3
2
1
4
5
Risk-balanced among risk factors – Without top down convictions, we prefer an agnostic, risk-balanced portfolio, because risk diversification is the only "free lunch" in finance. To express specific top down convictions, we can tilt the risk-balanced portfolio
Risk analysis and budgeting – Risk-balanced asset allocation starts with a clear identification of risk factors and the definition of a target risk profile
Risk weights – Asset class weight is a misleading metric in asset allocation, marginal risk contribution is the right metric
Risk-balanced in time – We continuously monitor the risk profile of our portfolios and we rebalance them to stay in line with our target risk profile taking into account the evolution of the risk environment
Universal – We apply the same methodology to build single-asset or multi-asset portfolios as well as traditional and alternative portfolios
Please see important information at the end of the document
LOIM · May 2010 · 62
Risk-balanced portfolio construction
The notions of risk and balancing are at the heart of our risk-balanced portfolio construction approach
* Equal Weight Risk Contribution ('EWRC') ** Risk contribution structure implied by client's strategic asset allocation
Risk contrib. #1 Risk. contrib. #2 Risk. contrib. #3
Volatility-Driven Allocation ('VDA')**
Risk-balanced portfolio (‘EWRC’)*
Risk contrib. #1 Risk. contrib. #2 Risk. contrib. #3
2 main types of target risk profiles
No conviction
Top-down convictions
1. Identify risk factors
2. Determine target risk profile
4. Rebalance to target risk profile
3. Monitor risk factors drift
Please see important information at the end of the document
LOIM · May 2010 · 63
Risk-balanced portfolio (‘EWRC’)
Capital weight
Risk contribution Risk contribution
Capital weight
Traditional 50/50 portfolio Risk-balanced portfolio
10%
90%
Fixed income Equities
50% 50%
Fixed income Equities
50% 50%
Fixed income Equities
80%
30%
Fixed income Equities
120%
Without top down convictions, we prefer an agnostic, risk-balanced portfolio, because risk diversification is the only "free lunch" in finance
* Equal Weight Risk Contribution ('EWRC')
Please see important information at the end of the document
LOIM · May 2010 · 64
Performance: Volatility-Driven Allocation (VDA)
VDA is our proprietary risk-driven portfolio construction approach for traditional global balanced portfolios to reduce drawdown
Example of portfolio: 30% equities / 70% interest rates
No Rebalancing (Buy-and-hold) Monthly Rebalancing Lombard Odier VDA Process
Average annual returnAverage ex-post volatilityMaximal drawdownSharp ratioPeakValleyEnd
2.2 %3.8 %12.6%0.20
29.10.200709.03.200919.10..2009
3.1 %5.3 %
15.7 %0.31
29.10.200709.03.200929.09..2009
4.0 %3.9 %
10.9 %0.66
29.10.200709.03.200919.10.2009
90
100
110
120
130
140
150
09-00 09-01 09-02 09-03 09-04 09-05 09-06 09-07 09-08 09-09No rebalancing (Buy and hold) Monthly rebalancing Lombard Odier VDA process
Please see important information at the end of the document
LOIM · May 2010 · 65
5. Your contacts
Please see important information at the end of the document
LOIM · May 2010 · 66
Your contact people
You can contact our relationship managers for more information
Géraud [email protected]+33 1 49 26 46 73
[email protected]+33 1 49 26 46 21
France
Alessandro [email protected] +41 44 214 1496
Heidi [email protected] +41 44 214 1470
Italy
Corrine [email protected]+44 20 3206 6155
United Kingdom
Emmanuel [email protected]+41 22 709 9339
Asia
Olivier [email protected]+41 22 709 9454
Claudia [email protected]+41 44 214 1379
Consultants
Uwe [email protected] +49 211 3003 306
Frank [email protected] +49 211 3003 305
Germany
Ernst [email protected]+31 20 522 0508
Andre Van [email protected]+31 20 522 0526
Benelux
Heide Jimenez Dá[email protected] +41 22 709 2762
Thomas [email protected] +41 44 214 1429
SwissInstitutions
Patrick Hjelmè[email protected] +41 44 214 1567
Scandinavia
Stefan [email protected] +41 44 214 1454
Frank [email protected] +41 44 214 1428
SwissFund Sales
David [email protected] +34 91 790 2882
Spain
Tom [email protected]+1 212 295 6169
US
Please see important information at the end of the document
LOIM · May 2010 · 67
Important information
This document reflects the opinion of Lombard Odier Darier Hentsch & Cie or an entity of the Group (hereinafter "Lombard Odier") as of the date of issue. It constitutes research, which is intended primarily for internal staff, but may be distributed upon request to certain institutional or sophisticated private investors for authorized purposes only. This document is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor it is directed to any person or entity to which it would be unlawful to direct such a document.
This document is furnished for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security. The opinions herein do not take into account individual clients’ circumstances, objectives, or needs. Each client must make his own independent decisions regarding any securities or financial instruments mentioned herein. Before entering into any transaction, each client is urged to consider the suitability of the transaction to his particular circumstances and to independently review, with professional advisors as necessary, the specific risks incurred, in particular at the financial, regulatory, and tax levels.
The information and analysis contained herein have been based on sources believed to be reliable. However, Lombard Odier does not guarantee their timeliness, accuracy, or completeness, nor does it accept any liability for any loss or damage resulting from their use. All information and opinions as well as the prices indicated are subject to change without notice. Past performance is no guarantee of current or future returns and the client may consequently get back less than he invested. Performance data of mutual funds do not take into account the commissions and fees charged on the issue and redemption of the units or shares.
The investments mentioned herein may be subject to risks that are difficult to quantify and to integrate into the valuation of investments. Generally speaking, products with a high degree of risk, such as derivatives, structured products, or alternative/non-traditional investments (Hedge Funds, private equity, real estate funds, etc.) are suitable only for sophisticated investors who are capable of understanding and assuming the risks involved. Upon request, Lombard Odier is available to provide more information to clients on risks associated with specific investments.
If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any and all of the subject securities or issuers. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. The description of the rating system used by Lombard Odier for its financial research is available on www.lombardodier.com.
This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.
© 2010 Lombard Odier Darier Hentsch & Cie - all rights reserved.
Please see important information at the end of the document
LOIM · May 2010 · 68