marcus evans 2007 private wealth management summit the “stay rich” hedge fund portfolio
TRANSCRIPT
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marcus evans
2007 Private WealthManagement Summit
The “Stay Rich”Hedge Fund Portfolio
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Enron
Pan Am
W. R. Grace
Polaroid
WorldCom
50 mortgage companies (so far)
Prominent companies sometimes go belly-up
Dead Public Companiesmarcus evans
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LTCM
Bayou
Amaranth
Sowood
Bear Stearns
Bear Stearns
Prominent hedge funds sometimes go belly-up
Dead Hedge Fundsmarcus evans
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Anecdotally, the failure rate of large public companies and prominent hedge funds is quite similar
You can’t tell the belly-ups without a program…
So What’s My Point?marcus evans
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Since the risk of failure is similar, the risk-control strategy ought to be similar
Why re-invent this wheel?
So What’s My Point?marcus evans
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Owning 5 or 6 stocks is a “Get-Rich-or-Get-Poor Strategy”
We might get rich (Microsoft, Google) – or we might go broke (Enron, mortgage companies)
This is MPT 101
Single Stock Riskmarcus evans
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Owning 5 or 6 hedge funds is also a “Get-Rich-or-Get-Poor Strategy”
We might get rich (Soros, Farallon) – or we might go broke (LTCM, Sowood)
This is Hedge Fund 101
Single Hedge Fund Riskmarcus evans
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To avoid going broke owning stocks: instead of holding a handful of stocks, we need to hold (roughly) 20 well-diversified stocks
This is MPT 101
Diversifying Away Single Stock Riskmarcus evans
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“Well-diversified” means not in the same industry sector or not otherwise correlated (don’t own 20 mortgage lenders)
This is MPT 101
Diversifying Away Single Stock Riskmarcus evans
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To avoid going broke owning hedge funds: instead of holding a handful of hedge funds, we need to hold (roughly) 20 well-diversified funds
This is Hedge Fund 101
Diversifying Single Hedge Fund Riskmarcus evans
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“Well-diversified” means not in the same sector or engaging in the same strategy (i.e., they are not all long subprime credit)
This is Hedge Fund 101
Diversifying Single Hedge Fund Riskmarcus evans
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Yet, most private investors’ hedge fund portfolios consist only of a small handful of individual hedge funds
What gives?
So What’s My Point?marcus evans
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Implication #1:
To invest in individual hedge funds, we need to have a LOT of capital allocated to hedge
How big is big?
The Implications of Hedge Fund 101marcus evans
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If the best hedge funds have $5 million minimums, we need to be investing $100 million in hedge
($5mm X 20 funds)
It’s sooo big!
The Implications of Hedge Fund 101marcus evans
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If we can negotiate average minimums of $1 million – very unlikely - we need to be investing $20 million in hedge
($1mm X 20 funds)
It’s sorta big…
The Implications of Hedge Fund 101marcus evans
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The reality is probably that $25 million allocated to hedge is the absolute minimum if you wish to invest in individual hedge funds
It’s big!
The Implications of Hedge Fund 101marcus evans
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Implication #2:
Multistrategy funds are not a way around this rule – they don’t offer institutional diversification
A fund is a fund is a fund.
The Implications of Hedge Fund 101marcus evans
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Investing in 3 multistrats means that 1/3 of our capital is exposed to one institution – is it Farallon or Amaranth?
A fund is a fund is a fund.
The Implications of Hedge Fund 101marcus evans
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Multistrats don’t always provide strategy diversification: at the peak, 95% of Amaranth’s capital was in one strategy
A fund is a fund is a fund.
The Implications of Hedge Fund 101marcus evans
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Multistrats don’t always provide strategy diversification: most multistrats are herd animals
A fund is a fund is a fund.
The Implications of Hedge Fund 101marcus evans
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Implication #3:
Like it or not, funds of funds will be an important element in the hedge fund portfolios of most private investors
Everyone loves to hate FOFs
The Implications of Hedge Fund 101marcus evans
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Of the 1,200 hedge FOFs in existence, about 50 are worthy of consideration
A few funds earn their extra layer of fees
The Implications of Hedge Fund 101marcus evans
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Someone must do what a good FOF does:
Offer access to closed funds
Perform up-front diligence
Perform ongoing diligence
Make sensible tactical adjustments
Offer built-in diversification
These services aren’t cheap, but they have to be done
The Implications of Hedge Fund 101marcus evans
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Hedge fund terror levels: The Red Zone – Investing
less than $25 million in hedge
The Orange Zone – Investing $25 - $75 million in hedge
The Green Zone – Investing more than $75 million in hedge
Don’t confuse us with TSA…
What Zone Are You In?marcus evans
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Why all the terror? The Red Zone – Investors in
individual hedge funds may destroy capital
The Orange Zone – Investors in individual funds may destroy returns
The Green Zone – Investors in individual funds are probably ok
Don’t confuse us with TSA…
What Zone Are You In?marcus evans
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In return for less-than-long-equity returns, do we want to risk getting poor?
Duh…
What Are We Getting for Taking Risk?marcus evans
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For < $25 million investors: Stick with the best FOFs
If you invest in individual funds, don’t commit more than 5% of your hedge exposure to any one
It may not be fun, but it’s smart
Red Zone Strategiesmarcus evans
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For $25 to $75 million investors:
Core position in a high quality, diversified FOFs (minimum 50% allocation)
Individual funds as satellite strategies (max. 5% in any fund)
There really are FOFs that are worth the extra layer of fees! Honest!
Orange Zone Strategiesmarcus evans
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For > $75 million investors: Use individual hedge funds
– 15 to 20 funds minimum
Use targeted FOFs for unusual strategies (real assets, etc.)
Consider engaging a hedge fund consultant (Albourne, etc.)
Only the largest families will fall into the Green Zone
Green Zone Strategiesmarcus evans
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Gregory Curtis
Chairman
Greycourt & Co., Inc.
(412) 361-0100
Fax 412-361-0300
www.greycourt.com
Contact InformationMarcus Evans
September 2007