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Quantitative Equity Strategies, LLC
Alternative Investments in the Retirement Portfolio
Ben [email protected] 10, 2013
This document does not constitute an offer to sell or a solicitation of an offer to buy securities or the solicitation of the management of a securities account. Such an offer will only be made by means of an Investment Management Agreement furnished to investors at a later date. The statements in this document are qualified in their entirety by reference to the Investment Management Agreement. In the event of any inconsistency between the descriptions or the terms in this document and the Investment Management Agreement, the Investment Management Agreement shall control. Quantitative Equity Strategies, LLC may make changes to this document without notification. Prospective investors should not construe the contents of this document as investment, tax, legal, or other advice and should consult with their own advisors concerning such issues. Past performance is no guarantee of future results. The Important Notes and Disclosures at the end of this document are an integral part of this presentation.
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QES
What are “Alternative” Investments?o Any non‐traditional investment (not pure stocks or bonds)o Usually considered a portfolio diversifier instead of a return
drivero Usually not highly correlated with equities or fixed income
securitieso Include hedged strategies, exotic beta, and other non long‐
only products
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Mutual Funds are the New Delivery Mechanisms for Alts
o No K‐1s
o Daily liquidity, more transparency
o Fees can be reasonable, usually no minimum net worth requirement
For these reasons, we will focus on 40‐Act‐based Alternative Funds today
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QES
Like nearly all investments, alternatives are typically evaluated based on the one factor that is NOT indicative of future results…
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Justifying Alternatives
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Justifying Alternatives
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Justifying Alternatives
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Growth of 1000S&P 500 vs. Barclays Aggregate
S&P 500 Barclays Agg
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Growth of 1000S&P 500 vs. Barclays Aggregate vs. HFRI
S&P 500 Barclays Agg HFRI
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Growth of 1000S&P 500 vs. Barclays Aggregate vs. HFRI vs. HFRX
S&P 500 Barclays Agg HFRI HFRX
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Correlation of Monthly Returns, 2007‐2013
Barclays
S&P 500 Agg HFRI HFRX
S&P 500 1.00 0.05 0.83 0.73
Barclays Agg 0.05 1.00 0.04 0.04
HFRI 0.83 0.04 1.00 0.94
HFRX 0.73 0.04 0.94 1.00
Source: Bloomberg, QES
QES
It’s all about the “wobble”11
Justifying Alternatives
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It’s all about the “wobble”12
Justifying Alternatives
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Under‐diversification increases tail risk! 13
Justifying Alternatives
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Uncertainty and Risk
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Uncertainty and Risk
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Advisors should be aware of 3 market risks:
• Interest rate risk
• Economic risk
• Volatility
How can I create convexity for client returns?
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Diversification Using Alternatives
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Interest rate risk and Investment Performance
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Source: Bloomberg, QES. Time Frame: January 1980 – October 2012
Diversification Using AlternativesQES
Minimizing economic risk in a portfolio
• Consider “deep value” strategies to increase convexity in the equity allocation
• “Smart beta” products may be a good addition in the equity or alternatives allocation (in lieu of traditional active mgmt)
• Avoid long‐only commodity products
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Dealing with Volatility risk
• Look to investments that benefit from rising volatility
• Avoid inverse funds – there are better solutions
• Rebalance more frequently
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Alt Funds – Caveat Emptor
• How will fees impact return expectations?
• Are there significant hidden charges?
• Size of fund, liquidity of underlying holdings are important considerations
• Be aware of tax inefficiencies
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Diversification Using Alternatives
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Quantitative Equity Strategies, LLC
A Practitioner’s View of Alternative Investments
Ben [email protected] 10, 2013
This document does not constitute an offer to sell or a solicitation of an offer to buy securities or the solicitation of the management of a securities account. Such an offer will only be made by means of an Investment Management Agreement furnished to investors at a later date. The statements in this document are qualified in their entirety by reference to the Investment Management Agreement. In the event of any inconsistency between the descriptions or the terms in this document and the Investment Management Agreement, the Investment Management Agreement shall control. Quantitative Equity Strategies, LLC may make changes to this document without notification. Prospective investors should not construe the contents of this document as investment, tax, legal, or other advice and should consult with their own advisors concerning such issues. Past performance is no guarantee of future results. The Important Notes and Disclosures at the end of this document are an integral part of this presentation.