Alternative investments
September 2007
Lars Kalbreier, CFA
Managing Director
What are Alternative Investments?
Traditional
Investments
Alternative
Investments
Equities
Real Estate
Hedge Funds
Alternative Investments are nothing new...
... they have just been professionalized over
the last decades
lightly regulated investment vehicles with
no restriction
regarding their investment strategy
invest across
all financial markets
(equities, bonds, currencies,
commodities, traded real estate) and in some cases also in illiquid
assets
use
all possible kind of financial instruments
, especially derivatives
(futures, swaps, options, etc) to implement their strategy
1949 – starting point of modern Hedge Funds
Alfred Winslow Jones opens an
equity fund
using
-
leverage
-
short selling
to hedge against market risk
In the same year:
NATO formed
Mao proclaims establishment of
the People‘s Republic of China
Konrad Adenauer becomes
...followed by a few global players
Michael Steinhardt - Steinhardt
Partners (1967-1995)
Julian Robertson – Tiger
Management
(1980-2000)
George Soros – The Quantum Fund
(1973-2000)
Catalysts
for further rapid development:
-
Globalization
widening scope for investment
-
Professionalisation of trading/Improvement of market structure
arbitration
...before experiencing a tremendous boom
Rapid growth of AuM in
hegde fund investments
reflects structural shift in
institutional asset allocation
Strong fund inflows have
increased correlation of
hedge fund returns with
equity markets
Hedge fund investments
should generate yearly
returns of 7-9% in USD
over the long-term
0
400
800
1200
1600
2000
1990
1992
1994
1996
1998
2000
2002
2004
2006
Q2
2007
Estimated assets managed by hedge funds
USD billion
When did private equity first appear?
Columbus‘ expeditions
Hanseatic League
-venture capital to
merchants
Private Equity: rebirth of the old model...
Private Equity in the past decades were boosted again to off-set stock exchange
limitations
Listed Companies
Private Equity
Focus on quarterly profits
Long term focus
Diversification of Assets
Focus on core business
Management – shareholder missmatch
Alignment of interest
„
US stock market‘s short term view saps US capitalism“,
...that accelerated in the past years
80
160
240
320
400
100
200
300
400
500
EU & US buyout deal volumes
Number of EU & US buyout deal (r.h.s.)
Leverage buyouts
– restructuring of established companies
Venture Capital
– invest in new companies / sectors
Two Kind of Private Equity deals
Shinsei Bank
Jack Wolfskin
TXU
Hertz
Sequoia Capital
Apple
Cisco Systems
Amgen
Situation now: Alternative Investments reach about 8%
of world equity market capitalization (USD 3,500bn)
Private Equity
40%
Real Estate
...with large institutions taking a significant stake
0%
5%
10%
15%
20%
25%
30%
35%
Calpers
Calsters
ABP
Ontario
Teachers
New York
State Common
Commodities
Real Estate
Hedge Funds
Private Equity
% of Total Asset
2%
4%
6%
8%
10%
12%
2003
2005
2007 forecast
% of total assets allocated to alternative investments (Europe)
Po co fundusze hedgingowe? Zdywersyfikowane inwestycje
w te fundusze przynosz
ą
bardziej stabilne stopy zwrotu
50
100
150
200
250
300
350
400
450
500
CS Tremont index
SMI with dividends
S&P 500 total return index
Indexed performance in USD (31.12.93 = 100)
...and offer diversification potential
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
Historical returns in % (1994-2007)
Private Equity: LBO boom is over, but we still see good
opportunities in selected markets
The Golden Age of large
LBOs is over, but market
weakness reopens
opportunities in small/mid
caps
We see regional
opportunities in Asia and
to some extent in Europe
The recent credit market
turmoil should refocus
attention on neglected
venture capital
Source: S&P LCD Review Europe
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Jan 98
Mrz 02
Mai 06
1st Lien/EBITDA
2nd Lien/EBITDA
Other Debt/EBITDA
Ratio
Private Equity usually outperforms listed equities …
–
Private equity earns an illiquidity premium
–
Corporate control – active investment strategy & specialization (sector know-how)
–
Superior growth potential (VC)
–
Leverage
4
6
8
10
12
14
16
10 Yr
20 Yr
Annualized returns in %
… but not all Private Equity funds are equal
–
Market is very illiquid
–
Selection of an investment is rather labour-intensive
–
The selection of a private equity fund manager is a very important task
35.70
25.00
24.80
10.70
10.30
9.80
1.60
1.90
2.00
-7.50
-7.30
-7.80
-10
-5
0
5
10
15
20
25
30
35
40
10 years
15 years
20 years
1st Quartile
2nd Quartile
3rd Quartile
4th Quartile
Przykład dywersyfikacji portfela przy wykorzystaniu
private equity
6%
7%
8%
9%
10%
11%
12%
Equities - Bonds
Equities - Bonds - Private Equity
Historical returns in % (1994-2006)
Keypoints
Major Alternative Investment classes are: Real Estate, Hedge Funds,
Private Equity
Alternative Investments experienced tremendous growth in assets over the
last years
Alternative Investments offer diversification to portfolios thanks to low
correlation to traditional asset classes
An optimal asset allocation would include 20% alternative investments:
12% 30% 20% Cash Bonds Equities
Total Return/ Alternative Investments
Performance of alternative asset classes
80
100
120
140
160
180
200
220
240
Indexed performance (31.01.04 = 100)
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