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FINANCIAL CONVERGENCE

FINANCIAL CONVERGENCE. PRESENTATION TO CADC 2005 AUGUST 18, 2005 PIERRE SAINT-LAURENT, CFA, CAIA. Hedge fund TCI to launch long-only investment fund By Norma Cohen Financial Times| August 11 2005. The Children's Investment Fund (TCI), is to form a long-only investment fund….

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FINANCIAL CONVERGENCE

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  1. FINANCIAL CONVERGENCE PRESENTATION TO CADC 2005 AUGUST 18, 2005 PIERRE SAINT-LAURENT, CFA, CAIA

  2. Hedge fund TCI to launch long-only investment fund By Norma Cohen Financial Times| August 11 2005 The Children's Investment Fund (TCI), is to form a long-only investment fund…. The move is part of a growing trend among hedge fund groups to diversify their product mix, and signifies an increasingly blurred distinction between hedge funds, traditional fund managers and private equity investors…

  3. SOME ISSUES • 21st CENTURY: LOWER RISK PREMIA • ACTUARIAL DEFICITS • EVER-INCREASING (DOWN) MARKET SYNCHRONIZATION • CHEAP (ER) BETA • TALENT RARITY CHANGE IN OUTLOOK PARADIGM SHIFT?

  4. MARKET DRIVERS • 21st CENTURY: LOWER RISK PREMIA AND FI YIELDS • ACADEMIC DEBATE AND RESEARCH • OPERATIONAL CHALLENGE • ACTUARIAL DEFICITS • WAKEUP CALL • NEW OUTLOOK ON ATTAINING OBJECTIVES • INTEGRATION OF PORTFOLIO MANAGEMENT TO NEW ASSETS

  5. TECHNICALITIES • EVER-INCREASING MARKET SYNCHRONIZATION • CHAN, GETMANSKY, HAAS AND LO (2005): LOWER EXPECTED RETURNS, INCREASING SYSTEMIC RISK • ASNESS (2005): HEDGE FUNDS INCREASE ‘FINANCIAL BIODIVERSITY’ AND CONTRIBUTE TO FINANCIAL MARKETS STRENGTH • RISK MANAGEMENT: A SAFER WORLD?

  6. DR. HEDGE ANOTHER LIGHT TRADING DAY LITTLE do THEY KNOW ... WITH MY ORBITING DERIVATIVES gun, I can destabilize ANY market I please.

  7. WHAT’S CHANGED • CHEAP (ER) BETA • CORE-SATELLITE APPROACH • BREADTH+DEPTH = INDEX (SYNTHETIC) • FOCUS ON ALPHA, ALPHA PORTING, ETC. • HIGH ALPHA IS NOT CHEAP • HIGH ALPHA IS NOT COMMON

  8. KPMG SAYS • “IT IS EVIDENT THE INDUSTRY CERTAINLY DOES NOT HAVE THE INFRASTRUCTURE TO SUPPORT THE WALL OF MONEY FROM INSTITUTIONAL CAPITAL.” • OPERATIONAL RISK BECOMES A KEY RISK IN FUTURE • QUALITY CAPACITY TO BECOME SCARCE, ACCORDING TO FoHF MANAGERS SURVEYED • FINDING ALPHA BECOMES DIFFICULT/EXPENSIVE (WHEN NOT CAPPED)

  9. CONVERGENCE ISSUES • STREAMLINING THE ANALYTICS • COMMINGLING ALTERNATIVE ASSETS IN LONG-ONLY PORTFOLIOS • DIFFERENT ASSETS, DIFFERENT REPORTING, DIFFERENT METRICS • OPTIMAL ALTS ALLOCATION BETWEEN 0 AND 100% (!?) • STREAMLINING THE LANGUAGE • COMMITTEE COMFORT ZONE • FIDUCIARY ROLE AND RESPONSIBILITY

  10. CONVERGENCE ISSUES • DOUBLE STANDARDS IN • TRANSPARENCY • LIQUIDITY • LEVERAGE • SHORT POSITION ACTIVITY • LEGAL DOCUMENTATION • ANALYTICS REQUIRED • TANSTAAFL

  11. CONVERGENCE ISSUES • REGULATORY CONCERNS • HUGE DEBATE: MORE REGULATION? • IF SO, HOW? • WHAT WILL REGULATION ACCOMPLISH? • SEC REGISTRATION SEEN BY SEVERAL AS A ‘THICKER STACK OF PAPER’

  12. DR. HEDGE QUICK, REGULATOR BOY- WE HAVE TO ACT SENSORS INDICATE SUSPICIOUS ACTIVITY in SECTOR 5. After a spike in volatility, Markets QUICKLY Stabilized TODAY... While Equilibrium Man AND Regulator Boy are diverted, I can unleash the real threat. My plan is WORKING

  13. AS A RESULT OF ALL THIS… • PRIVATE EQUITY PLAYERS MOVING INTO HEDGE FUNDS (e.g., Carlyle) • HEDGE FUNDS INVESTING IN PRIVATE EQUITY (e.g., DE Shaw, Hamilton Lane) • HEDGE FUNDS GOING INTO LONG-ONLY (e.g., TCI) • HOWEVER- HENRY KRAVIS: "HEDGE FUNDS KNOW HOW TO PICK STOCKS AND MAKE MONEY, BUT THAT IS NOT THE SAME THING AS CREATING VALUE THROUGH OWNERSHIP OF AN ASSET OVER THE LONG TERM IN A HANDS-ON WAY. THEY LACK THE RIGHT SKILLS OR EXPERIENCE TO MAKE A SUCCESS OF TURNING AROUND OR BUILDING PRIVATE COMPANIES."

  14. THANK YOU. AssetCounsel Inc. Montreal / Toronto Tel: (514) 998-8076 /(416) 890-0271 Fax: (514) 221-3067 /(416) 352-0127 PSL@AssetCounsel.com

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