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Consultiva Internacional, Inc. Third Annual Investment Management Conference Caribe Hilton Hotel San Juan, Puerto Rico Ricardo Cortez President, Private Client Group 15 November 2002. The Torrey Funds 505 Park Avenue New York, NY 10022 U.S.A. (212) 644.7800.

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slide1

Consultiva Internacional, Inc.

Third Annual Investment Management Conference

Caribe Hilton Hotel

San Juan, Puerto Rico

Ricardo Cortez

President, Private Client Group

15 November 2002

The Torrey Funds

505 Park Avenue

New York, NY

10022 U.S.A.

(212) 644.7800

The Torrey Funds (Europe)

40 Portman Square

London W1H 6LT

United Kingdom

+44 (207) 947.8780

alternative investments
Alternative Investments
  • Who employs them?
    • Individuals
    • Endowment Funds
    • Pension Funds
    • Others
  • Since when?
      • 1949: Alfred W. Jones created the first vehicle, employing a long/short strategy.
their role in asset allocation
Their Role in Asset Allocation

Dollar-Weighted Asset Mix

Alternative Investments

23%

Cash/short term

1%

InternationalEquities

14%

Fixed Income

21%

Domestic Equities

41%

Source: Commonfund, 2001

slide4

Two Different Long/Short Strategies

  • Long/Short Equity Style Investment
  • Variable Net Exposure
  • Securities and Sectors Selected for Out performance
  • Generally Only Long and Short Equity Investing
  • Seeks to Provide Enhanced Equity Equivalent Returns

Market-Neutral Style Investment

  • Long/Short Equal Weighting
  • Securities Often Paired for Each Sector
  • Often Involves Bond Investments and Arbitrage Strategies
  • Seeks to Provide Enhanced Bond Equivalent Returns

1

slide5

6,000+ Universe

1st Screen 840

300 Candidates

50 Focus List

25 Finalists

Portfolio 8-15

Altvest

Hedegeworld

MARHedge

Prime Brokers

Clients

Hedge Fund Managers

M O N I T O R I N G

Torrey Associates, LLC – Manager Selection

Database Searches

Industry Contacts

2

slide6

Inadequate Background

Long Only

Short Only

Highly Levered Debt or Equity

Extreme Use of Derivatives

Quantitative “Black Box”

Macro

Foreign Exchange

Torrey Associates, LLC – Manager Selection

6,000+ Universe

1st Screen 840

300 Candidates

50 Focus List

25 Finalists

Portfolio 8-15

Screen Out Strategies

M O N I T O R I N G

3

slide7

M O N I T O R I N G

Torrey Associates, LLC – Manager Selection

6,000+ Universe

1st Screen 840

300 Candidates

50 Focus List

25 Finalists

Portfolio 8-15

Managers with a fundamental/analytical background and approach

Documented experience at Short Selling

Typical manager in first three years of own operation

Low leverage

Substantial portion of liquid net worth invested in fund

Reputable service providers

Potentially Interesting Candidates

4

slide8

Definable investment “EDGE”

Assess analytical capabilities

Review risk management policies and implementation

Minimum 10 years of investment experience

Qualitative/Quantitative analysis

Torrey Associates, LLC – Manager Selection

6,000+ Universe

1st Screen 840

300 Candidates

25 Finalists

Portfolio 8-15

50 Focus List

In Person Interviews

By Principals

Internal Review

M O N I T O R I N G

5

slide9

6,000+ Universe

300 Candidates

25 Finalists

1st Screen 840

50 Focus List

Portfolio 8-15

M O N I T O R I N G

Torrey Associates, LLC – Manager Selection

Reference Checks

Due Diligence Checks

Internal Analytics: Correlation and Portfolio Optimization

Short List

6

slide10

6,000+ Universe

50 Focus List

25 Finalists

1st Screen 840

300 Candidates

Portfolio 8-15

M O N I T O R I N G

Torrey Associates, LLC – Manager Selection

Portfolio Construction

Selection of managers results in what Torrey believes is a well diversified portfolio

7

slide11
Should seek to diversify portfolios by investment approach and risk exposure

Diversification among investment approaches

Generalists: Strive for a balance between value and growth

Specialists: Each manager weighting generally limited to <= 20%

Diversification of managers by risk exposure

Net market

Sector

Style

Portfolio Construction - Diversification

8

alternative strategy returns adjusted for survivor bias by age decile 1994 2000

y= -0.0356Ln(x) + 0.2729

R2= 0.6542

  • Source: CrossBorder Capital, TASS Tremont
Alternative Strategy Returns(Adjusted for “Survivor” Bias)By Age Decile, 1994-2000

9

slide13

Incentive to Perform Generally Decreases as Fund Size Increases

Hypothetical $50 million fund

20% Annualized Returns

Year

Assets

Management Fee

1% of Assets

Incentive Fee

(20% of Appreciation)

Fund commenced

$50,000,000

-

-

1

$57,500,000

$500,000

$2,000,000

2

$66,125,000

$575,000

$2,300,000

3

$76,043,750

$661,250

$2,645,000

4

$87,450,313

$760,438

$3,041,750

5

$100,567,859

$874,503

$3,498,013

6

$115,653,038

$1,005,679

$4,022,714

7

$133,000,994

$1,156,530

$4,626,122

Total Fees

$5,533,400

$22,133,598

$27,666,998

This table is for illustrative purposes only and is based on the assumption of a hypothetical $50 million in initial assets, 20% annualized returns, 1% management fee and 20% incentive fee paid in arrears.  The table is a hypothetical presentation and cannot be read as a definitive/conclusive study.  There can be no assurances that actual fees and expenses will be identical to those of any actual fund.

10

slide14

Incentive to Perform Generally Decreases as Fund Size Increases

This table is for illustrative purposes only and is based on the assumption of a hypothetical $1 billion in initial assets, 0% annualized returns, 1% management fee and 20% incentive fee paid in arrears.  The table is a hypothetical presentation and cannot be read as a definitive/conclusive study.  There can be no assurances that actual fees and expenses will be identical to those of any actual fund.

11

slide15

S&P 500 DRI

The Torrey Development Fund, L.P.

The Torrey Development Fund: An Example

Five Years Ended 9/30/02

S&P 500 DRI

The Torrey Development Fund, L.P.

The Torrey Development Fund, L.P.

The Torrey Development Fund, L.P.

S&P 500 DRI

S&P 500 DRI

(i) Past performance is not necessarily indicative of future returns; (ii) Performance of The Torrey Development Fund, L.P. is net of all fees and expenses; (iii) Performance may differ based upon hot issue eligibility and individual dates of admission; and (iv) See Appendix A for more detail with respect to the indices used in this exhibit.

12

slide16

Key to “Indexes 1 & 2” in Following Charts

  • 1. “Index 1” is comprised of 33.33% Russell 1000 Growth Index, 33.34% Russell 1000 Value Index, and 33.33% Russell 2000 Index.
  • “Index 2” is comprised of 25% each Torrey U.S. Strategy Composite, Russell 1000 Growth Index, Russell 1000 Value Index, and Russell 2000 Index.

14

slide17

HYPOTHETICAL ASSET ALLOCATED PORTFOLIO

TOTAL RISK REWARD ANALYSIS

INDEX 1 VS. INDEX 2*

3 YEAR PERIOD ENDING JUNE 30, 2002

U.S. EQUITY

ROR

STD DEV

ALPHA

BETA

R-SQUARED

INDEX 1

-5.55

20.37

5.78

1.12

0.98

-0.30

18.76

9.58

1.02

0.97

INDEX 2

S&P 500

-9.18

18.00

0.00

1.00

1.00

6

More Return

More Return

Less Risk

More Risk

4

4.158

90 DAY U.S. T-BILL

2

0

-2

-4

RATE OF RETURN

-6

-8

-9.179

S&P 500

-10

-12

-14

Less Return

Less Return

Less Risk

More Risk

-16

-2

0

2

4

6

8

10

12

14

16

18

20

22

24

STANDARD DEVIATION

* Past performance is not necessarily indicative of future returns. It should be noted that this represents Torrey U.S. Strategy Composite performance and does not reflect performance of an actual fund. See Appendix B for important disclosure related to the calculation of composite performance. See Appendix A for more detail with respect to the indices used in this exhibit. Please see Appendix C for statistical definitions. This is neither an offer to sell nor a solicitation to invest. Such offer or solicitation can only be made by a current Private Placement Memorandum. Risk Benchmark used for this analysis: S&P 500.

RISK BENCHMARK USED FOR THIS ANALYSIS: S&P 500

18

slide18

HYPOTHETICAL ASSET ALLOCATED PORTFOLIO

TOTAL RISK REWARD ANALYSIS

INDEX 1 VS. INDEX 2*

5 YEAR PERIOD ENDING JUNE 30, 2002

U.S. EQUITY

ROR

STD DEV

ALPHA

BETA

R-SQUARED

INDEX 1

4.12

20.81

0.69

1.05

0.95

7.95

19.07

4.09

0.95

0.93

INDEX 2

S&P 500

3.66

19.38

0.00

1.00

1.00

More Return

More Return

Less Risk

More Risk

8

7

6

RATE OF RETURN

5

90 DAY U.S. T-BILL

4.453

4

S&P 500

3.663

Less Return

Less Return

Less Risk

More Risk

3

-2

0

2

4

6

8

10

12

14

16

18

20

22

24

STANDARD DEVIATION

* Past performance is not necessarily indicative of future returns. It should be noted that this represents Torrey U.S. Strategy Composite performance and does not reflect performance of an actual fund. See Appendix B for important disclosure related to the calculation of composite performance. See Appendix A for more detail with respect to the indices used in this exhibit. Please see Appendix C for statistical definitions. This is neither an offer to sell nor a solicitation to invest. Such offer or solicitation can only be made by a current Private Placement Memorandum. Risk Benchmark used for this analysis: S&P 500.

19

slide19

HYPOTHETICAL ASSET ALLOCATED PORTFOLIO

TOTAL RISK REWARD ANALYSIS

INDEX 1 VS. INDEX 2*

8 YEAR PERIOD ENDING JUNE 30, 2002

(LIFETIME OF COMPOSITE)

U.S. EQUITY

More Return

More Return

13

Less Risk

More Risk

12.475

S&P 500

12

11

10

9

8

7

RATE OF RETURN

6

5

4.767

90 DAY U.S. T-BILL

4

3

2

1

0

Less Return

Less Return

-1

Less Risk

More Risk

-2

0

2

4

6

8

10

12

14

16

18

20

STANDARD DEVIATION

ROR

STD DEV

ALPHA

BETA

R-SQUARED

INDEX 1

11.61

17.88

-0.87

1.03

0.95

12.63

15.97

0.88

0.89

0.90

INDEX 2

S&P 500

12.48

16.99

0.00

1.00

1.00

* Past performance is not necessarily indicative of future returns. It should be noted that this represents Torrey U.S. Strategy Composite performance and does not reflect performance of an actual fund. See Appendix B for important disclosure related to the calculation of composite performance. See Appendix A for more detail with respect to the indices used in this exhibit. Please see Appendix C for statistical definitions. This is neither an offer to sell nor a solicitation to invest. Such offer or solicitation can only be made by a current Private Placement Memorandum. Risk Benchmark used for this analysis: S&P 500.

20

slide20

Concerns

  • Talent
  • Liquidity
  • Transparency
  • Regulation
  • Suitability
  • Scalability

21

appendix a glossary related to indices
Appendix A: Glossary Related to Indices

Russell Indices

Russell produces a family of 21 U.S. equity indexes. The indexes are market cap-weighted and include only common stocks incorporated in the United States and its territories. All indexes are subsets of the Russell 3000® Index, which represents approximately 98% of the investable U.S. equity market.

Russell 2000® IndexMeasures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $490 million; the median market capitalization was approximately $395 million. The index had a total market capitalization range of approximately $1.3 billion to $128 million.

Russell 1000® Growth IndexMeasures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000® Value IndexMeasures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

S&P 500 DRI Index

The S&P 500 is the Standard & Poor’s 500 stock index. It is an unmanaged market-value weighted index of 500 stocks selected to provide a broad indicator of price movement in the U.S. stock market. All dividends reinvested.

S&P 500 Index

The S&P 500 is the Standard & Poor’s 500 stock index. It is an unmanaged market-value weighted index of 500 stocks selected to provide a broad indicator of price movement in the U.S. stock market.

MSCI EAFE Index

An unmanaged capitalization weighted index that monitors the performance of stocks from Europe, Asia, and the Far East (11 countries total) and includes the reinvestment of dividends.

slide22

Appendix B: Disclosures

Please note that in reviewing the performance information contained in the charts relating to Torrey U.S. Strategy Composite: (i) The performance of Torrey U.S. Strategy Composite is not the performance of an actual fund. The composite represents the performance of all Torrey-affiliated investment vehicles during the relevant period that employed a U.S. investment strategy that is substantially similar to the strategy expected to be employed by Torrey U.S. Strategy Partners; (ii) The composite performance has not been verified by a third-party and does not comply with the standards established by the Association of Investment Management and Research (AIMR); (iii) The performance of the composite may future affect its performance was calculated net of fees and expenses of each investment vehicle. The estimated fees and expenses of Torrey U.S. Strategy Partners are expected to be less than the actual fees and expenses of the investment vehicles included in the composite; (iv) Potential investors in the offshore funds should consider that the performance may differ based upon legal eligibility to participate in “new issues”; (v) Performance for hedge funds in the composite for the year 2001 is generally unaudited and may be subject to change upon final audit.

appendix c statistical definitions
Appendix C: Statistical Definitions

Alpha

Measures the relationship between the fund performance and the performance of another fund or benchmark index and equals the excess return while the other fund or benchmark index is zero.

Beta

Measures the systematic market risk and is equal to the change in fund performance in relation to the change in fund or index performance.

R^2 (R-Squared)

The R^2 coefficient measures the extent to which the performance of the fund and the performance of another fund or benchmark index are related. More specifically, the R^2 coefficient measures how much of the funds variability can be explained by the performance of the selected fund or benchmark index. R^2 values should always range between 0 and1. R^2 values close to 0 indicate a minimal relationship between the performance of the fund and the performance of the fund or benchmark. R^2 values close to 1 indicate a strong relationship the fund performance and the performance of the selected fund or benchmark.

Standard Deviation(a measure of volatility of returns):

A statistical measure of risk which represents the variability of returns around the mean (average) return. The lower the standard deviation, the closer the returns are to the mean (average) value. Conversely, the higher the standard deviation, the more widely dispersed the returns are around the mean (average).

Source: Altvest/ Investor Force