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Copyright © 2003 Hillsdale Investment Management Inc.
Hillsdale Investment Management Inc.
“Why Buy Hedge Fundsin a Rising Market”
Strategy Institute Hedge Fund Conference
December 9, 2003
December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 2
Why Buy Hedge Fundsin a Rising Market ?
1. Alpha lasts longer than beta and market timing is difficult.
2. Fixed risk is good.
3. Lower risk is better,
4. Efficient portfolios are best.
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 3
Finding Alpha,Managing Beta
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Alpha or Beta?(value-added) (market risk)
Historically, the market has always been able to provide a hot fund, or a strong sector trend, but finding a fund with consistent long term performance and an ability to navigate through a succession of market environments is very difficult.
ALPHA is a fund’s return “net of risk” and is also characterized as that portion of the manager’s/fund’s returns generated, in excess of the overall market.
BETA, on the other hand, is the measure of how the fund’s returns track, in relation to the overall market.
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 5
The “Monkey Return”© John Schmitz
• Always ask yourself what is the “monkey return” for any given strategy
– If a monkey ran the strategy, what return would he achieve (i.e., the random active security selection and market timing return)
• E.g., The monkey return for a Market Neutral Equity strategy is the T-bill rate (less base fees and expenses)
• For a US long-short strategy which is on average 50% net exposed to the US equity markets, the monkey return is 50% of the S&P 500 return plus 50% the US T-bill rate
• Only give the portfolio manager “credit” for his or her ability to generate returns in excess of the monkey return
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Canadian Mutual FundsTop Ten for 2003
RBC Precious Metals 117.6 73.7 424.4 -59.3 1.12 39.5
Dynamic Global Precious Metals 106.2 60.9 316.5 -52.3 0.92 32.2
Altamira Precious & Strategic Metals 105.5 50.7 242.6 -68.0 0.95 33.3
Sprott Gold & Precious Metals 103.4 n/a n/a n/a n/a 0.0
Dynamic Power Hedge 100.6 n/a n/a n/a n/a 0.0
Dynamic Global Resource 97.2 28.3 125.4 -63.7 1.05 23.9
AGF Precious Metals 96.0 57.1 287.5 -71.7 0.94 33.3
Dynamic Cdn Precious Metals 86.4 59.9 308.5 -61.4 1.03 34.3
CIBC Precious Metals 81.3 50.1 238.2 -65.0 0.77 26.0
S&P/TSX Median Gold Stock 86.5
Returns (%) Beta Std. Dev. (%)
1 Yr 3 Yr Best 3 Yrs Worst 3 Yrs 3 Yr 3 Yr
1 Year Returns
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 7
Canadian Mutual FundsTop Ten for 1999
Talvest China Plus 203.6 24.1 -1.3 229.2 -51.3 0.89 21.1
Excel India 202.4 67.5 -1.2 17.8 -69.5 0.78 25.3
AIM Global Technology 200.3 18.0 -38.6 607.8 -85.1 1.15 45.0
AGF Aggressive Growth 195.1 12.6 -25.1 554.7 -75.5 0.88 23.9
Altamira e-business 190.2 16.9 -36.1 2.6 -87.1 0.9 36.4
Cda Pacific Basin (KBSH) 177.6 13.0 -25.4 191.3 -75.6 1.22 23.2
Clarica MVP Asian Pac RSP 177.2 11.6 -23.3 187.3 -73.2 1.24 22.2
Altamira Sci& Tech 175.5 15.3 -39.7 712.7 -84.9 1.12 44.3
Talvest Global Sci & Tech 171.8 21.3 -41.2 671.5 -84.5 1.13 44.7
Elliot & Page Asian Growth 159.0 11.1 -8.7 99.1 -60.2 1.03 19.1
Returns to 2003 (%) Beta Std. Dev. (%)
1999 1 Yr 3 Yr Best 3 Yrs Worst 3 Yrs 3 Yr 3 Yr
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“Most of academic finance is teaching that you can’t earn 50
percent a year without some risk of losing a lot of money.”
William Sharpe
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Reducing &Controlling Volatility
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Good Hedge Funds Offer A Consistent Risk Profile …
0
5
10
15
20
25
30
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Risk (annualized standard deviation)
Ann
ualiz
ed R
etur
n
TSE
NASDAQMarketNeutral
AggressiveHedged
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… and a Consistent Return Profile(12 months)
Mkt Ntl
Agg Hedged
TSE 300
NASDAQ
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Maximum Return
Maximum Drawdown
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Maximizing Risk-Adjusted Returns
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0
1
2
3
4
5
6
7
8
-0.99 -0.80 -0.61 -0.42 -0.23 -0.04 0.15 0.34 0.53 0.72 0.91
The Value of Non-Correlation
In a multi-asset class portfolio, the greater the negative correlation between asset classes, the greater the contribution to reducing risk. This relationship is notlinear.
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Market Neutral9% ± 10
Long Equity10% ± 10
Blend9.5% ± 5
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
30 Years
A Non-correlated Return Profile19% ± 10
Use leverage to increase returns
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Hedge FundMechanics
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Market Neutral Equity Return Mechanics
Particulars -40% -20% -10% 0% 10% 20% 40%
Long Return -40% -20% -10% 0% 10% 20% 40%
Add: Alpha (1)6% 6% 6% 6% 6% 6% 6%
Net Long Return -34% -14% -4% 6% 16% 26% 46%Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Gross Long Return -34% -14% -4% 6% 16% 26% 46%
Short Return 40% 20% 10% 0% -10% -20% -40%Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6%
Net Short Return 46% 26% 16% 6% -4% -14% -34%Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Gross Short Return 46% 26% 16% 6% -4% -14% -34%
Add: Net Cash Return on Shorts (2)1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Gross Fund Return 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%Less: Mgmt. & Admin Fees 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Net Return before Perf Fees 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Less: Performance Fees @ 20% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Net Return After ALL Fees 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%
Market Returns
Market Neutral Equity Products
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Long Short Equity Return Mechanics
Particulars -40% -20% -10% 0% 10% 20% 40%
Long Return -40% -20% -10% 0% 10% 20% 40%
Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6%
Net Long Return -34% -14% -4% 6% 16% 26% 46%
Leverage 1.70 1.70 1.70 1.70 1.70 1.70 1.70
Gross Long Return -58% -24% -7% 10% 27% 44% 78%
Short Return 40% 20% 10% 0% -10% -20% -40%
Add: Alpha (1)
6% 6% 6% 6% 6% 6% 6%
Net Short Return 46% 26% 16% 6% -4% -14% -34%
Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Gross Short Return 46% 26% 16% 6% -4% -14% -34%
Add: Net Cash Return on Shorts (2) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Gross Fund Return -11.3% 2.7% 9.7% 16.7% 23.7% 30.7% 44.7%Less: Mgmt. & Admin Fees 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Net Return before Perf Fees -13.8% 0.2% 7.2% 14.2% 21.2% 28.2% 42.2%Less: Performance Fees @ 20% 0.0% 0.0% 1.4% 2.8% 4.2% 5.6% 8.4%
Net Return After ALL Fees -13.8% 0.2% 5.8% 11.4% 17.0% 22.6% 33.8%
Market Returns
Long Short Equity Products
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Portfolio Construction
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Strategy Design
Hillsdale strategies are designed around a proprietary approach, known as “The 5 Dimensions of Investment Measurement”©. Products are created with these 5 distinct measurements in mind:
1. Return2. Risk (Volatility)3. Correlation4. Drawdown5. Time Underwater
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Return Volatility Correlation DrawdownTime
Underwater BETA# of
StocksTarget Wgts.
Net GIC Wgts.
Net Mkt Exp. Leverage
Market Neutral
Cdn Market NeutralTBills + 5-8% 6-8% 0 Max 10% 6-9 mths 0 100-200 1-2% 0% 0% Max 1X
Long Short Equity
Cdn/US Aggressive HedgeBenchmark
+ 8% 14-16% 40-60%1/2 of Market
1/2 of Market 0.5 80-100 1-4% +- 15% 40-80% Max 2X
Performance Equity
Cdn/US PerformanceBenchmark
+ 4% 16-20% 80%Less than Market
Less than Market 1.0 40-60 1-4%
Max 20% 100% 0
Success Measurement Objectives Other Risk Controls
Strategy / Product
Hedge Fund Strategy Profiles
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 21
Portfolio Optimization
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Alternate Allocations for Risk Tolerance Ranges
8 Year Analysis to
TSXMSCI
World IndexSMcL MT
Bond S&P 500
TRI
Toronto Real Estate
Board Cdn 90 Day
T-Bills
Cdn Market Neutral Equity
Cdn Performance
Equity
Cdn Aggressive
Hedged Equity
Annualized Net Return
Annualized Risk
Information Ratio
Portfolio Beta
Best 12 Mth Return
Worst 12 Mth Draw
7.5% Volatility
7.5% Risk - Allocation #1 10% 0% 20% 10% 10.0% 10.0% 10.0% 10.0% 20.0% 11.8% 7.5% 1.58 0.35 37.4% -7.3%
7.5% Risk - Allocation #2 10% 10% 20% 0% 20.0% 0.0% 10.0% 10.0% 20.0% 11.4% 7.5% 1.52 0.34 35.8% -7.1%
8.0% Volatility
8.0% Risk - Allocation #1 10% 0% 30% 0% 0.0% 10.0% 10.0% 20.0% 20.0% 13.2% 8.0% 1.65 0.35 40.9% -5.6%
8.0% Risk - Allocation #2 10% 0% 10% 10% 30.0% 0.0% 10.0% 20.0% 10.0% 12.0% 8.0% 1.50 0.37 37.4% -6.5%
8.5% Volatility
8.5% Risk - Allocation #1 0% 0% 20% 0% 10.0% 0.0% 20.0% 20.0% 30.0% 15.1% 8.5% 1.77 0.29 46.1% -6.7%
8.5% Risk - Allocation #2 10% 0% 10% 10% 0.0% 10.0% 30.0% 20.0% 10.0% 13.7% 8.5% 1.61 0.39 43.7% -9.6%
Current Portfolio Mix 25% 8% 38% 15% 10.0% 5.0% 0.0% 0.0% 0.0% 7.6% 8.3% 0.93 0.44 27.4% -12.1%
Proposed Portfolio Mix 20% 5% 30% 13% 10.0% 2.5% 7.5% 2.5% 10.0% 9.7% 7.9% 1.24 0.41 33.1% -9.4%
Proposal to Sample Portfolio
October-03
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 23
-0.50 0.00 0.50 1.00
Correlation vs. TSX
Portfolio Correlation Analysis
Cdn 90 Day T-Bills
Toronto Real Estate Board
Cdn Market Neutral Equity
SMcL MT Bond
Cdn Aggressive Hedged Equity
Cdn Performance Equity
S&P 500 TRI
MSCI World Index
TSX
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The Impact of Non-Correlation• Existing Portfolio Profile
– Return 7.7%, Vol. 8.3%, Beta = 0.44 => IR = 0.93
• Portfolio Modifications– Sell
• 5% TSX: Profile = 8.4% Ret / 17.8% Vol / Correl. = 1.00• 3% MSCI: Profile = 3.3% Ret / 15.5% Vol / Correl. = 0.81• 7% SM Bond: Profile = 7.5% Ret / 4.6% Vol / Correl. = 0.20• 3% S&P500: Profile = 8.8% Ret / 17.1% Vol / Correl. = 0.79• 3% C$ TBills: Profile = 4.0% Ret / 0.3% Vol / Correl. = -0.08
– Purchase• 8% Cdn Market Neutral: Profile = 14.2% Ret / 9.6% Vol / Correl. = 0.08• 3% Cdn Small Cap: Profile = 21.1% Ret / 17.5% Vol / Correl. = 0.77• 10% Cdn Long Short: Profile = 18.6% Ret / 15.9% Vol / Correl. = 0.45
• New Portfolio Profile– Return 9.7%, Vol. 7.9%, Beta = 0.41 => IR = 1.24
• VALUE ADDED: – Return +200 bps, Vol. -40 bps, Beta -0.03, IR + 0.31 (+33%)
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 25
Hillsdale Investment Management Inc.
Client Portoflio AnalysisClient:
Date: FX Rate: 1.3500
H O L D I N G S C$ EquivalentPortfolio
% Benchmark CAN$ US$ C$ EquivalentPortfolio
% Benchmark
Cash & Equivalents 50,000 5.0% (25,000) - 25,000 2.5%
Cash - 0.0% C$ TBills - - - 0.0% C$ TBills
Tbills / MM Funds 50,000 5.0% C$ TBills (25,000) - 25,000 2.5% C$ TBills
GICs - 0.0% C$ TBills - - - 0.0% C$ TBills
Fixed Income 375,000 37.5% (75,000) - 300,000 30.0%
Short Term Bonds - 0.0% - - - 0.0%
Mid - Long Term Bonds 375,000 37.5% SM MT (75,000) - 300,000 30.0% SM MT
Equities (Long Only) 475,000 47.5% (75,000) - 400,000 40.0%
Canadian Equities 250,000 25.0% TSX (25,000) - 225,000 22.5% TSX
US Equities 150,000 15.0% (25,000) - 125,000 12.5% S&P
Foreign Equities 75,000 7.5% MSCI (25,000) - 50,000 5.0% MSCI
Alternative Investments 100,000 10.0% - - 100,000 10.0%
Real Estate 100,000 10.0% TREB - - 100,000 10.0% TREB
Private Equity - 0.0% CPE - - - 0.0%
Other - 0.0% CVC - - -
Hedged Investments - 0.0% 175,000 - 175,000 17.5%
Hillsdale - 0.0% 175,000 - 175,000 17.5%
Other Hedge - 0.0% - - - 0.0%
TOTAL PORTFOLIO 1,000,000$ 100.0% -$ -$ 1,000,000$ 100.0%
Return Risk I.R.(1) Return Risk I.R.(1)
Return / Risk Profile 7.7% 8.3% 0.93 9.7% 7.9% 1.24Beta 0.44 (vs. TSX) Beta 0.41
Proposed PortfolioRecommended Add'ns / Delet'ns
Sample PortfolioOctober-03
Current Portfolio Mix
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Efficient Frontier with Portfolio Weighted Options8 Years to Oct 2003
S&P 500 TRI
Cdn Market Neutral Equity
Current Portfolio Mix
TSX
MSCI World Index
SMcL MT Bond
Toronto Real Estate Board
Cdn 90 Day T-Bills
Cdn Performance Equity
Cdn Aggressive Hedged Equity
Proposed Mix
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0% 2% 4% 6% 8% 1 0 % 12% 14% 16% 18% 20%
Volatility (Standard Deviation)
Ann
ualiz
ed R
etur
n
Efficient Frontier
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 27
Chris Guthrie, CFA, Presidentcguthrie@hillsdaleinv.com
Arun Kaul, CFA, COOakaul@hillsdaleinv.com
John Loeprich, SVP Private Client Divisionjloeprich@hillsdaleinv.com , (416) 913-3922
John Motherwell, VP Institutional Marketingjmotherwell@hillsdaleinv.com , (416) 913-3923
________________________________________________________________________________________________________________________________ ______
Information: www.hillsdaleinv.com
C O N T A C T S
December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 28
Appendices
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Canadian Performance Equity:Performance
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Canadian Aggressive Hedged Equity: Performance
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Canadian Market Neutral Equity Performance
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Hillsdale Performance Record
To change reports, c l ick on tab)
Sort Order : 3 yr % (To change, c l ick co lumn heading once to sor t up, aga in to sor t down)
Update Fundlis t
A s o f October 31 , 2003
F u n d n a m e 5 S tar Rating Volat i li ty 1 y r
% 3 yr %
5 y r %
10 yr %
15 yr %
Incep (mm/yy)
Charts /Info
Hi l lsdale Cdn Per fo rmance Equ i t y ( 11 /14 )
C S M L O 4 0 . 5 7 13.40 23.19 2 0 . 6 5 (01/96)
Hi l lsdale Cdn Aggress ive H e d g e d A ( 11 /14 )
A L T A V + 2 1 . 7 0 8.82 1 5 . 5 7 (12/99)
Hi l lsdale Cdn Market Neut ra l Equ A (11/14)
A L T L O 0.94 0.99 4.60 ( 04 /00 )
S&P/TSX To ta l Return ( 11 /17 ) 2 6 . 8 4 - 5.29 6.28 8.16 8.22
To delete a fund from your Personal Fundl ist , uncheck the box at the lef t and then cl ick Update Fundl is t .
Update Fundlis t
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December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 33
(1) Advisors have the option of choosing the published trailer fee, with no share of the performance fee -OR- the published rate less 0.25% plus up to a 25% share of the performance fee.
(2) Performance fees are charged to the fund based on 20% of gross returns (subject to a high-water mark). Advisors share of the performance fee (should you choose this option) is up to 25%.
(3) Minimum investment for hedge funds is C$ 50,000 (US$ 35,000) for purchases by an accredited investor through a financial advisor.
YesC$ 150,000YesYes1.00%2.00%0%-5%Front End
HIL 220HIL 221
Canadian Market Neutral Equity
NoUS$ 100,000YesYes1.00%2.00%0%-5%Front End
HIL 120HIL121
U.S. Aggressive Hedged Equity
YesC$ 150,000YesYes1.00%2.00%0%-5%Front End
HIL 200HIL 201
Canadian Aggressive Hedged Equity
NoUS$ 100,000YesYes1.00%2.00%0%-5%Front End
N/AU.S. Performance Equity
YesC$ 150,000YesYes1.00%2.00%0%-5%Front End
HIL 240HIL 241
Canadian Performance Equity
RRSPEligibleMin. Invest.
High-waterMark
Perf . Fee
Trailer Fee
Mgmt FeeCommission
SalesOption
FundSERV Codes
Fund Name
Fees & Compensation
December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 34
Why Hillsdale ?
• A LEADER in alternative investment management strategies.
• Rational & Systematic portfolio management decisions.
• Disciplined commitment to risk control.
• Full range of institutional quality hedge fund products to match client risk/return profiles.
• Non-correlated products provide TRUE portfolio diversification.
• Competitive compensation structure which allows Advisor to share in the profits of the fund.