MMI Fall 2004 10-20 330PM Bill Turchyn.ppt

The Money Management InstituteManaged Account Solutions 2004

The Role of Alternative Investments – What should you Expect?

October 20, 2004

William Turchyn, PartnerMariner Investment Group, Inc.

780 Third AvenueNew York, NY 10017

212-758-6200

M A R I N E R

M A R I N E R MARINER INVESTMENT GROUP, INC.

Mariner Investment Group, Inc.

Focused on seeking absolute returns, low volatility and low correlation to traditional markets with emphasis on non-directional fixed income and credit related investing

Mariner and related entities manage over $5 billion for public and corporate plan sponsors, university endowments, insurance companies, foundations, and wealthy families in multi-strategy portfolios

Principals formerly headed proprietary trading and risk management at firms including Bear Stearns, Goldman Sachs, UBS, and Morgan Stanley

Registered Investment Adviser with offices in New York, Boston, Tokyo

100% employee owned

TREMONT CAPITAL MANAGEMENT, INC. THE GLOBAL SOURCE FOR ALTERNATIVE INVESTMENT MANAGEMENT

THE FUTURE OF INSTITUTIONAL HEDGE FUND

INVESTING

The Money Management Institute: Managed Accounts Solutions 2004

The Roosevelt Hotel – New York, NY

October 20, 2004 Presented by:

Robert I. Schulman, Co-Chief Executive Officer

THE GLOBAL SOURCE FOR ALTERNATIVE INVESTMENT SOLUTIONS4


$50

$190

$350

$870

$750

$600

-$100

$100

$300

$500

$700

$900

1990 1995 1998 2002 2003 2Q 2004

Source of data: Tremont Capital Management, Inc.

Tot

al A

sset

s in

$B

illi

ons

PAST ASSET GROWTH OF HEDGE FUNDS



$950

$1,150

$1,460

$1,850

$2,350

$500

$1,000

$1,500

$2,000

$2,500

2004 2005 2006 2007 2008

Source of data: Tremont Capital Management, Inc.

Tot

al A

sset

s in

$B

illi

ons

FUTURE ASSET GROWTH OF HEDGE FUNDS



GLOBAL HEDGE FUND INVESTORS

Not a U.S. Phenomenon; In Fact, U.S. is Behind

Family Offices

High-Net-Worth Individuals

Fund of Funds

Private Banks (United States and European)

U.S. Endowments and Foundations

Insurance Companies (Domestic and Offshore)

Pension Plan Sponsors Worldwide



Client 2003 2008Growth

Annualized

HWN Individuals 307.0 936.4 25.0%

Fund of Funds 145.0 442.0 25.0%

Endowments 63.7 218.9 28.0%

Foundations 61.6 203.6 27.0%

Corporate 65.3 271.8 33.0%

Public Funds 82.5 272.4 27.0%

Source: Tremont Capital Management, Inc.

INDUSTRY GROWTH FORECAST



INDUSTRY GROWTH FORECAST DRIVEN BY

CLIENT DEMAND

The industry project global hedge fund assets will quadruple by 2010; the adoption rate will rise from 1.2% to 3.0% of global high net worth individual (HNWI) and institutional assets.

An entire industry will be created out of the anticipation, identification, and measurement of hedge fund process and performance.

The industry will continue to embrace FoHFs, which enable an investor to diversify exposure to a range of hedging styles. Registered FoHFs will permit sponsors to distribute hedge funds to a wider group of private and institutional investors.

Pensions and public plans worldwide will asset allocate to this emerging asset class.

The traditional advisor is stuck; Beta is everywhere, and Alpha is scarce.

Source: Putnam Lovell NBF



HEDGE FUNDS’ VALUE PROPOSITION IN THE

PORTFOLIO

More consistent, risk-adjusted returns

Absolute return goals are not reliant on the return of equity markets

Reducing agents of market volatility when blended into a traditional portfolios

Excellent diversifier because of low correlation with both traditional equity and bond markets

Investors can choose among different risk and return profiles ranging from enhanced cash to very aggressive

Emergence of risk management tools



RETURN SOURCES

Stock Market

Shape of Yield Curve

Credit Spreads

Correlations

Interest Rates

Volatility



S&P 50030.0%

Russell MidCap

7.5%

LehmanInterm Govt/Credit

25.0%

Russell 20007.5%

CSFB/Tremont Market Neutral Index 15.0%

CSFB/Tremont Long/Short

Index 15.0%

S&P 50040.0%

Russell 2000 10.0%

RussellMidCap 10.0%

Lehman Intermediate Govt/Credit 40%

5.50 Years Ending 6/30/2004 ROR Std. Dev SharpeMaximum

Drawdown

Traditional Long Only 4.46% 9.60% 0.13 -19.09%

Portfolio w/Hedge Funds 6.16% 8.46% 0.35 -14.85%

CASE STUDY OF ALLOCATING TO HEDGE

FUNDS



Relative Strength: January 1994 to Present

CSFB/TREMONT ASSET-WEIGHTED INDICES

Bull Market Case

40

50

60

70

80

90

100

110

120

130

140

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Cu

mu

lati

ve P

erfo

rman

ce R

elat

ive

to H

F I

nd

ex (

=10

0)

40

50

60

70

80

90

100

110

120

130

140

CSFB/Tremont Convertible Arbitrage IndexCSFB/Tremont Equity Market Neutral IndexCSFB/Tremont Distressed IndexCSFB/Tremont Risk Arbitrage IndexCSFB/Tremont Fixed Income Arbitrage IndexCSFB/Tremont Global Macro IndexCSFB/Tremont Long/Short Equity IndexCSFB/Tremont Managed Futures IndexCSFB/Tremont Emerging Markets Index



Relative Strength: January 2000 to Present

CSFB/TREMONT ASSET-WEIGHTED INDICES

Bear Market Case

80

90

100

110

120

130

140

150

2000 2001 2002 2003 2004 2005

Cu

mu

lati

ve

Pe

rfo

rma

nc

e R

ela

tiv

e t

o H

F I

nd

ex

(=

10

0)

80

90

100

110

120

130

140

150CSFB/Tremont Convertible Arbitrage IndexCSFB/Tremont Equity Market Neutral IndexCSFB/Tremont Distressed IndexCSFB/Tremont Risk Arbitrage IndexCSFB/Tremont Fixed Income Arbitrage IndexCSFB/Tremont Global Macro IndexCSFB/Tremont Long/Short Equity IndexCSFB/Tremont Managed Futures IndexCSFB/Tremont Emerging Markets Index



HEDGE FUND IMPACT ON INSTITUTIONS AND

ULTRA HIGH NET WORTH

Shorter investment time frames

Benchmarking only works when markets go up

Modified thinking on traditional style box investing yields absolute return expectations

Modified risk management perspectives

Redefine equity and fixed income strategy allocations due to trading styles of hedge fund managers

Further erosion of benchmark considerations

More complex asset allocations methodologies

Flexible leverage analysis



PROFESSIONAL IMPACT ON HEDGE FUNDS

Liquidity accommodations

Transparency concessions

Sophisticated, consistent, but subjective, risk management processes

Capacity analysis consideration

Upgrading of reporting standards

Reduced return expectations

Lower returns



WRAP UP

Absolute return vehicles are here to stay and growing, not a passing fade

Hedge funds are a proven, consistent, low correlating portfolio diversifier, improving risk adjusted returns

Benchmarking issues remain challenging

Style drift must be redefined

Risk management is compromised at best; it’s total risk, not tracking risk

Capacity constraints will drive investment results

Leverage requires consideration

Alpha elusive

Role of Beta

Robert AldermanManaging Director

Merrill Lynch Alternative Investments

“The Role of Alternative Investments . . .What should you Expect?”


October 20, 2004

Why Alternative Investments

“Alternative investments have become mainstream

investment vehicles as high-net-worth individuals

around the world strive for better performance

and portfolio balance.”

- World Wealth Report, 2004 Merrill Lynch/Cap Gemini Ernst & Young

Why Alternative Investments

“I went looking for a private banker who wasn’t fixated

on having 60% in stocks, 30% in bonds and 10% in

cash and would think in new, creative ways . ..”

- CEO Internet Software CompanyBarron’s, October 18, 2004

Target MarketRegistration and Method of Offering

Hedge Funds (“traditional”)

Private Equity Funds

Registered Hedge Funds

Managed Futures Funds

Registered Fund (variety)

Private Placement

(always Privately Placed)

Registered Private Placement

(usually Privately Placed)

Registered Fund

(usually Publicly Offered)

Qualified Purchaser

> $5 MM in Investments)

Accredited Investor

NW (incl. Home) > $1

MM

or

Income > $200k (last 2

yrs)

($300k if joint with

spouse)

Suitable Investors who understand the inherent risks

Investment Referred to as . . . Investor Qualification

Comfortable with ILLIQUID investments

Can accept limited TRANSPARENCY

Not interested in INCOME from this investment

Understand TAX & JURISDICTIONAL issues

No YES

No YES

No YES

No YES

IntegrationThe AI Decision - Yes/No

Step 2High Level AA

Step 1AI Decision

AI = 12%

Portfolio Building How Much is Too Much?/ How Much is Not Enough?

Step 2High Level AA

Step 1AI Decision

Step 3Product Allocation

HedgeFunds

PrivateEquity

FuturesFunds

AI = 12%

Portfolio BuildingProduct Allocation

Step 2High Level AA

Step 1AI Decision


HedgeFunds

PrivateEquity

FuturesFunds

AI = 12%

Portfolio BuildingProduct Type

Step 4Product Type

MarketOfferings

Fund of Funds

Single Mgr.

Multi Mgr.

Single Mgr.

Step 2High Level AA

Step 5Portfolio Recommendation

Step 1AI Decision


HedgeFunds

PrivateEquity

FuturesFunds

AI = 12%

Portfolio BuildingPortfolio Recommendation

?

Step 4Product Type

MarketOfferings

Fund of Funds

Single Mgr.

Multi Mgr.

Single Mgr.

Stocks

Cash

Bonds AlternativeInvestments

(?)

Portfolio BuildingCore/Satellite

DirectionalFund of Fund(s)

non-DirectionalFund of Fund(s)

Rationale

1) Hedge Fund of Funds and Managed Futures Fund of Funds may provide diversification and potential non -correlation to traditional long only portfolios.

2) non-Directional - tend to be “market neutral” well diversified fund of funds with exposure to multiple strategies.

3) Directional - well run and potentially more concentrated or biased funds may provide opportunities for enhanced return.

Arbitrage

L/S

Global MacroStocks

Cash

BondsAlternative

Investments(?)

Portfolio Building Core/Satellite

Dir.FoF

Non-DirectionalFoF

Single ManagerManaged Futures

Arbitrage

L/S

Global MacroStocks

Cash

BondsAlternative

Investments(?)


Dir.FoF

Non-DirectionalFoF

Private Equity

Single ManagerManaged Futures

Arbitrage

L/S

Global MacroStocks

Cash

BondsAlternative

Investments(?)


Dir.FoF

Non-DirectionalFoF

Recommended AI Asset Allocations

Example AI Allocations - “Growth” clients*

*Assumes same risk profile, investment objectives, time horizon, liquidity needs, etc

Total portfolio: $1 MMAI allocation: $100 K

Total portfolio: $5 MMAI allocation: $500 K

Core Hedge FoF 60%

Futures FoF 20%

Category Hedge FoF

20%

Futures10%

Core Hedge FoF 50%

Category Hedge FoF

20%

Private Equity 20%

Total portfolio: $20 MMAI allocation: $2 MM

Core FoF 100%

QuestionsQuestions

A member of the Man Group

dedicated to alternative investments

The role of alternative investments – what should you expect?

John M. KellyPresident & CEOMan Investments Inc.

MMI Fall Conference – Managed Account Solutions 2004October 20, 2004

Important notes

Man Investments Inc. is registered as a broker-dealer with the U.S. Securities and Exchange Commission and is a member of NASD. Man Investments Inc. is also a member of Securities Investor Protection Corporation.

The Man Investments division of Man Group plc, of which Man Investments Inc. is a member, operates on a global basis and is referred to throughout this document as ‘Man’.

The material presented herein is informational only and is not an offer to sell, or a solicitation of an offer to buy, interests in any product.

Information contained herein is provided from the Man database except where otherwise stated. Alternative investments can involve significant risks and the value of an investment may go down as well as up. Movements in exchange rates between currencies may affect the value of an investment.

Past performance is not indicative of future results.

The registrations and memberships described above in no way imply that the SEC, NASD, or SIPC have endorsed the above-referenced entities to provide any of the services discussed herein.

Securities, futures and derivatives trading are speculative and involve substantial risk of loss. There can be no assurance that any investment will achieve profits or avoid incurring substantial losses. Prospective investors should particularly note that the past performance is not indicative of future performance.

www.maninvestments.com

Statistics on the hedge fund industry

Source: Hedge Fund Research Inc. The date range used is the most recent available. Past performance is not indicative of future results. There can be no assurance that any hedge fund strategy will generate profits or avoid incurring substantial losses.Source: HFR Industry Report, TASS, Absolute Return

• CAGR of 26% since 1990

• Total assets worldwide are estimated between $850 - $1,000 billion

• Estimated 5,500 hedge funds

• Approximately 75% of hedge fund assets under management in North America

• Inflow growth rate for 1st half of 2004 is estimated at 17%

Concentration and capacity

• Top 180 fund managers oversee $1 billion or more each Equals over 60% assets under management

• Many of the largest hedge funds are closed

• Over 10% of hedge managers have been operating for less than 1 year

• Approximately 40% of hedge fund managers have been operating for over 5 years

• In 1991, around 70% hedge fund assets – global macro In 2004, around 12% hedge fund assets – global macro

Source: HFR Industry Report, TASS, Absolute Return

Man Investments division (‘Man’) of Man Group plc

Source: Man database.1As of March 31, 20042As of March 31, 20043Pre leverage since January 1, 1996. This excludes RMF and Westport data.

Geographical distribution of sales3 since 1996

As of June 30, 2004

1 Europe53.2%

2 Asia29.0%

3 Middle East9.1%

4 North & South America 8.6%

• Providing alternative investment solutions since 1983

• Funds under management exceed $38.5 billion1

• Pioneer in principal-protected and multi-strategy alternative products

• Launched over 4502 alternative investment products

Worldwide regulatory developments

Germany• A new investment law went into effect on Jan. 1 broadening managers’ abilities to offer

hedge funds to both institutional and private client investors1

Singapore• Recent regulatory developments have allowed private client investments into hedge funds2

• Lower investment requirements2

- No minimum investment requirements for principal protected funds- Investment minimums of S$20,0003 for fund of hedge funds

Hong Kong• In 2002, local regulators introduced new hedge fund guidelines allowing retail distribution of hedge funds to the public

1Source: Hedgeworld2Source: Monatary Authority of Singapore3Approximately US$ 11,398

What are we seeing in the U.S. market?

• Appetite for registered products

• Significant increase in interest in principal protected alternative investment products

• Conservative selling approach and high level of service and education

• Differences between US and offshore markets Platform issues Time to market

Some of the potential risks of investing inhedge funds

• Potential loss of investment

• Limited liquidity

• Use of leverage and other speculative investment practices

• Lack of regulatory oversight

• Valuations

• Tax risks

• Layering of fees

• Strategy risk

These are some of the risks inherent in hedge funds and funds of hedge funds. Please see the Risks section and Important notes included in this presentation for a more detailed discussion.

$100protected at Maturity by a first Class bank1

Investment life

To

tal

po

ten

tial

ret

urn

at

mat

uri

ty

Value of securities underpinning GuaranteeGrows to US$ 100 over life of investment

$40 (for trading)

$60 approx. (Securities pledged to creditor to underpin principal protection)

Value of securities underpinning principal protectiongrows to $100 over life of investment

$100

Example of an enhanced structured product These products are not available to US investors

The diagram below shows the general principles of an enhanced principal protected structured product. This product utilizes a credit facility to provide investors exposure to a complementary investment program. Given the low correlations between the core portfolio and complementary investment program, the product is designed to deliver higher investment returns without a corresponding increase in volatility. In addition to the principal protection, the potential lock-in of net new trading profits may raise the minimum protection level at maturity.

Increased investmentexposure of $60

through a credit facility Profit lock-in feature

To

tal

pro

fit

po

ten

tial

Profit potential

Trading capital growth potential

Schematic illustration. There is no guarantee that a fund will experience a profit as depicted above. Past performance is not indicative of future results. ¹Subject to the terms and conditions of the principal protection, payable on the Maturity Date for the Face Value of each bond outstanding and redeemed on the Maturity Date. Products that include a principal protection feature may also be subject to the risk of default by a bank or other counterparty providing the principal protection. The illustration assumes that the investment is held from inception to maturity and that no distributions are made. Investors could incur losses or lose their principal protection by redeeming some or all of their investment prior to maturity. This structured product employs leverage. The more leverage employed, the more likely a substantial change will occur, either up or down, in the value of the investment. In certain market conditions, investors could be invested entirely in bonds or other debt securities, which could mean forfeiting all potential gains should equity prices rise. Principal protection may be underpinned by zero coupon bonds. Because these bonds do not pay interest, their prices may be more volatile than other bonds with similar maturities that pay interest periodically. There are risks inherent in hedge funds.


The Role of Alternative Investments – What should you Expect?

October 20, 2004

William Turchyn, PartnerMariner Investment Group, Inc.

780 Third AvenueNew York, NY 10017

212-758-6200

M A R I N E R


Retail investors don’t belong in hedge

funds. The returns don’t justify the fees.


Too much money is flowing into hedge

funds and is chasing too few opportunities.


Hedge funds blow up and are responsible

for worldwide financial crises


Pitfalls in Hedge Fund Investing*:

• High Leverage– 2003 Eifuku– 1998 LTCM

• Strategy Failure– 1998-2000 Soros– 1998-2000 Tiger

• Mispriced Securities– 2004 Clinton– 2002 Lipper– 2002 Beacon Hill

• Fraud– 2003 Canary– 1998 Manhattan Investments

* Source: Mariner Investment Group and Michael F. Griffin in March 3, 2003 Pensions and Investments article, “Dramatic Blowups share a few traits”, written by Chris Clair


What about transparency?

Shouldn’t I be able to see every security

that I own?


What about liquidity? Shouldn’t I be able to get my

money out in 3 business days?


How much is Beta worth and how

much should I pay for Alpha?


Are there any smart people left in the long only business? Should I be worried that they

are all moving to hedge funds?

MMI Fall 2004 10-20 330PM Bill Turchyn.ppt

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