Performance creates trust Liquid Alternatives Dr. Jan Viebig, CFA CEO Harcourt / Head Alternatives...

Performance creates trust Liquid Alternatives Dr. Jan Viebig, CFA CEO Harcourt / Head Alternatives Vontobel 11 November 2014

For institutional investors use only / not for public viewing or distribution Agenda Traditional Investments: The Volatility Problem What are Liquid Alternatives? Strategy-Specific Risks of Alternative Risk Premium Strategies Benefit from Intelligent Combination of Risk Premia Portfolio Diversifier Summary Page 2

For institutional investors use only / not for public viewing or distribution Traditional Asset Classes: The Volatility Problem Volatility Jumps & Contagion Sources: Bloomberg, Engle, R. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation". Econometrica 50 (4): 9871008 Annualized Volatility of Equity Markets Jan 1900 Oct 2014 3 Empirical Findings 1.Risk is time-varying (volatility clustering) 2.Viewed in a longer historical context, 2008 is not so unusual 3.Contagion between risky asset classes Page 3

For institutional investors use only / not for public viewing or distribution Agenda Traditional Investments: The Volatility Problem What are Liquid Alternatives? Strategy-Specific Risks of Alternative Risk Premium Strategies Benefit from Intelligent Combination of Risk Premiums Liquid, Cost-Efficient and Transparent Portfolio Diversifier Summary Page 4

For institutional investors use only / not for public viewing or distribution Comparison: Liquid Alternatives vs Hedge Funds Liquid Alternatives Traditional Alternatives (Hedge Funds) Ownership structureMutual Fund Private Placement / Offshore Corporation Regulation UCITS / Investment Company Act of 1940 AIFMD / Securities Act of 1933 Daily liquidity / Daily rebalancing possible YesNo Investment minimumLowHigh Transparency / Sales documents Sales prospectus Private placement offering memorandum & subscription documents Custody of assets Commercial Bank / Custodian Brokerage Firm/ Prime Broker Legal restrictions on leverage YesNo Page 5

For institutional investors use only / not for public viewing or distribution Examples Liquid Alternatives as a Replacement for Hedge Funds? Non exchange-traded assets monthly unobservable prices Highly liquid, exchange-traded assets Managed Futures / CTA Global Macro Long/Short Equity Equity Market Neutral Non-traditional Bond Event Driven: Merger Arbitrage Relative Value Verifiable daily prices Event Driven: Distressed Securities Private Equity Real Estate Liquid alternatives as replacement for hedge funds Page 6

For institutional investors use only / not for public viewing or distribution Alternative Risk PremiaTraditional Risk Premia Illiquidity Risk Premium Merger Arbitrage Risk Premium Equity Risk Premium Bond Risk Premia (Duration, Credit...) Momentum Risk Premium Convertible Arbitrage Risk Premium FX-Carry Risk Premium Value Risk Premium Volatility Risk Premium Risk Premium Approach Real Estate Risk Premium Commodity Risk Premium Page 8

For institutional investors use only / not for public viewing or distribution Strategy selection Three strategies suitable for a risk premium portfolio Page 9 LowHigh Low High Robustness in Periods of Stress Merger Arbitrage Convertible Arbitrage FX Carry Illiquidity Momentum Value Volatility* * Tail-risk hedged volatility strategy

For institutional investors use only / not for public viewing or distribution StudyStrategy Maximum R 2 (%) Model components Fung and Hsieh (1997)All70.0 Factor analysis is used to extract five dominant style factors representing five qualitative style categories, option-based factors Fung and Hsieh (2001) Managed futures 60.7Lookback straddles Mitchell and Pulvino (2001) Merger arbitrage 42.4 Value-weighted portfolio of long announced targets and short the acquirers Fung and Hsieh (2002a)All89.0 Zurich Capital Markets Trend-Follower index, option-based trend- following factor, traditional asset-class factors Fung and Hsieh (2002b) Fixed income arbitrage 79.0 Long position in Baa corporate bonds, short position on 10-year Treasury bonds, also swap, mortgage and yield-curve spreads Agarwal and Naik (2004) Equity-oriented hedge funds 91.6 Buy-and-hold factors, option-based factors, spread factors (HML, SMB), momentum factor. Fung and Hsieh (2004a) Funds of hedge funds 84.0 S&P500, spread Wilshire 1750 Small Cap Wilshire 750 Large Cap, change in Fed 10-year constant maturity yield, change in spread between Moodys Baa yield and portfolio of lookback straddles on bond futures, portfolio of lookback straddles on currency futures, portfolio of lookback straddles on commodity futures. Source: Viebig, Jan (2012): What Do We know About the Risk and Return Characteristics of Hedge Funds?, Journal of Derivatives & Hedge Funds. Strategy-specific Risks of Alternative Strategies Asset-Based Style Factor Models Empirical Studies (1/2) Page 10

For institutional investors use only / not for public viewing or distribution StudyStrategy Maximum R 2 (%) Model components Fung and Hsieh (2004b)L/S Equity87.1FamaFrench three factor model, Carhart momentum factor Capocci and Hubner (2004)All92.0FamaFrench HML, Carhart momentum factor, credit spread factors Dor et al (2006)All87.6 Wilshire 5000, CBOE Volatility Index, US SMB, US HML, EM Telecom Index Kuenzi and Shi (2007)L/S EquityS&P500, SMB, HML, volatility factors Racicot and Theoret (2008)All93 S&P500, SMB, HML, momentum factor, 1-month short put on the S&P500 Agarwal et al (2011) Convertible arbitrage 62.6 Volatility arbitrage (delta-neutral long gamma position, hedged credit and interest rate risk), credit arbitrage (hedged equity and interest rate risk), and positive carry (delta-neutral position, positive interest income, hedged equity risk) Strategy-specific Risks of Alternative Strategies Asset-Based Style (ABS) Factor Models Empirical Studies (2/2) Source: Viebig, Jan (2012): What Do We know About the Risk and Return Characteristics of Hedge Funds?, Journal of Derivatives & Hedge Funds. Page 11

For institutional investors use only / not for public viewing or distribution Case study 1: Momentum / Trend-Following Strategies Convex Payout Profile Market Price Page 12 Source: AQR. A Century of Evidence on Trend-Follow Investing. Fall 2012 2. Oscillating Markets Trend- following strategies generate convex payout profiles. Trend-following strategies perform well in both bull & bear markets. Risk: Choppy, trend-less markets.

For institutional investors use only / not for public viewing or distribution Case study 2: Merger Arbitrage Large Losses in Periods of Stress! Data: Bloomberg Page 13

For institutional investors use only / not for public viewing or distribution Why Liquid Alternatives? Bond DiversifierPortfolio Diversifier e.g. Relative Value: Fixed Income (Asset Backed, Convertible Arbi-trage, Corporate, Sovereign ) Non-traditional bond Intelligent combination of strategies can diversify away strategy-specific risks Equity Diversifier e.g. Equity Market Neutral Long/Short Equity Short Bias Trend-following Page 15

For institutional investors use only / not for public viewing or distribution Intelligent Combination of Strategy-Specific Risk Premia Market gains Straddle-type Payoff Pure Momentum Strategy Time-series momentum strategy profits from strong trends. Cross-sectoral momentum strategy as additional alpha source. Market gains Call-type Payoff Pure Dividend Strategy Target beta increases to 0.5 in a bull market environment. Manages tail risk by decreasing target beta to 0 in a bear market environment. Pure Premium Strategy Collects option premium from selling at- the-money options profiting from flat markets. Manages tail risk by buying out-of-the- money options. Maximalverlust Butterfly-type Payoff Market gains Page 16

For institutional investors use only / not for public viewing or distribution 7.67% return p.a. (9.82% vol. p.a.) Pure Momentum Strategy 8.04% return (8.80% vol. p.a.) Pure Dividend Strategy 5.21% return (4.50% vol. p.a.) Pure Premium Strategy RDS Portfolio 7.20% return p.a. (4.35% vol. p.a.) 1/3 Portfolio Allocation Backtesting: After bid-ask spreads, after fees, monthly rebalancing, analysis period 2003-2013 1/3 Diversification among strategies* Page 17 Source: Bloomberg, Datastream *Currency of returns: USD

For institutional investors use only / not for public viewing or distribution Combination of Strategy-Specific Risk Premia Leads to a More Stable Payout Profile Data until October 15, 2014. The performance is calculated with an investment of 1/3 in the VF Pure Momentum Strategy, 1/3 in the VF Pure Dividend Strategy and 1/3 in the VF Pure Premium Strategy and daily rebalancing. The VF Pure Momentum and the VF Pure Dividend were launched on October 21, 2013 and the VF Pure Premium was launched on December 9, 2013. The last data point for the HFRX Global Hedge Fund Index was not reported yet at the time of writing. Page 18

For institutional investors use only / not for public viewing or distribution Portfolio Diversifier: Diversify Across Strategies! A Look at the Investment Process is Key. Learning cycle Re-evaluation of the strategy taking into account real life experience with the fund. Data Portfolio construc- tion Execu- tion Contro l Liquid universe Time-Series Momentum Cross- Sectional Momentum Page 20

For institutional investors use only / not for public viewing or distribution Combination of Different Momentum Premia Performance and Correlation Value Return (SI)10.10% Return(YtD)12.35% Ann. StD (SI) 6.11% Correlation (MSCI World) 0.001 Correlation (Barclays Global Bond) -0.060 Correlation (Bloomberg Commodity) -0.195 Total Return YTD Source: Bloomberg. The performance and correlation data are calculated since inception of the VF Pure Momentum Strategy on October 21, 2013 until October 15, 2014. Past performance is no guarantee for future returns. Page 21

For institutional investors use only / not for public viewing or distribution Comination of Momentum Risk Premia versus Stocks and Bonds (October 2013 October 2014) Data since the launch of the VF Pure Momentum Strategy on October 21, 2013 until October 15, 2014. Return Oct 21, 2013-Oct,15, 2014 Ann. StD Oct 21, 2013-Oct,15, 2014 VF Pure Momentum Strategy10.10%6.11% MSCI TR Net World Index1.68%8.74% Barclays Global Bond Index6.42%1.89% HFRX Global Hedge Fund Index-0.44%3.15% MSCI TR Net World Index HFRX Global Hedge Fund Index Barclays Global Bond Index VF Pure Momentum Strategy Page 22

For institutional investors use only / not for public viewing or distribution Summary You can use liquid alternatives to diversify the time-varying risk of traditional asset classes (equity diversifier, bond diversifier and portfolio diversifier). Advantages of Liquid Alternatives: liquidity, transparency, cost-efficiency. Be aware that the risks of (liquid) alternatives are strategy-specific and often nonlinear in nature. Look for strategies with convex payout profiles, if you want to hedge traditional asset class risks. Look for solutions which intelligently combine different trading strategies to diversify strategy-specific risks and generate more stable payout profiles. Page 23

For institutional investors use only / not for public viewing or distribution Disclaimer Important legal notice: This document is for information purposes only and nothing contained in this document should constitute a solicitation, or offer, or recommendation, to buy or sell any investment instruments, to effect any transactions, or to conclude any legal act of any kind whatsoever. Prospective investors must rely on their own examination of the legal, taxation, financial and other consequences of an investment in the funds, including the merits of investing and the risks involved. Prospective investors should not treat the contents of this document as advice relating to legal, taxation or investment matters. Before entering into an agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment advisers as to its suitability for you. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Past performance is not a guide to current or future performance. Performance data does not take account of commission or costs charged when units are issued or redeemed. An investment in a sub-fund of the Vontobel Fund carries various risks which are explained in the sales prospectus. In particular, we wish to draw your attention to the following risks: Investments in the securities of emerging-market countries may exhibit considerable price volatility and in addition to the unpredictable social, political and economic environment may also be subject to general operating and regulatory conditions that differ from the standards commonly found in industrialised countries. The currencies of emerging-market countries may exhibit wider fluctuations. Investments in riskier, higher-yielding bonds are generally considered to be more speculative in nature. These bonds carry a higher credit risk and their prices are more volatile than bonds with superior credit ratings. There is also a greater risk of losing the original investment and the associated income payments. Commodity investments can be very volatile and are prone to sudden swings over the long run. Governments may at times intervene directly in certain commodity markets. These interventions can cause significant swings in the prices of different commodities. Investments in derivatives are often exposed to the risks associated with the underlying markets or financial instruments, as well as issuer risks. Derivatives tend to carry more risk than direct investments. Although Vontobel believes that the information provided in this document is based on reliable sources, it cannot assume responsibility for the quality, correctness, timeliness or completeness of the information contained in this document. Vontobel explicitly reserves the right to change, amend or delete parts of this document or the document as a whole without further notice. All herein publicized information, particularly share prices, calculation data or forecasts are based on the best knowledge and/or the market estimation as at the date indicated in the presentation. This document may not be reproduced, redistributed or republished for any purpose without the written permission of Vontobel. The Fund and its subfunds are included in the register of Netherland's Authority for the Financial Markets as mentioned in article 1:107 of the Financial Markets Supervision Act (Wet op het financile toezicht). In Spain, funds authorised for distribution are recorded in the register of foreign collective investment companies maintained by the Spanish CNMV (under number 280). The funds authorised for distribution in the United Kingdom can be viewed in the FCA register under the Scheme Reference Number 466623. Please refer for more information on the Vontobel Fund, a regulated collective investment scheme under Luxemburg law, to the latest prospectus, annual and semi-annual reports as well as the key investor information documents (KIID). Interested parties may obtain these documents free of charge from the representative in Switzerland: Vontobel Fonds Services AG, Gotthardstrasse 43, 8022 Zurich, the paying agent in Switzerland: Bank Vontobel AG, Gotthardstrasse 43, 8022 Zurich, the paying agent in Austria: Erste Bank der oesterreichischen Sparkassen AG, Graben 21, A-1010 Vienna, the paying agent in Germany: B. Metzler seel. Sohn & Co. KGaA, Grosse Gallusstrasse 18, 60311 Frankfurt/Main, from the authorised distribution agencies, the addresses mentioned below and from the offices of the fund at 69, route dEsch, L-1470 Luxembourg. They may also download these documents from our website at vontobel.com/am. Further information for UK: This communication is directed only at recipients who are eligible counterparties or professional clients, as defined in the Glossary to the Financial Conduct Authoritys Handbook of Rules and Guidance. Any investment or service to which this communication relates is only available to and will only be engaged in with such persons. Any other persons who receive this communication should not rely on or act upon this communication. This information was approved by Vontobel Asset Management SA, London Branch, which has its registered office at Third Floor, 22 Sackville Street, London W1S 3DN and is authorised by the Commission de Surveillance du Secteur Financier (CSSF) and subject to limited regulation by the Financial Conduct Authority (FCA). Details about the extent of regulation by the FCA are available from Vontobel Asset Management SA, London Branch, on request. Further information for Singapore and Hong Kong: The Fund and its subfunds are not available to retail investors in Singapore or Hong Kong. Selected sub-funds of the Fund are currently recognized as restricted schemes by the Monetary Authority of Singapore. These sub-funds may only be offered to certain prescribed persons on certain conditions as provided in the Securities and Futures Act, Chapter 289 of Singapore. The Fund is not authorised by the Securities and Futures Commission of Hong Kong. It may only be offered to those investors qualifying as professional investors under the Securities and Futures Ordinance. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution and if you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This information was approved by Vontobel Asset Management Asia Pacific Ltd., which has its registered office at 3601 Two International Finance Center / 8 Finance Street, Central, Hong Kong. Page 24

Performance creates trust Liquid Alternatives Dr. Jan Viebig, CFA CEO Harcourt / Head Alternatives...

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Transcript of Performance creates trust Liquid Alternatives Dr. Jan Viebig, CFA CEO Harcourt / Head Alternatives...