International Asset Management Limited
Independent specialists in tailor-made portfolios of hedge funds since 1989
Managing Risk in a Fund of Hedge Funds post 2008
– A personal perspective two years on
Bernard Minsky
Head of Portfolio Analysis and Risk Management
June 2010
Agenda
 A chronology – 2006 to 2010
 Risk management before 2008
 Our view in December 2008
 Fifteen minutes of fame
 Brave New World or Animal Farm
 Not just about risk management
 Concluding thoughts
2
A chronology – 2006 to 2010
Jan
2006
IAM
ABN AMRO
buys IAM
Jan
Market
Feb
Jun
Aug
Sep
Sub prime
losses emerge
Bear Stearns
HF fail
Quant equity
losses
Northern Rock
bailed out by HMG
Increase allocation to
conviction picks
Consortium buys
ABN AMRO
2007
IAM
Market
TCI writes to
ABN AMRO
Jan-Feb
Mar
Peloton and Carlyle
hedge funds fail
Bear Stearns bailed
by JP Morgan/Fed
Jul
2008
Aug
Oct-Dec
Dec
Lehman bankruptcy,
AIG, ML etc
Market turmoil,
liquidity strike
Madoff fraud
‘exposed’
Portfolio losses and
redemptions
IAM never had
Madoff exposure.
Employees buy- back
from Fortis
Enhanced risk
management
approved
Mar
Apr
Oct
Dec
Equity and credit
markets turn positive
AIFM draft published
Galleon insider
trading
New Greek Govt
austerity programme
Portfolio rotation
programme starts
Portfolios
bearish
Review risk
aggregator products
First significant new
client portfolio
Jan-Apr
Apr
May
Continuing fallout
from Greece
SEC sues Goldman
Sachs
EU bailout, Club Med
risk
Jan
Market
IAM Management
start negotiating
buy-out
Sep
FIRV managers
under spotlight
IAM
Dec
2009
IAM
Market
2010
IAM
Start Risk
Aggregation project
3
IAM risk management before 2008



Strong due diligence programme
Collegiate style of portfolio
management
Issues with approach
 Never invested in fraud or operational
blow ups
 Bespoke portfolios not
comingled funds
 Lack of detailed risk exposure reporting
by managers
 Tremendous network of contacts for
reference checking
 Manager driven
 Difficult to compare risk across
managers even within a strategy
 Conservative approach, true due
diligence veto
 Subjective approach to sizing
 Under-use of background
checking agencies
 Research analysts assessed
manager’s investment risk profile
4
Our view in December 2008: Macro events
Credit crisis
Policy shifts
 Financial system became too complex
for its own good
 Targeted changes to short-selling in
July and September
 When banks are in trouble we are all
in trouble
 Government providing capital to banks
 2007’s year-end liquidity crisis did not
reverse in January as many anticipated
 Loose monetary policies
Event risks raise correlation
levels dramatically
 Credit crunch has spiraled into a
widespread liquidity and
confidence crisis
 Question marks regarding bank
solvency triggered further redemptions
which has a knock-on effect
 Central banks concerned with inflation
through early 2008 (not Fed)
5
Our view in December 2008: Industry issues
Shorting
Redemption risk
Financing
 Short selling regulatory changes
 “Short-termism” in the hedge fund
investing community
 Significant number of financial
institutions reducing/withdrawing
credit lines to funds
 Pension fund stock lending shifts will
cause the largest risk
– Money classed as long term
suddenly ‘hot’
– “Game Theoretic” pre-emptive
redemptions
 Madoff devastates remaining
confidence in hedge funds credibility
 Trade financing that is offered will be
more expensive
 Longer duration trades financing will
continue to be problematic
 Reduced range of securities financed
 Private bank redemptions expected to
be much greater than institutional
6
Our view in December 2008: IAM challenges
Manager selection
Slow to sell Long/Short managers
Difficult to rotate in and out of strategies
 High profile blowups avoided such
as Madoff, Focus, Ospraie,
Peloton, Carlyle
 Slow to react to differing views
amongst credit and equity managers
 Had not converted a positive outlook
on certain strategies to
investable opportunities
 Several IAM managers performed
poorly, but to a lesser extent
 Sizing and asset allocation have been
a negative factor
 Increased risk outlook and reduced
allocation but not by enough
 Too many of our managers remained
long bias or with high level of
gross exposure
 Perceived lack of suitable managers in
these strategies
7
Our view in December 2008: A changed industry
Less crowding
Simplicity of strategy
Less leverage
 Fewer risk takers in the industry
 Simple equity long/short, trading, event
driven, credit arbitrage have the
greatest opportunities going forward;
 Too much volatility
 Small Relative Value funds
(<US$1 billion) will be problematic, as
prime brokers will offer less attractive
credit lines
 Quality of risk/reward under
more scrutiny
 Fewer funds
 Smaller long/short equity funds will not
be impacted, as they are less reliant
on financing
 Investment bank model
has disappeared
 There will still be attractive
opportunities on an unlevered basis,
with no threat of overcrowding
 Little appetite for pathdependant strategies
8
Our view in December 2008 – IAM Response
Development
at IAM
Macro events
Industry issues
IAM challenges
Changed industry
 Developed strategy
forecasting process
Renewed focus on:
 New Corporate
Governance
New opportunities:
 Emphasised top-down
asset allocation
 Counterparty risk
 Portfolio management
process review
 Macro
 Redemption risk
 Consolidation
of names
 CTA basket
 Equity Long/Short
 Long/Short Credit and
Distressed
 Risk budgeting
9
Fifteen minutes of fame
Nobody thanks you for saying yes…
…but they know who to blame if it goes wrong
 Risk management in bright focus
 Conflicts in responsibility for manager liaison and risk management
 Everybody second guesses… with hindsight, but we did
make mistakes
 Bespoke portfolios sheltered from “Game Theoretic” redemptions
 Strong operational due diligence meant no Madoff
A chance to make changes
 Managers becoming more transparent
 Framework for quantitative approach already in place
 Profile of good risk control procedures raised to highest level
 Every client and prospect wants to meet the risk team
10
Brave New World or Animal Farm
 Rewrote Risk Policy for new board to approve
 Founded Risk and Compliance Committee as sub-committee of the Board
 Changed reporting line for Head of Due Diligence
 Introduced quantitative risk budgeting process
 Subscribe to risk aggregation service, and background checking service
 Revamped monitoring of existing managers to align with governance change
 Overcoming scepticism within the firm
 Finding resources to produce the analyses
 Gaining manager support to increase portfolio transparency
 Allowing portfolio managers to manage, yet
 Justifying the controls as markets ease and avoiding pro-cyclicality
11
New risk budgeting process
Objective
Approach
Output
 To quantify worst-case losses without
diversification considerations

 The risk budget framework assigns a
maximum allocation (as a % of the
portfolio) to each approved manager
 To set allocation limits for each
underlying manager
 To ensure PMC decisions are made in
a risk aware framework

Use up-to-date readily available
data from managers: i.e. exposure;
maximum drawdown,
portfolio concentration
Each fund is rated according to how it
reacts to a battery of stresses, and
measured across four factors:
1. Directionality
 Risk budgets are mandatory and rules
for managing breaches are in the
firm’s policies
 Risk budgets are specific to mandated
portfolio risk tolerance
2. Concentration
3. Leverage
4. Liquidity
12
Risk budgets
Portfolio
Construction
Optimal
strategy
weights
Approved
manager
suitability
Portfolio
Management
Committee
approval
Rigorous
testing through
IAM Software
1. Credit
Fund
2. Event
Driven Fund
3. Equity
Market
Neutral
4. LongBiased
Equity Fund
5. Macro
Fund
6. Short-term
CTA
7. Generic
CTA
Market Risk Test (%)
0.5
9.0
3.0
12.8
28.2
4.7
7.6
Concentration Test (%)
4.9
4.5
2.0
2.8
0.0
0.0
8.9
Leverage Test (%)
10.0
4.3
3.1
3.6
32.1
3.6
5.0
Historic Max Drawdown (%) x 67%
1.2
2.5
2.3
21.5
5.4
6.7
17.2
2
3
1
1
1
1
1
Worst Case Loss (%)
12.5
13.5
3.1
21.5
32.1
6.7
17.2
Low Risk Appetite (%)
4.0
3.7
16.1
2.3
1.6
7.5
2.9
Medium Risk Appetite (%)
6.0
5.6
24.2
3.5
2.3
11.2
4.4
High Risk Appetite (%)
8.0
7.4
32.3
4.6
3.1
14.9
5.8
Example – Proposed Allocation in
a High Risk Portfolio
(3–8% min/max allocation)
4.5
4
8
3
1
6
4
Manager
Liquidity Rating
Source: IAM.
13
Downside risk measurement rather than dispersion measurement
Correlation
1
Manager
example
1 A lphaGen
Crucis
2
1
100.0%
48.0%
3
Manager
2 A lydar
Capitalexample
2
48.0% 100.0%
36.5%
Manager
example
3 A sian
Credit Hedge
56.2%
Manager example
4 B lueTrend
Manager
5 Capula
Glo balexample
Relative Value
Manager
6 Claren
Ro ad example
Credit
-25.7%
18.8%
5.3%
3
36.5% 100.0%
6.1%
4
56.2% -25.7%
6.1%
12.4% 100.0%
26.1% 43.9%
5.3%
52.1%
26.1%
28.5%
5
28.5% 100.0%
-3.2%
31.6%
16.9%
41.8% -21.3%
-3.8%
9 EBManager
A sia A bsoexample
lute Return
50.3%
45.1%
69.7%
14.1%
37.0%
Manager
example
10 Exane
Templiers
fund
35.8% 60.0%
61.7%
5.3%
46.7%
example
11 HoManager
rizo n P o rtfo
lio Ltd
42.9%
27.9%
14.2%
34.1%
Manager
example
12 Karsch
Capital
43.9%
31.9% 69.8%
13 M Manager
&G Episo deexample
Inc.
55.2%
32.7% 36.2% -16.9%
Manager
example
14 New
Star UK Gemini
Hedge USD
15.5% 33.9%
59.9% -34.2%
9.2%
12.9%
77.6%
15.3%
-11.9%
-4.0% -16.4% -33.3%
29.7% 26.4% -20.3% -14.2%
19.9%
74.5%
21.6%
-1.8%
67.6%
47.7%
11.3%
24.5% -27.1%
4.9%
57.2%
-8.4%
-4.5% 62.6% 32.4%
-9.5%
10.1%
70.5%
67.2% 42.8%
7.9%
21.5%
9
17.0% 100.0%
9.6%
5.6% 22.0%
9.6% 22.0%
63.5%
10
63.5% 100.0%
19.9%
11
4.9% 100.0% 23.3%
-0.2%
20.7% -26.6%
-3.4%
35.9% 32.9%
12
-8.4%
30.1% 38.4%
17.2% -19.9%
-11.9%
-1.8%
-4.5% 62.4%
-3.2%
35.9%
-4.0%
1.2%
-4.2% 34.0%
38.5%
-0.2%
15.1%
11.3%
46.1%
20.7% -38.6%
Manager
22 COM
A C Glo example
bal M acro Fund
-3.3%
22.5%
3.5%
44.5%
Manager
23 B rigade
Lvgd.example
Cap. Structures Fund
23.2%
-8.3%
62.1%
7.2%
High Correlation
11.1%
77.6%
19.2% -16.4%
-5.0% -33.3%
5.0%
29.7%
17.2%
72.5% 62.4% 22.2%
57.2% 23.3% 100.0% 29.6%
-4.0%
62.1%
18.0% 32.9%
21.6%
18.2%
-8.3%
3.5%
22.1% 38.4%
74.5%
14.1%
22.5%
21.5%
17.0%
19.2%
62.7%
11.1% -38.6%
-5.0%
8.1% 69.8%
44.5%
7.2%
-4.0%
51.7%
10.6%
36.1%
2.3% 36.2% 48.9%
5.0% -29.2% -33.8%
45.3% -28.3% 29.3%
2.2%
25.9%
14.1%
18.2%
17.3%
3.6%
54.6%
31.4%
45.9%
51.5%
-6.3% -28.4% -24.1% -38.2%
37.7%
48.5%
18.3%
12.5%
52.5%
32.1%
48.5%
37.8% -13.8% -39.0% -45.6% -34.2% -28.8%
33.7%
19.8%
14
55.3%
48.5%
32.1%
-11.1% 100.0%
46.7%
20.1%
47.7% 32.4%
48.5%
48.5%
55.3%
16
62.7%
-5.7% 48.0% 100.0%
-11.1%
15
46.7% 100.0%
11.3%
-9.5%
51.5%
18.3%
37.8%
48.5%
20.1%
24.5%
2.2%
-6.3%
37.7% -13.8%
-5.8%
7.3%
81.9%
17
81.9% 100.0%
-5.4%
-5.8% -26.3%
7.3%
0.9%
52.9%
9.1% -39.8% 20.8%
-1.0%
58.8%
-5.4% -25.2% 22.3%
6.8%
-15.7% -22.9%
18
-15.7% 100.0%
5.7%
-6.7%
12.8%
-1.9% -19.3% 62.4%
8.4%
45.1% 42.4% -10.0%
19
17.3% -28.4%
-4.1% -39.0% -26.3%
0.9% -25.2% -22.9%
5.7% 100.0% 39.6%
36.1% -33.8% -20.3%
31.4% -24.1%
7.0% -45.6%
-1.0% 22.3%
8.4% 39.6% 100.0% 23.4% 38.0%
45.3% -14.2%
51.7% 36.2% -28.3%
17.0%
54.6%
5.9%
10.6% 48.9% 29.3% -40.9% 24.3%
Medium Correlation
45.9% -38.2%
41.6%
1.9%
26.5% 34.4%
9.1%
52.9% -34.2% -39.8%
58.8%
6.8%
12.8%
-1.9%
21.7% 32.9%
20
21
45.1%
21.7% 23.4%
100.0%
Manager
example
1 A lphaGen
Crucis
2.9% -19.3% 42.4%
32.9%
38.0%
17.4% 100.0%
Manager
example
2 A lydar
Capital
12.5% -28.8% 20.8%
-6.7%
61.2% 62.3% 62.4% -10.0%
-3.0%
26.2%
Manager
example
3 A sian
Credit2.1%
Hedge
19.8%
Low Correlation
Co-Drawdown
-3.0%
2.1% 1
17.4% 26.2%
100.0%
22
52.5%
33.7%
61.2%
2.9% 62.3%
25.9% -29.2% 26.4% -27.1%
2.3%
26.5%
1.9% 34.4%
81.3%
81.3%
7.0%
5.9% 24.3%
41.6%
-5.7%
13
-4.1%
17.0% -40.9%
72.5% 29.6% 100.0% 48.0%
67.6% 62.6% 22.2%
3.6%
23
-1.3%
7.0%
18.0%
8
34.1% 38.3%
22
11.0% 46.9%
-2.0%
46.1%
15.3%
8.1% -26.6%
21
11.3%
13.2% -20.0%
38.5%
18.0%
11.0% 69.8%
-4.2%
61.5% 34.0%
-3.2% 40.6%
65.4%
18.0%
30.7%
20
-3.3% 23.2%
30.1%
-3.4% 36.6%
22.1%
29.1%
79.2%
19
15.1% -20.5% -45.4% 23.4%
65.4% 36.6% -19.9%
8.0%
8.0% 100.0%
19.7% -16.9%
9.2%
18
5.6%
example
18 TTManager
M id-Cap Euro
pe Lo ng Sho rt
-1.3% 46.9%
32.7% 33.9%
1.2%
7.9%
Manager
17 SCP
Ocean example
23.4%
27.9% 69.8% 36.2%
17
67.2%
61.5% 40.6% 32.9% 32.9%
example
21 YoManager
rk Euro pean
Oppo rtunities
36.7%
61.7%
16
25.8%
10.1%
4.6% -24.9%
7
30.7%
7.0%
45.1% 60.0%
15
70.5% 42.8%
12.9%
4.6% 100.0%
25.8%
-2.0% -20.0%
15.5% 64.3%
46.7%
Manager
example
16 P FM
Diversified
Offsho re
-45.4%
14
69.7%
14.2%
31.9%
13
55.2%
37.0%
79.2%
-20.5%
12
11.2%
29.1%
Manager
19 Tudo
r Tenso example
r
11
31.9%
64.3%
Manager
example
20 Winto
n Futures
41.8%
10
35.8% 42.9% 43.9%
5.3%
15 OZManager
Overseasexample
II
13.2%
31.6%
59.9% -21.3%
9
50.3%
14.1%
11.2% -24.9%
19.7% 38.3%
8
16.9%
-3.8%
31.9% 100.0%
70.3%
Manager
8 DB
Equilibria example
Japan
7
70.3%
-3.2% -34.2%
6
Manager
example
7 Davidso
n Kempner
Internatio nal
36.7%
6
12.4% 34.2% 43.9%
4
52.1% 34.2%
5
18.8%
2
18.6%
3
19.0%
4
-5.5% 15.1% 100.0% 33.6% 49.2%
23
-5.5% 100.0% 21.1%
5
6
52.6% 29.3% 28.8%
22.7%
7
8
26.5% 39.8%
24.1% 30.3%
25.3%
30.5% 20.2%
9
10
20.5% 39.4%
11
15.3%
27.7%
15.6%
35.5% 44.3%
27.8% 100.0%
24.5%
16.0%
25.1%
27.7%
31.8%
28.7% 100.0%
26.7%
13.5%
Manager
6 Claren
Ro ad example
Credit
32.2%
33.1% 33.6%
58.8% 28.6% 100.0% 23.3%
34.1%
68.1%
51.0% 30.0%
Manager
example
7 Davidso
n Kempner
Internatio nal
35.7%
50.2%
37.0%
40.1%
22.5%
28.1% 100.0%
35.2%
52.8%
33.1%
Manager
8 DB
Equilibria example
Japan
32.7%
25.6%
15.0%
55.5%
21.5%
25.1%
21.5% 100.0%
46.7%
38.5%
45.9% 28.3%
37.6% 30.6% 40.6%
example
11 HoManager
rizo n P o rtfo
lio Ltd
26.9%
27.9%
19.5%
Manager
example
12 Karsch
Capital
25.2%
56.9% 26.3%
40.5% 28.8%
19.0%
20.7%
50.3%
31.9%
38.1% 29.3%
36.1%
47.9%
30.1% 62.0%
34.1%
24.8% 32.6%
22.7% 34.2%
19.7% 28.0%
Manager
example
14 New
Star UK Gemini
Hedge USD
30.9% 43.9%
35.2% 60.4%
13.2%
15 OZManager
Overseasexample
II
20.8%
49.5%
37.4% 32.0% 46.9% 49.2%
60.1%
15.2%
41.2%
12.8% 48.9%
Manager
example
16 P FM
Diversified
Offsho re
23.5%
18.8%
45.9% 24.2%
51.7% 30.3% 33.0%
58.3%
45.0%
16.0% 34.2%
17
35.8%
18
19
20.5%
20
21
31.1% 46.2%
56.3%
55.3% 66.2%
31.3% 33.2%
53.3%
86.7%
31.8%
13.1% 42.8%
35.3%
17.2%
28.7%
42.1% 42.6%
67.6%
52.8%
41.9%
32.1%
44.1% 32.3% 34.4% 46.8%
52.5%
77.5% 48.8% 42.2%
37.6% 42.9%
47.0%
40.1%
52.4%
22
31.1% 30.9% 62.6%
51.7%
50.0%
23
39.1%
8.7%
39.5% 40.0%
37.0% 43.3%
32.5%
42.5%
33.1%
44.1%
52.1%
74.7%
50.7% 64.8%
21.1%
21.1%
47.0% 43.4% 28.6%
30.7%
61.5%
56.1%
31.3%
45.3% 60.2% 46.0%
21.7% 39.3%
54.1% 46.2% 32.6% 40.9%
68.1%
58.8%
59.0%
35.8% 43.0% 48.6%
35.5% 22.8%
36.5% 62.6%
8.5% 43.6% 49.6% 39.8% 46.9% 38.4%
37.5%
38.1% 30.3%
45.5%
37.9% 100.0% 38.8%
59.8% 30.3% 22.8%
25.6% 40.4%
13.2% 30.2%
41.7% 39.4%
56.2%
47.9% 43.4%
39.7% 39.8%
67.7% 60.2% 40.9%
41.2%
12.7% 24.6% 39.4% 39.2% 32.4%
37.4%
51.0%
34.5% 100.0%
50.1%
36.1% 24.9%
33.5% 44.6%
67.5%
41.1% 64.0%
39.1%
70.3%
44.5% 33.6%
67.4%
57.0%
52.9% 100.0%
41.9% 40.6%
41.8% 32.3% 43.0%
67.8% 100.0% 32.4%
44.5%
35.8%
47.1% 42.3%
15.1%
52.0%
52.8%
44.1%
33.5%
51.6%
31.6%
41.5%
47.5%
69.1%
45.7%
35.5%
54.5% 34.8% 34.8% 100.0% 38.4% 23.6%
21.7%
55.8% 43.0% 34.2% 33.8%
35.3% 100.0% 48.4%
27.8%
21.6%
27.2%
34.5%
67.1%
38.5%
27.2%
57.2%
35.5%
59.2%
77.2%
65.4%
64.5%
78.0% 68.3%
55.4%
57.8% 100.0% 24.3% 30.9%
55.2%
8.4% 26.2% 34.3%
15.2%
51.2%
17.5%
35.7% 24.6%
25.6%
17.5% 100.0%
60.1% 43.2% 40.9% 32.0%
12.2% 30.9%
22.5%
21.3% 24.6% 100.0% 84.3%
55.1% 36.6%
67.4% 20.3%
44.7%
23.5% 33.6%
51.3% 40.0%
23.5% 24.2%
Manager
19 Tudo
r Tenso example
r
16.0% 29.8%
Manager
example
20 Winto
n Futures
15.2%
27.8% 24.3% 80.6%
21.5%
58.4%
79.1% 23.4% 24.0% 30.3%
20.5%
18.4%
41.4%
45.3%
21.1% 33.2% 49.2% 32.3%
39.1%
21.2% 28.8%
52.5%
32.5% 26.4% 22.2% 36.2% 23.8%
57.7% 62.8% 46.9%
80.5%
55.8% 46.3%
27.2%
36.5% 30.8%
example
21 YoManager
rk Euro pean
Oppo rtunities
26.1%
59.4%
37.6% 33.3%
40.5% 40.9%
35.3% 34.6% 20.0% 46.4%
25.0% 26.3%
8.8% 32.2%
Manager
23 B rigade
Lvgd.example
Cap. Structures Fund
31.8%
50.3% 28.2%
54.3%
55.8%
29.5%
Manager
22 COM
A C Glo example
bal M acro Fund
Co-drawdown is the probability of the column fund suffering a loss at the same time a row fund suffers a loss.
Source: IAM.
44.5% 39.6%
41.4%
35.0%
High Co-drawdown
38.5%
57.4%
39.2%
8.7% 29.3%
37.2%
31.3% 49.3%
example
18 TTManager
M id-Cap Euro
pe Lo ng Sho rt
50.3%
44.7%
27.7%
Manager
17 SCP
Ocean example
17.0%
48.1%
7.9% 62.6% 62.9% 34.9%
37.3% 30.4%
39.5% 46.4% 100.0%
4.2%
example
13 M Manager
&G Episo de
Inc.
25.3% 30.0%
37.2% 40.0% 38.9%
41.2% 26.4% 38.4% 100.0%
35.2% 38.4%
16
20.1% 30.9%
61.8%
28.0%
13.8%
15
19.9%
53.0% 42.4% 40.6% 39.6%
39.5%
Manager
example
5 Capula
Glo bal
Relative Value
33.2%
14
32.1%
55.3% 36.4% 32.0%
15.7% 33.4%
Manager example
4 B lueTrend
example
9 EBManager
A sia A bso
lute Return
13
41.9%
46.5% 40.3%
45.9% 100.0% 60.6%
Manager
example
10 Exane
Templiers
fund
12
37.9% 30.9%
25.1% 30.3%
12.7% 38.0% 49.2% 44.0%
Medium Co-drawdown
34.7%
53.0%
55.7% 48.3%
25.8% 24.6%
51.3% 28.3%
27.6%
25.6%
79.8% 43.9%
35.0%
30.5%
31.5%
31.8%
37.3%
37.0%
27.9%
59.4% 44.8% 33.0% 64.4% 100.0%
55.0%
31.0%
36.7% 100.0%
31.0%
36.1%
52.9% 100.0%
25.6%
21.8% 28.3%
22.7%
42.7%
36.5%
25.1% 32.0%
33.1% 46.3% 29.9%
44.7% 100.0%
Low Co-drawdown
14
Not just about risk management
New Board makes
its mark
 New governance structure introduced
 Emphasis needed for clear definition of philosophy, style and processes
 Confirmed commitment to Bespoke Portfolio product
 Semi-annual review of progress with CEO
Improves portfolio
management
process
 More use of top-down strategy analysis
 Portfolio Manager responsibility allocated to committee members
 Better quantitative tools and better use made of them
 Investment Committee member linked to each manager relationship
15
Enhancing portfolio construction
Portfolio
Construction
Optimal
strategy
weights
Approved
manager
suitability
Rigorous
testing through
IAM Software
Portfolio
Management
Committee
approval
Rigorous Testing Process
Strategic Asset
Manager Selection and
Portfolio
Portfolio Scenarios
Allocation
Risk Budgeting
Optimisation
Simulations
Forecasting
Maximum allocation
for a given risk appetite
Challenges
allocation
Evaluate performance
and risk characteristics
and validate allocations
and Analysis
16
Backtests and forecasts
Historical backtest
3.0%
100%
2.5%
90%
Simulated forecast
20%
95th Percentile
80%
2.0%
80th Percentile
70%
Cumulative Returns
15%
1.0%
0.5%
0.0%
-0.5%
60%
50%
10%
40%
Mean
Cumulative Return
Median
20th Percentile
5th Percentile
30%
5%
Stress test
20%
-1.0%
10%
Scenario
0%
Monthly Portfolio Returns (LHS)
MSCI World Index (US$) (RHS)
-5%
Cumulative Portfolio Returns (RHS)
Jul08
May-08
Feb-08
Nov-07
Aug-07
May-07
Feb-07
Nov-06
Aug-06
May-06
Feb-06
Nov-05
Aug-05
May-05
Feb-05
Nov-04
Aug-04
May-04
Feb-04
0%
Nov-03
-1.5%
Aug-03
Expected
outcome
+20%
3.1%
-20%
-3.1%
Equity
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun08
08
08
08
08
09
09
09
09
09
09
Jul09
+100bp
0.1%
-100bp
-0.1%
Fixed Income - Rates
Manager contribution
7%
6%
-0.1%
+10%
0.2%
-10%
-0.2%
+20%
0.5%
-20%
-0.5%
Commodities
7%
6%
4%
0.1%
Halve
Currencies
8%
5%
Double
Fixed Income - Credit
Future views and confidence
Worst Case
-4.0%
5%
4%
3%
3%
2%
2%
1%
1%
0%
-10%
Negative
Neutral
0%
Positive
Mixed
10%
20%
-1%
30%
40%
-2%
en
Cr
Al
uc
yd
is
ar
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Ca
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pi
Cr
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lob
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Cla
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In
it
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at
Eq
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na
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ibr
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Ab
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Ex
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fu
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Ka
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w
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ar
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p
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rk
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in
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or
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CO
e
F
an
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ur
Op
ve
AC
es
ra
po
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G
rtu
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d
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Ca
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ta
ac
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ro
tru
Fu
ctu
nd
re
LI
s
BO
Fu
R
nd
US
D
1
M
th
0%
-20%
All-weather
manager
Al
ph
aG
Monthly Return
1.5%
Contribution to Positive Months
Contribution to Positive Months
Contribution to Negative Months
Bell-weather
manager
Contribution to Negative Months
17
Concluding thoughts
 Was this an Ancient Greek Tragedy?
-
Hubris, Nemesis and Catharsis
 Or a painful learning experience?
-
Bespoke portfolios work
-
Keynes was right about the long term
-
Liquidity, transparency and simplicity
-
Process, process and process
 Maintain your own equilibrium
-
Have a thick skin, but admit your failings
-
Be part of the solution not the problem
-
Stand up for what you believe
18
International Asset Management Limited (IAM) – Legal Disclaimer
This document was prepared by IAM, a company authorised and regulated by the Financial Services Authority (FSA). The information contained herein is not
for distribution and does not constitute or form part of any offer, recommendation or invitation to participate in any product. It does not take into account the
investment objectives, financial situation and particular needs of any investor. Any investor or prospective investor should consider whether such investment is
appropriate to their particular investment needs and financial circumstances and consult the offering memoranda of the product which are available upon
request. Past performance is no indication or guarantee of future performance. The value of investments may fluctuate and prospective investors may not
recover the full amount initially invested. The products described herein are not subject to approval or regulation by the FSA and as such the Financial Services
Compensation Scheme will generally not apply.
This document has been prepared by IAM on information available to them and has not been independently verified. Accordingly, no representation or
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IAM uses data from the following sources: Bloomberg, EurekaHedge, Hedge Fund Research Inc., Morgan Stanley Capital International Inc., Morningstar, IAM
and the relevant Administrators.
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Tel: +44 (0) 20 7734 8488 Fax: +44 (0) 20 7287 7129
Please contact: Jamison Skelli-Cohen (jskelli-cohen@iam.uk.com) or Sue Kim (skim@iam.uk.com)
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Please contact: Amanda Dippel (adippel@iam.uk.com)
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Tel: +34 (91) 391 5096 Fax: +44 (0) 20 7287 7129 (London Office)
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19