Montreal Exchange
Canadian Annual Derivatives Conference
August 17-19, 2005
Fairmont Le Chateau Frontenac
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Alternative Investment Management
Association (AIMA)
Global, not-for-profit trade association
Corporate membership: Europe, Asia, Australia,
North America (Chapters in Australia, Canada,
Hong Kong, Japan and South Africa)
Non-commercial communication with
institutional investors, regulators, financial media
Providing research, education, lobbying
enhancing understanding, sound practices
and industry growth
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AIMA Canada - www.aima-canada.org
 Established in March, 2003
 Over 70 corporate members across Canada
 Educational Initiatives
– March 2004 – Guide to Sound Practices for Canadian Hedge
Fund Mangers
– June 2004 – AIMA Canada Primer
– June 2005 – Guide to Sound Practices for Disclosure and
Promotion of Alternative Investments in Canada
– June 2005 – AIMA Canada Research Award
 Actively communicating with regulators, media and
other participants in the hedge fund community
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Growth of Canadian Hedge Funds Industry
Hedge Funds by Product Type
Assets in billions of dollars
Source: Investor Economics
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Growth of Canadian Hedge Funds Industry
Principal-protected Products by Type
December 2004
Source: Investor Economics
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Growth of Canadian Hedge Funds Industry
Stand Alone Hedge Funds
Assets in billions of dollars
Source: Investor Economics
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Growth of Canadian Hedge Funds Industry
Pure Fund of Hedge Funds
Assets in billions of dollars
Source: Investor Economics
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Canadian Hedge Fund Developments - 2005
 Portus Scandal/Norshield Liquidation
 IDA Report: Regulatory Analysis of Hedge Funds” (May 18/05)
 AIMA Canada’s Response
–
–
–
–
Formal response to IDA in September
Senate Banking Committee Appearance
Guide to Sound Practices For Disclosure & Promotion
Investor Checklist
 AIMA Canada is actively communicating with regulators, media
and other participants in the hedge fund community
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Global Hedge Fund Developments - 2005
 Performance Headwinds
– Secular or Cyclical
 Regulatory Developments
– SEC (US)
– FSA (UK)
 Global Growth Continues
– Global assets exceed $1 trillion
– Inflows are moderating
– Number of hedge funds continues to grow
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Growth in Hedge Funds Since 1990
$1,000,000
$972,608
$900,000
$820,009
$800,000
$700,000
Assets (In $MM)
$625,554
$600,000
$539,060
$490,580
$500,000
$456,430
$400,000
$367,560 $374,770
$300,000
$256,720
$185,750
$200,000
$167,790
$167,360
$95,720
$100,000
$38,910
$58,370
$8,463
$27,861
$99,436
$91,431
$57,407
$36,918
$55,340
$14,698
$0
$70,635
$73,585
2003
2004
$46,545
$23,336
$4,406
($1,141)
($100,000)
1990
1991
1992
1993
1994
1995
1996
Estimated Assets
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Source: HFR 2004 Annual Report
1997
1998
1999
Net Asset Flow
2000
2001
2002
Estimated Number of Hedge Funds
1990 - 2004
8,000
7,436
7,000
6,297
6,000
Number of Funds
5,379
5,000
4,454
3,873
4,000
3,617
3,325
2,990
3,000
2,781
2,383
1,945
2,000
1,514
1,105
1,000
821
610
0
1990
11
1991
1992
1993
Source: HFR 2004 Annual Report
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
AIMA Canada Research Award – 2005
“Faulty Hypotheses and Hedge Funds”*

Many researchers claim portfolios of hedge funds expose
investors to risks that can be surprising to the downside
– this is based on the higher kurtosis and negative skew
found in hedge fund returns

However, the occurrence of extreme returns in hedge
funds (negative or positive) is much less frequent for
hedge fund indices then for equity indices - why??

The problem lies in the distribution of returns for hedge
funds – they are not normal – and correcting for this
demonstrates that “extreme events” in portfolios of
hedge funds are surprisingly low!
*Todd Brulhart & Peter Klein, KCS Fund Strategies (Vancouver)
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AIMA Canada Research Award - 2005
Higher Moments of Equity and Hedge Fund Indices
This skew is calculated by dividing the third moment by the standard deviation, while the kurtosis is calculated by dividing the fourth moment by the standard deviation.
Index
Standard
Deviation (%)
Skew
Kurtosis Third Moment Fourth Moment
(%)
(%)
S&P 500 Total Return
4.402
-0.611
3.486
-52.15
1,309.11
Nasdaq
8.003
-0.373
3.664
-191.13
15,028.66
2.352
0.098
5.046
1.27
154.38
S&P 500 Total Return
4.229
-0.470
3.644
-35.56
1,165.49
Nasdaq
7.390
-0.390
3.889
-157.52
11,596.31
Fund Weighted Composite
2.001
-0.626
5.898
-5.02
94.47
Fund of Funds Composite
1.625
-0.257
7.305
-1.10
50.92
Panel A – CSFB/Tremont (Jan. 1994 to Dec. 2004)
U.S. Equity Index
CSFB/Tremont Hedge Fund Indices
Hedge Fund Index
Panel B – HFRI (Jan. 1994 to Dec. 2004)
U.S. Equity Indices
HFRI Hedge Fund Indices
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AIMA Canada Research Award – 2005
“Faulty Hypotheses and Hedge Funds”*
Conclusions
 A diversified portfolio of hedge funds is suitable for a broad
range of risk tolerances and large allocations are justified
 The use of leverage on a diversified portfolio of hedge funds
is supportable
 Allocating to hedge funds by applying mean-variance
tools only may cause investors to overlook risks associated
with higher moments
Caveat
“Past performance is not indicative of future results”
*Todd Brulhart & Peter Klein, KCS Fund Strategies (Vancouver)
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Summary Thoughts
 Hedge Fund industry is alive and well and growing
(albeit more slowly)
 AIMA continues to:
– Work with regulators, the media and other interested parties
to promote the proper use of alternatives
– Continues to promote due diligence, transparency and
education
Source: Investor Economics
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