FINANCIAL
CONVERGENCE
PRESENTATION TO
CADC 2005
AUGUST 18, 2005
PIERRE SAINT-LAURENT, CFA, CAIA
Hedge fund TCI to launch long-only
investment fund
By Norma Cohen
Financial Times| August 11 2005
The Children's Investment Fund (TCI), is to form a long-only
investment fund….
The move is part of a growing trend among hedge fund groups
to diversify their product mix, and signifies an increasingly
blurred distinction between hedge funds, traditional fund
managers and private equity investors…
SOME ISSUES





21st CENTURY: LOWER RISK PREMIA
ACTUARIAL DEFICITS
EVER-INCREASING
(DOWN) MARKET SYNCHRONIZATION
CHEAP (ER) BETA
TALENT RARITY
CHANGE IN OUTLOOK
PARADIGM SHIFT?
MARKET DRIVERS

21st CENTURY: LOWER RISK PREMIA AND FI YIELDS
ACADEMIC DEBATE AND RESEARCH
 OPERATIONAL CHALLENGE


ACTUARIAL DEFICITS
WAKEUP CALL
 NEW OUTLOOK ON ATTAINING OBJECTIVES
 INTEGRATION OF PORTFOLIO MANAGEMENT TO
NEW ASSETS

TECHNICALITIES

EVER-INCREASING
MARKET SYNCHRONIZATION

CHAN, GETMANSKY, HAAS AND LO (2005): LOWER
EXPECTED RETURNS, INCREASING SYSTEMIC RISK

ASNESS (2005): HEDGE FUNDS INCREASE ‘FINANCIAL
BIODIVERSITY’ AND CONTRIBUTE TO FINANCIAL
MARKETS STRENGTH

RISK MANAGEMENT: A SAFER WORLD?
DR. HEDGE
ANOTHER
LIGHT
TRADING DAY
LITTLE
do THEY
KNOW
... WITH MY
ORBITING DERIVATIVES
gun, I can destabilize
ANY market I please.
WHAT’S CHANGED

CHEAP (ER) BETA

CORE-SATELLITE APPROACH

BREADTH+DEPTH = INDEX (SYNTHETIC)

FOCUS ON ALPHA, ALPHA PORTING, ETC.

HIGH ALPHA IS NOT CHEAP

HIGH ALPHA IS NOT COMMON
KPMG SAYS



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“IT IS EVIDENT THE INDUSTRY CERTAINLY DOES
NOT HAVE THE INFRASTRUCTURE TO SUPPORT
THE WALL OF MONEY FROM INSTITUTIONAL
CAPITAL.”
OPERATIONAL RISK BECOMES A KEY RISK IN
FUTURE
QUALITY CAPACITY TO BECOME SCARCE,
ACCORDING TO FoHF MANAGERS SURVEYED
FINDING ALPHA BECOMES DIFFICULT/EXPENSIVE
(WHEN NOT CAPPED)
CONVERGENCE ISSUES

STREAMLINING THE ANALYTICS




COMMINGLING ALTERNATIVE ASSETS IN LONG-ONLY
PORTFOLIOS
DIFFERENT ASSETS, DIFFERENT REPORTING, DIFFERENT
METRICS
OPTIMAL ALTS ALLOCATION BETWEEN 0 AND 100% (!?)
STREAMLINING THE LANGUAGE


COMMITTEE COMFORT ZONE
FIDUCIARY ROLE AND RESPONSIBILITY
CONVERGENCE ISSUES

DOUBLE STANDARDS IN
TRANSPARENCY
 LIQUIDITY
 LEVERAGE
 SHORT POSITION ACTIVITY
 LEGAL DOCUMENTATION
 ANALYTICS REQUIRED


TANSTAAFL
CONVERGENCE ISSUES

REGULATORY CONCERNS

HUGE DEBATE: MORE REGULATION?

IF SO, HOW?

WHAT WILL REGULATION ACCOMPLISH?

SEC REGISTRATION SEEN BY SEVERAL AS A
‘THICKER STACK OF PAPER’
DR. HEDGE
MEANWHILE, AT
MARKET AUTHORITY
HEADQUARTERS-
QUICK,
REGULATOR BOYWE HAVE TO ACT
SENSORS
INDICATE
SUSPICIOUS
ACTIVITY
in SECTOR 5.
After a spike in volatility,
Markets QUICKLY
Stabilized TODAY...
My plan is
WORKING
While Equilibrium Man
AND Regulator Boy
are diverted,
I can unleash
the real threat.
AS A RESULT OF ALL THIS…

PRIVATE EQUITY PLAYERS MOVING INTO HEDGE FUNDS (e.g.,
Carlyle)

HEDGE FUNDS INVESTING IN PRIVATE EQUITY (e.g., DE Shaw,
Hamilton Lane)

HEDGE FUNDS GOING INTO LONG-ONLY (e.g., TCI)

HOWEVER- HENRY KRAVIS:
"HEDGE FUNDS KNOW HOW TO PICK STOCKS AND MAKE
MONEY, BUT THAT IS NOT THE SAME THING AS CREATING
VALUE THROUGH OWNERSHIP OF AN ASSET OVER THE LONG
TERM IN A HANDS-ON WAY. THEY LACK THE RIGHT SKILLS OR
EXPERIENCE TO MAKE A SUCCESS OF TURNING AROUND OR
BUILDING PRIVATE COMPANIES."
THANK YOU.
AssetCounsel Inc.
Montreal / Toronto
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