Kellogg Hedge Fund Conference:
Search for Alpha
Bob Litterman, Ph.D.
Head of Quantitative Resources Group
Goldman Sachs Asset Management
August 15, 2006
Source of hedge fund returns: alphas, betas, costs
January 1995 – March 2004
The study
conducted by
Ibbotson & Chen
finds that alphas
are significantly
positive.
25.0%
20.0%
5.0
Returns (%)
15.0%
10.0%
4.5
5.7
4.3
3.6
6.1
5.1
3.2
3.2
3.6
3.0
3.1
5.2
3.6
3.8
7.4
6.1
4.7
5.0%
3.7
4.9
3.8
0.0%
6.5
1.4
4.5
1.4
5.4
1.5
3.6
3.7
-5.9
Overall Equally
Weighted
Portfolio
Short
Managed
Future
L/S Equity
Global Macro
Fixed Income
Arbitrage
Event Driven
Equity Market
Neutral
Convertible
Arbitrage
-10.0%
Emerging
-5.0%
Hedge Fund Categories
Alpha (%)
Systematic Beta Returns (%)
Fees (%)
Source: Chen, Ibbotson. “Sources of Hedge Fund Returns: Alphas, Betas, and Costs”. Yale ICF Working Paper No. 05-17. August 2005.
1
Hedge fund industry performance and asset flows
January 1994 – March 2006
Rolling 12-Month
Returns
Rolling 12-Month Returns (%)
35.0%
Total Hedge Fund Assets
Under Management
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
-$100,000
-$200,000
-$300,000
USD (Millions)
Credit Suisse/Tremont Hedge Fund Universe
4Q94 2Q95 4Q95 2Q96 4Q96 2Q97 4Q97 2Q98 4Q98 2Q99 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05
$50,000
USD (Millions)
$45,000
$40,000
Quarterly Asset Flows
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
-$5,000
-$10,000
4Q94 2Q95 4Q95 2Q96 4Q96 2Q97 4Q97 2Q98 4Q98 2Q99 4Q99 2Q00 4Q00
2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05
Source: Credit Suisse/Tremont
2
Convertible arbitrage performance and asset flows
January 1994 – March 2006
Rolling 12-Month Returns (%)
35.0%
Rolling 12-Month
Returns
30.0%
Total Convertible Arbitrage
Assets Under Management
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
4Q94 2Q95 4Q95 2Q96 4Q96 2Q97
4Q97 2Q98 4Q98 2Q99 4Q99 2Q00 4Q00
2Q01 4Q01 2Q02 4Q02
$55,000
$50,000
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
-$5,000
-$10,000
-$15,000
USD (Millions)
Credit Suisse/Tremont Convertible Arbitrage Hedge Fund Universe
2Q03 4Q03 2Q04 4Q04 2Q05 4Q05
$5,000
$4,000
Quarterly Asset Flows
USD (Millions)
$3,000
$2,000
$1,000
$0
-$1,000
-$2,000
-$3,000
-$4,000
-$5,000
4Q94 2Q95 4Q95
2Q96 4Q96
2Q97 4Q97 2Q98 4Q98 2Q99 4Q99 2Q00 4Q00
2Q01 4Q01 2Q02 4Q02 2Q03
4Q03 2Q04 4Q04 2Q05 4Q05
Source: Credit Suisse/Tremont
3
General Notes
THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE
UNAUTHORIZED OR UNLAWFUL TO DO SO.
Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without GSAM’s prior written consent, be (i)
copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the
recipient.
Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce
returns. Investors cannot invest directly in indices.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied
upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.
© 2006 Copyright Goldman, Sachs & Co. All rights reserved. Rev #06-4143.
4