Structure of the presentation

Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry
AMC in India Fund Management Fees Debate

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

Whenever individual/retail investors pool together their resources and allow a professional fund manager to invest it, the exercise is called Asset Management. Reasons to Invest: Diversification Expert Management Choice Liquidity Access to New Markets Tax Benefits

Broad types of Pooled Investment Structures: Mutual Fund

Pension Fund
Hedge Fund

 Alpha
Beta R

Squared Standard Deviation Sharpe ratio

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

Entry of Hedge funds and Private Equity

The

lessons of the 2000-02 equity bear market share prices fell, pension funds went into the

When

red
That

opened the door to hedge funds, private equity and a whole school of investing known as alternative assets.

 An

aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns

 Estimates

of industry size vary widely due to the lack of central statistics, but as per various reports it is beyond $3 trillion The 25 largest hedge fund managers had $519.7 billion in assets under management as of December 31, 2009 Largest is JP Morgan Chase followed by Bridgewater Associates

 Management

Fee

calculated as a percentage of the fund's net asset value range from 1% to 4% per annum, with 2% being the standard figure

Performance

Fee

calculated as a percentage of the fund's profits Typical charge is 20% of returns, high of 45%

 Varied

strategies based on:

Market: commodity, equity, currency Instrument: futures, options, swaps Exposure Sector: emerging market, technology etc. Diversification: multi-manager, multi-strategy, multifund, multi-market

hedge fund typically commits itself to a particular strategy

Global Macro - Global Macro funds attempt to anticipate global macroeconomic events, generally using all markets and instruments to generate a return. e.g. discretionary macro, systematic micro, multi strategy Directional - Hedged investments with exposure to the equity market. e.g. long/short equity, in emerging markets, sector funds

Event Driven - Exploit pricing inefficiencies caused by anticipated specific corporate events.
e.g. distressed securities, merger arbitrage Relative Values - Exploit pricing inefficiencies between related assets that are mispriced.

e.g. fixed income arbitrage, equity market neutral, convertible arbitrage

Miscellaneous e.g. fund of hedge funds, fund of fund of hedge funds, 130-

30 funds

 The

fund has no employees and no assets other than its investment portfolio and cash. Portfolio is managed by investment manager, which is the actual business and has employees. Service Providers:

Prime broker Administrator Distributor

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

 One

of the industry's biggest problems is the markets themselves A particular asset class or investing style may go out of fashion

 It

stands to reason that the more money flowing to a particular investment strategy, the more likely returns will diminish. By logical extension, fund managers should therefore occasionally say no to new cash to keep from hurting performance. But in the money business, thats easier said than done Take an example

Take for instance a fund that buys debt issued by troubled companies, a mercifully finite universe of investment opportunities. Say the manager limits the size of the fund to $5 billion on the expectation of a 12 percent annual return. Management fees would reap $100 million. Hitting the performance target generates an additional $120 million (though many investors insist on minimum hurdle rates). Still, add it up and thats some $220 million of fees, with a 9.6 percent net return for investors. Not too shabby. Now, consider a $10 billion fund with the same securities as its target, but with annual return assumptions of 8 percent to reflect its larger size. Management fees would double. And a 20 percent slice of the profit would bring in $160 million. Thats $360 million for the fund manager, or nearly two-thirds more than the smaller fund. But for investors, the total return would be a third lower.

Mgt Performance Expected Fee(2% of fee (20% of Size Return fund size) profit) Total 100 220 5 billion 12% million 120 million million 200 360 10 billion 8% million 160 million million

This hypothetical calculation illustrates the conflicts fund managers face. True, performance ultimately determines the future flow of funds. But the incentives to scoop up new money, even if it dilutes returns, are strong. Still, some fund managers are managing admirably to resist the temptation. One is Oaktree Capital, the Los Angeles-based fund manager led by Howard Marks. The firm will soon close its latest distressed debt fund at $4.5 billion despite far higher demand from potential investors. Its last fund had $11 billio

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

 IF

FUND management is such an attractive business, why would large banks such as Merrill Lynch want to give it up? Being a fund manager: you have to beat the market. If you don't, intermediaries such as brokers and private banks will not select your funds Distributors still earn fees from fund management, by charging investors for the oversight of their portfolios or by taking commission on the funds they sell. At the same time they cut out much of the cost.

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

 THE

fund-management industry may have its problems, but it also has two enticing opportunities ahead of it. The two Esthe emerging and the elderly

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

Growth in Assets Management in India since 1963

Key Issues
Revenue is directly linked to market valuations, so a major fall in asset prices causes a precipitous decline in revenues relative to costs; Above-average fund performance is difficult to sustain, and clients may not be patient during times of poor performance; Successful fund managers are expensive and may be headhunted by competitors; Above-average fund performance appears to be dependent on the unique skills of the fund manager;

 Introduction Growth

of Hedge Fund and Private Equity Fund Management Industry Problems Changing Landscape-Asset Managing and Selling Outlook of the industry AMC in India Fund Management Fees Debate

Fees as high as 2% and 20% performance fees

High focus on Alpha, through widening the asset base Higher research needed. Greater flexibility like short-sell

Increasing Hedge funds have led to high fees to investors but modest returns for clients

 Investors

Lured by Last Year's Winners. Vying to Beat the Index Seldom Pays BENCHMARKING.

 What

the Statistics Say

 Historically,

mutual fund investors in India belong to the NAV returns variety. The first and last question on their minds is what return has the fund given? Rarely, if ever, do they ask questions like how much is the fund charging me? What goes into the expenses? Is it possible for the fund house to lower the expenses?

Source: Scheme Offer Document: DSP Blackrock

** Percentage of returns greater or less (-ve) than the indices

 In

recent years there has been a move to separate the effect of alpha from that of beta, which is the portion of an investor's return that comes straight from the market. Thus, if the S&P 500 index rises 8% and an American equity-fund manager delivers a 10% return, the investor gets eight percentage points of beta and two of alpha. Arguably, the client should pay top dollar only for the two additional points, not the eight he could have received even from a low-cost index-tracking fund. But alpha is quite hard to define.

Group2: Abhishek Agarwal Akhil Gupta Ankur Singla Jitesh Kejriwal Harish Mittal Ayush Gupta