“why buy hedge funds in a rising market · clarica mvp asian pac rsp 177.2 11.6 -23.3 187.3 -73.2...

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Copyright © 2003 Hillsdale Investment Management Inc.

Hillsdale Investment Management Inc.

“Why Buy Hedge Fundsin a Rising Market”

Strategy Institute Hedge Fund Conference

December 9, 2003

December 9, 2003 Copyright © 2003 Hillsdale Investment Management Inc. 2

Why Buy Hedge Fundsin a Rising Market ?

1. Alpha lasts longer than beta and market timing is difficult.

2. Fixed risk is good.

3. Lower risk is better,

4. Efficient portfolios are best.

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Finding Alpha,Managing Beta


Alpha or Beta?(value-added) (market risk)

Historically, the market has always been able to provide a hot fund, or a strong sector trend, but finding a fund with consistent long term performance and an ability to navigate through a succession of market environments is very difficult.

ALPHA is a fund’s return “net of risk” and is also characterized as that portion of the manager’s/fund’s returns generated, in excess of the overall market.

BETA, on the other hand, is the measure of how the fund’s returns track, in relation to the overall market.

3


The “Monkey Return”© John Schmitz

• Always ask yourself what is the “monkey return” for any given strategy

– If a monkey ran the strategy, what return would he achieve (i.e., the random active security selection and market timing return)

• E.g., The monkey return for a Market Neutral Equity strategy is the T-bill rate (less base fees and expenses)

• For a US long-short strategy which is on average 50% net exposed to the US equity markets, the monkey return is 50% of the S&P 500 return plus 50% the US T-bill rate

• Only give the portfolio manager “credit” for his or her ability to generate returns in excess of the monkey return


Canadian Mutual FundsTop Ten for 2003

RBC Precious Metals 117.6 73.7 424.4 -59.3 1.12 39.5

Dynamic Global Precious Metals 106.2 60.9 316.5 -52.3 0.92 32.2

Altamira Precious & Strategic Metals 105.5 50.7 242.6 -68.0 0.95 33.3

Sprott Gold & Precious Metals 103.4 n/a n/a n/a n/a 0.0

Dynamic Power Hedge 100.6 n/a n/a n/a n/a 0.0

Dynamic Global Resource 97.2 28.3 125.4 -63.7 1.05 23.9

AGF Precious Metals 96.0 57.1 287.5 -71.7 0.94 33.3

Dynamic Cdn Precious Metals 86.4 59.9 308.5 -61.4 1.03 34.3

CIBC Precious Metals 81.3 50.1 238.2 -65.0 0.77 26.0

S&P/TSX Median Gold Stock 86.5

Returns (%) Beta Std. Dev. (%)

1 Yr 3 Yr Best 3 Yrs Worst 3 Yrs 3 Yr 3 Yr

1 Year Returns

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Canadian Mutual FundsTop Ten for 1999

Talvest China Plus 203.6 24.1 -1.3 229.2 -51.3 0.89 21.1

Excel India 202.4 67.5 -1.2 17.8 -69.5 0.78 25.3

AIM Global Technology 200.3 18.0 -38.6 607.8 -85.1 1.15 45.0

AGF Aggressive Growth 195.1 12.6 -25.1 554.7 -75.5 0.88 23.9

Altamira e-business 190.2 16.9 -36.1 2.6 -87.1 0.9 36.4

Cda Pacific Basin (KBSH) 177.6 13.0 -25.4 191.3 -75.6 1.22 23.2

Clarica MVP Asian Pac RSP 177.2 11.6 -23.3 187.3 -73.2 1.24 22.2

Altamira Sci& Tech 175.5 15.3 -39.7 712.7 -84.9 1.12 44.3

Talvest Global Sci & Tech 171.8 21.3 -41.2 671.5 -84.5 1.13 44.7

Elliot & Page Asian Growth 159.0 11.1 -8.7 99.1 -60.2 1.03 19.1

Returns to 2003 (%) Beta Std. Dev. (%)

1999 1 Yr 3 Yr Best 3 Yrs Worst 3 Yrs 3 Yr 3 Yr


“Most of academic finance is teaching that you can’t earn 50

percent a year without some risk of losing a lot of money.”

William Sharpe

5


Reducing &Controlling Volatility


Good Hedge Funds Offer A Consistent Risk Profile …

0

5

10

15

20

25

30

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Risk (annualized standard deviation)

Ann

ualiz

ed R

etur

n

TSE

NASDAQMarketNeutral

AggressiveHedged

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… and a Consistent Return Profile(12 months)

Mkt Ntl

Agg Hedged

TSE 300

NASDAQ

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Maximum Return

Maximum Drawdown


Maximizing Risk-Adjusted Returns

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0

1

2

3

4

5

6

7

8

-0.99 -0.80 -0.61 -0.42 -0.23 -0.04 0.15 0.34 0.53 0.72 0.91

The Value of Non-Correlation

In a multi-asset class portfolio, the greater the negative correlation between asset classes, the greater the contribution to reducing risk. This relationship is notlinear.


Market Neutral9% ± 10

Long Equity10% ± 10

Blend9.5% ± 5

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

30 Years

A Non-correlated Return Profile19% ± 10

Use leverage to increase returns

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Hedge FundMechanics


Market Neutral Equity Return Mechanics

Particulars -40% -20% -10% 0% 10% 20% 40%

Long Return -40% -20% -10% 0% 10% 20% 40%

Add: Alpha (1)6% 6% 6% 6% 6% 6% 6%

Net Long Return -34% -14% -4% 6% 16% 26% 46%Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Gross Long Return -34% -14% -4% 6% 16% 26% 46%

Short Return 40% 20% 10% 0% -10% -20% -40%Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6%

Net Short Return 46% 26% 16% 6% -4% -14% -34%Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Gross Short Return 46% 26% 16% 6% -4% -14% -34%

Add: Net Cash Return on Shorts (2)1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Gross Fund Return 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%Less: Mgmt. & Admin Fees 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%

Net Return before Perf Fees 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%

Less: Performance Fees @ 20% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%

Net Return After ALL Fees 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%

Market Returns

Market Neutral Equity Products

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Long Short Equity Return Mechanics

Particulars -40% -20% -10% 0% 10% 20% 40%

Long Return -40% -20% -10% 0% 10% 20% 40%

Add: Alpha (1) 6% 6% 6% 6% 6% 6% 6%

Net Long Return -34% -14% -4% 6% 16% 26% 46%

Leverage 1.70 1.70 1.70 1.70 1.70 1.70 1.70

Gross Long Return -58% -24% -7% 10% 27% 44% 78%

Short Return 40% 20% 10% 0% -10% -20% -40%

Add: Alpha (1)

6% 6% 6% 6% 6% 6% 6%

Net Short Return 46% 26% 16% 6% -4% -14% -34%

Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Gross Short Return 46% 26% 16% 6% -4% -14% -34%

Add: Net Cash Return on Shorts (2) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%

Gross Fund Return -11.3% 2.7% 9.7% 16.7% 23.7% 30.7% 44.7%Less: Mgmt. & Admin Fees 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%

Net Return before Perf Fees -13.8% 0.2% 7.2% 14.2% 21.2% 28.2% 42.2%Less: Performance Fees @ 20% 0.0% 0.0% 1.4% 2.8% 4.2% 5.6% 8.4%

Net Return After ALL Fees -13.8% 0.2% 5.8% 11.4% 17.0% 22.6% 33.8%

Market Returns

Long Short Equity Products


Portfolio Construction

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Strategy Design

Hillsdale strategies are designed around a proprietary approach, known as “The 5 Dimensions of Investment Measurement”©. Products are created with these 5 distinct measurements in mind:

1. Return2. Risk (Volatility)3. Correlation4. Drawdown5. Time Underwater


Return Volatility Correlation DrawdownTime

Underwater BETA# of

StocksTarget Wgts.

Net GIC Wgts.

Net Mkt Exp. Leverage

Market Neutral

Cdn Market NeutralTBills + 5-8% 6-8% 0 Max 10% 6-9 mths 0 100-200 1-2% 0% 0% Max 1X

Long Short Equity

Cdn/US Aggressive HedgeBenchmark

+ 8% 14-16% 40-60%1/2 of Market

1/2 of Market 0.5 80-100 1-4% +- 15% 40-80% Max 2X

Performance Equity

Cdn/US PerformanceBenchmark

+ 4% 16-20% 80%Less than Market

Less than Market 1.0 40-60 1-4%

Max 20% 100% 0

Success Measurement Objectives Other Risk Controls

Strategy / Product

Hedge Fund Strategy Profiles

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Portfolio Optimization


Alternate Allocations for Risk Tolerance Ranges

8 Year Analysis to

TSXMSCI

World IndexSMcL MT

Bond S&P 500

TRI

Toronto Real Estate

Board Cdn 90 Day

T-Bills

Cdn Market Neutral Equity

Cdn Performance

Equity

Cdn Aggressive

Hedged Equity

Annualized Net Return

Annualized Risk

Information Ratio

Portfolio Beta

Best 12 Mth Return

Worst 12 Mth Draw

7.5% Volatility

7.5% Risk - Allocation #1 10% 0% 20% 10% 10.0% 10.0% 10.0% 10.0% 20.0% 11.8% 7.5% 1.58 0.35 37.4% -7.3%

7.5% Risk - Allocation #2 10% 10% 20% 0% 20.0% 0.0% 10.0% 10.0% 20.0% 11.4% 7.5% 1.52 0.34 35.8% -7.1%

8.0% Volatility

8.0% Risk - Allocation #1 10% 0% 30% 0% 0.0% 10.0% 10.0% 20.0% 20.0% 13.2% 8.0% 1.65 0.35 40.9% -5.6%

8.0% Risk - Allocation #2 10% 0% 10% 10% 30.0% 0.0% 10.0% 20.0% 10.0% 12.0% 8.0% 1.50 0.37 37.4% -6.5%

8.5% Volatility

8.5% Risk - Allocation #1 0% 0% 20% 0% 10.0% 0.0% 20.0% 20.0% 30.0% 15.1% 8.5% 1.77 0.29 46.1% -6.7%

8.5% Risk - Allocation #2 10% 0% 10% 10% 0.0% 10.0% 30.0% 20.0% 10.0% 13.7% 8.5% 1.61 0.39 43.7% -9.6%

Current Portfolio Mix 25% 8% 38% 15% 10.0% 5.0% 0.0% 0.0% 0.0% 7.6% 8.3% 0.93 0.44 27.4% -12.1%

Proposed Portfolio Mix 20% 5% 30% 13% 10.0% 2.5% 7.5% 2.5% 10.0% 9.7% 7.9% 1.24 0.41 33.1% -9.4%

Proposal to Sample Portfolio

October-03

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-0.50 0.00 0.50 1.00

Correlation vs. TSX

Portfolio Correlation Analysis

Cdn 90 Day T-Bills

Toronto Real Estate Board


SMcL MT Bond

Cdn Aggressive Hedged Equity

Cdn Performance Equity

S&P 500 TRI

MSCI World Index

TSX


The Impact of Non-Correlation• Existing Portfolio Profile

– Return 7.7%, Vol. 8.3%, Beta = 0.44 => IR = 0.93

• Portfolio Modifications– Sell

• 5% TSX: Profile = 8.4% Ret / 17.8% Vol / Correl. = 1.00• 3% MSCI: Profile = 3.3% Ret / 15.5% Vol / Correl. = 0.81• 7% SM Bond: Profile = 7.5% Ret / 4.6% Vol / Correl. = 0.20• 3% S&P500: Profile = 8.8% Ret / 17.1% Vol / Correl. = 0.79• 3% C$ TBills: Profile = 4.0% Ret / 0.3% Vol / Correl. = -0.08

– Purchase• 8% Cdn Market Neutral: Profile = 14.2% Ret / 9.6% Vol / Correl. = 0.08• 3% Cdn Small Cap: Profile = 21.1% Ret / 17.5% Vol / Correl. = 0.77• 10% Cdn Long Short: Profile = 18.6% Ret / 15.9% Vol / Correl. = 0.45

• New Portfolio Profile– Return 9.7%, Vol. 7.9%, Beta = 0.41 => IR = 1.24

• VALUE ADDED: – Return +200 bps, Vol. -40 bps, Beta -0.03, IR + 0.31 (+33%)

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Hillsdale Investment Management Inc.

Client Portoflio AnalysisClient:

Date: FX Rate: 1.3500

H O L D I N G S C$ EquivalentPortfolio

% Benchmark CAN$ US$ C$ EquivalentPortfolio

% Benchmark

Cash & Equivalents 50,000 5.0% (25,000) - 25,000 2.5%

Cash - 0.0% C$ TBills - - - 0.0% C$ TBills

Tbills / MM Funds 50,000 5.0% C$ TBills (25,000) - 25,000 2.5% C$ TBills

GICs - 0.0% C$ TBills - - - 0.0% C$ TBills

Fixed Income 375,000 37.5% (75,000) - 300,000 30.0%

Short Term Bonds - 0.0% - - - 0.0%

Mid - Long Term Bonds 375,000 37.5% SM MT (75,000) - 300,000 30.0% SM MT

Equities (Long Only) 475,000 47.5% (75,000) - 400,000 40.0%

Canadian Equities 250,000 25.0% TSX (25,000) - 225,000 22.5% TSX

US Equities 150,000 15.0% (25,000) - 125,000 12.5% S&P

Foreign Equities 75,000 7.5% MSCI (25,000) - 50,000 5.0% MSCI

Alternative Investments 100,000 10.0% - - 100,000 10.0%

Real Estate 100,000 10.0% TREB - - 100,000 10.0% TREB

Private Equity - 0.0% CPE - - - 0.0%

Other - 0.0% CVC - - -

Hedged Investments - 0.0% 175,000 - 175,000 17.5%

Hillsdale - 0.0% 175,000 - 175,000 17.5%

Other Hedge - 0.0% - - - 0.0%

TOTAL PORTFOLIO 1,000,000$ 100.0% -$ -$ 1,000,000$ 100.0%

Return Risk I.R.(1) Return Risk I.R.(1)

Return / Risk Profile 7.7% 8.3% 0.93 9.7% 7.9% 1.24Beta 0.44 (vs. TSX) Beta 0.41

Proposed PortfolioRecommended Add'ns / Delet'ns

Sample PortfolioOctober-03

Current Portfolio Mix


Efficient Frontier with Portfolio Weighted Options8 Years to Oct 2003

S&P 500 TRI


Current Portfolio Mix

TSX

MSCI World Index

SMcL MT Bond

Toronto Real Estate Board

Cdn 90 Day T-Bills

Cdn Performance Equity

Cdn Aggressive Hedged Equity

Proposed Mix

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0% 2% 4% 6% 8% 1 0 % 12% 14% 16% 18% 20%

Volatility (Standard Deviation)

Ann

ualiz

ed R

etur

n

Efficient Frontier

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Chris Guthrie, CFA, [email protected]

Arun Kaul, CFA, [email protected]

John Loeprich, SVP Private Client [email protected] , (416) 913-3922

John Motherwell, VP Institutional [email protected] , (416) 913-3923

________________________________________________________________________________________________________________________________ ______

Information: www.hillsdaleinv.com

C O N T A C T S


Appendices

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Canadian Performance Equity:Performance


Canadian Aggressive Hedged Equity: Performance

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Canadian Market Neutral Equity Performance


Hillsdale Performance Record

To change reports, c l ick on tab)

Sort Order : 3 yr % (To change, c l ick co lumn heading once to sor t up, aga in to sor t down)

Update Fundlis t

A s o f October 31 , 2003

F u n d n a m e 5 S tar Rating Volat i li ty 1 y r

% 3 yr %

5 y r %

10 yr %

15 yr %

Incep (mm/yy)

Charts /Info

Hi l lsdale Cdn Per fo rmance Equ i t y ( 11 /14 )

C S M L O 4 0 . 5 7 13.40 23.19 2 0 . 6 5 (01/96)

Hi l lsdale Cdn Aggress ive H e d g e d A ( 11 /14 )

A L T A V + 2 1 . 7 0 8.82 1 5 . 5 7 (12/99)

Hi l lsdale Cdn Market Neut ra l Equ A (11/14)

A L T L O 0.94 0.99 4.60 ( 04 /00 )

S&P/TSX To ta l Return ( 11 /17 ) 2 6 . 8 4 - 5.29 6.28 8.16 8.22

To delete a fund from your Personal Fundl ist , uncheck the box at the lef t and then cl ick Update Fundl is t .

Update Fundlis t

17


(1) Advisors have the option of choosing the published trailer fee, with no share of the performance fee -OR- the published rate less 0.25% plus up to a 25% share of the performance fee.

(2) Performance fees are charged to the fund based on 20% of gross returns (subject to a high-water mark). Advisors share of the performance fee (should you choose this option) is up to 25%.

(3) Minimum investment for hedge funds is C$ 50,000 (US$ 35,000) for purchases by an accredited investor through a financial advisor.

YesC$ 150,000YesYes1.00%2.00%0%-5%Front End

HIL 220HIL 221

Canadian Market Neutral Equity

NoUS$ 100,000YesYes1.00%2.00%0%-5%Front End

HIL 120HIL121

U.S. Aggressive Hedged Equity


HIL 200HIL 201

Canadian Aggressive Hedged Equity

NoUS$ 100,000YesYes1.00%2.00%0%-5%Front End

N/AU.S. Performance Equity


HIL 240HIL 241

Canadian Performance Equity

RRSPEligibleMin. Invest.

High-waterMark

Perf . Fee

Trailer Fee

Mgmt FeeCommission

SalesOption

FundSERV Codes

Fund Name

Fees & Compensation


Why Hillsdale ?

• A LEADER in alternative investment management strategies.

• Rational & Systematic portfolio management decisions.

• Disciplined commitment to risk control.

• Full range of institutional quality hedge fund products to match client risk/return profiles.

• Non-correlated products provide TRUE portfolio diversification.

• Competitive compensation structure which allows Advisor to share in the profits of the fund.

“why buy hedge funds in a rising market · clarica mvp asian pac rsp 177.2 11.6 -23.3 187.3 -73.2...

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