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Investment managers are trying to innovate. What are they innovating around?

"Beta"

What is an "investment wrapper" or "investment vehicle"?

"Investment vehicle" means "investment wrapper"; examples include open-ended mutual funds, closed-ended mutual funds, limited-liability companies (i.e. hedge funds), private partnerships. The wrapper is just the delivery form, almost any strategy can go into any wrapper

The S&P 500 is a market-capitalization-weighted-index; what is market-capitalization-weighting?

"Market-Capitalization", more commonly called "market-cap", means the total traded value of the company's equity • In other words, for every company, the total number of outstanding shares * the share-price.

In generic terms, what is the main performance metric of the investment management community?

"return per unit of volatility" "asset management math

About how much (in dollars) is the asset management industry expected to manage by 2020?

$100 Trillion in assets

What was the average annual growth rate in hedge fund asset from 1995-2014?

$20 Billion to $3 Trillion, an annual growth rate of over 28% per annum for 20 years

What was the average performance of hedge funds in 2008, as defined by the CS Tremont Index?

-20%

Approximately what % of all ETF inflows are currently going into "Smart Beta" products?

1/3

What are typical fees for active equity funds? What are typical fees for passive equity funds?

15-25%

The top ten names in the S&P 500 represent approximately what % of the total index?

18%

What is the traditional hedge fund fee structure?

2 & 20", which means "2% on AUM, plus 20% of all returns over a benchmark".

In five years, Deutsche Bank estimates that approximately what % of equity investment will be passive?

50%

Regarding ETFs, about how many ETFs are there worldwide?

6,800+ ETFs

About how many hedge funds exist today (the high estimate)?

8,000-10,000

Is it easy to launch a hedge fund; are there many barriers to entry?

? There are very few barriers to entry to launch a hedge fund; the cost to launch is quite low and at inception a hedge fund could be launched by even just one person.

What is benchmarking as it relates to asset management?

Benchmarking is evaluating performance against a yardstick

Burt Malkiel has done extensive research on the performance of mutual funds (and later hedge funds). In the 1970's and 1980's he studies mutual funds and what were his conclusions?

Consider: if performance were due entirely to skill, then we would expect to see 100% of Top Half performers repeat that in successive years, and 100% of Bottom Half performers repeat that in successive years.

List the four general hedge fund strategies we discussed.

Equity Hedge Event Driven Macro Relative Value

Ironically, what was the very worst performing hedge fund strategy in 2008?

Equity Hedged -40%

Did Fund of Hedge Fund managers successfully avoid some of the pitfalls in hedge fund investing in 2008?

Fund of Funds proved no better at picking winners than the average hedge fund index.

What are two examples of Alternative Strategies?

High concentration • Short-Selling • Hedged Positions • Isolating Idiosyncratic Factors • Leverage?

Please name the five largest "Smart Beta" funds (ticker is OK)

IWD IWF VTV VUG VIG

In common usage in finance, what is "Beta"?

In common usage "Beta" is usually not referencing "market volatility", it is referencing "market return".

What is the definition of "volatility" as used with financial assets and asset management?

In finance, "volatility" means "the standard deviation of percentage returns".

What is carried interest and why is it controversial?

It is a share of the profits. If the fee is only calculated and paid annually, then the argument is that it's not income (taxed at 40-50%), it's a long-term capital gain (taxed at 20-25%).

What are two arguments against market-capitalization-weighted benchmarks like the S&P?

Larger companies (defined as having a larger market-cap) dominate the index • Portfolio weighting is determined to some degree by price; if two companies have the same number of shares, the one with the higher stock price will have a higher representation in the index. • Some critics say this leads to buying-high-and-selling-low, as stocks with higher prices have a larger representation in the index.

Regarding the Ultra ProShares ETF, what phenomenon did we observe as realized volatility increased?

Monte-Carlo Simulation Example: "1yr Return of ETF / 1yr Return of S&P 500" {1000 paths, using 5% mean return, and 5% then 15% volatility}

List three ways in which hedge funds avoid regulation and scrutiny?

No general solicitation to the public • Sale of hedge fund interests limited to 100 or fewer investors • Avoid disclosure requirements by not owning more than 5% of any publically traded company's publically listed stock

What was the conclusion of the Morningstar performance study, as it relates to high-fee vs. low-fee funds?

Only Emerging Markets showed any success against benchmarks.

What are three examples of Alternative Assets?

Real Property • Private Equity • Deeply distressed debt • Commodities • Currencies • Volatility • Reinsurance • Business Receivables

The S&P is dominated by a few industry sectors; what are the top 2 industry sectors represented in the S&P?

Technology Healthcare

Is there a specific definition to the term "hedge fund"?

The definition is very wide, to the point of being useless

What is Path Dependency?

The return to the investor depends not on the point-to-point price movement of the S&P 500, it depends on how we go there

What was the major conclusion from the Wharton Mutual Fund study, about post-crisis performance?

The underperformance of large company mutual funds compared to the S&P 500 is worse more recently than ever in the past.

Does adding leverage to a traditional asset make it an alternative asset?

There is nothing "alternative" in leverage by itself. A leveraged investment in the S&P is not "alternative", it is just leveraged and more risky.

List three of the largest asset managers in the world

They work for an investment company • They are hired by the corporation with the assets • They take money from many investors

List the six risks found in hedge funds that are unique to hedge funds, not usually found in mutual funds.

Wide Investment Mandate & Style Drift: Survivorship Bias: Key Man Risk: Lack of Transparency: • Redemption Risk: Lack of Third Party Price Verification:

Is the objective of most hedge funds to beat the S&P 500?

almost never to beat the S&P 500.

What is a simple definition of "Smart Beta"?

any rules-based portfolio allocation methodology that doesn't use market-cap weighting any systematic (i.e. rules-based) portfolio allocation strategy that deviates from the standard market-cap allocation scheme

What is a Fund of Hedge Funds?

are portfolio managers who build a diversified portfolio of hedge funds, across various investment styles.

What was hedge fund performance in the 2008 financial crisis?

e, the performance of the industry was without question very poor and unexpected.

Please give three examples of Smart Beta methodologies.

equal amount to all names statistical & mathematical relationships fundamental factors technical (price) factors

What event in 2008 popped the bubble for the Madoff Fund and exposed its massive fraud?

hen securities prices fell dramatically in 2008

What is the main reason hedge fund strategies were appealing to asset managers; what did they offer?

increase a portfolio's expected risk-adjusted return.

The "Ultra ProShares" ETF is an example of what kind of ETF?

leveraged

Regarding ETFs, about how much AUM are in ETFs worldwide?

n $2.5-3.0 Trillion

What are four qualities that virtually all hedge funds share?

pooled investment vehicle private unregulated limited partnerships or limited liability companies.

After the crisis, clients demand what type of account which cures many of the risks that are unique to HFs?

t, Separate Accounts have become the norm for all large investors (i.e. any investor who can demand it).

What are two arguments in support of market-capitalization-weighted benchmarks like the S&P?

• By definition it represents the experience of the average investor • It is unambiguous and objective • It weights stocks by their relevance to the overall market and by the ability of managers to invest in them.

What is the term that summarizes the primary criticism of "Smart Beta" strategies?

• By definition, alternative allocation methodologies will create portfolios that have a different risk profile than a market-cap-weighted benchmark. • These risks can include high concentration in fewer names, poorer liquidity, and higher volatility. Often, these risks are only fully appreciated in times of market stress.

List three qualities that have dominated the US equity market, since the 2008 crisis

• High correlation • Low yet episodic volatility; distorted valuations

What is happening, inevitably, to the investment management industry in the face of falling revenues?

• When fees plummet, economies of scale become very relevant. Large investment complexes can devote resources to research and analysis, can support large sales organizations and customer service. • Investors want fewer relationships with larger more capable investment management companies, rather than many many relationships with smaller ones.