Deutsche Bank AG · XETR:DBK
Deutsche Bank — Investor Presentation (December 2001)
33 slides from Deutsche Bank's investor presentation, December 2001
Slide 1: Hedge Funds: An introduction with three case studies
Hedge Funds An introduction with three case studies DB Absolute Return Strategies December 2001
Slide 2: Agenda
Agenda l What are hedge funds? l How they operate, using three case studies l Performance in various market conditions l Positioning in a client portfolio l Challenges & opportunities
Slide 3: What are hedge funds?
— What are hedge funds? ik set Deutsche Asset Management Deutsche Bank Group
Slide 4: Hedge fund = Absolute return fund
Hedge fund = Absolute return fund
Slide 5: Hedge Funds: The Myth...
Hedge Funds: The Myth... Perceptions are due to widespread industry publicity l Soros’ massive currency bets in the early 1990s l The Long Term Capital Management debacle in 1998 l Quantum Fund downsizing and restructuring in 2000 l Julian Robertson’s Tiger Fund closure in 2000
Slide 6: Hedge Funds: The Reality...
Hedge Funds: The Reality... The truth is that: l Hedge funds have existed for decades l More than 6,000* hedge funds exist today l Most are small, avoid both publicity and making noise in the markets l Many are not risky and can be an appropriate investment for conservative investors l Many are not
Slide 7: Asset class growth
Asset class growth Asset growth in absolute return strategies1 ($Abn) $A bn under management 1000 8,000 900 Number of funds 800 6,000 700 600 500 4,000 400 300 2,000 200 100 0 0 88 89 91 92 95 96 98 20 999 90 93 94 97 st) 19 19 19 19 19 19 19 19 19 19 19 (E 1 00 $AUD bn under management Number of fu
Slide 8: Characteristics
Characteristics l Seek positive returns regardless of market direction l Depend primarily on manager’s abilities rather than market behavior for results l Define risk as loss of principal rather than performance relative to a market benchmark
Slide 9: Source of returns?
Source of returns? l Manager skill in identifying and exploiting inefficiencies and other anomalies l Ability to utilise other techniques such as short selling and derivatives l Not constrained to hold benchmark constituents as in traditional management Able to capture value that traditional money m
Slide 10: What is short selling?
What is short selling? Long Buy stock today - sell it in future Expectation: stock will rise Short Sell stock today - buy back in future Expectation: stock will fall
Slide 11: How do I sell a stock that I don't own?
How do I sell a stock that I don’t own? Borrow stock. Once borrowed, it is yours to sell. (1,000 shares at $5) (1,000 shares at $5) (1,000 shares at $4) (1,000 shares at $4) Result: received $5,000, then paid $4,000 Net $1,000 profit
Slide 12: Use the complete universe
Use the complete universe Australian All Ordinaries Index 1998 1999 2000 2001 YTD 1 Annual Index Return +5% +15% +2% -5% % Shares Positive Return 51% 60% 46% 42% % Shares Negative Return 49% 40% 54% 58% … a hedge fund can capitalise on undervalued as well as overvalued companies. 1 Year to date at 3
Slide 13: How they operate, using three case studies
How they operate, using three case studies
Slide 14: Categories of hedge funds
Categories of hedge funds Hedge Fund Strategies Long/Short Relative Value Event Driven Equity Global Macro Multi-Strategy US Opportunistic Discretionary Rotational Convertible Arbitrage US Sector Systematic Fixed Merger Global/ Income Arbitrage International Statistical Distressed Arbitrage Debt Sho
Slide 15: Equity hedge
Equity hedge l Purchasing undervalued equity securities and selling overvalued securities short (often referred to as long / short equity) Typical Equity Fund Long / Short Equity Fund Stock Holding Stock Holding ABC $200 ABC $100 XYZ $0 XYZ -$100 -$30 -$0 l What would happen to each of the portfolio
Slide 16: Does that mean I'll never make money?
Does that mean I’ll never make money? $1,800 Electronic data systems $1,600 +46.3% $1,400 $1,200 $1,000 S&P500 Index -14.0% $800 $600 $400 Amazon -65.9% $200 $0 Nov-00 Mar-01 Jun-00 Aug-00 Jan-01 Apr-01 Oct-00 Feb-01 Jul-00 Dec-00 Sep-00
Slide 17: Equity hedge - not all the same
Equity hedge - not all the same l Diversification of portfolio l Hedge ratio - % long vs. % short l Multiple of underlying equity capital l Sector bets / exposures l Risk management approach - especially on short positions
Slide 18: Event driven
Event driven l Exploit valuation imbalances between securities of companies involved in significant corporate events - mergers, spin-offs, bankruptcy, or reorganisations Merger arbitrage: VodafoneAirtouch / Mannesmann November 1999 Event VodafoneAirtouch PLC announced an offer for Mannesmann. Nov 99
Slide 19: Event driven - example
Event driven - example Spread between Vodafone and Mannesmann Price 450 Market price of acquiror (Vodafone) over time 400 350 300 250 Spread 200 150 100 50 Market price of target (Mannesmann) over time 0 10/99 11/99 12/99 01/00 02/00 03/00 04/00
Slide 20: Event driven - not all the same
Event driven - not all the same l Announced vs. pre-announced events l Maximum exposure to any single merger l Diversification of mergers - industry, region l Hedge ratio l Debt vs. equity l Liquidity of holdings
Slide 21: Relative value
Relative value l Exploits temporary imbalances and mis-valuations in related market instruments - convertible bond arbitrage and derivative arbitrage Convertible bond arbitrage example:Corning Inc. l Corning Inc, an optical fibres and photonic components manufacturer in the US issued a zero coupon c
Slide 22: Relative value - not all the same
Relative value - not all the same l Type of Relative Value (Convertibles, Fixed Income, Pairs Trading, etc.) l Diversification of positions l Maximum exposure to any single issuer l Credit quality of portfolio l Hedge ratio l Level of average premium
Slide 23: Performance in various market conditions
Performance in various market conditions
Slide 24: Long term comparison to equities
Long term comparison to equities Hedge Fund Index S&P 500 Index 40% - 16.1% 1.7% -16.6% 10.3% 20.8% -26.0% 30% 13.6% -1.9% 20% 1.1% 10% 14.1% 8.9% 2.8% 19.0% 0% -10% -20% -30% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Annual YTD average Hedge Fund Index is represented by the HFRI F
Slide 25: Long term comparison to global bonds
Long term comparison to global bonds Hedge Fund Index JP Morgan Global Bond Index 40% 16.7% 18.6% 36.4% 30% 16.7% 2.2% 16.7% 20% 10.0% 15.4% -12.7% - 6.0% 10% 2.7% 2.8% -3.9% 0% -10% -20% -30% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Annual YTD average Hedge Fund Index is represen
Slide 26: Equity bull market comparison
Equity bull market comparison S&P 500 Hedge Fund Composite Index 40.0% 30.0% 20.0% 10.0% 0.0% Sep-98 to Dec-94 to Nov-90 to Apr-97 to Nov-97 to Aug-96 to Nov-95 to Oct-99 to Dec-91 to Sep-92 to Mar-00 to Jan-99 Sep-95 May-91 Jul-97 Apr-98 Nov-96 Jun-96 Dec-99 Dec-91 Mar-93 Mar-00 Hedge Fund Composit
Slide 27: Equity bear market comparison
Equity bear market comparison S&P 500 Hedge Fund Composite Index 20.0% 10.0% 0.0% -10.0% -20.0% Jun-01 to Jul-98 to Feb-01 to Jun-90 to Sep-00 to Feb-94 to Jan-00 to Jan-90 to Jul-99 to Aug-97 to Apr-00 to Sep-01 Aug-98 Mar-01 Oct-90 Nov-00 Mar-94 Feb-00 Jan-90 Sep-99 Aug-97 May-00 Hedge Fund Compos
Slide 28: Positioning in a client portfolio
Positioning in a client portfolio
Slide 29: Absolute returns as part of a portfolio
Absolute returns as part of a portfolio Australian fixed Overseas fixed interest interest Indexed bonds Cash Property (Direct and Listed) Absolute return funds Overseas shares Australian shares Other Asset allocation is represented by the average manager weightings for the William M. Mercer pooled g
Slide 30: Benefit of adding absolute return funds
Benefit of adding absolute return funds Date: Dec 1999 - Sept 01 Absolute return funds (15%) Annual return Risk (annualised std. deviation) 5% 8% 4% High growth portfolio with High growth portfolio 7% 15% hedge funds 3% High growth portfolio with 6% 2% 15% hedge funds High growth portfolio 5% Return
Slide 31: Challenges and opportunities
Challenges and opportunities
Slide 32: Challenges
Challenges l Defining and understanding - misconceptions l Global investment requiring extensive research l Single manager risk l Asset allocation - where does it fit? l Local regulatory and taxation considerations l Capacity - access to best talent
Slide 33: Opportunities
Opportunities l Multi-manager - prudent approach for investors l Attractive risk / return characteristics l Skill based investments l Strong diversification benefits l Performance differentiation - especially given the forward looking expectations in traditional assets
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