“Time keeps on slippin', slippin', slippin' Into the future Time keeps on slippin', slippin', slippin' Into the future…

…I wanna fly like an eagle…”

Steve Miller Band “Fly Like an Eagle” What is a ?

Like mutual funds, hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss. (US Securities & Exchange Commission)

…for this they charge a fee (common sense) Really?

 Perhaps a misnomer  Try “Alternative Investment Manager”  Not a homogeneous group:  Private offerings  Investment Companies  Commodity Trading Advisors  May or may not be regulated (yet)  May or may not deal in regulated markets  May or may not be “hedged” When did hedge funds begin?

 1949: A.W. Jones  1950’s & 1960’s: Growth to 200 funds  1970’s: The first shakeout  1980’s: Big names appear:  : Steinhardt Partners  Commodity Corp  : Quantum

‐ Largely word‐of‐mouth ‐ Dominated by equity long/short funds “Credulity”

• 1990’s: More press: ‐ : Tiger ‐ : Caxton ‐ Paul “Tudor” Jones . Include commodity & currency trading . Capacity views expanded . Broad talent exodus from the Street . Demonstrated superior risk management . High Net Worth & Endowments as clients . LTCM & Asia Crisis (??) “Incredulity”

• 2000 ‐ 2010: Amaranth, Madoff & “Gates” – Correlation concerns (The LONG/short) – Transparency dilemma – Media & regulatory scrutiny – Banks, mismanagement & fraud (?) – Leverage & liquidity questions – High Net Worth & Endowments as clients “Industrial”

2011 – 2017

. Correlation concerns continue . Performance problems persist . MF Global & SAC shutdown . Pension fund penchant . Cost of compliance Current Issues

• Distribution & Platforms • Laws of “Bigness” • Regulation – Cost of Starting Up – Cost of Being Small • The “risk cycle” • Performance & Fees $3.1 Trillion (end 2017)

Reality Sucks

AI Industry – SIZE matters Dates to remember:

• 1970’s Bear Market • 1987 Stock Market Crash • 1994 Bond Market Disruption • 1997 Asian Market Crisis • 1998 LTCM • 2000 – 2003 Meltdown (Enron & MCI) • 2007 – 2009 Financial Crisis What do hedge funds do? (anything they want…well, almost)

By Style: Relative Value (compare) Event Driven (wait) Systematic (model‐driven) Opportunistic (whatever works) What do hedge funds do?

By Process:

Discretionary

Quantitative (Mathematical valuations)

Systematic (Model‐driven trades & portfolio) What do hedge funds do?

. By Assets: . Equities . Commodities . Foreign Exchange . Fixed Income . Derivatives . Multi‐asset Relative Value

Convertible Arbitrage Capital Structure Arbitrage Fixed Income Arbitrage Equity Market Neutral* Volatility Arbitrage* Event Driven

Risk Arbitrage/Merger Arbitrage* Credit Arbitrage Activist Management Distressed securities Dates to 1800’s Most illiquid Lender‐of‐last‐resort Requires dysfunctionality Opportunistic

Macro(economic) = thematic* Short‐selling Emerging Market Equity Long/Short = the classic Systematic

Commodity Trading Advisor roots Quantitative Equity Algorithmic Execution

‐ Data Dependent ‐ Technology Driven ‐ Scientific Method Alternative Strategies represent a broad array of risk:return opportunities % AIS in the Mix of AIS with Stock/Bond 9.00

100% Alternatives 50% < 40% < 30% < 20% < 10% < 0% Alternatives

8.50

100% Stocks

Average Annual Return 8.00

7.50

7.00

6.50

100% Bonds 6.00 3.00 5.00 7.00 9.00 11.00 13.00 15.00 Average Annual Volatility

% AIS in the Mix of AIS with Stock/Bond What matters? Strategy or Manager Highly variable returns within class Why hedge do hedge funds exist?

The need for long‐duration return Pensions Private Public Individual Retirement Family Office (HNW) Endowments Insurance The need for diversification A Short History of Living Long (and Well)

Public & Corp Bond Market Growth Mutual Fund Growth First Public Stock Alternative Lots of Marry Boom/Bust Pensions Market Investment Sons Well Investing (Germany) Crash Growth MPT

Biblical Medieval1700’s 1800’s 1900’s 1970’s 1990’s Formation of Corporations, Shareholders & Financial Institutions How does the future look?

Competition: 10,000 Hedge Funds(?)

Opportunity: Global Imbalances

Regulation: The Great Debate

Risk Preferences/Cyclical Downturn Competition for Value‐add Consistent Alpha – no style Higher Fees Alpha above Style

Style Driven Alpha `

Beta to Style

Beta to Market Lower Fees Regulation of the Financial Industry

 National Association Of Insurance Commissioners (1871)  Federal Reserve Act (1913)  Glass‐Stegall Act (1933)  Security Exchange Act (1934)  Commodity Exchange Act (1936)  Investment Company Act (1940)  Sarbanes Oxley (2002)  Hedge Fund Registration (2004‐2006)  Dodd Frank (2010)