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Man Investments AHL Update - January 2011

28th January 2011
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38mins 38secs

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Presenter: Good morning and a very warm welcome to the first Global AHL webcast. I’m joined today by Tim Wong, Chief Executive of AHL, Harry Skaliotis Head of Client Portfolio Management. For those of you who have not attended one of our webcasts before the format is as follows. There will be a formal presentation by Tim and Harry for around about 20, 25 minutes. This will be followed by Q&A lasting a similar time. The Q&A is anonymous and we would urge everyone to submit questions throughout the entirety of this process. We would hope to get around to each and every question. If we’re unable to or if some of these questions really require a direct phone call, then we will follow up afterwards. I’ll now turn over to Tim and Harry.

Tim: Good morning, I’m Tim Wong, CEO of AHL. The last two years has been quite busy for us. We have expanded our team significantly and we have added a lot of improvements to our model and last year we have also seen a turn around in performance. So today we’ll start off with Harry going through the performance update for 2010 and then I will go through in more detail about the various changes that has happened within the team. Harry?

Harry: Thank you Tim. Good morning everyone. I’d like to provide a summary of our performance in 2010. It was a good year for managed futures and for AHL in particular. Before focusing on the year, we have before us the track record of our diversified programme and the AHL Diversified CLC Fund, which has now been running for around fifteen years.

So just to put things into context one can see that on an annualised basis performance has been very strong at just under 17% per annum. Clearly, we have performed significantly better than the global stock market, and importantly we have also outperformed relative to the media manager in which we’re measuring the benchmark using the Stark 300 Trader Index for Managed Futures. Apart from the absolute return potential that the strategy offers, investors are always keen on allocating to the strategy for its diversification benefits, and we can see very evidently not just with the correlation figure but on the diagram as well that during the crisis periods, when we saw big and continued reversals in equity markets, our performance was able to continue in a kind of positive direction.

In fact, when one looks at our performance, or the industry performance, relative to other asset classes, we find that consistently we see a relatively low degree of correlation, not just with the equity markets but in fact with bonds and with other hedge fund styles as well. So this really reiterates the importance of considering an allocation to this investment style within a diversified portfolio.

So focusing now a little bit more on 2010, during the year the Fund, so Diversified was up 14.8% - as many of you are aware the Fund is weakly valued, as most of our open ended funds are, and so that is more of the calendar year performance number, it’s actually up until the last Monday of 2010. So, on a calendar basis, fund performance is up slightly more than that by about 16%. We do now publish daily performance estimates and one can pick those up from various sources including Bloomberg.

So I think what was quite nice about last year, when look at the monthly returns, I’ve just been speaking about the de-correlation and diversification benefits that the strategy offers, and there were a couple of months in particular that I’d to highlight. If we look at May and June of last year, we can see that global stock markets sold off considerably by around 12%, and during those two months the portfolio did a pretty good job of protecting against losses. We were slightly down by about 1% as well, but obviously it was much less severe for us, and we were able to make money from other asset classes even if we saw the reversals in equity. In August, we saw even more of a contrast when once again equities were down by about 3½%, and that was actually a very good month for us, we were actually up by 6.8%, and in particular our long exposure to bonds, which was a feature of our performance throughout the year, proved very profitable as we saw the S&P downgrading its credit ratings of countries like Portugal and Greece for example.

So turning onto an attribution of our returns across the asset classes that we trade, it’s very evident that fixed income markets and, in particular, the government bond futures that you can see there, the dark grey bar, performed very strongly for us. Governments around the world and central banks have maintained interest rates at very low levels and our long exposures we have held almost for the full 12-month period have paid off very handsomely. What was nice to see last year was the diversification in a portfolio actually working very well towards the end of the year, because we did start to see bond prices coming off their highs, and so although we made money for the first nine or ten months in bonds we gave some of that back in November and December.

But at that point we saw other sectors really starting to drive performance forward. In particular in the FX market we saw a very strong Australian dollar as the economy continues to perform well and also supported by high relative interest rates compared to many other countries. Commodity based currencies like the South African Rand had also performed very well. And then to a lesser extent we saw some of the commodity markets, metals performed very well, silver prices for example in the last three or four months rallied by much of 60-70%, and again agricultural commodities we saw cotton and corn prices really rally quite strongly as people and investors became concerned about the supply constraints.

On the negative side, we saw that equities were a difficult sector to make money from, and there were lots of commentary about the risk on and risk off as investors changes their minds about how widespread the problems within Greece and Ireland might be and the implications for Europe, and on the other hand we saw intermittent rallies in equities. Energy markets as well were for more difficult for us. We saw crude oil prices in the summer months in particular ranging between $75-80 and that caused a number of reversals in our signals. More recently, we’ve clearly seen prices breaking through that range, up above $90, and that has again become a more profitable sector for us in recent weeks.

Just to put last year’s performance into context, I think it’s useful to look back at and attribute our performance over previous years. And what’s very clear from the diagram is that the performance over the last 5 years has been driven by a different sector in each year. We had 2006 with a very strong commodity rally and we performed very well in metals. That was followed by good performance from FX in 2007. Energy markets were the main story in 2008 as oil prices briefly broke through $150 and then came back tumbling down. Stock markets were the one sector that actually worked from a trend following perspective in 2009, and this year bonds have performed very strongly.

So it really does show why applying a diversified approach to the strategy is very sensible, and more recently we can also see that our investment discipline has paid off. Because bonds were a difficult sector for us last year, we didn’t see any clear credit. On a longer-term basis we maintain our convictions that we can make money from our approach to trading, in effect, and that paid off with our performance in 2010.

Just to give a little bit further colour, I think it always helps to see how a manager has built their positions up and been able to make money from markets, and we’re looking here at three month euro/dollar futures, and this is the kind of pattern. If you look at the price behaviour for this short term interest rate future it is the pattern that we’ve seen across the bond and interest rate markets where we saw a sustained rally in prices. That allowed us to maintain a long exposure right up until November/December, and then as I mentioned earlier we started to see a slight pullback in prices. And to put this into context this contract added about 2% to performance during the course of last year.

I mentioned the 9% that we saw last year when in the latter months as bond prices stopped and we saw other sectors really taking the lead, and clearly the metals sector, gold and silver prices are a nice example of this, and based on that very strong rally that we saw during the last few months of the year our trading in silver added a further 1½% to P&L. And with that I’d like to hand over to Tim to provide an update on the organisational research development over the last year.

Tim: Thank you Harry. Since 2008, we have been very busy in terms of hiring, and we have expanded our team and invested a lot more in our infrastructure. So I’m pleased to say that at today we have 130 people. We have majority of people in London but also we have 13 people in Oxford and also a trading desk in Hong Kong. Our research team has expanded by over a third in two years, and with that expansion we have decided last year to make our organisation into various focused research sections.

So last year we had refocused the team into various sectors; you can see on this chart that is equities, bonds, interest rates, commodities, currency, volatility. At the same time, we make sure that the sector teams are collaborating with each other, and there’s also a central methodology team that are producing research that are applied across a whole sector. We believe this structure will provide us with both the focus that is needed and allow us to hire people with specific backgrounds into the specific sector team. But at the same time our process, our structure enables people to continue their collaboration.

As you know, we also have a collaboration with Oxford University since 2007, where we have continued to hire very good people from academia and through the Oxford connection, at the same time being able to tap into leading edge research that the academics are generating. So collaboration really is kind of the cornerstone of the team philosophy and so far I think we have seen very good results coming from the collaboration and also the specialisation that’s happened between the various teams.

Just a quick kind of picture of the changes in personnel over the year, we have continued to hire people into our team and in fact this year going forward we are still going to hire significantly into our team. There’s always going to be some turnover, and most of the turnover will happen within the first one to two years, and that’s only natural. And last year we have added a net six people, but this year we have a heavier programme in terms of recruiting into research, technology, operations and trading.

On Page 13, just a quick overview, reminding you of our whole research and investment process. So everything started off with ideas, and we always have a bag load of ideas that we continue to explore. Once the idea has been chosen, we have to go through acquiring the data, the device, the model to extract the information out of the data testing hypothesis. Then once we’ve built the training model, we’ll test it by paper trading, and after that really that’s where the much more intensive kind of work really starts, is through our proprietary trading allocation.

So this process is controlled by a committee headed by Andy Leppard, our Head of Research, and last year we have deployed at peak around $90m to test all these ideas before they actually go through to client trading. And it is a very important part for us because we believe that until you can test your ideas in real life and test it again to real world constraints, you won’t really find out whether or not there’s anything that a model doesn’t work in real life. And today, you know last year we have about 30, 37 kind of different models that’s gone through the process, you know, through into kind of client trading. There are many more that are still being tested, refined and some are being rejected before we reach the client trading kind of stage. After that then if we’re happy about the trading performance in proprietary, using our proprietary capital, and then it’s up to the investment manager who’s in the index tracker team and also the CIO team to decide the allocation of these models into our client trading.

So here we have some of the examples that we have implemented in 2010. You know we have upgraded our momentum filters. This is something we do every few years. We have also extended our model to take into account of cross market information, which has been making our portfolio construction kind of more dynamic. Just an example those few kind of enhancements have probably added a couple of percent of performance for our kind of model. We have used kind of spread in a commodity space, and single stock trading allows us to add alpha by examining more closely the sector’s effect at using some of the fundamental overlay from the stock market information to allow us to enhance and capture more alpha. And lastly, but also very important, is we continue to enhance our electronic trading programme.

So that is becoming a very large part of what we do. Over 80% of the takings are done completely by electronic means; there’s no human intervention. Even the remaining 20%, a lot of that is done through a screen based trading. So this electronic trading platform is really very important for us, and we have, at the moment, you know, we’re on to our second generation of the electronic trading algorithms, it’s much more adaptive, and comparing that to our last generation of model and also to the best kind of trading outcomes you can get from a broker, it’s probably about 20% better in executing the market. So we’re very pleased with that, and we have continued to enhance our execution capability and we have about 20 people working on that.

Looking ahead, we have a very big schedule to implement in this year. Some of those that I’ve mentioned there on the right hand side. So event predictors, and they’re trying to focus on shorter term events that happens where we can put a trade on and after the event sort of finish we kind of take the trade off, you know, seasonal patterns, whether or not they are monthly, quarterly, weekly etc. Index construction, that is really about extracting certain factors to try to for us to trend follow rather than trend follow each market. Apart from that, you know, volatility, curve trading, carry model, we have an upgraded version. I’ll mention a couple of these in the subsequent two slides.

So one example of what we have been researching into and which will go into client trading very shortly is a new carry income protected. We’ve been trading carry really for more than 10 years, and this enhancement allows us to add another factor for carry trading, you know taking into account what’s happening on the yield curve. We’ve upgraded the optimiser used in the carry model, so that should stabilise performance more, and we have also tried to use the forecast of volatility in trying to control the risk better. So we’re seeing quite a significant improvement both in performance and also the ability to control drawdowns in this particular model. As you probably know, carry trading makes money fairly steadily; however, the drawdown can be very severe. So one thing we have done with this new version is to try to control that, the drawdown much better.

Another thing that I’ve mentioned before, trying to look at seasonality kind of patterns, we have been doing that on and off for quite a few years but never really until recently sort of found some things that are consistent and which can be applied to enough in market for us to make a very big splash on it. However, the last couple of years I think we have done a fair bit of research which allows us to throw it out into a few major sectors. So again if you look at the performance it does add more kind of consistency, it is uncorrelated to our main kind of trend following programme which is very useful.

So these are just some examples that will be the models that you will be seeing in 2011. As I said before, we have increased our team size significantly over the last couple of years, and that’s why we’re seeing much richer the pipeline into our model releases, and this year we are still investing significant into people. We probably have 20 open vacancies, which we’re trying to fill. At the same time, we’re continuing to invest and upgrade our infrastructure, and so I think the pipeline’s only going to get richer from this point onwards.

I suppose we will have to leave some time for questions.

Presenter: Good, Tim, Harry, thank you very much for that. We have quite a number of questions that have come in, and maybe we can start with questions around portfolio positioning, as we’ve moved into 2011, and obviously we’re aware that you don’t have, given your system views on markets, but perhaps you can talk a little bit about how the portfolio is generally positioned, and there’s also a particular question relating to European fixed income markets and what the portfolio looks like from that perspective.

Harry: Yeah sure. So clearly what we didn’t speak about or covered, we’ve been through 2010, we haven’t spoken about performance this year, the year has got off to a more difficult start for us, depending on the product and volatility targets, the portfolios are down about 3 to 4% this year, and that’s really been driven by the reversals that we’ve seen primarily in the FX markets. So, as good as currencies were for us in the last couple of months last year, we’ve seen the Australian dollar weakening, as I guess the flash floods that we had in Australia have had an impact and contributed to a downward revision of growth forecast for the country. At the same time the dollar and the euro have also strengthened. To a lesser degree, we’ve seen the precious metals market sealing off as well. So in combination FX and metals have been negative this year.

And so that gives you a sense I guess of how we’re positioned. We do remain long of the Australian dollar and short US dollar and euro, although obviously to a lesser degree than we had started off the year. In other sectors, we are long in equities. Again, we have some weakness earlier in the month, but the markets have come back again. So overall we’re about 30% net long in stocks. We are now short in bonds and short term interest rates. So the signals have switched given the sell off that we saw at the end of last year in the bond market, and then generally across the commodity markets we remain long.

Presenter: Thank you for that. There was a supplementary question which I think is worth addressing. In the Man Group Trading Update, there was a report of a one billion dollar redemption of funds from Man, and the question wants to know whether that had any impact on January’s performance?

Harry: The redemption was actually not anything to do with AHL; it came from another part of the business. I believe it may have even been an investor in one of the long only products, so it no impact on AHL at all; it was one of the other products.

Presenter: Thank you for clarifying that. Moving on to some of the models that were being discussed, Tim, a few minutes ago, can you tell us whether typically the new models, for example the carry model, are applied across all Man’s different funds, whether they be UCIT funds, offshore funds, onshore funds, or do these tend to be applied selectively?

Tim: The model in general is applied across all our funds as much as possible. The only reason why it may not be applied will be if we are developing a model and that is applied to a particular market or a particular sector, say for example credit, and if that jurisdiction, because we have funds across many different jurisdictions, onshore, offshore etc, and if in that jurisdiction we are not allowed to trade that particular market asset class and then the model clearly can’t be applied there. But our portfolios are run as much as possible to be pretty much identical across the various markets and sectors. So in general we basically apply it to everything.

Presenter: Thank you. Coming now to holding periods, we have a question about the typical or average holding period that AHL finds itself in, in today’s market?

Tim: We get told about a lot of long term averages, so maybe give you a bit of a flavour of how things have sort of changed over the years as well. Today, I think our average trade duration is about 17 days – I think last year was probably about 16 days – and so that has been fairly stable. So if you look at the figures going back to 2005, for example, then that figure was 17 days. So, you know, there’s only a day’s difference and we’ve sped up a little bit since 2005. And if you go back further and going back to 2000, then our average holding period was probably around kind of 20-something days.

So over the years interestingly that we have sped up our trading by a bit - that is primarily due to the fact that we have continued to improve our execution quality. But at the same time, you know, in terms of just what the duration actually means, it means that we’re trying to capture trends really around about a month and onwards type of duration.

Presenter: Thank you. Moving on to a different topic, a questioner would like to know in 2010 how AHL did compared to its peer group. Maybe you could talk a little bit about that.

Harry: Yes, absolutely. I mean I think that 2010 was a good year for the major managers, futures managers in general. It depends on who one considers our peer group. But in terms of the bulge bracket managers with running multiple billions of dollars, I think that our fund, again, one needs to look at a like for like basis, so it’s important to look at the calendar year numbers. And I mentioned that our diversified programme, and the UCITs equivalent would be trends to that, was up 16% on the calendar year. And we see that others like BlueTrend for the majority of the year were actually sort of a bit behind the peer group but rallied in December and finished off at a similar level to us. And then when one looks at Aspect, Winton and Transtrend, I mean these are the managers that I think people usually compare us to, they were up probably between 12-14%. So I think we were slightly ahead but, in general, it was a good performance for the group as a whole.

Presenter: Thank you. There has been rumours and discussion that AHL is planning to move to daily trading, would you like to give something of an update on where AHL stands on that project?

Harry: Sure. I think we’ve always spoken with investors about the tremendous underlying liquidity that we have in our strategy, and I believe that that was demonstrated in 2008. I think the asset class came through very well, reputationally, in terms of performance and being able to maintain their liquidity to investors. Our open ended funds have traditionally offered weekly liquidity which already is probably much higher frequency dealing than most other hedge fund styles. But the questioner is correct in picking up that there is demand among some investors, I think people in particular that are looking to invest in UCITs products have a demand or in some cases there may be regulatory reasons their liquidity is important. So we’re responding to that, and we’re hoping that within the next three to four months we will be able to offer daily liquidity, and we’re looking at the UCITs range of products, initially, and then based on demand that could be extended to other products as well.

Presenter: Good, that’s very clear, thank you. Tim, this may be one more for you but AHL refers regulatory to targeting volatility and maybe you could expand a little bit on that?

Tim: Sure, you know, our investors basically buy our products because they like the fact that they can generate fairly significant returns. They understand that basically it is hard to know compared to kind of volatility. And what we try to do is make sure that the volatility of the programme can be maintained and, you know, we can control the risk so that over time the return will kind of, we can deliver that over medium to long term. We can’t actually target return from year to year basis because it is quite a volatile kind of strategy; it’s very hard to forecast when exactly you’re going to generate a return. But what need to do is to make sure that we can target and control the volatility to within a certain range and, you know, if you look at the statistics, look at data, that’s over a three to five years basis the return can be fairly consistent.

The other interesting angle here is also that we are from a different kind of investors set; they have different demands. Some demand to have products that are much more lowly volatile, and some demands products that are more highly volatile because they want high returns, and so it’s for us we have to be offering a product which has the appropriate kind of volatility to suit the kind of different kinds of investors.

Presenter: Thank you, I’m sure that’s made that much clearer to our audience. Possibly another question for you from one of our listeners, and it reads: “I’m aware of the impact of economic cycles on performance of asset classes, but can you provide examples of seasonality?”

Tim: Seasonality, I mean there are various types of seasonality. There’s seasonality based on commodities to cycles, there’s seasonality that is based on more on a stock equity reporting, company reporting cycles, economic data releases, and there’s some seasonality that we try to explore which could be purely technical if you like. So it could be to do with kind of people squaring their books, you know, during certain periods, and reacting to a month end kind of profit taking and others. So the various types of seasonality apply to different asset classes. Some asset classes, if you look at stocks, then there will be the company reporting cycle that’s more important, if you look at fixed income and others, then perhaps you should look at a more where you’re kind of mechanical.

Presenter: We have a number of questions all which relate to issues such as the impact of our orders on market trading, and therefore the capacity that AHL is able to handle, maybe if you could give us a little bit of colour around that?

Tim: Yeah sure. So in my presentation imagine that we are on to our second generation of trading algorithms. You know, we have been doing these things for more than 15 years to try and define a better way of executing and trying to handle larger, kind of oversize. The one way of looking at that is that, today, you know, if you look at the order streams that we produce into the market, it’s largely you can’t really differentiate our order streams versus the smaller kind of players. So in other words what we’re trying to do is we’re trying to operate in the market without really leaving any footprint that’s bigger than much smaller kind of players, and that is achievable today because the electronic trading platform is completely anonymous.

So, in the past, we have also spent a lot of time trying to make sure that our footprints are not as big; however, because the market before electronics trading wasn’t totally kind of anonymous, there was still possibility for people to work out how much orders we were doing etc. However, today, because, you know, short trading platforms are completely anonymous, our job is to make sure that we can feed out all of these so that the actual fact is that we’re acting as if we are conglomerate of five smaller funds rather than kind of one much bigger one. And so far these results, we have been vindicated by the results that we’re seeing in continuation of improvement in our slippage and, you know, the fact that we have managed to speed up our trading frequency, which in general is a kind of good thing. It’s also evidence that we are handling our capacity. I would probably argue better than any other people.

Presenter: That’s very encouraging by the sounds of things we can expect AHL to continue to grow in terms of assets under management. There are quite a number of questions that are best dealt with by follow up phone calls rather than being asked over such a public system. So for anyone online whose questions have not been answered, someone will be coming back to you to have specific discussions, so generally they’re rather too technical for a webcast of this nature. That in fact completes all the other questions that have been asked. Tim, Harry, thank you very much for what was a very clear exposition on what’s going on at AHL, what we can expect, it sounds greatly encouraging, and thank you both for your participation. And I’d like to thank the very large number of people online for attending this presentation. We look forward to a further update from AHL later in the year. Thank you to everybody.

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