Gems Recovery Portfolio Gems Recovery Portfolio
Introduction Introduction Gems was established in 1987 and currently manages assets of over $7 billion for investors around the globe. As one of the first Fund of Hedge Fund managers in the industry, Gems has 20 years of accumulated investment expertise through its exposure to different market conditions across several cycles. This investment experience gives Gems a clear edge in an extremely competitive though relatively young industry. Longevity and our disciplined award-winning investment methodology complement our analytical capabilities and give us access to the most sought-after hedge fund managers. These strengths enable us to adapt dynamically to the often rapid changes in the markets and capitalise on the investment opportunities they present.
Award Winning Portfolio Award Winning Portfolio 2007/08 Gems Recovery Portfolio Awards InvestHedge Fund of the Year InvestHedge Event Driven and Distressed Fund of the Year EuroHedge Best Performing Specialist Fund over 3 Years Lipper Best Risk-Adjusted Returns Award for 2007
Table of Contents Table of Contents Section 1: Portfolio Overview Section 1: Portfolio Overview Section 2: Recovery Opportunity Set Section 2: Recovery Opportunity Set Section 3: Performance Section 3: Performance Section 4: Recovery Opportunities Section 4: Recovery Opportunities
Section 1: Portfolio Overview Section 1: Portfolio Overview
Portfolio Highlights Portfolio Highlights Capital Preservation Portfolio Objective: Targeting annualised returns of 10-18% with 4- Investment Objective: 8% volatility Invests in a broad range of recovery and other Investment Approach: credit-related strategies with emphasis on managers who can capitalise on their specialised understanding of a company’s intrinsic value and the complexities of capital structures, as well as through their understanding of the economic cycle
Portfolio Facts Portfolio Facts Gems Recovery Portfolio assets under management: $1.7 billion Percentage of assets invested with closed managers: 51.99% High degree of flexibility at the strategy level Top quality managers • Manager alpha from credit selection Consistent Results • Uncorrelated returns throughout the credit cycle Gems Recovery Portfolio is also available in an Enhanced version (with up to 2X leverage)
Investment Focus Investment Focus Value Analysis Event Process Involves extensive analysis to Involves structuring investments determine if the purchase of following events that have driven the security is below its down the price of the security or, liquidation value. This provides alternatively, an event or catalyst a value floor for the that is expected to cause the investment. Hard assets such security to be rerated upwards. as real estate and equipment can be more easily valued. This creates a bias towards these sectors of the market. Alternatively, analysis of all of the company’s assets and future prospects can suggest Aim: To synthesise these that the market has seriously mispriced the value of those elements into an investment assets. strategy
Gems Approach to Recovery Gems Approach to Recovery Investing Investing Top Down Research Understand the economic scenario in various geographies Assess where the richest opportunity sets exist Monitor current investment themes; understand new investment themes and sub-strategies Gems looks for managers with: • A rich understanding of corporate fundamentals and capital structure • Strong legal and forensic accounting skills • Access to strong deal flow, including international deals • Experience in distressed investing through many Bottom Up Research market cycles (long term view)
Evolution of Credit Markets Evolution of Credit Markets 2008 1998 Few investment instruments Sophisticated, heavily traded credit available to capture instruments (CDS, iTraxx) opportunities Managers have liquid, efficient tools to Predominantly long only structure desired risk profile strategy Shorting of bonds more prevalent Hard to short bonds Much more liquid bank debt market Bank loans hard to buy Global growth in credit markets are Unexciting coupon clipping exploding strategy More dedicated hedge fund managers in credit strategies
Portfolio Construction Portfolio Construction Gems Recovery portfolio construction is based on: Strategy selection based on the opportunity set within the economic cycle Geographic and sector diversification Manager diversification (~30 managers) Avoiding position overlap between managers Finding managers with systematic, quantifiable alpha
Section 2: Recovery Opportunity Set Section 2: Recovery Opportunity Set
Strategy Emphasis Strategy Emphasis Source: Gems Investment Research
Dynamic Environment, Changing Dynamic Environment, Changing Opportunities Opportunities On-the-run •Mortgage spreads ABX at 70 (Mar) Mortgage meltdown ABX BBB- begin to fall (end 07) ABX 40 (Aug) ABX trades at 15 ABX 100 (Nov) Mid 2007:Spreads Spreads* Spreads hit Credit widen to 600 bps Spreads hit cyclical historic lows of 200 bps highs (700 bps) Emergency Fed cut Fed cut of 75 bps Fed Fund 50 bps Fed rate at Rate Fed raised interest (Jan); 75 bps cut Fed rate hits low of 1% Fed rate at 4.25% Fed Rate Dips Fed rate at 1.25% 5.25%(Dec) rate 5 times (2.25% (Mar) Rate at below 2% (June) (Nov) Aug: Liquidity Crisis Dec) 2.25% (Dec) M&A boom Corporate fraud Corporate spreads* Volatility at all time continues temporarily widen low 9/11 •Bulk of gains on March: Iraq War •Shift into equities, •Corporate fraud short side April: markets turned Enron particularly, post � Aldelphia Equity Market Low •Event driven restructuring equities •Short subprime � Worldcom Private equity type •Deep value equities •Distressed debt opp •Short financials October: Debt Market deals Low •L/S credit •Capital struct. Arb. •Restructuring debt opp. •Non US opp. •Distressed Opp •Event driven •Start of new •Long distressed debt •Deep value •Short Opp distressed opp •Deep value stocks •Short Cap. Structural Arb. Market Events Distressed Opportunities Recovery Portfolio * Corporate BBB- spread Source: Gems Investment Research
Consistent Returns Consistent Returns * Credit spreads are cyclical, ranging from less than 300bps to 800bps Throughout the cycle, good credit managers find opportunities to make steady returns Source: Gems Research Investment Ltd / Period: January 02 – May 08 *Represents the OAS (Option Adjusted Spread) for Lehman High Yield Bond Index BB and lower
Section 3: Performance Section 3: Performance
Gems Recovery Portfolio Gems Recovery Portfolio USD Historical Performance Recovery Returns vs. Various Indices USD Performance Statistics Period: *Jan. 02 through May. 08 / Performance figures are net of fees. Past performance is no guarantee of future returns.
Strategy Allocation vs Strategy Allocation vs Profit Attribution Profit Attribution Strategy Allocation* Profit Attribution* (Percentage of Net Profit) Source: Gems Investment Research * Apr 1, 2008 YTD
Geographic Allocation Geographic Allocation Source: Gems Investment Research Date: 1 April (estimate) Allocation 2008
Section 4: Recovery Opportunities Section 4: Recovery Opportunities
Indications of Credit Downturn Indications of Credit Downturn Credit Markets are in the midst of a major credit contraction • Less liquidity • Bank balance sheets under tremendous stress • Harder for companies to receive financing Wider credit spreads • Lenders more cautious • Corporates have higher interest costs • More risk priced into the bonds Higher anticipated defaults • Market estimates expect bond defaults to rise significantly in 2008/09
Huge Increase in Stressed Debt Huge Increase in Stressed Debt iTraxx Europe Investment Grade 10 Year 20% of the high yield bond market is trading at distressed levels (1000+bps over Treasury)* Source: Bloomberg / Period: September 07 – April 08 * Merrill Lynch distress ratio of February 08
Credit Contraction Getting Worse Credit Contraction Getting Worse Financial Sector Writedowns Writedowns in the financial sector since 2007 have exceeded $300 bn and are expected to grow. Bank balance sheets could decrease by $2 trillion during the current credit contraction Large writedowns at investment banks (UBS, Merrill Lynch, Lehman) expected to continue throughout 2008 Large backlog of leveraged loans; banks are delaying syndication Source: Bloomberg / Date: As of 1, April 08
Credit Spreads in the Banking Credit Spreads in the Banking Sector at All-time Highs Sector at All-time Highs 10 Year CDS Spread Bears Stearns CDS Merril Lynch CDS Goldman Sachs CDS JP Morgan CDS The credit market is worried about intermediary risk Premia in the financial sector are growing, excellent short/ long opportunities Source: Bloomberg / Period: April 07 – April 08
Leveraged Loans in Free-fall Leveraged Loans in Free-fall NAV of Closed End Fund Investing in Leveraged Loans Lack of demand created huge overhang in bank debt market in late 2007, early 2008 Attractive entry points for long opportunities, good short opportunities Source: Bloomberg / Period: March 04 – April 08
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