UBP Alternatives Breakfast 2016: Turning to Alternatives in an Uncertain Market Environment

30 September 2016, London

UNION BANCAIRE PRIVÉE

SPEAKERS

  • Yves Guntern – Alternative Investments Business Head, UBP
  • Ashwin Vasan – CIO and Founder, Trend Capital
  • Thierry Lucas – CIO and Founder, Portland Hill Capital
  • Sidney Rostan – ILS Portfolio Manager, SCOR Investment Partners
  • Jos Shaver – Managing Partner and Portfolio Manager, Electron

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Introduction
Enhancing portfolio returns with uncorrelated assets

Yves Guntern – Alternative Investments Business Head, UBP

Why don’t we start by looking at flows and demands? With reference to Europe, we have seen over the past 12 months a €51 billion inflow into alternative strategies. European investors generally speaking are reducing the risk in their portfolios and allocating to more conservative strategies. It’s a very similar picture in Asia; I was there last week and we see that the trend in clients’ portfolios is absolutely the same, in the same direction.

We’ve all read the press during the summer saying that there are massive outflows from cash funds but that doesn’t really correspond to what we’re seeing here. The reason for this is that the profile of investors in the US is different than what we have in Europe and in Asia, in the sense that in the US after the global financial crisis, institutional investors had very quickly allocated to hedge funds in 2009/2010 and since then they’ve had a pretty sizeable exposure to alternative strategies, including actual of course.

They are in a situation where they were too conservative; they didn’t reach the 7-8% target return that they needed in order to cover liabilities. They’re therefore in a position where they need to increase the risk in their portfolios which is the opposite direction to what we’re seeing.

Obviously the US is a much larger market, so net-net it’s a global outflow for the industry. The amounts which we see, which goes around the industry, is $25 billion outflows; and that’s a big number. Is it dramatic in an industry that manages more than $3 trillion at this stage? I don’t think so, but it’s the flows and the direction which are important, and the flow is positive in Europe.

Why are investors taking exposure to alternative investments in order to reduce the risk in their portfolios? Twenty years ago, if we look back to 1995, if an investor wanted to reach a target of a nice, single digit return at 7.5%, all you had to do in 1995 to get to that return was to buy a portfolio which was 100% invested in bonds.

Ten years later to get to that same 7.5%, you would have to take some risk but still be in the low risk bond portfolio for 50% of the assets, but for the other 50% we would need to diversify and take some more risk on the portfolio.

Ten years later, in 2015, to get to that 7.5% is becoming more and more challenging. You could only have 12% allocated to bonds, the so-called ‘faithless place’, but as we’ll see, that might not be the case anymore, and you had to go and get a lot of returns from different sources with a portfolio that, as you can see from the volatility side, is now at three times the risk that it was in 1995 to get to the same return.

So you might say that we don’t need 7.5% in an environment where we have zero yield and 4-5% would be a good result for this year already, but I’m fine with a balanced portfolio like we had in 2005, between some less risky, some more risky assets.

The issue here is that this picture has changed since 2005, and we do see that in an environment where you don’t have yields anymore on the bond side, thecorrelation between equities and fixed income will increase. It might very well come to a level where it was from 1963 to 2000, where the correlation between those two asset classes was positive. It’s only in the past 18 years that we’ve seen negative numbers, which was very nice because you could balance your exposure between more risk and risk off trades. That is a major change in the portfolio.

We’ve seen the correlation increase no later than three weeks ago on that famous Friday where we saw equities correcting by 2% and bond portfolios that corrected between 2-4% on the lower end of the curve in Germany. These are massive moves in the same direction and this dramatically increases the overall risk within the portfolio.

Instead we use alternative strategies to improve this risk return ratio. I’m not saying that you have the same risk with an alternative portfolio than bonds in 2005, but what we’re trying to achieve here is an improvement of the risk return profile of the portfolio.

Remember that on average the volatility of alternative strategies is only a third of what you have on the equity side – we’ve seen over the past 15 years in the major equity drawdowns a real added value for alternative strategies to reduce the drawdown of the portfolio.

This is a very important element, because people always remember 2008 and the correction and say that hedge funds didn’t deliver what they were supposed to do; an important number to look at is the beta to equity of hedge funds, which peaked in 2008 with a lot of directionality within the industry, generally speaking. That beta to equity has come down to below the historical average of 0.3, which is now around 0.25. This is an important number, because we think that the exposure will be much lower in the case of drawdowns on the alternative strategies.

What we have seen so far this year is the hedge fund index, which is measured by the HFRI index at a 3.5% positive return, whereas world equities made 4.4%.

A lot of people are looking at the S&P. We tend to forget that Europe is down 7% and if you look at equities, 4.4%; it would mean that the hedge fund industry on the whole has captured 80% of the upside of equity markets; if you look at the volatilities, with less than half of the volatility. The number is five here and the beta is 0.4 for this year. If you look at specific periods of challenging markets, just since the beginning of the year, we had the drawdown January until February 15th, where equities were down 6.7% on average and only 2.6% on the hedge fund side, which is a very much more comfortable situation.

Luckily markets recovered sharply and we’re all fine. The question mark is, is it going to happen every time going forward? Every strategy, sub-strategy on the hedge fund side and alternative investments contributed positively on a year to date basis. This picture of getting the upside and less exposed to the downside is not only true on a year to date basis. We have seen it since the beginning of 2015.

Obviously the numbers are nothing to be really excited about in the sense that the return for last year was 2.5% on hedge funds, versus three and something on the equity side, but still it’s the trend and the achievement which is important – capturing more than 60% of the upside while being exposed to less than 30% of the downside.

This is the convexity approach that we have been looking for, for a long time, and as I said, even if the absolute number is not anything to go crazy about, the importance is this convexity. That’s what we need in order to improve the risk adjusted return ratio of the portfolios.

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U Access (IRL) Trend Macro
A macro call against the crowd

Ashwin Vasan – CIO and Founder, Trend Capital

We run a global macro fund, we invest in both developed markets and in emerging markets. We launched in August 2011 with about $200 million in assets under the management. We currently have about $1.5 billion, all of which are in the same strategy. We have 18 people, of them the investment professionals are four analysts, two traders and myself. The company has offices both in Greenwich Connecticut as well as in Boca Raton Florida.

The field of global macro is practised in many different ways; the predominant way in which it’s practised is that it consists of platforms which have 50, 60, 70 traders on board, and they’ll work on all those platforms for over a decade, and the predominant way in which macro assets are traded is based on technical analysis and momentum driven trading strategies.

Whatever constitutes fundamental analysis in those shops consists primarily of doing street research and adjusting street research in their forming and reforming of their views.

Where we’re very different at Trend Macro is the fact that most of the work that we do internally on the research front is done by our analysts. All our analysts are PhD trained. Research is the single biggest driver of what we do in this shop in terms of delivering the trends for our clients.

I’d say to you that if you ask the question which we get asked frequently, why have you as a fund been so significantly outperformed in the global macro period in the past five years, it’s the fact that our research frequently gives us very different views.

In 2010, for example, when the entire world was trading Europe as an interest rate market, our debt sustainability models were clearly showing us that fiscal deficits in Europe were about to explode and that there would be multiple sovereign downgrades in these countries. Consequently, being short here in government bonds and being short in things like the Euro, needless to say meant we made a lot of money over that period of time. Fast forward to 2012, the whole world hates Europe and they think that European countries, especially the peripheral economies, need to be boundaried; they think that net debt ratios are high and will continue to keep rising, and that the amount of money that they believe is needed to bail out Spain and Italy and the lost access to capital markets would have to be somewhere in the region of €1.5 trillion.

We did work on all three themes. The bottom line is that the current account deficits in these countries were shrinking, and they were not shrinking because of recession.
The debt GDP models that the street was publishing had been in a different state, a state of brevity. I’ll tell you that what they’d done is use the fiscal multiplier on the Greek example, and it was completely inappropriate for what was going on in Spain, Portugal and Ireland; therefore they got exploding GDP trajectories.

And finally, let’s just say very politely the assumptions they made about Europe needing €1 trillion to bail at Spain and Italy, in case they lost access to capital markets was wrong. The actual number was €289 billion if you did your calculations correctly, so in 2012 for example, we made a lot of money and were probably the only macro fund that made any money in being involved in the European government bonds.

The single biggest factor that drives returns at Trend Capital is fundamental research. The second thing is how we construct portfolios. Most macro funds talk about their trades. We don’t talk about our trades. We talk about our volumes. We manage several different aspects of the portfolio. First is concentration risk, and we probably run far less concentration risk. For example, the maximum exposure we take on a single currency position will besomewhere between 20 to 25% of AuM. A typical macro fund will take anywhere between 100 and 200% of that, depending on how much conviction the manager has on that particular currency.

The second thing we do is manage correlation risk; it’s one thing to have a portfolio of 10 trades, but if they’re all highly correlated the chances that you’ll be able to have a diversification down is quite slender. Let me just give you a piece of analysis which we’ve done which will highlight this point. We looked at very strong trending markets, particularly in equities and in even years when the S&P500 closed up 25%, we found that even if you knew specifically that that’s exactly what was going to happen, if you ran concentrated correlated flow charts, there was no way that you could monetise that 25% because on average in those years, the S&P corrects by 5% at least four times.

The importance of portfolio construction even in highly trained markets is very, very important for both you and for us.

The final thing I’ll tell you is that the world is changing dramatically. I believe one of the reasons that it’s changed is because of the regulatory framework under Dodd Frank broker rules.

One of the reasons large macro funds don’t make money today is because they’re too big. The regulatory rug has been pulled out from under the markets and so they don’t provide the liquidity required to be successful. We made two very conscious decisions in this company, and we’ve done this since inception.

Number one, that this will be a cash strategy. We’re $1.5 billion right now, we will not take in any more assets once we get to $2.5 billion, so that’s a firm commitment to all investors.

Number two, the lack of liquidity in the financial markets today means something very, very important. It means for any given market which you see on the screen today the amount of volume that’s going through is significantly lower than what it used to be in the past. That means if you’re operating as a typical macro economy which is basically going long and short on assets and then putting stops in the marketplace to protect yourself, the chances of you getting stopped out are quite high.

This is why a lot of macro funds will tell you, yes, we have the right people but we weren’t able to amortise it because we got stopped out. We do something a little bit different in order to accommodate the fact that these conditions can change, which is we use a lot of optionality in the portfolio which acts as our stops instead. The fund spends about 2.5% a year on option premiums, we use the carry received on currency and fixed income trading in order to pay for this option premium.

What does this ultimately mean for your investors? It means that we have generated over the past five years a return in the region of 7% and we’ve done this with volatility somewhere between 5-6%, and we’ve done it with pretty much very little correlation to any fixed income, currency, emerging market or other asset that are out there.

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Portland Hill SICAV − European Long/Short
European equities with a convex return profile

Sidney Rostan – ILS Portfolio Manager, SCOR Investment Partners

I started in finance 22 years ago, and I spent a number of years with various financial institutions, then finally I decided to start Portland Hill, which is basically a continuation of what I’ve done over the past two decades; I started Portland Hill five years ago.

It started with $8 million. We are now managing approximately $800 million. The team has grownas well, so we are six on the investment side, 14 on the business side.

We focus on European centric ideas, that’s really the majority of things that are being dealt on a daily basis. We also have a focus in six sectors with expertise in business services and consumer, but also healthcare and chemicals, and financials.

I always thought it was good to have some optionality in terms of where I would put capital, but at the same time I want to build the expertise of European focus and then finally I think we have this focus in midcaps, typically representing 70% of our portfolio.

We define midcaps as companies that have a $1-20 billion market cap, and we like that space for obvious reasons and it’s a space that covers a great deal on the sell side and the buy side where we can get closer to management teams, and eventually we are able to see things that we feel that the market has not, and that has led to the returns we’ve delivered over the past couple of years. So really, looking out for ideas off the beaten path has been a strong differentiator as far as we’re concerned.

We typically build the portfolio around 20 to 25 ideas, so this is not equivalent to stocks or names, it’s around 20 to 25 investments. These get expressed through sometimes one security, sometimes through several securities, and each idea comes in and out of the portfolio really based on the criteria.

I’d say the first one is based on the recent profile that I’ve seen on the idea, and secondly on the downside risk and then finally how I see it fitting within the portfolio, because obviously it’s one thing to look at an idea independently, and another to look at it as part of a bigger portfolio.

One last point that I should mention is that catalyst has been a big driver of the performance of Portland Hill in the last couple of years, and obviously catalysts are always relevant, but typically I would say in the mid cap space, where it doesn’t get on the first page of the Financial Times every day, that’s ultimately where you would be surprised, even when a company shares their corporate activity plans, it doesn’t necessarily get digested by the markets.

We were involved in a German hospital operator – obviously a German hospital operator is very boring but that was an advantage. It gives you good visibility in terms of top line growth and margins, and I’ve always felt that there was room for additional consolidation and that happened 15 months later when they sold all their assets for more than the market cap. The stock was up 60%.

Just to take a more recent example, last year we had a very strong year. We were up 18.5% net and we were holders of Rexam, the aluminium can packaging company. That’s a good example. Originally three years ago, I was involved in them because they were getting rid of a non-core healthcare packaging unit, and after they sold that unit and they had distributed the cash back to shareholders, it was quite clear through discussions with the management team that there was room for consolidation of the sector, and looking at fundamentals, it’s a very concentrated market. It has three big players, and Rexam, and the consolidation now with Thyssen obviously happened two years later. You need to be comfortable with the fundamentals, but we were rewarded for that and stock went up about 40% in the February of last year.

Later that year, just to give you a few more examples of the type of things we do, we were holders of a company called Gerresheimer. It’s a big capture name, and they specialise in glass and plastic packaging for the healthcare industry, so they manufacture pre-filled syringes, insulin pens, inhalers and it’s a company that I’ve been following for 10 years, so I know them very, very well and certainly they’ve been very good at delivering some bolt on positions.

Now last year it was a typically bolt on position, and it was something that management had mentioned in a number of meetings, that it was in the pipeline and that it could well happen, and they delivered in July the acquisition of Centor in North America and the stock was up 20% that month and it’s about 16% in a year, so clearly the catalysts had not been properly identified or at least digested by capital markets.

A month later we actually benefited from the deal that Troya delivered – Troya is a German outdoor advertiser. They have 50% of the market and we actually invested in the stock, and six months after the launch the stock was at €8. It’s now at €40, so we’ve made five times our money in that particular stock, and last year the stock was up 177% and in particular 20% in August when the market was down 10. The CEO and main shareholder had been communicating the feasibility over the quarters.

So this illustrates the type of names we like, things that are typically not so crowded by hedge funds, where we feel we have a different shade of view that we’ve thought about for a decade, and that has been very helpful to deliver strong returns on the long side.

I will say a few words about the shorts, because it has been a very helpful part of the portfolio. Just to highlight that our biggest performers this year are short and we’ve had a strong short in Marks & Spencer, which we know has been suffering tremendously this year, given the number of negative numbers they have had in their general merchandise over the years. Typically I focus on the incumbent, where you see a business that is very recognised, political intervention, the wrong incentives at the management level, and so clearly a number of characteristics that I look for. Ideally it is in a segment where you have a new player that is coming in, which is very disruptive in terms of product offering or in terms of pricing, and we have had a number of big successes on the short side.

I could mention a few others, like EDF, which was down 40% last year and 20% this year, all on short across UK food retail for multiple years, which as you know has been a bloodbath, and also on short in airlines, Lufthansa, which has gone very, very well. So the short market to book is something very important to me, and certainly has been helpful in driving strong returns over the past couple of years.

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SCOR Insurance-Linked Securities Strategies
Attractive yield with no asset correlation

Sidney Rostan – ILS Portfolio Manager, SCOR Investment Partners

I’m Sidney Rostan, Senior Portfolio Manager at SCOR Investment Partners which is the asset management arm of the SCOR group, which is the fifth largest insurance company in the world.

Assuming you are less familiar with our asset class than with other alternative asset classes, I thought it interesting to spend one minute on a description of what the insurance market is and how it interacts with the ILS asset class.

First of all, ILS stands for insurance linked securities, and more broadly the insurance linked reinsurance. Investments are transactions transferring insurance daily risk from the insurance and reinsurance industry to the capital management space and capital market investors. We start from the insured obviously, individuals like you and me and the corporates would get insured by an insurance company. On life-related risk and non-life related risks, we call casualty, primarily damage type of risk, property damage and liability kind of risks.

I’m going to focus here on non-life risks and more precisely on natural catastrophe risks because 95% of the cat bond space is made up of catastrophe exposures.

Insurers in that respect are concentrators of natural catastrophe risks, and they get themselves covered, reinsured by reinsurance companies, so the reinsurance market sits behind the insurance. The basic idea is to spread risk across as many actors as possible, creating a neutralisation effect and there is one step further. Various companies are exchanging risk among themselves, that’s called the re-mutualisation market, a further step in the mutualisation of the risk.

All those players, the insurance companies, reinsurance companies, and more and more corporates tend to turn to the capital markets, towards us to complement or as an alternative to the cover they get through traditional market players, so at the end of the day we are protection providers, just like reinsurance companies are to insurance companies, some other reinsurance companies and just corporates. Why do they do that? It’s simply because there are more and more concentrations of exposures because of the economic growth, and there are more and more peak exposures to be covered.

How do we offer such additional protection? In two ways. The most known way is publicly traded securities, which are called catastrophe bonds. It’s $25 billion in the market, so in terms of liquidity a small market, I would say, which has developed a lot in recent times, but is still pretty small and pretty concentrated on the peak peril regions. It covers cars, houses, flats which can be damaged by hurricanes, floods, earthquakes, typhoons in Japan, wind storms in Europe. We really cover natural catastrophes here and these bonds are listed and tradable – they are also traded in the secondary market which is pretty active. Those bonds are typical three-year flow duration terms, between two and five years, with two years’ duration on average.

To give you some metrics on the market, there are roughly 30 transactions per year in the primary market, 100 transactions outstanding at any point in time, and 200 investment opportunities, because any single capital insurance is typically made of two layers – covering the same risk but with a different risk level, or covering two separate risks. So those bonds bring liquidity to our portfolios, obviously, and they are at the same time exposed to mark to market moves, like conventional bonds.

You also have a second one which is less known but which is bigger. Those are OTC instruments, which are all privately negotiated bilateral contracts in the bilateral way, directly with insurance and reinsurance companies. These products and other products, we will not mention here, are in the company for $45 billion, so the total size of the alternative capital invested in the insurance space is currently roughly $70 billion.

Those transactions are on a one-year basis and they are not tradable, so there is only one-year liquidity, less liquidity, no mark to market, but that space is far bigger because we assume that the property OTC market worldwide is $400 billion big, it’s more than 10 times bigger than the cat space, so it’s a far broader investment universe, being able to provide far more diversification and improve risk adjusted returns on top of what we can find in the capital space.

What are the benefits and the risk for an investor in our asset class? You will understand that we are primarily and almost exclusively exposed to natural catastrophe risk, which makes our asset class diversified to virtually everything, so the full benefit is a low correlation from traditional and other alternative asset classes. We used to describe this asset class as a smart beta asset class. The thing that is more surprising, is it is also a low volatility asset class. It has also shown a higher reward-to-risk profile compared to all other asset classes over the last 15 years. It provides protection against rising interest rates, because all our investments are floating rate investments, and allows us to participate in a very broad and growing market. There are also obviously risks relatedto the asset class, the liquidity risk as I mentioned. cat bonds are liquid but other products in which we invest are less liquid, so there is definitely a liquidity risk in it. Another major issue is the complexity of the structure. They’re difficult to understand, so we need specialised skills to be efficiently involved in that market. We have a bit of counterparty risk that we try to avoid as much as possible, to be truly diversified, but we can have sometimes a small amount of counterparty risk in our asset class and so the basic risk we take is the risk of an extreme loss in the case of a very severe catastrophic event.

A few figures on the benefits of the asset class. Over the last 15 years the annualised return is a bit above 8% and the volatility is below 5%, roughly 3% on an annual basis, which is less than your other asset classes, so that’s a good risk return profile.

Since 2002, we have a low correlation between one and two, so between 4.1 and 4.2 points and if we see the correlation with equities, bonds and commodities, during the more recent times, over the last six years, there is almost no correlation and it has also proven to be really diversifying when there is significant turmoil in the market.

We look for advanced diversification of perils and risk levels and we are able to be invested in any single segment of the market, cat bonds and OTC. We try to find the best balance between liquidity, diversification and risk adjusted return. We believe that that type of balance, with roughly two thirds of cat bonds and one third of OTC is optimal, giving the target return we have on that fund which is now 600 to 800 basis points and giving the once daily liquidity we offer to investors. We manage $500 million on that strategy.

The other one is the 100% cat bond strategy, which is a bit more conservative in terms of target returns, because on average cat bonds go for less liquid, less yielding types of investments. We manage $75 million here and we offer here a weekly liquidity as we have only liquid investments. This is, in our view, a good entry point to our asset class.

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U Access (IRL) Electron Global Utility Fund
Global and pure L/S utility experience

Jos Shaver – Managing Partner And Portfolio Manager, Electron

By way of background, my name is Jos Shaver and I run the global utility fund for Electron Capital. I’ve been in the utilities sector for about 24 years, and some of those years have been abroad – five years in Asia covering utilities and five years in Europe before moving back to the US in 2004. The portfolio that I cover is with the rest of the team, it’s called the Utilities Infrastructure. We define that as the electric, water, waste, gas utilities and also infrastructure stocks.

The sectors are quite large cap sectors, $2.8 trillion in total market cap, and we’re very much a global fund. About two thirds of what we invest in, you’ll find is outside the US.

There are nine people on the team. There are five people on the investing side. We’ve all been together on the investing side for close to about 8.5 years on average, so a lot of continuity is there. We’re all experts in the sector, we all have different areas of focus.

The assets under management of the firm is about $610 million and have effectively doubled over the last year and I think one of the reasons why, is a little bit what was mentioned earlier with respect to crowdedness. If you look at our names, as you might imagine you would not the find names on the Goldman Sachs VIP hedge fund list. This is an uncrowded sector.

To give you an example, we’re very much global investors. Take a look at Asia. Asia is one of the largest market cap regions for utilities but it’s very much a desert. People go to Asia, they’re going there to invest in things like Tencent, so utilities are very much undervalued, yet they’re a very big cap stock.

For example today we’ve got a company called Tenaga which is from Malaysia, that’s about 3% of the KLCI, it’s equivalent to half of what Exxon Mobil is to the S&P, so how does that help us? We can put on more gross without taking a lot of emerging market net risk.

Why look at this sector on a global basis, what is the competitive advantage by looking at the sector globally?

Number one, we have a very low correlation if you look at the utilities sector by region. For example, if you compare that to industrials or materials, you’ll find that you have a very high correlation by region for those sectors, so whether you have a materials company for example here in Europe or a materials company in the US, it’s the same road map, but the utilities are very, very different. It’s a very regionally focused sector, and I always use a telephone analogy to walk people through that.

For example, you could be sitting here in London, you could buy a handset from Nokia out of Finland, or you can buy a handset from Samsung out of Korea, but you’re not going to buy your electricity from Kepco out of Korea, right? So this inability to arbitrage electricity across oceans drives a lot of this regional correlation.

Plus if you think about it, those two companies I mentioned, they do produce the exact same commodity because they’re producing electrons; they produce them in very different ways. One is mostly hydro power, the other is a mix of coal and natural gas, plus these electrons are wires, they’re subject to different regulatory regimes, so you have very little regional correlation and that’s an advantage to us; if we can generate alpha in these four different regions on a consistent basis, that actually results in a higher return for risk.

The other thing I wanted to leave you with as well is talk about the structural changes that are happening in this industry. I know when you hear utilities, it has a connotation of low vol, low beta, widow and orphan type stocks and by the way, our sector is low bid tech stocks, but it doesn’t mean you can’t find some side paper turn opportunities.

In fact, we see that all day, in there’s more opportunity that I see in the utilities today than I’ve seen in my 24 years of covering this sector because of all the structural change that’s happening.

Solar has a storing impact on our markets. For example, about 2.5 years ago we were short a company called RWE, the big German utility, because we saw all the solar being built out in the German power market, and we saw what was going to be happening there in terms of shaving the power prices, selling less at a lower price.

Now that same movie that was playing out in Germany has started to play out in the US, so companies like Calpine, where we’re short, where we see basically Calpine settling for a lower price, lower margins, solar coming and penetrating into Texas, these are things that are really impacting that structure.

A lot of people will hear about solar, they’ll look at some of the opportunities and by the way I’m a big fan of solar. We’re going to build more and more solar in this world, but I think that solar companies themselves will be pretty lousy investments.

For example, I think it’s very similar to the auto manufacturing industry that started 100 years ago, where you had thousands of auto manufacturers in the US. Now you have very few but you have more and more cars in the garage. I think it’s very similar to that, the barriers to entry are very low. Imagine any other industry… you guys look at a lot of different industries, where you have a new competitor coming in and the marginal cost of production of that new competitor is zero. That’s what it is with solar, because you’re getting your fuel from the sun for free, and at the same time you have the government subsidising that competitor. I can tell you the unregulated power sector is no different.

The other thing I want to talk about is energy efficiency, which also has a consortium impact on markets. Today, for example lighting in the US is 18% electricity and you go into Home Depot and you can buy an LED bulb for about $3-5 and that uses about 15% of the energy that an incandescent bulb does.

Also, smart thermostat – NESS makes them, Google, Bosch makes one as well and what it has is an embedded microprocessor in the thermostat in your home, and it actually learns your behaviour and it adjusts the temperature accordingly. You’ll save between 10-12% on your energy bills and this is my number. Smart thermostats are having a strong impact and will have a strong impact on power markets because they’ll shape peak power prices.

For example, today in Texas it’s just starting to happen where if you’re an energy retailer you will go to a customer such as yourself and say, listen, you keep your house at 75 degrees in the summer, but I’m going to give you a free NESS thermostat, and the quid pro quo for that is during the peak demand days, when there is an emergency time, I will ration you back to 75 or 76 degrees by one degree. It will happen automatically, you won’t even know that I’m doing it because you’re on the cloud now and if I can do that with a million plus homes, what have I done? I’ve shaved the peak power price, and that’s a big deal in our sector because peak power prices are tremendously expensive.

Also the last thing on the water side, a lot of things are happening in industrial water. That’s changing structurally quite a bit. The last year we were only in one position in Europe, which was Ole Environ, that stock was about 45%. That’s still a secular trend that’s going to continue for quite a period of time.

Finally, there are about 375 stocks that we cover. We’ve covered these stocks for a very long period of time. We don’t have to worry about how they make money, we know exactly how these companies make money. What we focus on is that structural change; that focuses where we spend our time on stock picking, and that’s what drives our alpha. We analyse returns of about 10% per annum over the years, over the 8.5 year track record, and in terms of concentration, our top 10 longs, and our top 10 shorts, are just 30-50% of the fund’s gross.

What’s driving those returns? Clearly it’s stock selection but it’s not just about that. It’s also about this regional correlation I mentioned to you and also the fact that we’re not in a product space.

We tend to have less of the wobbles than others do. For example this year, in February/March the average long/short fund was down by seven or eight and we were down by two or three. Whenever the index was down during the month, on average that index was down about 3.5%. But during those same exact down months, Electron returned -0.1% on average.

Whenever the index was down during the month over our track record, 50% of the time or half the time we put on a positive number, so half the time when the index is down, we’ve gone positive. This used to be 49% but last month we had a good month where utilities got a crush. They were down about 5.5%, we were up about 60 basis points that increased us to 250.

We have had some bad months as well, but for 19% of the months the index is up and we’re negative but the positive thing is that we have 2.7 times of these good months as these bad months and that in our view was the key note of returns, how you create wealth in this business.

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Biographies

Yves Guntern
Alternative Investments Business Head
Yves is Alternative Investments Business Head, responsible for Partnerships with single HF managers as well as responsible for Business Development for Liquid strategies.
Prior to joining UBP, he was Head of Global Investment Products at Renaissance Investment Management from 2007 to 2009 and was appointed CEO of the company’s Geneva operation. From 2003 to 2007, he was already with UBP Alternative Investments as Head of Marketing & Business Development. Yves started his career in 2000 at Morgan Stanley Capital International. He holds a BA in Econometrics and is a CFA charter holder.

Ashwin Vasan
Chief Investment Officer & Founder
Mr. Vasan has over 20 years of investment experience. Prior to founding Trend Capital, Mr. Vasan was the Head of Macro Trading at Shumway Capital Partners from July 2009 through to March 2011. Prior to that, he worked as a portfolio manager at Tudor Investment Corporation from 1999 to 2009, where he was a partner. Prior to Tudor, Mr. Vasan was a Portfolio Manager at Oppenheimer Funds. He began his career at Citibank where he was an International Economist from 1989 to 1991. Mr. Vasan received his BA in Economics from the University of Nebraska, his MA in Economics from San Diego State University, and did three years of PhD work at New York University.

Thierry Lucas
Chief Investment Officer & Founder
Mr. Lucas has 18 years of investment experience in the following areas: (i) Equity Long/Short, Event Driven & Risk Arbitrage strategies, across the capital structure (equity, credit) and via derivatives ; (ii) All industries with a main focus on Consumer, Financials, Healthcare, Chemicals, Business Services, Telecom & Media; (iii) Geographies, mainly in Europe and selectively in global situations. Prior to founding Portland Hill Capital in 2012, Mr. Lucas was a Partner at Eton Park International between 2005 and 2012. Prior experience includes also Merrill Lynch (2003-2004) and Goldman Sachs (1998-2000). Mr. Lucas graduated from Harvard Business School in 1998.

Sidney Rostan
ILS Portfolio Manager
Mr. Rostan joined SCOR Investment Partners as an ILS portfolio manager in July 2015. Prior to that, he worked in the French investment bank Natixis, where he was responsible for the ILS activity since 2006, including in particular the origination, structuring and placement of more than $3 billion of cat bonds and privately placed transactions. Mr. Rostan previously held a senior structurer position at Marsh, where he created and developed a European weather derivatives and cat bonds activity. Prior to that he worked with Crédit Foncier de France and Dexia. Mr. Rostan holds a Master in Finance from the Skema Business School.

Jos Shaver
Managing Partner & Portfolio Manager
Mr. Shaver has over 20 years of investment and industry experience in the utilities & infrastructure sectors. Prior to re-launching Electron in 2012, he was a Portfolio Manager at SAC Capital Advisors, where he ran a global utilities & infrastructure book. Prior to SAC, he founded Electron Capital Management in 2005, a global utilities and infrastructure-focused long/short fund. Prior to starting Electron, he worked for SG Barr Devlin, Credit Suisse First Boston/Donaldson, Lufkin & Jenrette and UBS. Mr. Shaver received a BA in Mathematical Economics from Colgate University and an MBA in Finance and Accounting from Columbia Business School.