Alternative Investments Brochure - RBC Wealth Management
Advance withAlternative InvestmentsDiversification when you need it
All charts are for illustrative purposes and not intended to be representative of any specific investment vehicle. Please refer to theAppendix on back cover for definitions of benchmarks displayed. Past performance is not indicative of future results. This information isnot intended to be used as the primary basis of investment decisions. Because of individual client requirements, the information shouldnot be construed as advice designed to meet the particular investment needs of any investor.
Advance with Alternative Investments 1Expand your investment toolkitOf all the lessons learned from the 2008 market dislocation, one of the most lasting realizations isthat our tolerance for risk may actually be lower than we previously imagined. Yet as markets haverecovered through the years that have followed, we may have also learned that some risk may berequired to achieve the returns we seek. Therefore, taking steps to accept risk — and consequentlymanage it — may be a priority for you.Portfolio diversification is one way tohedge against risks associated withindividual securities. For example, equityand fixed income investors spread riskby owning stocks from diverse sectorsand geographies, and by purchasingbonds from different issuers withdifferent credit ratings and maturities.But when broad price swings remaincommonplace for stocks, and bonds andcash seem stuck in a low interest rateenvironment, alternative investmentsmay offer a solution to protect againstthese types of systemic risks.RBC Wealth Management definesalternative investments simply as anyinvestment outside of publicly traded,long-only, stocks, bonds, or cash. Thoughalternative investments are commonlyperceived to carry an undue amount ofrisk, alternative investments may actuallylower certain types of risk exposure bytaking advantage of what are often called“non-correlated asset classes.” This term isused for alternative investments becausetheir performance is less likely to correlatewith the performance of the broaderstock, bond, and cash markets. As noncorrelated assets, alternative investmentscan help portfolio volatility attributableto equity markets as well as help improveoverall returns. By losing less valuecompared to a volatile benchmark, aninvestment can both recover faster andgrow quicker. Conversely, non-correlatedassets may not perform as well as thebroader equity market during extendedbull markets, where they may only capturea portion of the equity market upside.It is certainly true that alternativeinvestments come with importantconsiderations to understand beforeinvesting. For example, not all strategiesare alike or serve the same purpose.Some strategies may use leverage orother complex financial structures thatinvolve risk, some may be more illiquidand/or difficult to value, and some mayhave limited regulatory oversight.Which solution is right for yourgoals?Alternative investments come inseveral shapes and sizes. Dependingon your specific needs and financialcircumstances, one may be moreappropriate than another. The purposeof this brochure is to provide a briefoverview of some of the most commontypes of alternative investments andthose that are offered at RBC WealthManagement: hedge funds, privateequity, and real assets.Alternative investment strategiesHedge FundsPrivate EquityReal AssetsConvertible ArbitrageBuyoutCommoditiesDistressedDirect LendingEnergyEquity Long/ShortMezzanineInfrastructureFixed Income ArbitrageVenture CapitalReal EstateGlobal MacroTimberManaged FuturesMarket NeutralMerger ArbitrageThis chart provides examples of investment strategies employed by alternative asset managers.
2 RBC Wealth ManagementHedge fundsPotential to diversify beyond traditionallong-only investingDefinitionWe define hedge funds as investment strategies that have access to a broadermandate than just equities, bonds, and cash. Some examples of the types ofstrategies available to hedge fund managers include shorting, the use of leverage,the use of derivative securities, and the ability to invest in instruments that donot offer daily liquidity. This broader approach provides hedge fund managersthe opportunity to generate differentiated sources of return, increased portfoliodiversification, and enhanced risk-adjusted returns.Features and benefitsDifferentiated sources of returnHedge funds include differentiated sources of return, allowing for reducedvolatility which has resulted in returns that have been historically more consistentthan the S&P 500 over time.From 1990 to 2015, hedge funds were able to provide more consistent returns thanequity markets, as represented by the S&P 500, by capturing 50% of the equity marketupside and 25% of its downside. By limiting the downside market participation, hedgefunds not only provided notable out performance over equities, but did so with muchless volatility. This performance result is possible because most hedge funds haveaccess to strategies that can hedge their market exposure — although it is importantto note that not all hedge funds hedge. It is also important to note that in strong equitymarket environments, hedge fund strategies are likely to underperform on a relativebasis. For example in 2013, the S&P 500 was up 32% while hedge funds, as representedby the HFRI Fund Weighted Composite Index, were up just 9%.
Advance with Alternative Investments 3Growth of 1MM, 1990-201514n HFRI Fund Weighted Composite Index10n S&P 500In 0042005200620072008200920102011201220132Using HFRI Fund Weighted Composite Index as a proxy for hedge funds and the S&P 500 for equity markets,the above chart shows the potential for hedge funds to outperform equity markets on a cumulative basis.(Source: Zephyr Analytics)Portfolio diversificationHedge funds can provide diversification benefits through reduced correlation.The investment management industry has always highlighted the importance ofportfolio diversification. Over time, the definition of “portfolio diversifiers” has evolved.Over the past few decades, diversifying by region, sector, market cap, maturity, andcoupon has largely been sufficient for equities and bonds. However, over time, this hasproven not to be enough for some investors. As a result, alternative strategies have beenconsidered as an option to help achieve those same intended diversification objectives.Portfolio diversification from 1990-201520%15%10%Improved Returns8.52%5%9.19%Lower Volatility9.0%Lower Drawdown6.72%Max Drawdown0%-5%ReturnStandard Deviation-10%-15%-20%-25%-25.17%-30%-35%-31.44%n Portfolio A Balanced (No Alternatives) 40% Bonds, 60% U.S. Equityn Portfolio B Balanced (With Alternatives) 40% Bonds, 35% U.S. Equity, 10% DiversifiedHedge Funds, 10% Private Equity, 5% Real EstateUsing the HFRI Fund Weighted Composite Index as a proxy for hedge funds, the S&P 500 as a proxy for equitymarkets, the Barclays US Aggregate as a proxy for bonds, the Cambridge Private Equity Index as a proxy forprivate equity, and the National Association of Real Estate Investment Trusts (NAREIT) All Equity Index forreal estate, the above chart shows that allocating a portion of your portfolio to alternative investments mayhelp reduce the overall volatility of your portfolio and create the potential for greater wealth creation andpreservation over time. (Source: Zephyr Analytics)
4 RBC Wealth ManagementEnhanced risk adjusted returnsHistorically, hedge funds have preserved value relatively well in down marketswhen compared to traditional equities.Hedge funds have typically shown over time that they can mitigate downsideparticipation during market dislocations, including the bursting tech bubble in theearly 2000’s and again in the recent financial crisis of 2008. In 2008 for example,equity markets, as represented by the S&P 500, were down 37% while hedge funds,represented by the HFRI Fund Weighted Composite Index, were down 19%. Likewisefrom April to December 2001, the S&P 500 was down 15%, while hedge funds,represented by the HFRI Fund Weighted Composite Index, were up about 5%.Downside protection during market dislocations10%0%-10%-20%-30%-40%-50%Recession 9/11 terrorist CorporateRussia default; Tech bubbleburstsconcernsattacksLTCM blow upFraudAug. 1998 Apr. - Dec. '01 Fed. - Aug. '01 Sept. '01 Mar. - Sept. '02Iraq warDec. '02 Feb. '03Credit crisisJun. '08 Mar. '09n HFRI Fund Weighted Composite Indexn S&P 500Using the HFRI Fund Weighted Composite Index as a proxy for hedge funds, and the S&P500 as a proxyfor equity markets, the above charts shows that hedge funds have tended to decline less than the equitymarkets in periods of severe equity market stress. By providing downside protection, hedge funds mayreduce the recovery time from drawdowns and may provide portfolio growth opportunities more quickly.(Source: Zephyr Analytics)Fund of Hedge FundsFund of hedge funds provide a vehicle for investing in multiple hedge fund strategiesand managers, and provide investors with an additional layer of due diligence,monitoring, and risk management. While there are diversification benefits of thisstructure, an additional layer of fees is often charged.
Advance with Alternative Investments 5Private EquityPotential to enhance returns through anilliquidity premiumDefinitionPrivate equity funds attempt to achieve enhanced risk-adjusted returns relativeto public stock markets. Private equity funds utilize strategies such as acquiringprivate companies and adding value by improving operational efficiency to enhancemargins, or by adjusting corporate strategy to drive growth. Since private equityfunds take a long-term view on their investments, they are less liquid investments;however, they have demonstrated the ability to capture an illiquidity premiumbecause of this long-term investment view. The typical holding period for privateequity is 10 years or more. As a result, understanding the life cycle of a private equityfund is very important.Private equity fund life cycle300000 300,000200000 200,000100000 100,000 00-100000 -100,000-200000 -200,000-300000 -300,00012345Fundraising period Investment period6789Harvesting periodYearsn Cash distributionsn Cash contributionsAbove is an example of the J-Curve life cycle for a private equity fund.1011121314Distribution period15
6 RBC Wealth ManagementDuring the “Fundraising Period” (years one through three), the fund managercollects commitments, or the amount of money an investor wants to invest. Theentire commitment amount is generally not collected up front; instead, an investor’scommitment amount is gradually “called” by the private equity fund through a seriesof capital calls. The timing of the capital calls will vary based on a private equity fund’sidentification of underlying portfolio investments during the “Investment Period”(years one through five). Throughout the ”Harvesting Period” (years four througheight) of a private equity fund’s life, portfolio companies are restructured or continueto grow as the private equity manager begins to position the underlying companiesfor re-sale. During the “Distribution Period” (years eight and forward) of a fund’s life,investments are realized through the sale of the portfolio companies, and proceeds arereturned to private equity investors in the form of distributions. Note that each periodof the private equity life cycle may overlap and may vary depending on the fund.Features and benefitsPrivate equity fund investing is a strategy that rewards patient investors by capturingthe illiquidity premium inherent in private investments. Private equity companiesutilize this premium afforded to investors with long-term investment horizons, byallocating capital to strategies that can provide above-market risk-adjusted returns.According to Venture Economics, private equity funds have historically had excessreturns over public markets of three to four percent annually over trailing five- andten-year periods.Historically, private equity has outperformed broad-based public equity indicesJan 1990 – Dec 2015Annualized returnStandard deviationCambridge PE Index14.27%11.43%S&P 5009.29%14.57%Growth of 1MM, 1990-2015403530In MM252015105n Cambridge Associates LLC U.S. Private Equity 11992199319940n S&P 500Using the Cambridge Private Equity Index as a proxy for private equity performance, and the S&P 500 asa proxy for equities, the above chart shows that allocating a portion of your portfolio to private equity mayhelp you enhance the overall return on your investment capital. (Source: Zephyr Analytics)
Advance with Alternative Investments 7Real AssetsPotential to hedge against inflationDefinitionIt is important to be aware that a variety of real asset strategies exist, including realestate, commodities, timber, and energy, to name a few. Real assets can be viewedas tangible assets that are differentiated from traditional financial assets. Real assetfunds aim to enhance risk-adjusted returns by capitalizing on investment mandatesto achieve opportunistic growth, inflation protection, and/or income generationgoals.Features and benefitsUsing real estate as an example, various strategies can be employed based oninvestment objective. The real estate market segments are generally described asCore, Core Plus, Valued Added, and Opportunistic. The risk return profile of thesesegments increases as one moves from Core to Opportunistic. For example, strategiesin the Core segment might purchase properties that are generally fully leased, havereadily available information, and have efficient markets. These properties aregenerally held to produce secure income. On the other side of the spectrum is theOpportunistic segment. Opportunistic strategies often employ the “buy it, fix it, sellit” strategy. Often times, these are properties that are in the development processand have higher return potential. However, this increased return potential may alsoresult in higher risk potential as these strategies may use greater leverage. Morespecifically, leverage can enhance returns in a favorable market, but can exacerbatelosses in an unfavorable market. Indices measuring real estate performance, such asthe National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index,have tracked real estate returns of nearly 8% annually since 1990, with just one-thirdof the volatility of the S&P 500 during the same time.
8 RBC Wealth ManagementJan 1990 – Dec 2015Annualized returnStandard deviationNCREIF Property Index7.82%5.65%S&P 5009.29%14.57%Growth of 1MM, 1990-20151210In 319940199519962n S&P 500n NCREIF Property IndexUsing the NCREIF Property Index as a proxy for real estate investments, and the S&P 500 as a proxy forequity markets, the above chart illustrates that allocating a portion of your portfolio to real assets maygenerate returns at a fraction of the volatility of broader-based stocks. (Source: Zephyr Analytics. NCREIFProperty Index measures investment performance of a large pool of individual commercial real estateproperties acquired in the private market for investment purposes only.)
Advance with Alternative Investments 9StructuresMutual Funds, Interval Funds, PrivateInvestment CompaniesLiquid AlternativesPrivate FundsAlternativeInvestment Strategy‘40 Act FundsInterval FundPrivate InvestmentCompanyRegulatoryoversightRegistered w/SECRegistered w/SECLimitedClient eligibilityNo minimum investorrequirementsAccredited InvestorAccredited Investoror QualifiedPurchaserFee structureAsset-BasedPerformance &Asset-BasedPerformance &Asset-BasedLiquidityDailyQuarterlyMonthly to 12 yrs.Contractual riskLowMediumHighMutual FundsTraditionally investor access to alternative investments was limited to privateinvestment companies; however, alternative strategies have expanded into themutual funds space as well, as more investors are looking for strategies that mayhelp them diversify their portfolios above and beyond traditional stocks and bonds.Mutual funds have restrictions regarding use of leverage, illiquidity features, andminimum diversification, among other considerations.Interval FundsA growing structure used by alternative investment managers are interval funds.Interval funds are registered with the SEC under the Investment Company Act of 1940,and may require minimum investor qualifications. Interval funds typically provideliquidity, but may have lock-up periods. An important feature of interval funds is thatthe board of directors has discretion to offer liquidity, but is not required to do so.Private Investment CompaniesPrivate investment vehicles are not registered with the SEC under the InvestmentCompany Act of 1940, and often require minimum investor qualifications. Privateinvestment companies file exemptions and are thus not subject to the samerestrictions as mutual funds and interval funds with regards to leverage, liquidity,and portfolio diversification. These private structures may have the ability to capturean illiquidity premium afforded to longer-term investment opportunities.
10 RBC Wealth ManagementRisk managementAs with any investment, alternative investments come with theirshare of risks. It is very important to understand the risks you aretaking when you add alternative investments to your portfolio.The following list summarizes some key risk characteristics often associatedwith alternative investments. Additional notes on these risks are provided below.Please note that risks related to specific investments may be found in the offeringdocuments for each product. The client and advisor should read and understandthese documents prior to investing.Risks May have limited regulatory oversight May have limited transparency May have more illiquid terms relative to traditional stock and bond portfolios May have higher fees relative to traditional stock and bond portfoliosInvestment details Minimum investments vary among offerings Many require minimum investor qualifications such as net worth and investmentexperience Liquidity (redemptions) can vary with potential lock-ups and advanced notice Tax reporting could be K-1s (typically requires multiple extensions) or 1099s.Manager selectionManager dispersion is significant within alternative investments, so it is importantthat any investment strategy has been thoroughly evaluated and is well understood.For example, hedge fund strategies in 2014 fluctuated significantly from topperforming managers to bottom performing managers. For example, the returndispersion in the long/short equity space in 2014 was nearly 40% (-19% to 20%)while the dispersion of the U.S. Equity returns was a mere 9% (9% to 18%),accounting for four times the greater dispersion during the same time period.Though the following example refers to hedge funds, manager dispersion affects allalternative strategies, including hedge funds, private equity, and real assets.
Advance with Alternative Investments 11Hedge Fund return dispersion by -2%-3%-10%-10%-20%-19%-18%-14%-18%-30%U.S. EquityU.S. bitrageGlobalMacroMarketNeutralManagedFuturesUsing data reported from the Dow Jones Credit Suisse Hedge Fund Indices (HFN Indices), returns reflectedabove are the top 5% and bottom 5% of reporting funds. U.S. Equity represents U.S. Large Cap Core Equityfunds in the eVestment database for 2014. U.S. Fixed Income represents U.S. Core Fixed Income funds inthe eVestment database. Returns reflected are the top 5% of funds and bottom 5% of reporting funds inthe data set. (Source: Decagon, Investor Strategy Expectations 2015.)Liquidity riskLiquidity can vary from daily to more tha
environment, alternative investments may offer a solution to protect against these types of systemic risks. RBC Wealth Management defines alternative investments simply as any investment outside of publicly traded, long-only, stocks, bonds, or cash. Though alternative investments are commonly perceived to carry an undue amount of
2 RBC FUNDS AND RBC PRIVATE POOLS Annual Information Form Name, formation and history of the funds This annual information form contains information about the RBC Funds (collectively, the RBC Funds) and the RBC Private Pools (collectively, the RBC Private Pools and together with the RBC Funds, the ) listed on the cover page. In this document:funds › we, us and our refer to RBC Global Asset .
2 RBC FUNDS AND RBC PRIVATE POOLS Annual Information Form Name, formation and history of the funds This annual information form contains information about the RBC Funds (collectively, the RBC Funds) and the RBC Private Pools (collectively, the RBC Private Pools and together with the RBC Funds, the ) listed on the cover page. In this document:funds we, us and our refer to RBC Global Asset .
The views expressed herein reflect the RBC GAM-US as of 6.30.17. Views are subject to change at any time based on market or other conditions. RBC Global Asset Management (U.S.) Inc. (“RBC Global Asset Management - US” or “RBC GAM-US”) is a federally registered investment adviser founded in 1983. RBC Global Asset Management (RBC GAM) is the
1.2 The Scope of our Wealth Management Services 1.3 Components of Wealth Management 1.4 Process of Wealth Management 1.5 Need for Wealth Management 1.6 Expectation of Clients 1.7 Challenges to Wealth Management in India 1.8 Code of Ethics for Wealth Managers 1.9 Review Questions 1.1 Introduction to Wealth Management What is 'Wealth Management'?
RBC Global Asset Management Inc. Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management Inc. GLOBAL FIXED INCOME MARKETS . The bond-market outlook 44. Soo Boo Cheah, MBA, CFA – Senior Portfolio Manager, RBC Global Asset Management (UK) Limited Taylor Self, MBA – Senior Analyst, RBC Global Asset Management (UK) Limited
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Asset Management is the generic process that seeks to ensure that land and buildings, as the asset base of an organisation, are structured in the best corporate interests of the organisation concerned. The strategic plan refers to land and buildings only. It aligns the asset base with the organisation’s corporate goals and objectives and responds to all functional and service delivery .
