opening keynote: mike diamond and josh charlson

#NICSAGMM

Fidelity® Institutional – Alternative Investments

Platform

Presentation for NICSA

Michael Diamond, VP Product Management – Alternative Investments

September 11, 2014

1 Data as of December 31st, 2013.

3

Gain confidence with the strength and reputation of Fidelity® Investments

• A leading money

manager for over

60 years

• $1.9T1 assets under

management

Money

Management

• #1 provider of

workplace retirement

savings plans in U.S.

• 23.8M1 workplace

participants


administration

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discount brokerage

firm with 14.5M1

customer accounts


administration

• Private ownership enables

continuous reinvestment

• Recognized name clients trust

• Balance sheet strength

• $4.6T1 assets under administration

Personal

Investing

Workplace

Savings Institutional

• More than 5,0001

intermediaries

• A leading clearing

and custody provider,

and mutual fund

distributor


administration

- Edward ‘Ned’ C. Johnson, 3rd

We start with the premise that

Fidelity’s reputation, which is the

basis for earning customers’ trust,

is its greatest asset.

”

“

4

Fidelity Institutional Overview

Fidelity Financial Advisor Services

Scott Couto – President $337 B AUM

Intermediary Fund Sales

Fidelity Institutional Wealth Services

Michael Durbin – President $754 B AUA

3,200+ RIAs

RIA, TPA, Trust Custody

National Financial

Sanjiv Mirchandani – President $729 B AUA

245 Broker Dealers and 225 Custody clients

Broker Dealer Clearing, Trust Custody

Fidelity Family Office Services

Edward Orazem – President $56 B AUA

217 relationships

Family Office Custody

Fidelity Capital Markets

Brian Conroy – President 756 M Shares traded per day

Execution Prime Services

W

orkplace

Investors

Institu

tions

PersonalInvestors

Distrib

utionA

sset

M

anagem

en

t

Operations and Services Group

Mark Katzelnick - COO

Technology

Ron DePoalo – CIO

Product

Mark Haggerty – President

Client Experience

Maggie Serravalli – EVP

Fidelity Institutional – Gerry McGraw - President

Supporting Organizations

Data as of December 31st, 2013

Slide eReviewed under - 617610.3.0

Enhance

Research and

Due Diligence

Capabilities

Provide

Education and

Thought

Leadership

Strengthen

Client

Experience and

Streamline

Processing

Expand Access

to Institutional

3rd Party Quality

Products

Expand the FI alternatives offering to support advisors with a comprehensive

solution that includes education, tools, research and expanded product access

via third parties as well as delivering the leading custody solutions provided today

Fidelity Institutional (FI) Alternative

Investment Offering Vision

5

Alternative Investment Product Center

6 For illustrative purposes only

AI Mutual Fund Sales make up 18% of long-

term mutual fund flows in FI

0%

5%

10%

15%

20%

25%

2011 2012 2013 Sep-2014

Multialternative

Nontraditional Bond

Multicurrency

Market Neutral

Managed Futures

Long/Short Equity

Bear Market

'% of Fund Flows'

Source- FundsNetwork.com

7

For broker-dealer use and investment professional use only. Not for distribution to the public as sales material in any form.

The third party service providers listed are independent companies and are not affiliated with Fidelity Investments. Listing them does not suggest a recommendation or

endorsement by Fidelity Investments. The third-party products mentioned herein are the property of their respective owners.

Third party marks are the property of their respective owners; all other marks are the property of FMR LLC.

The content provided in this presentation is general in nature and is for informational purposes only. This information is not individualized and is not intended to serve

as the primary or sole basis for your decisions as there may be other factors you should consider. Fidelity does not provide advice of any kind. You should conduct your

own due diligence and analysis based on your specific needs.

Fidelity Institutional serves banks, broker-dealers, insurers, registered investment advisors and other financial professionals. Fidelity Institutional comprises of National

Financial, Fidelity Capital Markets, Fidelity Institutional Wealth Services, and Fidelity Family Office Services.

Fidelity Family Office Services is a division of Fidelity Brokerage Services LLC, Member NYSE, SIPC. Fidelity Capital Markets is a division of National Financial

Services LLC. Member NYSE, SIPC.

Fidelity Institutional Wealth Services provides brokerage products and services and is a division of Fidelity Brokerage Services LLC. National Financial is a division of

National Financial Services LLC through which clearing, custody or other brokerage services may be provided. Both members NYSE, SIPC.

©2014 FMR LLC. All rights reserved.

698425.1.0

8

Disclosure

The Alternative Mutual Fund

Landscape

Josh Charlson, Director of Manager Research for Alternative Strategies

The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,

in whole or in part, without the prior written consent of Morningstar, is prohibited.

ALT MUTUAL FUNDS TRENDS

Section I

10 The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means,


How Morningstar Defines an

Alternative Investment

• An investment can be defined as “alternative” if it falls

into one or more of the following three buckets:

1. Non-traditional asset classes (i.e. commodities,

currencies).

2. Non-traditional strategies (i.e. shorting, hedging, event

driven).

3. Illiquid assets (i.e. private equity, private debt).



What is an Alternative Investment?

• Dynamic classification.

– Once an investment becomes mainstream, it is no longer “alternative.”

– Emerging market stocks, listed REITs.

• Legal structure does not define the investment.

– Hedge funds aren’t necessarily alternative, and mutual funds

aren’t necessarily traditional.

• A good alternative investment is one that produces positive risk-

adjusted returns (over a reasonable time frame) and exhibits a low

correlation to traditional investments.



Growth of Hedge Fund Assets

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Single Manager Hedge Funds

Funds of Hedge Funds

Assets in Liquid Alternative Vehicles USD BilAssets in Liquid Alternative Vehicles USD Bil

Assets in Liquid Alternative Vehicles USD Bil

Assets in Morningstar’s Hedge Fund Database USD Bil



Growth of Alternative ETF and Mutual

Fund Assets

Assets in Liquid Alternative Vehicles USD Bil

0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mutual Funds ETFs



Flows into Liquid Alternatives: Mutual Funds

-10

10

30

50

70

90

110

2007 2008 2009 2010 2011 2012 2013

Bear Market Currency Long/Short Equity Managed Futures

Market Neutral Multialternative Nontraditional Bond

Flows Into Alternative Mutual Funds USD Bil



Alternatives Category Growth, 2013

Morningstar Category Estimated Net Flow 2013 Organic Growth Rate % 2013

Nontraditional Bond 53,706,899,757 79

Long/Short Equity 20,624,967,875 81

Multialternative 9,841,500,717 57

Market Neutral 4,590,846,550 20

Bear Market 2,690,304,342 39

Managed Futures 2,654,739,560 32

Multicurrency (491,169,846) (4)



Top Drivers of Investments in

Alternatives



Institutions’ and Advisors’ Allocations to Alternative

Investments in 2014



ALT CATEGORIES

Section II

19

20

Classification Chart

Mutual Fund and ETF Categories

Multialternative

Equity-based

Categories

Bear Market

Long/Short Equity

Market

Neutral

Nontraditional Bond

Commodities Categories Currency

Derivatives

Categories

Managed Futures

Volatility Trading Inverse/ Leverag

ed



Category: Long-Short Equity

• These funds take a hedged, net-long exposure to the stock market.

• Must have at least 20% net short exposure

• Typical beta ranges between 0.3 and 0.8, averages 0.5.

• Several variations on the strategy:

– Long and short directional bets on individual stocks or indexes – Wasatch Long/Short FMLSX, Accuvest Global Long Short AGLS

– Long stock + short calls+ long puts. – Gateway GATEX, Schooner SCNAX

• Typical benchmark: Custom index of 50% S&P 500 and 50% cash



Category: Market Neutral

• These funds hedge out most equity market risk, and exhibit betas to stock indexes of between -0.3 to 0.3.

• Risk/return levels are similar to bond funds.

• Three major strategies:

– Equity market neutral, merger arbitrage, and convertible arbitrage.

– An emerging strategy of “event-driven” which is an extension of merger arbitrage into other corporate events.

• Equity Market Neutral:

– These funds take long and short positions in stocks such that the market risk in the long positions is virtually offset by the short positions.

– The goal is to isolate “alpha” from stock selection.

– Generally the most difficult strategy to execute.

– JPMorgan Research Market Neutral JMNAX



Category: Market Neutral (continued)

• Merger Arbitrage:

– These funds buy target stocks and short the acquirer

(stock-for-stock transaction) or short calls (cash transaction).

– The goal is to isolate the premium paid for the target.

– Collecting premium is selling insurance on the deal closing.

– Merger Fund MERFX, Arbitrage Fund ARBFX.

• Convertible Arbitrage:

– These funds buy convertible bonds and short the stocks of the same

issuer.

– The goal is to benefit from the mispricing of the convertible bond,

which includes an embedded option.

– Convertible bond holders are paid an illiquidity premium.

– Calamos Market Neutral Income CMNIX.



Category: Nontraditional Bond

• The largest category in terms of assets ($140 billion as of 5/28)

• Lots of different flavors: Unconstrained, Opportunistic, Long/Short,

Tactical, Absolute Return

• These funds invest primarily in debt (all types) but can hedge

duration risk, credit risk, or both.

• Most, however, are reducing duration risk and focusing on credit

risk

• Category correlation to high yield bond funds since 2008: 0.95

• Typical benchmark: Barclays US Aggregate Bond Index



Category: Managed Futures

• These funds take long and short bets on futures contracts based

upon positive or negative price momentum, typically across various

asset classes.

• Systematic, automated strategies, which can range in volatility.

• Typical benchmark: Credit Suisse Managed Futures Liquid Total

Return Index

• Single-manager versus multi-CTA structures:

– Single manager structures can be less diversified in terms of strategy,

but are much cheaper.

– AQR Managed Futures AQMIX

– Multi-CTA structures charge underlying management and performance

fees which are not included in the expense ratio:

– Mutualhedge Frontier Legends MHFAX



Category: Multicurrency

• These funds invest in short-term foreign-currency government debt or

currency futures or forwards.

• Most funds are explicitly short the U.S. dollar, and a few are absolute

return (neutral to the direction of the dollar index)

• Risk/return profile similar to bond funds.



Category: Multialternative

• This is largest category in terms of options: 118 funds as of May

28, 2014.

• Must have at least 20% net short exposure and invest at least 50%

of assets in alternative strategies

• These funds offer a diversified mix of alternative strategies and

asset classes, accessed through separate accounts, ETFs, or

mutual funds.

• Typical benchmark: Morningstar Conservative Target-Risk Index

• Most, but not all, multialternative funds are also multimanager:

– Absolute Strategies ASFIX, Hatteras Alpha Hedged Strategies

ALPHX.

• There are a growing number of tactical funds in this category.

– JHancock2 Global Absolute Return JHAAX, UBS Dynamic Alpha

BNAAX.



Multialternative Category vs. Conservative

Portfolio



ALT RESEARCH PROCESS

Section III



Morningstar Analyst Ratings for

Alternative Mutual Funds

• Debuted in June 2012.

– 69 funds and 71% of assets by Q2 2014.

– Global Fund Reports for all 69 funds.

• Same 5 Pillars: People, Parent, Process, Performance, Price.

• Same rating system: positive (Gold, Silver, Bronze); Neutral;

Negative.

• Customized application for alternative mutual funds.



Evolution of Fund Ratings



The Five Pillars

People Proces

s

Parent Performance Price



Morningstar Analyst Ratings: 5 Pillars

People Hedge fund track records.

Experience with shorting and risk management.

Experience in managing alternative funds

Reasonable investment in mutual fund.

Parent Boutique shops.

Series trusts: some boards spread too thin with little or no investment in funds.

Close eye on product launches and capacity constraints.

Full look through on relative strength of entire alts product lineup.




Process Transparent and repeatable.

Shorting process should stand on its own merit.

Risk-management process is essential: top-down exposure limits; bottom-up position loss limits; steps to increase and reduce risk, etc.

Trading/transaction cost considerations.




Performance Analyze multiple track records. (hedge fund, long only, etc.)

Different risk/return profiles in different market environments.

Heterogeneous categories.

Lack of industry standard benchmarks.

Statistics such as alpha, beta, correlation, bear correlation, upside/downside capture, maximum drawdown.




Price More expensive than stock and bond funds.

Use annual or prospectus net expense ratio, examine fee layers.

Relative to category and distribution channel.

Managed futures funds charge fees not included in the

expense ratios.



Distribution of Alternative Fund Analyst

Ratings

69 Mutual Funds, 71% of Alt Assets; Data as of

6/10/2013,

1

10

12

40

6



Questions & Comments

• [email protected]

312-696-6564

• Website:

http://advisors.morningstar.com/advisor/al

ternative-investments.htm



mailto:[email protected]

http://advisors.morningstar.com/advisor/alternative-investments.htm




opening keynote: mike diamond and josh charlson

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