Next Investment for my Mom

We had a structured note product - managed futures with a capital guarantee. It has now matured and it is time to reinvest some of the money. I'm planning to reinvest the amount we originally invested in this product and transfer the profit to our other broker to be added to our investment with Thomas White. Our manager at UBS sent information on some products we could re-invest in:

1. Man/AHL managed futures - This is a very similar product to the Man fund I have invested in myself. I did some analysis of the data supplied - it's returned 16.5% p.a. since September 2002 with a 4.9% monthly standard deviation. The MSCI returned 17.2% with a standard deviation of 3.1%. So it gives stock like returns but with more volatility. However, it has low correlations with other investments. 0.11 with the MSCI, 0.23 with CREF Bond Market, -0.03 with TIAA Real Estate, zero with the S&P 500. The only strong correlation I found (0.73) was with Superfund Quadriga B another managed futures product. Is there a managed futures beta (systematic risk factor) ? Yes, I like this product :)

2. UBS A&Q Alternative Solution Index Certificates - This provides access to UBS internal hedge funds. A&Q stands for "Alternative and Quantitative" - these are quant driven hedge funds. 75% of the money is in hedge funds, 10% in commodities, 5% in real estate, 5% in private equity, and 5% in cash. Between June 2006 (inception) and the end of February the Certificate returned an annualized 10.46% with a Sharpe ratio of 1.02, which beat the various benchmarks presented (The SPX did 4.91% including dividends). So this product seems to be of good quality.

3. UBS Multi-Strategy Proprietary Index Certificate - This also provides access to UBS internal hedge funds - but these are the O'Connor funds which are not quantitative funds. Both hedge fund products diversify across individual funds and strategies. From May 2004 to October 2004 it returned 6.09% with a Sharpe ratio of 0.68, which is not particularly attractive compared to equities in that period but better than bonds. Interestingly, at the end of October they terminated their U.S. long-short equity program due to underperformance. So maybe returns will improve going forwards?

4. UBS Agribusiness (USD) Strategy Certificate - 80% is invested in agricultural related stocks and 20% in commodities. I wonder if this is a sign of a bubble - selling this stuff to investment bank retail clients? Maybe a little bit in this one? There is no data as it is a new product.

Minimum investment in these products is typically $10k with $1k increments above that. You don't need huge amounts of money to invest in hedge funds, at least outside the U.S.

He suggests investing most in option 2 and less in each of the three others. We're looking at a $US200k investment. I'm going to suggest to weight the Man/AHL fund more highly than the O'Connor funds or the Agribusiness Certificate and give him the benefit of the doubt on the other two.

I'm also looking to replace a bond fund with an equity fund. The bond fund only returned about 3% per year since we bought it in 2003 and we have too many bonds. More on that in another post.