Why invest in hedge funds? A presentation prepared for GlobeOp Financial Services

1. Starving the Black Swan
Why Invest in Hedge Funds (after all that has happened).
Presented by George Evans
Global Head of Business Development
GlobeOp Financial Services

2. Today’s Hedge Fund Landscape.
Confidence is Back.
• Despite continued economic uncertainty, hedge funds are still on the
upswing, delivering solid performance for global investors.
• The hedge fund industry worldwide now controls total assets worth $2.02
trillion as of April, 2011, greater than what the industry held prior to the
credit crisis (Hedge Fund Research, 2011)
• Year-over-year assets in hedge funds in 2011 are up by $102 billion over
the first quarter of 2010.
• In the post-Madoff era, regulatory scrutiny has intensified and will likely
expand.
• Institutions – such as corporate pension plans, family offices,
endowments and foundations – have become major participants,
expanding the core investor base beyond wealthy individuals.

3. Paradigm Shift: Institutions allocate
more capital to hedge funds.
2008 to 2010 Projected next 12 to 18 months

4. Institutional types.
Trends and allocations.

5. What kind of investment strategies
do you want?
• Pension funds are facing the prospect of an exponential increase in
withdrawals from retiring subscribers -- despite the shrinking value
of their asset base.
• In this scenario, hedge funds provide a powerful tool for
effective liability hedging.
• The specter of inflation has increased the appetite for capital
preservation among endowments and foundations – and these
investors have targeted rates of return that can’t be achieved with
today’s low-yielding bonds.
• Global alternatives like real-estate, infrastructure bonds and
natural resources offer all types of hedge investors the potential for
diverse anticipated returns and high earnings quality.

6. Pension Funds: Unfunded liabilities / hedge fund strategies
Type of Security 2004 2005 2006 2007 2008 2009
US Equities 0.4363 0.4322 0.4172 0.3957 0.3378 0.3299
Non-US Equities 0.1497 0.1534 0.1743 0.1848 0.1802 0.188
US Fixed Income 0.2769 0.2757 0.2648 0.2629 0.2528 0.2486
Non-US Fixed Income 0.0116 0.0114 0.0087 0.0085 0.0143 0.009
US Real Estate 0.0396 0.0434 0.052 0.0553 0.0647 0.0524
Private Equity 0.0429 0.0432 0.0454 0.0499 0.0715 0.0659
Hedge Funds 0.0002 0.0013 0.0089 0.0082 0.0115 0.0238
Funding Ratio 0.825 0.8454 0.8618 0.9336 0.7831 0.5832
"Portfolio Allocation for Public Pension Funds" by George Pennacchi and Mahdi
Rastad in Journal of Pension Economics and Finance, April 2011,
http://bit.ly/iVkaCk

8. How has the governance of
hedge funds improved?
• Hedge funds are responding to the changed environment:
Nearly half (46%) of funds have enacted a risk management
system consistent with the expectations of boards of trustees or
legislative mandates. (Preqin 2011)
• Administrators have become central in helping investors to meet
the need for transparency and integrity in hedge fund governance.
• Investor demands and transparency/reporting requirements
continue to increase rapidly

9. Why it’s a good idea
to invest in Hedge Funds today
• Hedge fund managers typically invest their own money in the
fund they manage, which helps align their interests with investors.
• Hedge funds typically have the resources and research to find
and evaluate the best options across multiple categories and
strategies.
• Industry has been secured against operational risk.
• Investment strategies of hedge funds have been customized for
institutional investors.

10. …but beware the black swan

11. the black swan
• Operational risks predominate, with an average of 15 hedge funds
collapsing each year on average
(Edhec’s Risk and Asset Management Center, 2005)
• 2002 CAPCO study found 41% of hedge fund failures are due to
misrepresentation, 30% involved misappropriation of monies
• 14% due to trading outside accepted boundaries and 6% due to
inadequate or faulty technology.

12. How to Starve the Black Swan
Nine Best Practices
1 Know the marks of a 4 Nip fraud in the bud 7 Pay-for-performance
credible administrator Reconcile data from all sources-- Measure and evaluate
Check their standards – at least prime-brokers, counter-parties and performance of managers in
SAS 70 Type II. Preferably ISAE exchanges both the short and long term and
3402, SSAE 16 certifications ensure commensurate fees
2 Identify risk “landmines” 5 Transparency 8 Monitor counterparty risk
Value-at-Risk, Extreme risks, Communicate in real-time with Include prime brokers, valuation
consistency with memorandum reporting via a Web interface agents, auditors and other
partners
3 Pay attention to key metrics 6 Eliminate conflicts of interest 9 Guarantee IT data integrity
Snapshots of NAV are available Independently verify price data for and backup
every day to support evaluation unlisted assets and disclose Plan for business continuity and
and decision making sources disaster recovery for all IT
systems

13. Questions? Comments?