Research & Rankings / The Hedge Fund Report Card BY STEPHEN TAUB PHOTOGRAPH BY FREDRIK BRODEN

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1 The Hedge Fund Report Card BY STEPHEN TAUB PHOTOGRAPH BY FREDRIK BRODEN

2 B Silver Point s first-place finish illustrates that for a firm to rate highly with investors, it needs to do more than just perform well. Investors want to receive the best risk-adjusted return, and they consistently rank alpha generation as the most important attribute when selecting a hedge fund. But they make it clear that a top-performing hedge fund firm must also provide comfort and reassurance in a number of other areas and perhaps for a long period of time before investors will be willing to plunk down a sizable sum with it. A firm s risk management practices, the degree of transparency it provides and the confidence that its interests are aligned with investors are also important factors. Ashbel Williams Jr., executive director and chief investment officer of the Florida State Board of Administration which invests and safeguards $167.5 billion in assets of the Florida BACK IN 2009, SILVER POINT CAPITAL WAS NOT EXACTLY POPULAR with investors. Its clients had just suffered through a huge, 35 percent drawdown, from June 2007 through December 2008, and some investors felt the credit and distressed-debt firm had become too big and that its strategies had run their course. Investors were frustrated with Greenwich, Connecticut based Silver Point s historical lockup and liquidity terms, which only permitted them to redeem their money once a year. And like many hedge funds at the time, Silver Point irked some clients when it used side pockets for some of its very illiquid assets, although they subsequently performed well and have since been wound up. Since then Silver Point, founded by Goldman Sachs Group alums Edward Mulé and Robert O Shea, has rebounded, riding the bull market in credit that started several years ago. After rising percent in 2009, Silver Point Capital Offshore posted gains of between roughly 16 and 20 percent in three of the four ensuing years (it Retirement System and more than 30 other funds for the state of Florida and local governments says that although performance is important, he is just as interested in whether a hedge fund firm s interests are aligned with those of its investors and whether it has good compliance and strong transparency. This fits into the concept of integrity, Williams explains, speaking about hedge fund firms in general. The investment business is a people business. Silver Point, rated B and ranked No. 21 overall last year, also ranks among the top ten in all eight categories on which investors were asked to judge hedge funds. In fact, it comes in No. 1 for Alpha Generation its ability to produce excess returns above a benchmark as well as for Alignment of Interests and Transparency. It is a great, old-line, credit-oriented shop, says a major allocator of hedge fund assets. People a few years ago thought it was too big and boring. But it has had great performance. increased 4.53 percent in 2011), making KEY FACTORS WHEN One prominent hedge fund investor singles out Silver Point for its excel- EVALUATING A HEDGE FUND money by focusing on opportunities that arose from the financial crisis. Silver Point Scale: 1 to 10 (10 = most important) lent investor relations and client service. invested in corporate bankruptcies as well RANK FACTORS SCORE They are tops, says another investor. as in restructurings and financial liquidations, such as Lehman Brothers Holdings. perform well and have great organiza- They have been very consistent. They 1 Alpha Generation 8.99 Following the drawdown in , people familiar with the firm say, Silver Point boosted its risk management process by further developing in-house risk systems and implementing its systematic analysis of macro and market risks as part of its investment process. Investors have rewarded the firm s turnaround in a big way: Silver Point ranks No. 1 overall in Alpha s annual Hedge Fund Report Card survey this year and is one of only eight firms to earn an overall Risk Management Alignment of Interests Transparency Infrastructure Independent Oversight Liquidity Terms Investor Relations tional strength. Landing at No. 2 in the rankings is Third Point, the New York based eventdriven firm founded by Daniel Loeb. Third Point earns its first A grade despite being among the more consistently wellperforming hedge funds over the past few years. It gained some 25 percent in 2013, 21 percent in 2012, percent in 2010 and in Since launching his firm in 1995, Loeb has gained widespread notoriety for his A. The pension funds, endowments, foundations, funds of funds and other investors responding to this year s survey were asked to judge the firms in which they are invested for our annual Hedge Fund 100 ranking of the world s largest hedge fund firms. (For more information see How We Compiled the Rankings, page 28.) The ranking includes results for only the 47 firms that received statistically significant numbers of responses. bombastic, scathing letters to managers and directors of companies in which he has lost confidence. More recently, he has made headlines for taking the controversial long side to Pershing Square Capital Management s high-profile short position in Herbalife, a multilevel marketing company that sells nutrition products. But the 51-year-old Loeb is really an eclectic investor who made big bucks investing in Greek debt in 2012 and in early 2013 short-

3 THE HEDGE FUND REPORT CARD 2014 RANK FIRM (LOCATION) WEIGHTED SCORE RANK FIRM (LOCATION) WEIGHTED SCORE GRADE A GRADE C 1 Silver Point Capital BlackRock (Greenwich, CT) Says another investor: 25 Bridgewater Associates Loeb is incredibly talented. 2 Third Point (Westport, CT) He is first-rate. He has reasonable transparency, gen- 3 Adage Capital Mgmt th out of26 Two Sigma Investments/Two Sigma (Boston, MA) Advisers 100 funds erates alpha and has good 4 5 Elliott Mgmt Corp. Citadel (Chicago, IL) Discovery Capital Mgmt (South Norwalk, CT) Farallon Capital Mgmt risk control. Rounding out the top five finishers are Boston based 6 Perry Capital (San Francisco, CA) Adage Capital Management, 29 Lone Pine Capital (Greenwich, CT) New York based Elliott Management 7 Davidson Kempner Capital Mgmt Wellington Hedge Mgmt (Boston, MA) Corp. and Chicago based Citadel. All three firms 8 CQS (London, U.K.) Brevan Howard Asset Mgmt (London, U.K.) retain their A ratings from last year, despite the fact that 9 GRADE B 32 Och-Ziff Capital Mgmt Group Elliott s and Citadel s main Fortress Investment Group funds fell slightly short of 33* MKP Capital Mgmt their 2012 returns. 10 Pine River Capital Mgmt (Minnetonka, MN) 34* Winton Capital Mgmt (London, U.K.) Adage, founded by former Harvard Management 11 Coatue Mgmt York Capital Mgmt Co. executives Phillip Gross 12 Fir Tree Partners GRADE D and Robert Atchinson, lands at No. 3, in part because it 36 Greenlight Capital Baupost Group (Boston, MA) receives an A in four of the 14 Millennium Mgmt Carlson Capital (Dallas, TX) total eight categories. Otherwise it receives a B in three 38 Caxton Associates King Street Capital Mgmt Canyon Capital Advisors (Los Angeles, CA) Convexity Capital Mgmt (Boston, MA) Pershing Square Capital Mgmt categories Risk Management, Infrastructure and Investor Relations and a D for Transparency. It falls 17 D. E. Shaw & Co Pennant Capital Mgmt (Summit, NJ) from No. 1 last year even 18 Taconic Capital Advisors though it beat the S&P Moore Capital Mgmt Viking Global Investors (Greenwich, CT) Marshall Wace (London, U.K.) HBK Capital Mgmt (Dallas, TX) Mason Capital Mgmt GRADE F BlueCrest Capital Mgmt (London, U.K.) Eton Park Capital Mgmt its stated objective for at least the third straight year. Elliott Management finishes fourth overall. Its two hedge funds, Elliott International and Elliott Associates, gained 11.8 percent and * Tudor Investment Corp (Greenwich, CT) 46 Bain Capital (Boston, MA) percent, respectively, last 23* Magnetar Capital (Evanston, IL) Cerberus Capital Mgmt year, compared with returns of between 12.4 percent and *Ranking due to rounding, not an actual tie 13.4 percent the previous year. The firm employs an ing the Japanese yen and buying big stakes in U.S. companies ranging from Yahoo to American International Group. Third Point earns an A in all but one of the eight categories: Infrastructure. What s more, it ranks No. 1 overall in two of the categories, Independent Oversight and Liquidity Terms. Loeb s image certainly wasn t hurt when he announced plans last year to return 10 percent of his capital to clients, suggesting to investors that his priority is not growing assets at the expense of potential returns. And although his image as a bully may be a turnoff to some conservative investors, most look at the bigger picture. For example, one investor says Third Point s back office has kept up with the firm s rapid growth over the years. They do have a robust risk management system, he adds. opportunistic approach to making money, regularly engaging in shareholder activism, distressed investing, interest rate trading, event arbitrage and investments in a wide range of instruments, including equities, debt and private real estate equity securities. One investor credits Elliott for being well run, maintaining good risk controls and having a large back office. Their ability to communicate their strategy and performance sets them apart, adds a pension fund manager. Another pension fund manager, however, says that although he is a big Elliott fan and the fund has produced for us, he is concerned that it poses some headline risk. This stems from its activist activities as well as periodic publicity surrounding Elliott founder Paul Singer, who has earned considerable notoriety

4 RISK MANAGEMENT for his aggressive support of Republican political candidates as well as progressive issues like immigration reform and gay marriage. The investor says that, in general, he would prefer hedge fund managers maintain low profiles when it comes to potentially controversial issues for fear of unnerving pension fund board members or plan participants who may disagree with a manager s positions. Citadel, founded by Kenneth Griffin, holds steady at No. 5. In the individual categories it receives three A ratings, for Alpha Generation, Infrastructure and Investor Relations, ranking between first and fourth for each of those attributes. On the other hand, it receives a C for its Liquidity Terms. At the end of the day, our investors entrust us to create alpha, with a strong orientation toward tight risk management, Citadel chief operating officer Gerald Beeson tells Alpha. Beeson says Citadel stressed in meetings with investors following its disappointing 55 percent loss in 2008 that it was not planning to close. The firm told investors that it was determined to get back to its high-water mark and that the most-senior principals and other partners had the vast majority of their net worth invested in the funds. When they hear that approximately 20 percent of our capital belongs to principals and employees, it resonates with them, Beeson says. It means we are very long-term-focused. Four firms receive an overall grade of F: London based ALPHA GENERATION At the end of the day, our investors entrust us to create alpha. GERALD BEESON, CITADEL 1 Silver Point Capital (Greenwich, CT) 9.56 A 2* Coatue Mgmt 9.14 A 2* Baupost Group (Boston, MA) 9.14 A 4 Citadel (Chicago, IL) 9.10 A 5 Adage Capital Mgmt (Boston, MA) 8.88 A 43* Carlson Capital (Dallas, TX) 6.00 D 43* Convexity Capital Mgmt (Boston, MA) 6.00 D 45 BlueCrest Capital Mgmt (London, U.K.) 5.69 F 46 Bain Capital (Boston, MA) 5.43 F 47 Eton Park Capital Mgmt 5.08 F 1 Baupost Group (Boston, MA) 9.43 A 2 Elliott Mgmt Corp A 3 Millennium Mgmt 9.10 A 4 BlackRock 8.89 A 5 Brevan Howard Asset Mgmt (London, U.K.) 8.88 A 43 Discovery Capital Mgmt (South Norwalk, CT) 7.11 D 44 Eton Park Capital Mgmt 6.75 F 45 Pershing Square Capital Mgmt 6.33 F 46 Bain Capital (Boston, MA) 5.86 F 47 Cerberus Capital Mgmt 5.78 F BlueCrest Capital Management (ranked No. 24 last year), New York based Eton Park Capital Management (No. 55 last year), Boston based Bain Capital (not ranked last year) and New York based Cerberus Capital Management (No. 48 last year). No. 46 ranked Bain and No. 47 ranked Cerberus each receive an F in six of the eight categories, while No. 45 ranked Eton Park gets an F in three categories and No. 44 ranked BlueCrest draws an F in two. Bain s Brookside Capital hedge fund unit, which managed $6.2 billion at the end of 2012, is secretive and opaque even by hedge fund industry standards. Still, Bain earns a B for its Liquidity Terms and a C for Alignment of Interests. Cerberus, headed by Stephen Feinberg, is possibly somewhat misunderstood in the marketplace. More than most other managers, it is a hybrid of a hedge fund and a private equity firm, making investments in liquid securities such as stocks and publicly traded bonds as well as in less liquid assets such as bank loans, bankruptcy-related claims and other credits. Interestingly, one of the categories it does not get an F in is Transparency, where it receives a B. Apparently, Cerberus investors are satisfied that the firm provides good insight into the kinds of securities that its hedge funds invest in and their risk profiles. Cerberus gets a D for Alpha Generation, however. This is somewhat surprising given that Cerberus International, one of the firm s main hedge funds, has fared pretty well in recent years, rising about 14 percent in 2013 after gaining about 12 percent the previous year. But it is not surprising to see Michael Platt s BlueCrest get an F. After all, the firm s $12.6 billion BlueCrest BlueTrend fund, its second-largest fund, wrapped up its first losing year in its more than eight-year history, dropping percent in This was worse than the returns of most trend-following multistrategy funds last year and has proved to be a big setback for BlueCrest, which managed nearly $33 billion as of January 1. The firm s largest fund, $12.8 billion BlueCrest Capital International, lost 1.56 percent last year. AllBlue, a fund of BlueCrest funds, added just 1.53 percent last year. Yet in 2012 the last full year for which respondents were voting BlueCrest fared relatively better, as all of the funds made money, including AllBlue (up 6 percent), BlueCrest Capital International (up 6 percent) and Multi Strategy Credit (up 7.23 percent). 2nd out of 100 funds

5 TRANSPARENCY BlueCrest receives an F in only two categories. One of them, however, is Alpha Generation, which investors generally feel is the most important attribute among hedge funds. It also draws an F for Transparency. Eton Park is perhaps the most surprising firm to land at the bottom, even though it received an F last year. The multistrategy hedge fund firm, founded by Goldman Sachs alumnus Eric Mindich, posted a respectable 22.3 percent gain last year in its Eton Park Fund after posting a 12.6 percent gain in However, some investors may recall the firm s loss of some 11 percent in 2011 and its long lockups and side pockets. Investors give the firm an F in three of the eight categories: the two most critical ones Alpha Generation and Risk Management and Liquidity Terms. Eton Park is clearly sensitive to this prevailing sentiment. Late last year it established a new share class with shorter liquidity of four quarters; its other share classes are limited to seven quarters. This means investors in the new class can get their money back once a year. The management fee for the four-quarter share class will be 2 percent per year, with a reduced fee of 1.75 percent per year for larger investments. Other high-profile hedge fund firms stand out on the Hedge Fund Report Card. London based CQS, which finishes eighth with an A, made one of the biggest leaps in the standings, rising 18 places from a C last year. The multistrategy firm, which looks for relative- value trades across a company s capital structure, was founded by Michael Hintze and manages $12.8 billion. Interestingly, in 2013 the $2.3 billion CQS Directional Opportunities Fund gained 16 percent, less than half of the 35.9 percent it rose in 2012 and below its 20 percent compounded annual return since its 2000 inception. CQS receives three A grades. It ranks second for Independent ALIGNMENT OF INTERESTS 1 Silver Point Capital (Greenwich, CT) 8.78 A 2 Adage Capital Mgmt (Boston, MA) 8.75 A 3* Baupost Group (Boston, MA) 8.71 A 3* Perry Capital 8.71 A 5 Davidson Kempner Capital Mgmt 8.64 A 1 Silver Point Capital (Greenwich, CT) 8.44 A 2 Perry Capital 8.29 A 3* Pine River Capital Mgmt (Minnetonka, MN) 8.14 A 3* Third Point 8.14 A 5* Fir Tree Partners 8.13 A 5* Fortress Investment Group 8.13 A 43 Caxton Associates 5.88 D 44 Baupost Group (Boston, MA) 5.86 F 45 BlueCrest Capital Mgmt (London, U.K.) 5.63 F 46* Bain Capital (Boston, MA) 5.29 F 46* Convexity Capital Mgmt (Boston, MA) 5.29 F Oversight and fourth for Infrastructure and ties with three others for seventh place for Transparency. We are very focused on delivering long-term performance and alpha generation, says Karyn Geringer, CQS s head of marketing for the Americas. She adds that in recent years the firm has added top investment talent and invested in information technology and other infrastructure. After the 2008 market meltdown, CQS installed a dedicated client service team and brought in Leila Kotlar-Bouget to head up global client services. We put folks on the ground and put in place a process around understanding our investor base and their portfolios, to be responsive and to maintain relationships, Geringer explains. However, CQS still has some work to do: Despite its overall high standing, it only receives a C for Alpha Generation. Seth Klarman s Baupost Group, which moves up from a D to a B grade, also ranks among the top five in several categories. It has We put folks on the ground and put in place a process around understanding our investor base and their portfolios, to be responsive and to maintain relationships. KARYN GERINGER, CQS 43 Eton Park Capital Mgmt 6.58 D 44 Brevan Howard Asset Mgmt (London, U.K.) 45 Two Sigma Investments/Two Sigma Advisers 6.53 F 6.44 F 46 Winton Capital Mgmt (London, U.K.) 6.42 F 47 Cerberus Capital Mgmt 6.00 F the highest score for Risk Management and ranks second, in a tie with Coatue Management, for Alpha Generation. This seems to reflect widespread appreciation for the eclectic investment firm s compounded returns in the high teens per annum since its launch in 1982, despite its generally large cash position. Boston based Baupost also ranks second for Infrastructure and tied for third for Alignment of Interests. It is held back, however, by a D for Investor Relations and an F for Transparency.

6 INFRASTRUCTURE According to a source close to Baupost, the firm does not give third-party providers portfolio information beyond the quarterly reporting package that it provides to all its clients. This may have played a role in Baupost s low score for Transparency. Investors rank the eight main attributes for selecting a hedge fund in the same order of importance as last year. Alpha generation is the Holy Grail, insists Michael Hennessy, co-founder and director of investments for Chapel Hill, North Carolina based Morgan Creek Capital Management, an investment adviser to institutions and wealthy families. The fund also needs good risk management to create an optimal blend, and alignment of interests goes a long way to balancing that. The five highest-ranked firms in the Alpha Generation category are Silver Point, Baupost, New York based Coatue Management, Citadel and Adage. Three firms receive an F: BlueCrest, Bain and Eton Park. Timothy Barrett, CIO of the $1.6 billion Texas Tech University System in Lubbock, Texas, says alpha is only critical for certain strategies. For credit funds, for example, he is just as interested in beta as in alpha. Consistency of performance and the drawdown are critical, he contends. Judith Posnikoff, one of the founders of Irvine, California based Pacific Alternative Asset Management Co., an institutional fund-of-hedge-funds firm, says alpha generation reflects the past. She is more interested in a firm s investment process for generating ideas going forward: How do its managers come up with ideas? How do they size them? Portfolio construction is a big, critical part of the investment process, to see if it is repeatable, she notes. Charles Stucke, senior managing director for Guggenheim Partners and CIO of Guggenheim Investment Advisors, says historical alpha generation is less important to him than strategy and the markets the fund invests in. We are a very top-down thematic allocator, he explains. Assessing the current attractiveness of a strategy is important to us. 1 D. E. Shaw & Co A 2 Baupost Group (Boston, MA) 9.29 A 3 Citadel (Chicago, IL) 9.24 A 4 CQS (London, U.K.) 9.17 A 5* Brevan Howard Asset Mgmt (London, U.K.) 9.00 A 5* Moore Capital Mgmt 9.00 A 43 Mason Capital Mgmt 7.14 D 44 Discovery Capital Mgmt (South Norwalk, CT) 7.00 F 45 Bain Capital (Boston, MA) 6.86 F 46* Cerberus Capital Mgmt 6.78 F 46* Pennant Capital Mgmt (Summit, NJ) 6.78 F Just like last year, Risk Management is deemed the secondmost-important attribute. The firms ranked in the top five in this category are Baupost, Elliott, New York based Millennium Management, New York based BlackRock and London-based Brevan Howard Asset Management. Millennium has extraordinary risk controls, says one investor. Says another of Silver Point, which ranks sixth in the category, They take risks when they prudently pay off for them. This is especially important when managers are buying debt and other types of securities, particularly in the distressed market. Four firms finish at the bottom: Eton Park, New York based Pershing Square, Bain and Cerberus. Perhaps investors are not happy that William Ackman s Pershing Square which generally runs a very concentrated portfolio has stuck with its very large, high-profile negative bet on Herbalife or maintained its support for retailer J.C. Penney Co. for as long as it did. (It liquidated its entire stake in August 2013.) SCALING UP BLUEMOUNTAIN CAPITAL S RAPID GROWTH HAS MADE IT A FIRM TO WATCH. AS RECENTLY AS JANUARY 2011, BlueMountain Capital Management had a respectable $5.6 billion under management. But Andrew Feldstein and Stephen Siderow, who founded the New York based firm in 2003, weren t satisfied. Blue Mountain felt that one of the benefits of scaling up would be that the firm could play a bigger role as the counterparty in less liquid, larger deals. The firm spends most of its time investing in complex credit instruments such as credit default swaps, corporate and convertible bonds, loans, collateralized debt obligations and other asset-backed securities. It also extents mezzanine credit facilities to borrowers. So the firm embarked on an aggressive fundraising campaign, courting large institutional investors and offering to place their capital in single investor funds, which require longer commitments than the firm s commingled funds. BlueMountain s founders think the longer lockups and less frequent redemption windows allow them to deploy as much cash as they feel they need for a deal and to take more concentrated positions without worrying every quarter about raising cash. Scale gives you negotiating power in a larger number of strategic opportunities, Siderow stresses. Otherwise we wouldn t be able to look at a lot of investment opportunities. By the end of 2013, the firm had grown to $17.6 billion large enough to land it on the radar of Hedge Fund Report Card voters, who gave the firm very high marks. BlueMountain fell just short of having enough responses to qualify for this year s ranking, however. But the firm continues its rapid evolution. In early 2013, BlueMountain recruited James (Jes) Staley as a managing partner and member of the firm s management, investment and risk committees, responsible for developing strategic initiatives and cultivating relationships. At the time, Staley was head of JP- Morgan Chase & Co. s investment bank and frequently mentioned on a short list of candidates to one day replace Jamie Dimon as head of the bank, so hiring him was something of a coup.

7 INDEPENDENT OVERSIGHT 1 Third Point 8.57 A 2 CQS (London, U.K.) 8.33 A 3* Pennant Capital Mgmt (Summit, NJ) 8.25 A 3* Silver Point Capital (Greenwich, CT) 8.25 A 5 Elliott Mgmt Corp A 43 Pershing Square Capital Mgmt 44 Two Sigma Investments/Two Sigma Advisers 6.79 D 6.78 F 45 Greenlight Capital 6.43 F 46 Cerberus Capital Mgmt 6.22 F 47 Bain Capital (Boston, MA) 6.14 F Investors rank Alignment of Interests third in importance. The top firms in this category are Silver Point, Adage, Baupost, New York based Perry Capital and New York based Davidson Kempner Capital Management. Guggenheim s Stucke stresses that alignment of interests does not just mean that the manager has skin in the game; he generally avoids funds that are below their high-water marks out of fear that the manager will take higher than normal risk to get back to the break-even point. The four firms that receive an F in the category are Brevan Howard, New York based Two Sigma Investments, Londonbased Winton Capital Management and Cerberus. Investors rank Transparency fourth in importance. The topranked firms here are Silver Point; Perry Capital; Minnetonka, Minnesota based Pine River Capital Management; Third Point; and New York based Fir Tree Partners and Fortress Investment Group, which tied for fifth place. That was about the time Blue- Mountain decided to start scaling back its asset-gathering campaign for a limited period of time. Shortly after Staley joined the firm, it decided to temporarily soft-close its flagship fund, the $6.7 billion Blue Mountain Credit Alternatives Fund. That decision, combined with the fund s performance, further enhances our reputation as a firm that does the prudent thing, Staley says, sensitive to critics who wonder if the firm grew too fast. The flagship fund rose 7.9 percent in 2013 after gaining 14.5 percent the previous year and 3.6 percent in Since its 2003 inception * Actual tie 5th out of 100 funds it has compounded at 9.7 percent. Perhaps more impressive, its largest drawdown was just percent, experienced at the height of the financial crisis, between August and December The Blue Mountain Long/Short Credit fund has posted gains of between roughly 4 percent and 8 percent in each of the past three years. An investor says Blue Mountain is one of the industry s best assetbacked-securities managers, with a great team and putting up good numbers. If the firm can keep up the good work, it may well land near the top of the Hedge Fund Report Card next year. S.T. Transparency is a controversial issue, however. On the one hand, many investors prefer knowing as much as possible about a hedge fund firm s investments and operations. We don t hire a fund without it, insists Paamco s Posnikoff. She says her firm s risk and IT departments do a lot with the data, such as running screens, analyzing diversification and vetting risk. She adds that Paamco has proprietary metrics that help it better understand how the managers are trading and whether they are losing their edge. Transparency has always been a tug and pull thing, Posnikoff says. If you can do something with it, good; otherwise you are overwhelmed with data. Indeed, this is part of the reason investors like Morgan Creek s Hennessy think the issue is overrated or misunderstood. It can be very misguided, he asserts. It can go to an extreme. He disagrees with people who espouse what he calls 100 percent, tickby-tick transparency. He says this kind of transparency from quantitative-oriented firms like Renaissance Technologies could harm investors who may want to implement some sort of overlay strategy. They trade so rapidly that by the time you implement your strategy, the manager has moved on, says Hennessy. Infrastructure is very important to some investors, ranking fifth among the eight attributes. Risk control and strong back office Portfolio construction is a big, critical part of the investment process, to see if it is repeatable. JUDITH POSNIKOFF PACIFIC ALTERNATIVE ASSET MANAGEMENT CO. are the second- and third-most-important attributes, says Maneck Kotwal, investment officer at the State of New Jersey Division of Investment. If a fund doesn t have an institutional- quality infrastructure, we would not recommend investing in it even if it generated alpha, aligned its interests with investors and had good transparency, asserts a knowledgeable allocator of client assets to hedge funds. We wouldn t pick a fund because it has this. But we would not if it doesn t have these attributes. It is a deal breaker. It has to have an institutional-quality infrastructure, adds a major hedge fund investor. This includes its system, its administrator, its asset handling, its controls, its decision- making process and how trades are processed. We have a checklist for back-office due diligence, he adds. The top firms in this category are New York based D.E. Shaw & Co., Baupost, Citadel, CQS and Brevan Howard, which ties with New York based Moore Capital Management. Four firms receive an F: South Norwalk, Connecticut based Discovery Capital Management, Bain, Cerberus and Summit, New Jersey based Pennant Capital Management. Independent Oversight, provided by independent boards of directors, auditors and fund administrators, has come to the forefront since 2008, Posnikoff points out. But she stresses that it has always been important. Tops in this category are Third Point, CQS, Pennant, Silver Point and Elliott. Receiving an F: Two Sigma, New York based Greenlight Capital, Cerberus and Bain.

8 INVESTOR RELATIONS Liquidity Terms rank seventh among the eight categories on If a hedge fund business is not profitable or marginally profitable, it puts pressure on the manager to take risks above its mandate. CHARLES STUCKE, GUGGENHEIM PARTNERS which investors judge hedge funds. But this also is a controversial attribute, as some investors may appreciate that certain strategies warrant a longer lockup, whereas others want to know they can withdraw their money with just 90 days notice. Jason Goeller, absolute-return portfolio manager at the Public Employees Retirement Association of New Mexico, says that although he mostly agrees with the hierarchy of attributes, he would put liquidity closer to the top of the list. Liquidity has become especially important to him since 2008, when several of his investments were placed in illiquid side pockets. Guggenheim s Stucke also says he would move liquidity up in importance, noting that for some strategies it is more important than transparency and oversight. For example, it is less of an issue with long-short investing, which is all about stock selection and should be pretty liquid. However, he says, liquidity is more critical with distressed investing and some event-driven investments. We want good gating and lockup terms, Stucke stresses. The highest-ranked firms in this category are Third Point; Winton; Adage; Westport, Connecticut based Bridgewater Associates; and Fortress. Pennant, Boston based Convexity Capital Management, Eton Park and Cerberus receive Fs. The attribute least important to investors is Investor Relations, although clients appreciate when this function is handled well. LIQUIDITY TERMS 1 Third Point 9.14 A 2 Winton Capital Mgmt (London, U.K.) 9.10 A 3 Adage Capital Mgmt (Boston, MA) 8.50 A 4 Bridgewater Associates (Westport, CT) 8.46 A 5 Fortress Investment Group 8.19 A 43 Farallon Capital Mgmt (San Francisco, CA) 6.25 D 44 Pennant Capital Mgmt (Summit, NJ) 6.22 F 45 Convexity Capital Mgmt (Boston, MA) 6.14 F 46 Eton Park Capital Mgmt 5.00 F 47 Cerberus Capital Mgmt 4.33 F 1 Citadel (Chicago, IL) 8.90 A 2 Fortress Investment Group 8.81 A 3 Davidson Kempner Capital Mgmt 8.64 A 4 Silver Point Capital (Greenwich, CT) 8.63 A 5 Perry Capital 8.57 A 43 BlueCrest Capital Mgmt (London, U.K.) 6.44 D 44 Caxton Associates 6.25 F 45 Pennant Capital Mgmt (Summit, NJ) 6.11 F 46 Cerberus Capital Mgmt 6.00 F 47 Bain Capital (Boston, MA) 5.43 F For example, in singling out Silver Point, one investor points to the firm s investor relations staff for being as knowledgeable about Silver Point s specific investments as the investment professionals not an easy task at a firm that specializes in making investments in complex securities and strategies. They know what clients want and don t want, the investor says. They are not just hired hands. Silver Point finishes fourth in this category, behind Citadel, Fortress and Davidson Kempner. On the other end of the spectrum, New York based Caxton Associates, Pennant, Cerberus and Bain receive Fs. Several investors cite what Texas Tech s Barrett calls the trust factor. Barrett explains that you need to know the portfolio manager and his or her team well enough to trust them. To gain this trust, he usually speaks with a manager every month or every quarter. Many funds regularly conduct conference calls. They keep you in the loop about their thinking, he says. Barrett adds that he also looks for consistency of thought processes when managers communicate. This is related to integrity, which Guggenheim s Stucke says is the No. 1 priority for him. It comes through in their reputation, background checks and independent references, he explains. Stucke is also concerned with a hedge fund firm s profitability and capitalization. If a hedge fund business is not profitable or marginally profitable, it puts pressure on the manager to take risks above its mandate, he says. We like to invest in solvent businesses. a HOW WE COMPILED THE RANKINGS Investors were asked to score the funds they re invested in on eight attributes: Alignment of Interests, Alpha Generation, Independent Oversight, Infrastructure, Investor Relations, Liquidity Terms, Risk Management and Transparency. Investors also rated each of the attributes in terms of importance. The scores in the attribute categories are based on the average of the ratings for each hedge fund firm by its investors. For the overall ranking we started by calculating weighted scores for the attribute categories for each firm, using the importance ratings for those attributes. The attribute-weighted scores were added up for each firm, then divided by the total possible maximum score to come up with the overall weighted scores. A grading curve was applied to the results to arrive at the relevant letter grades. Reprinted from the Winter 2014 issue of alpha Magazine. Copyright 2014 by alpha Magazine. All rights reserved. For more information call (212)