Hedge Fund Overview Concordia University, Nebraska AUGUST 2016
Important Information Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification does not assure a profit and does not protect against loss in declining markets. In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. Russell Investments ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments management. Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the FTSE RUSSELL brand. Copyright 2016 Russell Investments Group, LLC. All rights reserved. Date of first use: August 2016 AI-24424-08-17 p.2
Hedge funds: diversification and risk reduction are primary goals Multi-strategy approach to hedge funds designed to provide improved risk adjusted returns to the total portfolio over the long-term Historically, low correlation with traditional assets Typically low correlation among the various hedge fund strategies Dynamic management of underlying strategies is critical, as opportunities shift among, and within them throughout various market environments HEDGE FUND STRATEGIES - OVERVIEW and OBJECTIVE RELATIVE VALUE TACTICAL TRADING EVENT DRIVEN Seeks to identify price discrepancies or liquidity mismatches in securities that share a common factor such as interest rates, an index or issuer Seeks gains based on themes or trends in equity markets, interest rates, commodity markets, government securities, currencies or futures markets Seeks gains from market movements of a financial instrument caused by specific events EQUITY HEDGE Utilizes long and short positions primarily in equity and equity-related instruments p.3
Roles-based framework Investment strategies fulfill roles in a portfolio Growth Global listed equity Directional hedge Liquid real assets: listed infrastructure and REITs Return enhancement Extended equity & fixed income sectors Private markets Equity oriented assets, provide core growth engine for portfolio Typically higher return and generally higher risk type assets Risk reduction/ Diversification Core & long bonds Absolute return Volatility management Core private real estate Commodities Diversifying strategies to growth and return enhancement Strategies may fulfill multiple roles in a portfolio p.4
Investment strategies classified by role in portfolio Role of hedge funds Growth (Liquid) Return Enhancement (Less liquid) Risk Reduction / Diversification Global Equities Domestic International Developed Emerging Markets Equity Long/Short Equities (HFs) Liquid Real Assets Real Estate Investment Trusts (REITs) Listed infrastructure Fixed Income Bank loans High Yield Distressed Debt Emerging Markets Debt Private debt Event driven (Hedge Funds) Private Non-Core Real Estate Private Capital Core Fixed Income Short Duration Bond Global Fixed Income Low Volatility Hedge Funds Relative Value Tactical Trading Cash and Cash Equivalents Commodities Private Core Real Estate p.5
Primary hedge fund strategies Hedge Fund Strategies Non-Directional = Low Market Exposure Directional = Low to High Market Exposure Event Driven Equity Mkt Neutral Fixed Income Arbitrage Convertible Arbitrage Merger Arbitrage Distressed Equity Long/Short Emerging Markets Global Macro CTA/ Commoditi es Low Beta High Beta Exhibit used for illustrative purposes only and not meant to represent any actual investment. p.6
Hedge fund allocation provide diversification benefits 7% 6% HFRI Relative Value 60% Russell Global Index/40% Barclays U.S. Aggregate Index Russell Global Index 5% Barclays U.S. Aggregate Index Annualized Returns 4% 3% HFRI Macro HFRI Event Driven HFRI Equity Hedge Fixed Income Index Equities Index Hedge Fund Index 60/40 Portfolio 2% 1% Merrill Lynch 3-Month LIBOR HFRI Fund of Funds Diversified 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% Annualized Volatility p.7 Data from Aug 31, 2006 July 31,2016 Source: HFR (www.hedgefundresearch.com) Indexes are unmanaged and cannot be invested in directly. Historical data is not an indication of future results.
Hedge Funds have historically provided significant diversification benefits 0% Cumulative Drawdown Analysis 17 years ending July 31,2016-10% -20% -30% -40% -50% Tech Bubble Global Financial Crisis 2011 Credit Crisis -60% Nov 99 Mar 00 Jul 00 Nov 00 Mar 01 Jul 01 Nov 01 Mar 02 Jul 02 Nov 02 Mar 03 Jul 03 Nov 03 Mar 04 Jul 04 Nov 04 Mar 05 Jul 05 Nov 05 Mar 06 Jul 06 Nov 06 Mar 07 Jul 07 Nov 07 Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 Mar 14 Jul 14 Nov 14 Mar 15 Jul 15 Nov 15 Mar 16 Jul 16 HFRI Fund Weighted Composite Index 1 Russell Global Index p.8 1 The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds. Indexes are unmanaged and cannot be invested in directly. Historical data is not a guarantee of future results.
Appendix
Our HF research coverage spans the range of strategies Relative Value Cameron McVie Credit / Event-Driven Cedric Fan Equity Hedge Mark Rapela Tactical Trading Mark Raskopf Fund of Funds Wade Millen Fixed Income Equity Fundamental Discretionary Macro Conservative Credit Long/Short Mortgages Asset Backed Securities Municipals Rates Diversified Activists Merger Arbitrage Special Situations Diversified US Europe Global Japan Emerging Markets Commodities Currencies Emerging Markets Global Diversified Diversified Convertibles Derivatives Volatility Asset Based Distressed / High Yield Opportunistic Diversified Credit Short Biased Long Biased Variable Net Low Net Sector Focused Managed Futures Quantitative Macro Systematic Macro Market Defensive Strategic Yield Alternative Multi-Strategy Quantitative Multi-Strategy Energy Infrastructure Insurance Real Estate Equity Market Neutral Statistical Arbitrage Quant - Diversified Multi-Strategy Multi-Strategy As of June 2016 p.10
We know hedge fund managers And are selective about who our clients invest with ~10,100 Hedge Fund/Fund of Funds in the World 1 ~1800 956 81 Hedge Funds monitored by Russell Hedge Fund Products Russell Researches 2 Russell s Ranked Managers 2,3 Source: Russell Investments 1 HFR industry report 2Q16 (10,149 hedge funds) 2 As of 8/15/16 3 Represents managers with ranks of 4(Hire) and 3(Retain) Hedge Fund products Russell Researches and Russell Ranked Managers are the total universe of products researched and not all funds researched are available for all Russell products p.11
Investment due diligence Focuses on identifying alpha potential and sound risk management People Portfolio Processes Key decision makers are experienced, senior professionals and accountable for all portfolio decisions Pedigree and reputation of principals and investment team Risk management led by senior team members Response during adverse conditions Properly resourced Performance history during good markets and bad Consider future alpha potential Market environments in which the strategy would be expected to do well or be challenged Strategy overview Investment idea generation Consistency of performance Alert for style drift Rigorous risk management Analytical tools supported by significant resources Numerous meetings are performed to evaluate suitability of investment p.12
Manager Ranking Bottoms up approach to aggregated findings Ranked Categories: People Investment Staff Organizational Environment Portfolio Portfolio construction Risk Management Processes Decision Making Structure Research Technical Analysis/ Trading Rank Legend 5 Excellent 4 Above Peers 3 Average 2 Below Average 1 Significantly below Peers Overall Rank 4 - Hire 3 - Retain 2 - Review 1 - Terminate p.13
Investment approval and oversight Provides for robust portfolio governance Alternatives Research Sounding Board Portfolio Management Sounding Board Investment Strategy Committee Scope: Vets managers entering Russell s Alternative Investments portfolio platform Establishes ranks of manager products Scope: Oversees Portfolio Construction process Oversees Fund guidelines Oversees investment risk and ODD Recommends funds to Investment Strategy Committee for final approval Scope: Oversees all investment related activities within the Investment Division under the supervision of the Executive Committee and Board Investment Committee Reviews investment performance and establish investment policy and strategy Ensures new assignments are consistent with investment strategy and fiduciary responsibility p.14
Hedge fund strategies Strategy Description Sub-strategy Relative Value Event Driven Seeks to identify price discrepancies or liquidity mismatches in securities that share a common factor like interest rates, an index or an issuer. Seeks gains from market movements of a financial instrument caused by specific events. Fixed Income Volatility Merger arbitrage Special situations Distressed debt Equity Hedge Tactical Trading Utilizes long and short positions primarily in equity and equity-related instruments. Seeks gains based on themes or trends in equity markets, interest rates, commodity markets, government securities, currencies or futures markets. Fundamental approach Quantitative approach Discretionary macro Quantitative macro p.15