Memorandum To Water & Power Employees Retirement Plan ( The Plan ) From RVK, Inc. ( RVK ) Subject Custom FoHF Finalist Recommendation Date February 23, 2017 Recommendation After reviewing the RFP responses for the custom Fund of Hedges Funds RFP, Plan Staff and RVK recommend that the Board interview the following finalist candidates: BlackRock, Inc. Blackstone Alternative Asset Management Goldman Sachs Asset Management Grosvenor Capital Management Background The Plan and RVK launched a Request for Proposal ( RFP ) for custom Fund of Hedge Fund mandate in the fourth quarter of 2016. Respondents were required to complete the RFP by October 24, 2016. The following minimum qualifications ( MQs ) were used to initially reduce the universe to a list of appropriate candidates. 1. Offeror must have at least $7.5 billion in discretionary assets under management in institutional multi-strategy fund of hedge fund portfolios. 2. Offeror must have at least ten years of experience managing discretionary, multistrategy Hedge Fund of One portfolios and include this performance history in the proposal 3. Offeror must certify in writing that it will act as a fiduciary when performing these services and be bound by Prudent Investor Rule standards. 4. Offeror must be an investment advisor registered with the SEC or otherwise exempt from registration. If exempt, the Manager must explain the nature of their exemption from registration. (Form ADV, Parts 1 and 2, must be submitted). 5. The Offeror must comply with City of Los Angeles and the Los Angeles Department of Water and Power requirements 6. The successful Offeror must agree to obtain a City of Los Angeles Business Tax Registration Certificate. 7. The Offeror and its personnel must have all authorizations, permits, licenses, and certifications as required under federal, state or local law to perform the services specified. rvkuhns.com
8. The key professionals and/or firm must not have, nor could they potentially have, a material conflict with the Plan, Staff, the Consultant, or the Custodial Bank. 9. The Offeror must have adequate fiduciary and liability insurance coverage. At a minimum, each Offeror must provide proof of Errors and Omissions/Professional Liability Insurance, including the dollar amount of coverage. 10. Upon selection as a successful Offeror, the firm should be willing to enter into a management contract. 11. The Offeror must have at least ten (10) discretionary customized Fund of One accounts. In addition to the minimum qualifications, Plan Staff and RVK established a pre-score screen based on preferred criteria in order to better focus the candidate list on firms who are best positioned to provide institutional quality service to a diversified custom Fund of Hedge Funds mandate. Managers were scored across several criteria: Employee Ownership Partner and Employee Capital Invested in Funds Diversification of Investor Base Continuity of Senior Investment Personnel Ratio of Approved Managers to Research Analysts Breadth of Hedge Fund Strategies Covered Minimum Qualification Review The custom Fund of Hedge Funds RFP resulted in 18 responses. After reviewing the responses, 1 offering firm did not meet the minimum qualifications, leaving 17 firms for further evaluation. Preferred Criteria Review & The next step in the process was to narrow the list of candidates based on the preferred criteria determined by Staff and RVK. Firms which received half or fewer of the available points were eliminated from contention. There were 7 firms which failed to achieve a score above 50%, one of which also failed MQs. This step narrowed the list of candidates to 11 firms. Framework Staff and RVK worked to assemble a comprehensive scoring system that sought to balance evaluation criteria across a variety of factors. Each offering firm was asked to include a proposed portfolio for LADWP, provide a track record for a product with 10 years of performance history, and to answer a list of questions that covered everything from general information about the firm and organizational structure, to in depth questions regarding the firm s manager selection and risk management process. The responses were scored relative to RVK 2
one another across the criteria below: Organization and Team: 35% Criteria Considered Depth and experience of staff, personnel stability, stability of capital base, ownership structure and incentive alignment, conflicts of interest Process: 25% Criteria Considered Investment due diligence process, operational due diligence Process, Risk Management and Portfolio Construction framework Strength of Proposal and Costs: 25% Criteria Considered Management fee proposal, fees for underlying managers, inclusion of a proposed portfolio, clearly articulated process for working with large institutional clients Performance: 15% Criteria Considered: Over 3, 5, 7, and 10-year periods, annualized returns, sharpe ratio, and information ratio, over 10-year periods, max drawdown and time to recover, over 5 and 10 year periods, correlations to equity markets Plan Staff and RVK independently scored the responses of the 11 remaining candidates using the standardized scoring framework. Scores were then averaged together. The focus of the analysis was to identify firms whose resources, organizational stability, experience, and infrastructure put them in the best position to execute on and service a large, customized mandate for an institutional client. The four firms that were identified as finalists are listed below. BlackRock, Inc. Blackstone Alternative Asset Management Goldman Sachs Asset Management Grosvenor Capital Management A complete list of the responding firms and the step in the process at which each was eliminated is provided in Appendix A. Appendix B displays the trailing annualized performance of the 10-year return history that was submitted by each firm who made it to the RFP scoring round relative to its peer group as defined by HFR. RVK 3
Appendix A The below table includes the 18 RFP responses along with the stage at which each was eliminated. Firm Name Aberdeen Aetos Capital BlackRock, Inc. Blackstone Alternative Asset Management, L.P. EntrustPermal LLC GAM Goldman Sachs Hedge Fund Strategies Grosvenor Capital Management, L.P. JP Morgan Alternative Asset Management, Inc. K2 Advisors, LLC KKR Prisma LGT Capital Partners Lighthouse Partners Mesirow Advanced Strategies, Inc. Morgan Stanley Alternative Investment Partners PAAMCO, LLC Skybridge Capital The Rock Creek Group Stage Eliminated Minimum Qualifications Finalist Finalist Finalist Finalist RVK 4
Appendix B 3-Year Annualized Return 3Y Annualized Return 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% BlckRk BlckStn Gldman Grsvnr JPM KKR Prisma LGT Lighths Mesirow Paamco Rock Creek HFR FoF Peers 3Y 3.1% 4.4% 3.3% 2.2% 2.5% 1.4% 3.2% 3.9% 1.2% 1.4% 2.4% 1.9% Rank 34 21 32 45 39 59 32 25 62 58 41 50 5-Year Annualized Return 5Y Annualized Return 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% BlckRk BlckStn Gldman Grsvnr JPM KKR Prisma LGT Lighths Mesirow Paamco Rock Creek HFR FoF Peers 5Y 4.1% 4.7% 3.8% 3.3% 3.2% 2.5% 3.5% 5.2% 2.3% 2.3% 3.8% 1.9% Rank 22 14 24 31 34 48 28 11 50 50 25 50 10-Year Annualized Return 10Y Annualized Return 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% BlckRk BlckStn Gldman Grsvnr JPM KKR Prisma LGT Lighths Mesirow Paamco Rock Creek HFR FoF Peers 10Y 4.1% 4.8% 4.8% 4.0% 3.5% 4.5% 4.2% 4.6% 3.0% 3.3% 3.5% 3.0% Rank 26 13 14 28 38 16 25 15 50 44 38 50 RVK 5