Item 7: Types of Clients
All of our clients are pooled investment vehicles (none of which are SEC-registered investment
companies) focusing on hedge fund investment strategies for qualified institutional and
individual investors through fund of funds strategies, meaning that they invest all of their assets
in third-party hedge funds. The investors in our client funds may consist of high-net-worth
individuals, trusts and pension plans.
We determine in our sole discretion any requirements for entering into an investment advisory
contract with a client fund or otherwise opening or maintaining an account, including whether a
potential client fund is large enough to implement its investment program.
With respect to our client funds, any initial and additional subscription minimums are disclosed
in the offering memorandum for the particular client fund.
Item 8: Method of Analysis, Investment Strategies and Risk of Loss
General Client Fund Investment Methods and Strategies
Our investment approach represents a combination of professional judgment and analytical
rigor. This involves 1) formulating strategy allocation targets based on a range of qualitative and
quantitative factors; 2) determining the investment appeal of each hedge fund; 3) preparing a set
of pro forma hedge fund allocations reflecting strategy and fund attractiveness, availability, and
applicability to the client portfolio; and 4) understanding the limitations of the statistical tools
and, therefore, anchoring these tools with appropriate assumptions.
Our construction process begins by setting investment objectives, including return, risk, time
frame, liquidity, and any unique client-driven considerations. We then utilize a combination of
bottom-up and top-down approaches. We draw upon our historic experience to begin the
portfolio construction process, utilizing a mix of qualitative information on strategies as well as
quantitative modeling of past results. Our qualitative evaluation process is combined with
fundamental and quantitative assessments of hedge fund strategies and markets. This includes
the analysis of capital flows into and out of hedge fund strategies, as well as other supply and
demand factors such as new securities issuance and market implied volatilities.
We employ a dynamic top-down approach to strategy allocation, which is guided by a belief in
“mean reversion”: when a strategy has produced above average returns for a significant period
of time, we generally expect that strategy to perform below its historical average for a
subsequent period of time. This phenomenon results from investors “chasing” past returns. If a
strategy performs well, capital tends to rush in, making it more difficult to achieve solid future
returns, as inefficiencies are eliminated by the increased competition in that strategy.
The vast majority of our time is spent on bottom-up research, meeting with managers and
conducting due diligence.
Risk management influences strategy allocation, fund selection, and portfolio construction, and
is an inherent part of our culture. We employ a fundamental and quantitative approach to
determining fund weightings and risk exposures within the portfolio.
Portfolio diversification by fund and strategy is also important. We tend to overweight
strategies that we expect to outperform over 1-2 year cycles, with the expectation that some
strategies will serve as important diversifiers to limit risk. Ideally, this will create returns with
low volatility and low correlation to traditional investments.
We include funds in a portfolio based upon a combination of their merits as well as how their
return stream is expected to correlate with the other funds in the portfolio. Each fund is
assigned an expected weight in the portfolio, based on both quantitative and qualitative factors.
These weights are reviewed at least semi-annually. Typically, rebalancing will occur when an
actual position size strays from these weights.
Underlying Portfolio Fund Investment Programs and Strategies
By investing the assets of our client funds in underlying portfolio funds, we indirectly engage in
a wide variety of investment programs and strategies. These programs and strategies vary among
our underlying portfolio funds. Among our underlying portfolio funds, investment programs
may include investments in a wide range of securities of both U.S. and non-U.S. issuers,
including common stocks, bonds and other fixed-income securities, and strategies such as
emerging markets, event-driven, distressed debt, short-selling and leverage.
Risk Factors
Investing in securities involves risk of loss that our client funds, and the investors in those funds,
should be prepared to bear. The following sets forth the various potential risk factors with
respect to both our client funds’ fund of funds strategies and the underlying portfolio funds in
which our client funds may invest.
Potential Risks Associated with our Client Funds’ “Fund of Funds” Strategies
General. We invest all of our client funds’ assets in investment funds managed by third
party portfolio managers. The success of each client fund depends upon our ability to
allocate fund assets and the ability of the portfolio managers of underlying funds to
develop and implement successful investment strategies. Subjective decisions made by
us and/or the portfolio managers of underlying funds may cause a client fund to incur
losses or to miss profit opportunities on which it may otherwise have capitalized.
Use of Multiple Managers is No Assurance of Success. No assurance is given that the
underlying portfolio funds’ collective performance will result in profitable returns for a
client fund as a whole under all or any conditions. The possibility exists that good
performance achieved by one or more portfolio managers of underlying portfolio funds
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