Item 7: Types of Clients
As previously described in Item 4, Larch Lane’s clients consist of investment advisors and
registered investment advisers that manage private investment funds. Larch Lane does not have
any minimum requirements with respect to opening or maintaining a Client account. We may in
the future provide advisory services to other clients, including private investment funds and
registered investment funds.
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 formulating strategy allocation targets based on a range of qualitative and
quantitative factors and determining the investment appeal of each fund or subadvisor, as the case
may be. The importance of a quantitative approach, if any is used, is reflective of the underlying
strategy. It will be more relevant in analyzing hedge funds that invest in liquid securities rather
than in credit managers whose underlying investments may not be traded securities.
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, when applicable. Our qualitative evaluation process is combined with
fundamental and quantitative assessments of hedge fund or credit strategies and markets. This
includes the analysis of capital flows into and out of hedge fund, credit, or risk premia 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. This is particularly
relevant when analyzing hedge fund strategies. When considering credit strategies, we consider
factors pertaining to the underlying credit risk that is being taken, liquidity, manager’s process
and resources as well as the expected persistence of the investment opportunity. To the extent that
a portfolio is designed to invest with a particular manager, our due diligence process focuses on
identifying issues that would negate the initial premise behind the investment thesis.
The vast majority of our time is spent on bottom-up research, meeting with managers and
conducting due diligence.
Risk management influences strategy allocation, manager selection, and portfolio construction,
and is an inherent part of our culture. We employ a fundamental and quantitative approach to
determining investment weightings and risk exposures within the portfolio.
Portfolio diversification by manager and strategy is also important, for certain Clients. We tend
to overweight strategies that we expect to outperform over one- to two-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 advise our Clients to include managers or strategies in a portfolio based upon a combination
of their merits as well as how their return stream is expected to correlate with the other investments
in the portfolio. Each strategy is assigned an expected weight in the portfolio, based on various
factors. These weights are reviewed periodically. Typically, rebalancing will occur when an
actual position size strays from these weights.
Risk Factors
Larch Lane is responsible for providing investment research and recommendations for the
acquisition and disposition of investments to our Clients. In the case of non-discretionary accounts,
Clients may accept or reject a recommendation given by Larch Lane at their discretion. The
performance of each fund depends upon the Client’s ability to allocate fund assets and the ability
of the selected portfolio managers to develop and implement successful investment strategies.
Investing in securities involves risk of loss that the Client should be prepared to bear.
The following sets forth some of the potential risk factors with respect to our investment
recommendations:
Potential Risks Associated with our “Fund of Funds” Strategies
• General. We recommend Clients to invest their assets in investment funds managed by
third-party portfolio managers. However, the success of each fund depends upon the
Client’s ability to allocate fund assets and the ability of the portfolio managers to develop
and implement successful investment strategies. Subjective decisions made by us, the
Client and/or the portfolio managers may cause a 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 managers’ collective performance will result in profitable returns for
a Fund as a whole under all or any conditions. The possibility exists that good performance
achieved by one or more portfolio managers may be neutralized or exceeded by poor
performance experienced by other portfolio managers.
• Dependence on the Investment Manager. The success of any collective investment is
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