The Alternatives Advisor to Institutional InvestorsLos Angeles • New York
The Alternatives Advisor to Institutional Investors
Fresno County Employees’ Retirement Association (FCERA)Presentation on Cliffwater Hedge Fund Advisory Services
February 3, 2016
2
Contents
Organization Review• Organization history and structure• FCERA relationship• FCERA administrative support• Fee proposal
Why Hedge Funds?
Cliffwater Investment Approach• Investment process• Investment due diligence• Operational and legal due diligence• Composite performance
Portfolio Construction• Portfolio structure and optimization• Transition management
Monitoring and Reporting
Questions & Answers
3
Cliffwater LLC
Founded in 2004
100% employee owned, 7 partners
SEC registered, accept fiduciary responsibility
Offices in Los Angeles and New York
Experienced professional staff– 53 employees
Institutional client base– 38 total clients, 32 hedge fund clients
Assets under advisement*– $76 billion in total assets under advisement – $56 billion in alternative assets– $36 billion in hedge funds– $12 billion in private equity– $8 billion in real assets
*Assets as of September 30, 2015 (Private assets valuation generally lags by a quarter)
4
The Cliffwater Hedge Fund Team
Portfolio Advisory Senior Professionals Hedge Fund Senior Investment Professionals
Daniel Stern Senior Managing Director Head of Hedge Fund Research
20 years of hedge fund experience
Additional Hedge Fund Team Members
Investment ResearchRory Doyle, Managing Director Steve Masarik, Director Kevin Ryan, Vice President Ryan Cummins, Vice President Eric Kurtz, Sr. Associate
Eli Sokolov, CFA Managing Director
9 years of hedge fund experience
Kevin Lenaghan, CFA Managing Director
8 years of hedge fund experience
Chris Solarz, CFA Managing Director
12 years of hedge fund experience
Stephen NesbittCEO, CIO
20 years of hedge fund experience
Kathleen Barchick, CFA, Senior Managing Director
12 years of hedge fund experience
Thomas Lynch, CFA, Senior Managing Director
9 years of hedge fund experience
James FeidlerSenior Managing Director
11 years of hedge fund experience
Pete Keliuotis, CFA Senior Managing Director
11 years of hedge fund experience
Mark Johnson Managing Director
10 years of hedge fund experience
Andrew Rudolph Managing Director
15 years of hedge fund experience
Aaron Dalrymple, CFA Managing Director
11 years of hedge fund experience
Operations Due Diligence Lance Johnson, COOJonathan Tabak, Managing Director Kevin McCann, Director
Legal Due Diligence Jonathan Rogal, General Counsel Stanley Liu, Director Linda Baker, Vice President
Monitoring & ReportingDavid Wippel, Managing Director Steve Thomas, DirectorJoshua Belvedere, Sr. Associate Tom Christensen, Associate Tori Irons, Associate D’Ann Patterson, AnalystThomas Brown, Chief Technology Officer
5
Cliffwater Organization
Stephen NesbittCEO/ CIO
Kathleen BarchickSr. Managing
Director
James FeidlerSr. Managing
Director
Thomas Lynch Sr. Managing
Director
Pete KeliuotisSr. Managing
Director
Mark JohnsonManaging Director
Gabrielle ZadraSr. Managing
Director
Daniel SternSr. Managing
Director
Lance JohnsonChief Operations
Officer
Jonathan Rogal General Counsel
Thomas BrownChief Technology
Officer
Eric AbelsonManaging Director
Mark Williams Managing Director
Chris Rice‐ShepherdManaging Director
Joon ChoiManaging Director
Erik Ogren Vice President
Mario Monroy Senior Associate
Jeffrey ToporAssociate
Sean CastilloAssociate
Kyle BarberAnalyst
William DornbrookAnalyst
Natalie SajalIntern
Jonathan TabakManaging Director
Kevin McCannDirector
Emily MullinsVice President
David Wippel Managing Director
Eli SokolovManaging Director
Aaron DalrympleManaging Director
Andrew RudolphManaging Director
Kevin Lenaghan Managing Director
Chris SolarzManaging Director
Rory DoyleManaging Director
Steve MasarikDirector
Kevin Ryan Vice President
Ryan CumminsVice President
Eric KurtzSenior Associate
Susanne WeiSenior Associate
Stanley LiuDirector
Linda BakerVice President
Karen ShangAccounting Manager
Emily HagermanAnalyst
Fiona RosesAdmin Assistant
Sopi Welch Admin Assistant
PortfolioAdvisory Private Assets Hedge Funds Operations Due
DiligenceLegal &
Compliance Monitoring & Reporting Corporate
Carol KomesuTreasurer/Controller
Technology
Reboot Networks
Backstop Solutions
Payoda
Jennifer BermudezDirector
Steve Thomas Vice President
Paulo Jeronymo Vice President
Joshua BelvedereSenior Associate
Christina NolanAssociate
Tom ChristensenAssociate
Tori IronsAssociate
Thidar MawAssociate
D’Ann PattersonAnalyst
6
Cliffwater’s Clients
Our size, reputation, and experience attracts top tier managers on a global basis . . .
Yet we are small enough to help our clients access the top quality opportunities.
Representative List of Cliffwater Clients
Endowment/FoundationAmerican UniversityDenison UniversityOberlin College Reed CollegeThe College BoardThe Principia CorporationUndisclosed Private College*Undisclosed Public University*University of Nebraska FoundationUniversity of OttawaVMI Investment Holdings, LLC
Corporate/PrivateDuke (Progress) EnergyGreater Miami Jewish Federation, Inc.Principal Financial Group Undisclosed Corporate Pension Fund*
Healthcare Mercy HealthMedStar Health Undisclosed Healthcare Endowment*
State PensionMaine PERSNew Mexico PERA Ohio STRS Rhode Island ERSState of New JerseyState of Wisconsin (SWIB)Undisclosed Public Pension Fund*
City/County PensionCity of PhiladelphiaDistrict of Columbia Retirement BoardHouston MunicipalSacramento CountyTexas County & District Retirement
*Cliffwater is not allowed to disclose certain names and information of some of its clients. This is a representative list of clients. Inclusion in the list does not represent an endorsement or approval of Cliffwater or the advisory services provided.
7
Cliffwater Alternatives Coverage and Assets under Advisement*
Long/ShortGlobalEuropeAsiaSector
Market NeutralRelative value
Equity market neutral
EventMerger arbitrage
ActivistMulti‐strategy
Macro/TradingDiscretionarySystematic
CTAsCommodities
Emerging markets
CreditLong/ShortDistressed
Structured Credit
Hedge Funds Private Equity Real Assets Real Estate
Leveraged BuyoutsGlobalUS
EuropeAsia PacificSector
LBO CapitalizationLargeMidSmall
Regional
VentureEarly
GrowthLate
Diversified
Growth U.S. Global
Private Debt
Distressed
Bank Loans
Mezzanine
Direct Lending
EnergyUpstreamMidstreamDownstream
Natural ResourcesTimber
AgricultureMining/minerals
Water
InfrastructureCore
Opportunistic
CommoditiesIndices
Enhanced IndicesHedge FundsLong‐only
Public Real Assets
Core
Value Add
Opportunistic
Regional
Sector Funds
REITS
$36 billion AUA $8 billion AUA$12 billion AUA
* As of date 09/30/2015 (Private assets valuation generally lags by a quarter). Assets include approximately $925 million in discretionary portfolios. Cliffwater oversees approximately $5 billion in Opportunistic investments, a subset of alternativesectors listed above.
8
Demonstrated Thought Leadership – Recent Research Reports
9
Scope of Hedge Fund Advisory Services
Hedge Funds and Asset Allocation– Assist with assumptions and policies
Investment Due Diligence– Broad coverage
Operations Due DiligenceLegal ReviewFund RecommendationsWeb Access to Reports, AnalyticsPortfolio Construction– Fund and strategy weights– Tactical weights– Rebalancing
Monitoring and Risk Management– Monthly performance reporting– Monthly fund and market commentary– Monthly portfolio characteristics, risk
analytics, liquidity, manager organizational changes
Monitoring and Risk Management (continued)– Fund amendment recommendations– Watch List and redemption recommendations– Annual re‐underwriting of due diligence
(investment and operational)
Client Service– Senior investment professionals comprise client
service team– Also offer direct access to research teams and
reporting teams– Attendance at client meetings as requested– Board education/presentations– Facilitate knowledge transfer– Access to all Cliffwater research– Onsite visits to Cliffwater offices– Joint participation in manager meetings
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How Cliffwater Anticipates Working with FCERA
Task Frequency Cliffwater GC*FCERA Staff
FCERA Board Description Cliffwater Professionals
Administration Daily X X
Oversight of cash flows for subscriptions, redemptions and amendments alongside FCERA and custodian
Operations, Monitoring/ Reporting and Legal due diligence teams
Initial Portfolio Structure One‐Time X X X
Initial portfolio structure for direct fund investments; done in conjunction with Grosvenor portfolio
Portfolio Advisory (Keliuotis/Feidler/Nesbitt) and Investment Research team
Investment Due Diligence Ongoing XSource managers and conduct investment due diligence
Investment Research team
Operations Due Diligence Ongoing XConduct operations due diligence
Operations Due Diligence team
Legal Due Diligence Ongoing XLegal review of business terms and conditions
Legal Due DIligence team
Manager Recommendations Ongoing X X XMake recommendations for implementing strategy
Portfolio Advisory (Keliuotis/Feidler) and Investment, Operations, and Legal Due Diligence
Parties Involved
* GC = General Consultant
11
How Cliffwater Anticipates Working with FCERA (cont’d)
Task Frequency Cliffwater GC*FCERA Staff
FCERA Board Description Cliffwater Professionals
Manager MonitoringWeekly, Monthly, Annual
XMonitor investment managers used to implement strategy
Investment, Operations, and Legal Due Diligence teams; Monitoring/Reporting team
Performance and Risk Review Monthly X X XReview performance, risk, exposures and report exceptions to FCERA and GC
Monitoring/Reporting team and Portfolio Advisory
Prepare Board Materials Monthly X X
Attend FCERA board meetings; collaborate with FCERA staff on presentations
Portfolio Advisory (Keliuotis/Feidler)
Portfolio Structure Review Annual X X X XReview portfolio structure with and without Grosvenor portfolio
Portfolio Advisory (Keliuotis/Feidler/Nesbitt)
Investment Policy Statement Review
Annual X X X X
Work with GC and FCERA staff to review IPS, including guidelines and performance and risk benchmarks
Portfolio Advisory (Keliuotis/Feidler)
Asset Allocation Annual X X X XAssist GC and FCERA with asset allocation and role of HF portfolio
Portfolio Advisory (Keliuotis/Feidler/Nesbitt)
Parties Involved
* GC = General Consultant
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Cliffwater Administrative Support for FCERA
Cliffwater will assist FCERA with enhanced administrative support including the following:Cliffwater Support Services for FCERA
Trade ExecutionMonitor and reconcile appropriate account(s) on a monthly basis to ensure trades are executed as expected
Legal DocumentsNegotiate business legal terms in side letters with investment managers, when applicableWork with FCERA counsel on legal, regulatory, and other FCERA‐specific issuesCoordinate the collection of all supporting documentation required by the investment managers upon initial close/subscriptionRecommend action on limited partnership amendments and consents
Subscriptions/RedemptionsMonitor all subscription and redemption activity and collect all related notices
Cash ManagementMaintain an ongoing cash forecast to ensure cash needs are being met
Accounting/ReportingMaintain an independent record of valuations and cash flows for all investments on a monthly basisReconcile cash flows, income, and investment returns to custodian bank recordsTax documentation assistance for onshore/offshore accountsShare class allocation accountingGenerate and distribute total portfolio and asset class specific reporting packagesAssist in the annual audit as needed
13
FCERA Program Structure with Specialist Consultant
HF
Man
ager
Con
trol
Cliffwater:‐ Develops portfolio structure and hedge fund
program IPS‐ Sources and recommends managers‐ Monitors managers and portfolio‐ Operations/administrative support‐ Collaborates with FCERA staff (non‐discretionary)‐ Works with general consultant as appropriate
Benefits vs. fund‐of‐funds:• Lower fees (15‐30 bps vs. 60‐100+ bps)• Control over manager selection/allocation• Broad selection of managers• Direct manager relationships• Customized liquidity profile
FCE
RA
Con
trol
14
Cliffwater Fee Proposal
Non‐DiscretionaryServices
DiscretionaryServices
$ 100 million
$ 150 million
$ 200 million
$ 250 million
$ 300 million
$ 350 million
$ 400 million
$ 425,000 $ 425,000 $ 425,000 $ 425,000 $ 425,000 $ 425,000 $ 425,000
42.5 28.3 21.3 17.0 14.2 12.1 10.6
$ 100 million
$ 150 million
$ 200 million
$ 250 million
$ 300 million
$ 350 million
$ 400 million
$ 375,000 $ 500,000 $ 625,000 $ 675,000 $ 725,000 $ 775,000 $ 825,000
37.5 33.3 31.3 27.0 24.2 22.1 20.6
NOTE: these fees are not additive. The total fee for a combination of discretionary and non‐discretionary services would be between $425,000 and $875,000, depending on desired mix of discretionary and non‐discretionary services.
Fees include administrative services as described on page 12.
15
Cliffwater Hedge Fund Advisory Philosophy
1. Benchmarking and Accountability
2. Resources and Infrastructure
3. Collective Decision‐Making
4. Frequent Communication
5. Clients First
6. Senior Professionals
1. Benchmarking and Accountability
2. Resources and Infrastructure
3. Collective Decision‐Making
4. Frequent Communication
5. Clients First
6. Senior Professionals
How We Execute…
1. Performance Driven
2. Full Service
3. Customized Approach
4. Intensive Communications
5. Open Platform
6. Value Added Service
1. Performance Driven
2. Full Service
3. Customized Approach
4. Intensive Communications
5. Open Platform
6. Value Added Service
How We Think…
The Alternatives Advisor to Institutional Investors
16|
Why Hedge Funds?
17
Strong Historical Performance
Since 1990, Hedge Funds have had better annualized returns with significantly lower volatility than global equities and investment grade fixed income.
* Hedge Funds = HFRI Fund Weighted Composite Index; Global Equities = MSCI ACWI Index; IG Fixed Income = Barclays Aggregate Index
Global Equities Inv. Grade Fixed Income70% Equities, 30% Inv.
Grade Fixed Inc. Hedge Funds*Cumulative Return 363.8% 384.9% 401.2% 1129.9%Annualized Return 6.1% 6.3% 6.4% 10.1%Annualized Volatility 15.1% 3.7% 10.7% 6.7%
Volatility (% / mo) 1.3% 0.3% 0.9% 0.6%Sharpe (rfr = 1%) 0.34 1.44 0.50 1.35% Positive Months 59.9% 69.2% 60.9% 69.6%Maximum Drawdown ‐54.0% ‐5.2% 94.8% ‐21.4%
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Hedge Fund Downside Protection
A benefit of hedge funds is that they outperform during periods of market stress
Scenario Name Drawdown Peak TroughMonths
Between Peaks Drawdown Peak TroughMonths
Between PeaksThe Financial Crisis ‐ 2008 ‐54.03% Oct‐07 Feb‐09 69 ‐21.42% Oct‐07 Feb‐09 36
‐4.75% Mar‐00 May‐00 5‐6.39% Aug‐00 Nov‐00 17
Russian Debt Crisis ‐ 1998 ‐13.50% Jun‐98 Aug‐98 5 ‐11.42% Apr‐98 Aug‐98 11
MSCI World ‐ Net USD HFRI Fund Weighted Composite Index
Technology Meltdown ‐ 2000 ‐46.80% Mar‐00 Sep‐02 70
* Hedge Funds = HFRI Fund Weighted Composite Index; Global Equities = MSCI ACWI Index
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Hedge Funds Provide Diversifying Alpha
S&P 500Inv. Grade Bonds High Yield
HFRI Fund Weighted
HFRI Equity Hedge
HFRI Macro Systematic
HFRI Relative Value HFRI Macro
HFRI Multi‐Strat.
HFRI Conv. Arb. HFRI Event HFRI FI Corp.
S&P 500 1.00
Inv. Grade Bonds 0.11 1.00
High Yield 0.60 0.23 1.00
HFRI Fund Weighted 0.74 0.08 0.64 1.00 > 0.7
HFRI Equity Hedge 0.73 0.06 0.57 0.95 1.00 0.3 ‐ 0.7
HFRI Macro Systematic 0.39 0.12 0.13 0.55 0.49 1.00 < 0.3
HFRI Relative Value 0.50 0.10 0.66 0.73 0.68 0.16 1.00
HFRI Macro 0.32 0.31 0.28 0.64 0.55 0.61 0.34 1.00
HFRI Multi‐Strat. 0.53 0.16 0.74 0.75 0.68 0.20 0.80 0.43 1.00
HFRI Conv. Arb. 0.47 0.17 0.69 0.62 0.60 0.07 0.80 0.25 0.78 1.00
HFRI Event 0.70 0.05 0.70 0.90 0.84 0.37 0.76 0.50 0.76 0.66 1.00
HFRI FI Corp. 0.53 0.12 0.82 0.69 0.59 0.17 0.71 0.38 0.81 0.67 0.77 1.00
Data is from January 1990 ‐ June 2015
Correlations
Asset Class Correlations 1990 ‐ 2015
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Hedge Fund Alpha Generation – Cliffwater Model Portfolio*
3.07%
‐10%
‐5%
0%
5%
10%
15%
20%
25%
Rolling
12 Mon
th Alpha
Returns
Cliffwater Model Hedge Fund Portfolio AlphaRolling 12 Month AlphasThrough Sept 30, 2015
CW Model Portfolio
HFRI Fund Weighted Index
HFRI Fund‐of‐Funds Index
‐20%
‐10%
0%
10%
20%
30%
40%
Rolling
12 Mon
th Alpha
Returns
1. Cliffwater All Hedge Fund StrategiesRolling 12 Month Alphas
CW Model PortfolioCW Model Market NeutralCW Model Credit/DistressedCW Model Event DrivenCW Model Equity LSCW Model Macro DiscretionaryCW Macro Model CTACW Model Multi‐Strategy
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
Cumulative Re
turn (G
rowth of $
1.00)
Cumulative Model Hedge Fund PortfolioTotal Return and its Alpha and Beta Components
Through Sept 30, 2015
Cumulative Total Return
Cumulative Alpha Return
Cumulative Beta Return
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
Cumulative Alph
a (Growth of $
1.00)
1.3 Cumulative Alpha Returns for Strategy Groups
CW Model PortfolioCW Model Market NeutralCW Model Credit/DistressedCW Model Event DrivenCW Model Equity LSCW Model Macro DiscretionaryCW Macro Model CTACW Model Multi‐Strategy
*The Cliffwater model portfolio performance results presented are unaudited and have been prepared for informational purposes only. The performance results reflect thehypothetical, back‐tested results of a model portfolio of Cliffwater approved hedge funds that are weighted to the target strategy weights of the model determined byCliffwater over time. The performance results of the model portfolio do not represent actual trading. The returns are net of all underlying fund or account expenses,management fees, and performance‐based fees, but gross of any Cliffwater's fees. Past performance does not guarantee future performance.
21
Hedge Funds Improve Risk‐Adjusted Expected Return
– A 20% hedge fund allocation improves expected return while reducing expected risk– The portfolio risk/return ratio improves from 0.50 to 0.62 with the addition of hedge funds
Based on Cliffwater Capital Market Assumptions as of January 1, 2016
The Alternatives Advisor to Institutional Investors
22|
Cliffwater Investment Approach
23
Cliffwater Investment Process
•Investment •Operational•Legal
• Customized• Diversification bystrategy, industry, cycle, and geography
• Global Sourcing• Broadest Universe of Funds
• Proactive Calling
• Monthly/Quarterly Calls• Annual Meetings• ManagerDevelopmentMemos
Monitoring
ManagerSourcing &Access
DueDiligence*
PortfolioConstruction
1. Client Focused
2. Uniform Process
3. Collective Decision‐Making
4. Fully Documented
5. Transparent
How We Execute…
• Collaborative
*Generally, only Investment Due Diligence is conducted on Long Only strategies.
24
Cliffwater Internal Investment Approval Process
AnalystPreliminary
Due Diligence & Rating
(A, B, or C)
InvestmentDue Diligence
Operations, LegalDue Diligence
Research Group
Approval
InvestmentCommitteeApproval
Partnership,ManagerSourcing
A‐RatedFunds
ClientRecommendation,
Investment
“Focus List”comprised of A, B‐rated,
archive C‐rated
Client AccessibleDocumentation
found on Cliffwater CRM Platform
IC MinutesDue diligence
Preliminary Rating
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Hedge Fund Selection Process – By The Numbers
2,000 Unique
Managers**
UniverseFocusList
*CliffwaterApproved
List
Investment, Operational,
LegalDue Diligence
Approval by Research Group
Approval by Cliffwater Investment Committee
Sourcing and Initial Due Diligence by Cliffwater Research Group
A and B‐rated managers are moved to the Focus list for further due diligence
8,000HedgeFunds
131
Market Neutral
Credit/ Distressed
Event Driven
624Equity L/S
Macro Discretionary
Macro CTA
Multistrategy
*As of 12/31/2015** Source: HFRI
26
Investment Due Diligence Components
Our investment research analysts rate over 1,400 hedge fund managers across four major criteria…
…approximately 425 managers are rated “B” and 200 are rated “A”
Business Stability
Personnel
Strategy
Portfolio
Risk ManagementTransparency
Fund Liquidity
Fees &Expenses
Alphavs Beta
Peers
Risks
Organization
Investment Process
Governance
Performance
27
Alpha/Beta Separation is Essential
Fund 1
Fund 2
Fund 3
Fund 4
Fund 5
Fund 6
Fund 7
Fund 8Fund 9
Fund 10
Fund 11
Fund 12
Fund 13
Fund 14
Fund 15
Fund 16
Fund 17
Fund 18
Fund 19
Fund 20
Fund 21
Fund 22
Fund 23
Fund 24
Fund 25
Fund 26
Fund 27
Fund 28Fund 29
Fund 30
Fund 31
Fund 32
Fund 33
Fund 34
Fund 35
Fund 36Fund 37
Fund 38
Fund 39
Fund 40
Fund 41
Fund 42
Fund 43
Fund 44
Fund 45
Fund 46Fund 47
Fund 48
Fund 49
Fund 50
Fund 51
Fund 52
Fund 53
Fund 54
Fund 55
Fund 56
Fund 57
Fund 58Fund 59
Fund 60
Fund 61
Fund 62Fund 63
Fund 64
Fund 65
Fund 66
Fund 67
Fund 68
Fund 69
Fund 70
Fund 71
Fund 72
Fund 73
Fund 74
Fund 75
Fund 76
Fund 77
Fund 78
Fund 79
Fund 80
Fund 81
Fund 82
Fund 83
Fund 84
Fund 85
Fund 86
Fund 87
Fund 88
Fund 89
Fund 90
Fund 91
Fund 92
Fund 94
Fund 95
Fund 96
Fund 97
Fund 98
Fund 99
Fund 100
Fund 101
Fund 102
Fund 103Fund 104
Fund 105
Fund 106Fund 107
Fund 108
Fund 109
Fund 110
Fund 111
Fund 112
Fund 113
Fund 114
Fund 115
Fund 116
Fund 117
Fund 118Fund 119
Fund 120
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
-0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00
Info
rmat
ion
Rat
io
Beta
Risk‐AdjustedAlpha
(information ratio)
Beta
Cliffwater RecommendedHedge Funds
28
Operational and Legal Due Diligence Components
Our operations team grades each performance component against best industry practices
Each hedge fund must pass operational review before the manager is approved
Legal & Regulatory
Compliance
Business Risk Mgmt
Personnel
Segregation of Duties
Service Providers
Technology & Systems
Trade Execution
Trade Reconciliation
Financing
CounterpartyRisk
Valuation Procedures
Il l iquid Pricing
Pricing Sources
Accounting
Governance
Operations InfrastructureProcesses
Valuation
29
Analyst Reports
Profile Report– Cliffwater analysts prepare a 3 to 4 page qualitative assessment on every hedge fund and assign an A to C rating
Performance Report– A monthly quantitative analysis of return, risk, attribution, and universe comparison for every hedge fund
“Select” Due Diligence Report– A comprehensive write up on hedge funds chosen for full due diligence and recommendation to clients– Select reports are re‐underwritten at least annually
Meeting/Call Notes– Analysts provide a write up summarizing all meetings and calls with hedge funds, covering discussion points and
findingsFund Development Report– As part of a comprehensive monitoring process, analysts prepare and send reports to clients alerting them of any
material manager events (i.e. departures) with a conclusion and recommendation (if required)Watch List Report– Analysts prepare a Watch List Report, followed by regular updates, for hedge funds where significant concerns
exist (performance, organization, or other)Redemption Recommendation Report– Analysts prepare a Redemption Recommendation Report in instances where a hedge fund no longer meets
investment expectationsAnalyst reports and meeting notes are accessible by clients through
Cliffwater’s client website
Analyst reports and meeting notes are accessible by clients through
Cliffwater’s client website
30
Cliffwater Hedge Fund Composite*(Periods ending November 30, 2015)
5.68%
4.60%
7.86%
4.54%
2.65%
3.76%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
3 Years 5 Years 7 Years
Cliffwater Hedge Fund Composite HFRI Fund‐of‐Funds Composite
* The Cliffwater Hedge Fund Composite is comprised of diversified hedge fund portfolios of Cliffwater's clients, both discretionary and non‐discretionary, with absolute returnobjectives that are typically benchmarked to the HFRI Fund of Funds Composite Index. The composite returns are asset weighted based on the returns of the portfolios in thecomposite. Portfolios included in the composite must consist primarily of Cliffwater recommended funds or accounts. The returns are net of underlying fund expenses andmanager fees, but gross of Cliffwater fees. Past performance does not guarantee future performance. Please see disclosures on page 43.
Cliffwater Composite Hedge Fund Performance
The Alternatives Advisor to Institutional Investors
31|
Portfolio Construction
32
Cliffwater Hedge Fund Return and Risk Architecture
MarketBetas
Equity
Credit
RealRates
Inflation
StrategyBetas
Market Neutral
Credit/Distressed
Event Driven
Equity Long/Short
Macro
Macro CTA
Multistrategy
Manager Alpha
Selection
Timing
Return significant,persistent
smaller,inconsistent
zero sum,persistent
Risklarge,symmetric,systematic
variable,non‐symmetricsystematic
alpha risk,symmetric,diversifiable
Risk‐adjusted SharpeRatio return/risk information
ratio
Hedge Fund Total Return
* Strategy betas are also referred to as “alternative” betas
=
We both (1) measure each source of hedge fund
return historically and (2) forecast each source of
return, including individual manager alphas
We both (1) measure each source of hedge fund
return historically and (2) forecast each source of
return, including individual manager alphas
33
Five Steps to Hedge Fund Portfolio Construction
1) Pick an objective
2) Set target strategy weights
3) Number of hedge funds
4) Hedge fund selection
5) Optimize portfolio weights
Asset Weighting
Retu
rn o
r R
etu
rn E
quiv
ale
nt
OptimalAsset
Weight
Implied Return (Marginal Cost)
Marginal Return
Cliffwater combines proprietary models with forward looking assessments to customize hedge fundportfolios to meet clients’ varying needs
34
The Optimal Number of Hedge Funds
Fund of Funds have historically over‐diversified their portfolios
Cliffwater research shows the optimal number of hedge funds ranges between 15 and 30, depending upon selection skill
Average Cliffwater client invests in 20 hedge funds
FCERA may choose to keep the existing Grosvenor fund‐of‐funds with complimentary direct allocations; in this case Cliffwater would structure a complementary portfolio
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1 6 11 16 21 26 31 36 41 46
Ris
k A
dju
sted
Retu
rn (
Info
rma
tion R
atio
)
Number of Hedge Funds in the Portfolio
X = Optimal Number of Hedge Funds
Perfect Foreknowledge
Excellent Skill
Good Skill
No Skill
Selection Skill and the Optimal NumberOf Hedge Funds
35
1 2 3 4 5 6 7 8 9 10 11
Model Weights Libor
Equity Beta*
Credit Beta**
Beta Return Beta Risk
Alpha Return
Alpha Risk
Info Ratio
Total Return Total Risk
Market Neutral 5% 1.45% ‐0.05 0.00 ‐0.28% 1.10% 2.66% 3.29% 0.81 3.83% 3.47%Credit/Distressed 20% 1.45% 0.00 0.35 1.68% 2.80% 2.40% 3.58% 0.67 5.53% 4.54%Event Driven 20% 1.45% 0.20 0.15 1.84% 5.00% 3.50% 4.47% 0.78 6.79% 6.71%Equity Long/Short 25% 1.45% 0.40 0.10 2.72% 9.15% 4.20% 4.65% 0.90 8.37% 10.26%Macro‐Discretionary 15% 1.45% 0.10 0.00 0.56% 2.20% 4.90% 5.72% 0.86 6.91% 6.12%Macro‐Systematic 5% 1.45% ‐0.10 0.00 ‐0.56% 2.20% 5.00% 9.35% 0.53 5.89% 9.61%Multistrategy 10% 1.45% 0.15 0.20 1.80% 4.20% 3.00% 4.61% 0.65 6.25% 6.24%
Hedge Fund Portfolio 100% 1.45% 0.16 0.22 1.61% 4.57% 3.65% 3.42% 1.07 6.70% 5.73%* MSCI World Equity Index** S&P/LSTA Leveraged Loan Index
Expected Sources of Hedge Fund Return and Risk ‐‐ October 1, 2015
Beta Alpha Libor+Beta+Alpha
Strategy
1 2 3
StrategyMarket Neutral
Credit/Distressed
Event Driven
Macro‐Discretionary
Macro‐Systemat
icMultistrategy
Market Neutral 2 3.80 0.50 1.00Credit/Distressed 3 4.00 0.70 0.35 1.00Event Driven 3 5.00 0.70 0.35 0.55 1.00Equity Long/Short 5 6.00 0.50 0.35 0.55 0.55Macro‐Discretionary 3 7.00 0.50 0.35 0.45 0.45 1.00Macro‐Systematic 2 10.00 0.75 0.15 0.15 0.15 0.15 1.00Multistrategy 2 5.00 0.70 0.35 0.55 0.55 0.55 0.15 1.00
20
Expected Hedge Fund Alpha Calculations5
# of Hedge Funds
Avg Fund Alpha Risk
Intra‐ Strategy Correl
Inter‐Strategy Correlations
Baseline Model Portfolio Construction
36
Full Portfolio Construction Example
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Return RiskSharpe Ratio Rank Beta
Beta Return
Alpha Return
Alpha Risk
Info Ratio Rank
Portf Wghts
Contribution to Portf Risk Diff
Implied Return
Exp Info
RatioExp
Return
Expect minus Implied Return* Rank
Mkt Neutral 1 12.12% 5.81% 1.55 3 0.00 0.00% 9.01% 5.41% 1.67 4 7% 2% -5% 2.26% 0.80 6.83% 4.57% 2Mkt Neutral 2 9.88% 5.64% 1.20 7 0.00 0.00% 6.77% 5.07% 1.33 7 7% 2% -5% 2.31% 0.75 6.32% 4.00% 3Credit/Distressed 1 11.90% 3.95% 2.16 1 -0.01 -0.01% 8.54% 3.96% 2.15 1 7% 1% -5% 1.71% 0.80 5.62% 3.91% 4Credit/Distressed 2 6.92% 10.73% 0.45 15 0.33 0.16% 3.60% 8.60% 0.42 17 7% 10% 3% 11.88% 0.60 9.34% -2.54% 12Credit/Distressed 3 12.23% 4.77% 1.83 2 0.07 0.04% 8.66% 4.20% 2.06 2 7% 5% -2% 5.97% 0.65 5.61% -0.36% 6Event Driven 1 8.41% 5.24% 1.01 10 0.19 0.09% 4.90% 3.68% 1.33 8 7% 6% -1% 7.09% 0.80 6.40% -0.70% 7Event Driven 2 9.47% 10.32% 0.64 12 0.40 0.20% 5.71% 6.11% 0.93 11 7% 13% 6% 15.21% 0.65 8.56% -6.65% 16Equity LS 1 7.80% 13.07% 0.45 16 0.60 0.30% 4.01% 5.26% 0.76 13 7% 16% 9% 18.84% 0.55 8.46% -10.39% 17Equity LS 2 7.99% 4.80% 1.05 9 0.15 0.07% 4.58% 3.49% 1.31 9 7% 5% -1% 6.65% 0.70 5.71% -0.94% 8Equity LS 3 15.35% 9.02% 1.39 5 0.17 -0.50% 12.63% 7.43% 1.70 3 7% 8% 1% 9.86% 0.70 8.59% -1.27% 10Equity LS 4 13.66% 8.35% 1.23 6 0.21 0.10% 9.82% 6.70% 1.47 6 7% 9% 2% 11.12% 0.70 8.26% -2.86% 13Macro-Discr 1 14.92% 7.90% 1.48 4 -0.07 -0.04% 11.61% 6.97% 1.67 5 7% 3% -3% 3.95% 0.75 7.35% 3.41% 5Macro-Systematic 1 19.48% 14.69% 1.09 8 0.01 0.00% 16.10% 12.58% 1.28 10 7% 6% -1% 7.16% 0.75 11.97% 4.81% 1Multistrat 1 6.69% 7.34% 0.57 13 0.15 0.07% 3.52% 6.49% 0.54 16 7% 8% 1% 9.41% 0.80 8.44% -0.97% 9Multistrat 2 6.84% 5.89% 0.65 11 0.21 0.10% 3.42% 4.15% 0.82 12 7% 7% 0% 8.07% 0.70 6.47% -1.61% 11DJ/CS Hedge Fund Index 6.41% 7.26% 0.49 14 0.30 0.15% 2.86% 4.05% 0.71 15 11.34% 1.00 8.09% -3.25% 14HFRI Fund Weighted Index 5.88% 7.57% 0.40 17 0.34 0.17% 2.27% 3.17% 0.72 14 11.21% 1.00 7.43% -3.77% 15
Portfolio 11.15% 4.73% 1.75 0.16 0.04% 7.52% 3.48% 2.16 100% 100% 0% 8.10% 1.23 7.59% 3.29%Group Average 10.35% 7.78% 1.04 0.18 0.06% 6.94% 5.72% 1.23 8.47% 0.75 7.61%
Market Neutral 13% * Portfolio value equals the average of the absolute values in the columnCredit/Distressed 20%Event 13%Equity Hedge 27%Global Macro 13%Multi Strategy 13%
100%
Historical Return and Volatility Other Historical Risk and Return Measures Capital vs Risk Budget Expected Return & Optimal Weights
Hedge Fund Portfolio Construction Example
37
Cliffwater Experience with Portfolio Completions and Transitions
FCERA is considering various options to increase its hedge fund exposure from 4% to 8%– Specialist consultant (Cliffwater) to build out direct portfolio– Another fund‐of‐funds alongside legacy account (Grosvenor)– Single fund‐of‐one
Cliffwater has extensive experience working alongside legacy Funds‐of‐Funds:– Direct fund portfolio structure takes into account fund‐of‐funds exposures– Can also facilitate portfolio transition to move to 100% direct model if desired
Client Example 1• Cliffwater oversees $300 million in hedge fund exposure• 2 legacy funds‐of‐funds (one terminated on Day 1; the other fund‐of‐one used as transition manager)• Final direct portfolio initially targeted at 22 (still in development)
Client Example 2• Cliffwater oversees $10 billion in aggregate hedge fund exposure, including funds‐of‐funds• 6 legacy funds‐of‐funds (mix of commingled and funds‐of‐one)• Built direct portfolio of 40 funds with over 100 funds through fund‐of‐funds managers
Client Example 3• Cliffwater oversees $350 million in hedge fund exposure• 1 legacy fund‐of‐funds (fund‐of‐one)• Final direct portfolio, including new funds, totaled 24, including 4 legacy funds
38
Hedge Fund Portfolio Transition Experience
1) Evaluate the FOF portfolios
2) Identify desirable managers
3) Liquidation / in‐kind transfer
4) Build aggregate portfolio
Funds to be Transferred:
Fund HFoF Manager NAV Manager Liquidity Lockup Period
Next Liquidity Date Notice Period Side Pockets
Portfolio A Manager 1 14,025,978 Quarterly None XXXXX 90 2%Portfolio B Manager 2 16,187,704 Quarterly 1 year XXXXX 45 0%Portfolio C Manager 2 24,904,213 Quarterly 1 year XXXXX 90 0%Portfolio D Manager 3 21,280,898 Monthly 1 year XXXXX 30 0%Portfolio E Manager 1 15,845,314 Quarterly 2 year XXXXX 60 0%Portfolio F Manager 3 21,301,011 Monthly None XXXXX 60 6%Portfolio G Manager 2 43,893,183 Quarterly None XXXXX 60 0%Total 157,438,301
The Alternatives Advisor to Institutional Investors
39|
Monitoring & Reporting
40
What we do after an investment is made… Cliffwater analysts conducted 1,100
meetings and 2,200 calls over the last
year
Cliffwater analysts conducted over 500 monthly monitoring calls in the last year
All Cliffwater hedge fund personnel participate in a
Monday morning meeting to review the week’s events and
manager review
All analyst meetings, calls, and write‐ups are
documented and placed on Cliffwater’s proprietary web platform for client access
Our Hedge Fund Reporting Group
provides returns within 6‐10 business days of
month end and portfolio analytics within 5 weeks.
* Chart segments scaled to approximate commitment of analyst time
Hedge Fund Monitoring*
41
Web‐based Research Library and Client Site to Access Research & Reports
42
Client Portfolio Reporting – Sample Hedge Fund Portfolio Snapshot
43
Cliffwater Disclosures
This presentation has been provided to you for the purpose of discussing an investment advisory relationship. The material contained herein is confidential and is intended for one‐on‐one or small groupmeetings with qualified, sophisticated investors. It may not be copied, transmitted, given, or disclosed to any third party. This presentation is not an advertisement and is not intended for public use fordistribution or for the investing public. This material is not meant to be, nor shall it be construed as, an offer or solicitation of an offer for the purchase or sale of any security.
This presentation was prepared exclusively for information and discussion purposes, and is not meant to be, nor shall it be construed as, an attempt to define all information that may be material to you.All information including opinions or facts expressed herein are current as of the date appearing in this presentation and is subject to change without notice. All third party information has been obtainedfrom sources believed to be reliable. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in thispresentation. The information and opinions in this presentation do not constitute investment advice.
This presentation may include sample or pro forma performance. Such information is presented for illustrative purposes only and is based on various assumptions, not all of which are described herein.Such assumptions, data, or projections may have a material impact on the returns shown. Nothing contained in this presentation is, or shall be relied upon as, a representation as to past or futureperformance, and no assurance, promise, or representation can be made as to actual returns. Past performance does not guarantee future performance.
References to market or composite indices (such as the S&P 500), benchmarks or other measures of relative market performance over a specified period of time (each, an “index”) are provided forinformation only. Reference to an index does not imply that a portfolio will achieve returns, volatility or other results similar to the index. The composition of an index may not reflect the manner in whicha portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject tochange over time.
– Hedge Fund Research, Inc. (“HFR”) is the source and owner of the HFR data contained or reflected in this report and all trademarks related thereto.
– Frank Russell Company (“FRC”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The Russell Index datamay contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.
– Thomson Financial Inc. is the owner and/or licensor of the Cambridge Associates LLC data contained or reflected in this material.
The Cliffwater Hedge Fund Composite is comprised of diversified hedge fund portfolios of Cliffwater's clients, both discretionary and non‐discretionary, with absolute return objectives that are typicallybenchmarked to the HFRI Fund of Funds Composite Index. The composite returns are asset weighted based on the returns of the portfolios in the composite. Portfolios included in the composite mustconsist primarily of Cliffwater recommended funds or accounts. For these purposes, a portfolio that consists of at least 90% of Cliffwater recommended funds or accounts will be deemed to be a portfoliothat consists primarily of Cliffwater recommended funds or accounts. A portfolio will be removed from the composite when (i) the portfolio no longer consists of at least 90% of Cliffwater recommendedfunds or accounts, or (ii) Cliffwater no longer provides consulting services with respect to the portfolio. The historical performance for portfolios removed from the composite are kept in the historicalperformance of the composite. The composite returns are based on the valuations reported by the sponsor and/or administrator of the fund or account. The returns are not audited nor are theycompliant with the provisions of Global Investment Performance Standards (GIPS) which require, among other things, full composites for all asset categories and returns calculated net of all fees includingadvisory fees and discretionary responsibilities. Past performance does not guarantee future performance. Amounts may not sum due to rounding. The returns rely upon the accuracy and completenessof financial information provided to Cliffwater by such sponsors and/or administrators and the custodian banks of Cliffwater’s clients and, therefore, Cliffwater has not conducted an independentverification of this information. Returns are typically adjusted for cash flows based on the timing reflected in the valuations reported by the sponsor and/or administrator of the fund or account. All cashflows and values used to calculate the returns are in, or have been converted to, U.S. dollars. The returns are net of all underlying fund or account expenses, management fees, and performance‐basedfees, but gross of Cliffwater's fees. Unlike the composite return, the index return does not reflect any underlying fund or account expenses, management fees, or performance‐based fees. Unlike theunderlying funds and accounts included in the portfolios within the composite, an index is unmanaged and fully invested. There is no correlation between the performance of the index and the composite.