salient webinar riskedbased asset allocation 91813 final

8/13/2019 Salient Webinar Riskedbased Asset Allocation 91813 Final

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For Institutional Use Only. Not For Further Distribution.

Risk-Based Asset Allocation

& Portfolio AnalysisSalient Quantitative Research

September 2013


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DisclosureThis information is being provided to you by Salient Advisors, L.P., and is intended solely for educational purposes. No other distribution or use of these materials has been authorized. The opinions expressed in these

materials represent the personal views of the investment professionals of Salient Advisors, L.P., and is based on their broad based investment knowledge, experience, research and analysis. It must be noted, however, that

no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Certain statements in this communication are forward-looking statements of Salient Advisors, L.P.

The forward-looking statements and other views expressed herein are as of the date of this letter. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and

there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. The Adviser disclaims any obligation to update publicly

or revise any forward-looking statements or views expressed herein. There can be no assurance that the Strategy will achieve its investment objectives. The value of any strategy will fluctuate with the value of the

underlying securities. Please note t hat the returns in this presentation are the result of a hypothetical investment framework.

This information is neither an offer to sell nor a s olicitation of any offer to buy any securities. Any offering or solicitation will be m ade only to eligible investors and pursuant to any applicable Private Placement Memorandum

and other governing documents, all of which must be read in their entirety.

There are special risks associated with an investment in commodities and futures, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse

political or financial factors. T ransactions in futures are speculative and carry a high degree of risk.

Research and advisory services are provided by Salient Advisors, L.P., a wholly owned subsidiary of Salient Partners, L.P. and a Secu rities and Exchange Commission Registered Investment Adviser. Salient research has been

prepared without regard to the individual financial circumstances and objectives of persons who receive it. Commodity services provided through Salient Advisors, L.P. a Commodity Trading Advisor (CTA) and Commodity

Pool Operator (CPO), registered with the Commodity Futures Trading Commission (CFTC) as a CTA and a CPO and a member of the National Futures Association (NFA). Salient recommends that investors independently

evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investors individual

circumstances and objectives.

Salient is the trade name for Salient Partners, L.P., which together with its subsidiaries provides asset management and advisory services. Insurance products offered through Salient Insurance Agency, LLC (Texas license

#1736192). Trust services provided by Salient Trust Co., LTA. Securities offered through Salient Capital, L.P., a registered broker-dealer and Member FINRA, SIPC. Each of Salient Insurance Agency, LLC, Salient Trust Co., LTA,

and Salient Capital, L.P., is a subsidiary of Salient Partners, L.P.

Please note that the returns presented in this paper are the result of a hypothetical investment framework. Backtested performance is NOT an indicator of future actual results and do the results above do NOT represent

returns that any investor actually attained. Backtested results are calculated by the retroactive application of a model constructed on the basis of historical data and based on assumptions integral to the model which may or

may not be testable and are subject to losses. Certain assumptions have been made for modeling purposes and are unlikely to be realized. No representations and warranties are made as to the reasonableness of the

assumptions. Changes in these assumpti ons may have a material impact on the backtested returns presented. This information is provided for illustrative purposes only. Backtested performance is developed with the benefit

of hindsight and has inherent limitations. Specifically, backtested results do not reflect actual trading or the effect of material economic and market factors on the decision-making process. Since trades have not actually

been executed, results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity, and may not reflect the impact that certain economic or market factors may have had on

the decision-making process. Further, backtesting allows the security selection methodology to be adjusted until past returns are maximized. Actual performance may differ significantly from backtested performance.

Backtested results are adjusted to reflect the reinvestment of dividends and other income. The above backtested results are do not include the effect of backtested transaction costs, management fees, performance fees or

expenses, if applicable. No cash balance or cash flow is included in the calculation.

2013 Salient. All Rights Reserved.


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Todays Presenters

David LintonManaging Director,

Head of Sales and Intermediary Services

Bill EnszerDirector of External Managers,

Portfolio Manager

Roberto M. Croce, Ph.D.Director of Quantitative Research,

Portfolio Manager


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Developed,

10%

Small Cap,

19%

Growth,

12%

Value,

12%

Dividend/

Income,

6%

Treasuries,

25%

EM Debt,

1%

HY Bonds,

14%

Dollar Allocation Risk Allocation

For illustrative purposes only.

Dollar Allocation


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Stocks, 90%

Other, 10%Risk Allocation


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Topics

Viewing portfolios in terms of risk

Beta vs. volatility terminology

Using betas to understand managers

Understanding risk

Using risk as an input in portfolio construction

Considering downside risk in portfolio construction

Knowing current risk profile

Convergence vs. Divergence

Testing for Convergence and why it matters

Using Divergence to build more robust Alternatives portfolios

Bringing it all together

Application 1: examining investor current allocations

Application 2: adding a Liquid Alternatives sleeve to investor portfolios


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Topics




Understanding risk











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Viewing Portfolios in Terms of Risk

The average amount by which a managers returnsco-move with a benchmark

The Language of Risk

Beta

RiskContribution

The fraction of portfolio volatility due to a particularconstituent, benchmark, or risk factor

Volatility

The average amount by which a managers returnsfluctuate around their average

Technically: annualized standard deviation of returns


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Understanding Volatility

Source: Salient Advisors, L.P., Bloomberg, September 2013.For illustrative purposes only. Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflect the deduction of fees or expenses. Note that an investor cannot invest directly in the Index.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Monthly

S&P500Returns

AbsoluteValueof

S&P500

Returns

Monthly

Average: 3.98%

Monthly

Average: 0.65%

Volatility tells us the average size of returns without regard for the sign of those returns.Its a measure of riskiness.


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Understanding Beta

Source: Salient Advisors, L.P., September 2013.

For illustrative purposes only. Past performance is not necessarily indicative of future results.

Beta:a measure of

riskit tells us how

much fund returns varyin response to changes in

a risky benchmark.

However, it is only ameasure of relative risk,

and tells us very little

about absolute risk.

Alpha: averagemanager returns in

excess of benchmark

Fund-Specific Risk

y = 0.78x + 0.0027

-20%

-15%

-10%

-5%

0%

5%

10%

15%

-20% -15% -10% -5% 0% 5% 10% 15%

ExampleFundReturns

Sample Benchmark Returns


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-20%

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 2013

Return(%)

Year

Monthly Returns

Portfolio of Stocks w/ S&P 500 Beta = 1

Portfolio of Bonds w/ Barclays Agg Beta = 1

Understanding Beta

Beta Volatility

Source: Salient Advisors, L.P., Bloomberg, September 2013.

For illustrative purposes only. Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflect the deduction of fees or expenses. Note that

an investor cannot invest directly in the Index.

Equal Betas to Different Benchmarks = Different Volatilities


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Using Betas: Expressing Manager Styles

Exposure toUS Equity

AlphaName of Fund Tilt towardvalue stock

Tilt towardsmall cap stocks


For illustrative purposes only. No investment strategy can guarantee results.

Express manager returns in terms of betas to common market risks. In the process, re-state each managers returns as a function of market factors.

= + 1 1 + 2 2 + +

: Manager Returns

: Estimate of managers exposure-adjusted average performance

: Estimate of managers exposure to Factor (where factors are market proxieslike S&P 500 or the Continuous Commodity Index)

: Manager-specific component of returns.

Sample Fund Bonds Stocks Commodities US Dollar High Yield Tilt Value Tilt Growth Tilt Small Cap Tilt Dev Ex US TiltEmerging

Market Tilt

Long Only Stock Picker A 0.00% 0.00 1.04 0.01 0.00 0.00 0.41 0.00 0.15 0.00 0.00

F I i i l U O l N F F h Di ib i


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Using Betas: Spotting Manager Style vs. Skill

Source: Salient Advisors, L.P., Bloomberg, 2003-2013.

For illustrative purposes only. Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflect the deduction of fees or expenses. Note thatan investor cannot invest directly in the Index.

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

USDollars

Year

Manager

S&P 500

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

USDollars

Year

Manager

Russell 3K Value

What appears to be outperformance... Is actually just a value bias

Sample Fund Bonds Stocks Commodities US Dollar High Yield Tilt Value Tilt Growth Tilt Small Cap Tilt Dev Ex US Tilt EmergingMarket Tilt

Long Only Stock Picker A 0.00% 0.00 1.04 0.01 0.00 0.00 0.41 0.00 0.15 0.00 0.00

F I tit ti l U O l N t F F th Di t ib ti


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Sample Fund Bonds Stocks Commodities US Dollar High Yield Tilt Value Tilt Growth Tilt Small Cap Tilt Dev Ex US TiltEmerging

Market Tilt

High Yield Credit Manager 0.00% 0.00 0.35 0.08 -0.13 0.67 0.00 0.00 0.00 0.10 0.05

Using Betas to Understand Asset Classes

We believe Asset Classes are rarely as pure as investors may think.

High yield fixed income, for example, actually has a sizeable loading on equities.

Many managers actually have a negative exposure on the US dollar (positiveloading on foreign currencies) due to foreign holdings.



No loading on treasury bonds. Somehigh yield bond funds are contributingequityrisk, not bond risk.

Manager likely hasforeign credit exposure.

F I tit ti l U O l N t F F th Di t ib ti


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Using Betas: Understanding Managers with Short Histories

Step 1: Calculate managerbetas to common marketbenchmarks over periodfor which we have data

Step 2: Multiply theresulting betas by thebenchmark returns duringthe period of interest(2008)

The results are shown to

the right. This illustrationmodels the Fund usingdata from 2010 onwardthen compares with actualreturns in 2008

What if a Funds inception date was 2010, but you wanted to understand

how they would have faired in 2008?



$0.60

$0.65

$0.70

$0.75

$0.80

$0.85

$0.90

$0.95

$1.00

$1.05

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

USDollars

Year

Actual Model

For Institutional Use Only Not For Further Distribution


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Understanding Risk Contribution

No investment strategy can guarantee results.

Alpha

Betasto underlying factors

or benchmarks

Returnsfrom underlying

factors or benchmarks

Fund Specific Risk



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Understanding Risk Contribution

Source: Salient Advisors, L.P., Bloomberg, January 1, 1990- August 31, 2003. For illustrative purposes only.

Stocks are represented by the MSCI World Index. Bonds are represented by the Barclay US 10 Year. A 60/40 Portfolio is 60% MSCI World Index and 40% Barclay US 10 Year.Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflect the deduction of fees or expenses. Note that an investor cannot invest

directly in the Index.

$0

$1

$2

$3

$4

$5

$6

USDollars

Year

Stocks

Bonds

60/40

By understanding the primary drivers of risk,

the investor is able to grasp what will likelyaffect portfolio returns

This view of portfolio risk tells us what the primary drivers of portfolio volatility are.

The results are often quite counter-intuitive.




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Calculating Risk Contribution: The BasicsIts not as complicated as it seems


Portfolio of 2 assets with weights: 1and 2.

The variance of the portfolio is then:

2= ,

=1

=1

=12 1,1 1

2+ 1 2 1,2 1 2 +

+1 2 1,2 1 2+ 22 2,2 2

2

Where: 1is weight of asset 1

1is the volatility of asset 1

1,2is the correlation between asset 1 and asset 2

Risk Contribution

from Asset 1Risk Contribution

from Asset 2


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Risk-Weighting Walkthrough


For illustrative purposes only. No investment strategy can guarantee results. Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflectthe deduction of fees or expenses. Note that an investor cannot invest directly in the Index. Indices used in table above: MSCI World Index, Continuous Commodity Index, Barclays Aggregate Bond Index,

Barclay CTA Index.



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Target StandardDeviation

Weights

Balanced Risk

Contribution



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For illustrative purposes only. No investment strategy can guarantee results. Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflectthe deduction of fees or expenses. Note that an investor cannot invest directly in the Index. Indices used in table above: MSCI World Index, Continuous Commodity Index, Barclays Aggregate Bond Index,

Barclay CTA Index.



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Using Risk Contribution

Suppose a Financial Advisor constructed a diversified equity portfolio using3 different equity managers.

A View of Diversification



What does the portfolios risk profile look like?How much does the investor benefit from the different equity styles?

Sample Fund Bonds Stocks Commodities US Dollar High Yield

TiltValue Tilt Growth Tilt

Small Cap

Tilt

Dev Ex US

Tilt

Emerging

Market Tilt

Value Manager 0.00% 0.00 1.01 -0.01 -0.03 0.03 0.67 -0.27 0.00 0.00 0.02

Growth Manager 0.00% 0.00 0.92 0.03 0.00 0.05 0.00 1.01 -0.06 0.00 0.02

Small Cap Manager 0.00% 0.00 1.12 0.04 0.00 0.08 1.30 1.19 0.48 0.00 0.02



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Using Risk Contribution

Despite having several, very different line items, the portfolio is hardly diversified.

Nearly all of the portfolios risk is still driven by US Large Cap Stocks. Over time, theremay be very little difference between the two portfolio return streams.


96.0%

4.0%

Generic Stock Risk

Style Risk and other Exposures



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Volatility & Correlation Matter

Low Volatility + Low Correlation = Low Risk Contribution



Indices used above are as follows: Stocks: S&P 500 Total Return Index, Value: Russell 3000 Total Return Value Index, Growth: Russell 3000 Total Return Growth Index, Small Cap: Russell 2000 Total Return Index, Dev Ex US: MSCI World Index DailyNet TR Local, Emerging: MSCI Daily TR Net Emerging Markets Local, High Yield: Barclays US corporate High Yield Total Return Index Value Unhedged USD, Commodities: Continuous Commodity Index, Bonds: Barclays US 10Yr Note Futures Index,

US Dollar: US Dollar Index Spot Rate

-0.32

1.00

0.31

-0.21

0.00 0.00 0.00 0.00 0.00 0.00

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

Bonds Stocks Commodities US Dollar High Yield Value Tilt Growth Tilt Small Cap Tilt Dev Ex US Tilt EmergingMarket Tilt

7%

20%

15%

9%

5%3% 4%

10%

6%

14%

0%

5%

10%

15%

20%

25%

Bonds Stocks Commodities US Dollar High Yield Value Tilt Growth Tilt Small Cap Tilt Dev Ex US Tilt EmergingMarket Tilt

Correlation to Equities

Volatility

Volatility(%)

Correlation



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Topics




Understanding risk












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Downside Risk: When Correlations Go to One

Because many strategies behave differently in volatile periods, we thinkinvestors should consider downside risk separately.

Accounting for the degree to which correlations go to one in down marketstypically helps address this challenge.

These differences are not captured in the prior analysis, which only looks atthe long-run averagebehavior of managers relative to benchmarks.

Because history is primarily made up of calm periods, the long-run average

doesnt always do a good job capturing this asymmetry.

No investment strategy can guarantee results.



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The Language of Downside Risk

Convergent Returns

Have high correlation to equitieswhen equities are doing poorly

Examples: stocks, private equity, high

yield credit, real estate, relative valuestrategies, event driven strategies, etc.

For our purposes of this discussion, Convergence/Divergence

will be measured as correlation to rises in volatility.

Divergent Returns

Have negative correlation toequities when equities are doingpoorly

Examples:treasuries, valuestrategies, managed futures, globalmacro, etc.



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Determining if a Manager or Strategy is Divergent

Step 1: Line up manager returns next to the VIX

Step 2: Use Excel formula to show return on days when VIX is increasing

Step 3: Calculate correlation of strategy with rises in volatility



Convergent

Correlations During Divergent Periods

Manager 1 Manager 2 Manager 3 Manager 4

(0.35) 0.22 (0.45) (0.80)

Divergent



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EQUITY CREDIT COM BONDS CURR ALTERNATIVES

Stocks

Value

Growth

SmallCap

DevExUS

EmergingMarket

HighYield

Commodities

Bonds

USDollar

MacroHFs

Rel.ValueHFs

EventDrivenHFs

Stocks 0.91 0.91 0.70 0.95 0.63 0.61 0.43 -0.35 -0.35 -0.03 0.48 0.49

Value 0.80 0.68 0.62 0.85 0.59 0.59 0.43 -0.36 -0.38 -0.01 0.42 0.38

Growth 0.85 0.37 0.79 0.89 0.60 0.55 0.35 -0.33 -0.26 0.03 0.47 0.59

Small Cap 0.68 0.75 0.49 0.74 0.52 0.58 0.22 -0.35 -0.24 0.14 0.43 0.62

Dev Ex US 0.97 0.83 0.76 0.66 0.69 0.62 0.46 -0.45 -0.26 0.04 0.54 0.57

Emerging Market 0.87 0.75 0.73 0.70 0.91 0.59 0.54 -0.32 -0.26 0.18 0.49 0.46

High Yield 0.71 0.73 0.52 0.73 0.76 0.74 0.24 -0.25 -0.32 -0.05 0.62 0.44

Commodities 0.51 0.47 0.42 0.53 0.54 0.60 0.58 -0.20 -0.46 0.30 0.39 0.30

Bonds 0.35 0.26 0.38 0.33 0.33 0.42 0.46 0.57 -0.14 0.06 -0.54 -0.35US Dollar -0.46 -0.53 -0.29 -0.51 -0.44 -0.48 -0.31 -0.81 -0.41 -0.19 -0.15 -0.20

Macro HFs -0.03 0.22 -0.22 0.17 0.00 -0.11 0.07 0.48 0.36 -0.53 0.08 0.35

Rel. Value HFs 0.68 0.71 0.47 0.58 0.75 0.76 0.79 0.74 0.61 -0.64 0.30 0.65

Event Driven HFs 0.62 0.70 0.36 0.49 0.76 0.76 0.84 0.59 0.46 -0.39 0.15 0.89

Determining if a Manager or Strategy is Divergent

Not All Hedge Funds are Equally Divergent


For illustrative purposes only. Past performance is not necessarily indicative of how the Index will perform in the future. Index performance does not reflect the deduction of fees or expenses. Note that an investor cannot invest directly in the

Index. Indices used in table above: Stocks: S&P 500 Total Return Index, Value: Russell 3000 Total Return Value Index, Growth: Russell 3000 Total Return Growth Index, Small Cap: Russell 2000 Total Return Index, Dev Ex US: MSCI World Index Daily

Net TR Local, Emerging: MSCI Daily TR Net Emerging Markets Local, High Yield: Barclays US corporate High Yield Total Return Index Value Unhedged USD, Commodities: Continuous Commodity Index, Bonds: Barclays US 10Yr Note Futures Index, US

Dollar: US Dollar Index Spot Rate, Macro HFs: HFRI Macro (Total) Index, Rel. Value HFs: HFRI Relative Value (Total) Index, Event Driven HFs: HFRI Event-Driven (Total) Index

CorrelationDuri

ngPeriodsofRisingVolatility

Correlation During Periods of Falling Volatility

The correlationbetween mostasset classes riseduring periodsof risingvolatility



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Why We Believe Convergence Matters

We think that with highly Convergent strategies, beta exposures rarely fully reflect downside risk.

This is especially true for multi-asset portfolios, like Hedge Funds.



October 2008 Performance

Macro HFs Rel. Value HFs Event Driven HFs

Predicted -2.6% -6.1% -6.2%

Actual -1.7% -14.1% -7.5%

Sample Fund Bonds Stocks Commoditie s US Dollar High Yield

TiltValue Til t Growth Ti lt

Small Cap

Tilt

Dev Ex US

Tilt

Emerging

Market Tilt

Macro HFs 0.00% 0.15 -0.02 0.13 0.00 -0.07 0.00 0.10 0.00 -0.09 0.11

Rel. Value HFs -0.01% -0.07 0.02 0.05 0.00 0.30 0.43 0.48 -0.14 0.03 0.02

Event Driven HFs 0.00% -0.04 0.13 0.06 0.02 0.14 0.36 0.55 -0.09 0.08 0.03

Oct 2008 Return -1.3% -16.8% -18.3% 7.8% -13.8% 0.5% -1.8% -2.3% -2.9% -12.2%

Total

Macro HFs -0.21% 0.30% -2.46% 0.00% 0.96% 0.00% -0.17% 0.00% 0.26% -1.29% -2.6%

Rel. Value HFs 0.10% -0.41% -0.97% 0.00% -4.20% 0.22% -0.85% 0.32% -0.10% -0.25% -6.1%

Event Driven HFs 0.05% -2.14% -1.15% 0.13% -1.92% 0.18% -0.96% 0.20% -0.24% -0.38% -6.2%



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Topics




Understanding risk












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Bringing It All Together

Examining Sample Investor Current Allocations Alternatives Portfolio

Step 1: Identify primary drivers of current portfolio risk

Step 2: Construct a more balanced portfolio

Step 3: Identify the merits of a specific Alternatives portfolio

Step 4: Examine which new allocations would be best



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Sample Traditional Investor Portfolio

Dollar Allocation



Asset Class Fund Type Fund % Asset Class %

Equity

Developed 10.0%

60.0%

Small Cap 19.4%

Growth 12.3%

Value 12.3%

Dividend / Income 5.9%

Commodities Commodities 0.0% 0.0%

BondsTreasuries 25.0%

26.0%EM Debt 1.0%

Credit HY Bonds 14.0% 14.0%

Total 100.0% 100.0%

Developed, 10%

Small Cap, 19%

Growth, 12%

Value, 12%Dividend / Income,

6%

Treasuries, 25%

EM Debt, 1%

HY Bonds, 14%



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Factor Analysis by Fund



High R2indicates that the betas provide a predictive representation of the Fund.

Sample Fund R2 Bonds Stocks Commodi ties US Dollar High Yield Ti lt Value Ti lt Growth TiltSmall Cap

Tilt

Dev Ex US

Tilt

Emerging

Market Tilt

Developed Equity Fund 0.97 0.05% -0.15 0.89 0.07 -0.43 0.10 0.91 0.31 0.00 0.79 0.19

EM Debt Fund 0.74 0.03% 0.46 0.39 0.19 -0.12 0.44 0.00 0.00 0.08 0.00 0.19

Commodities Fund 0.86 -0.43% 0.36 0.00 1.13 -0.28 0.29 0.00 0.00 0.00 0.00 0.00

Small Cap Fund 0.99 0.07% -0.31 1.09 0.04 0.00 0.09 0.00 0.00 0.83 0.16 0.00

Growth Fund 0.99 0.02% -0.04 1.08 0.02 0.00 0.00 -0.12 0.90 0.00 0.00 0.00

Value Fund 0.80 -0.20% -0.22 0.73 0.10 0.00 0.00 0.00 0.00 0.00 1.58 0.00

Dividend / Income Fund 0.93 0.15% 0.00 0.69 0.13 -0.07 0.00 0.94 0.00 -0.15 0.00 0.09

Treasury Fund 0.96 0.09% 1.04 0.00 -0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00

HY Bond Fund 0.90 -0.15% -0.07 0.33 0.11 0.00 0.90 0.00 0.00 0.00 0.00 0.00



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Portfolio Risk Contribution Factor Level



Despite the multiple line items in the investors other asset allocation, theportfolio is largely undiversified and dominated by equity risk.

Stocks, 90%

Commodites, 6%

Bonds, -1%Credit, 3% Other, 3%



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The Dividend & Income Fund looksa lot like value stocks, which isconsistent with what you wouldexpect.

The EM Debt Fund looks a lotlike domestic stocks and highyield. Could we be gaining thatexposure more cheaplyelsewhere?

The Value Fund looks more likethe S&P. Maybe we should finda better fit.

Fund Risk Contribution



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Constructing A More Balanced Portfolio

Less Equities Required than Investors May Think



Risk AllocationDollar Allocation

Developed, 8%

Small Cap, 5%

Growth, 2%

Value, 2%

Dividend /Income, 8%

Commodities,10%

EM Debt, 15%

Treasuries, 30%

HY Bonds, 20%

Stocks, 54%

Bonds, 2%

Commodites,25%

Credit, 10%

Other, 9%



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A Balanced Portfolio May Reduce Drawdown


an investor cannot invest directly in the Index.


Return Vol Ret/Risk Max Drawdown

7.2% 11.2% 0.64 -36.9%6.9% 8.5% 0.81 -26.3%



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Bringing It All Together

Liquid Alternatives should avoid:

High cost most 2/20 structures are unnecessary

Inefficient offerings can be replicated with traditional beta and are really equitiesin drag

Highly Convergent exposures performs poorly in volatile periods

Use prior techniques to assess managers on a level that goes beyond theirFact Cards

Analyze their risk level, and how it will affect the rest of portfolio

Assess returns during volatile periods

Reconstruct longer histories to include stressful markets

Adding a Liquid Alternatives Sleeve to Investor Portfolios



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EQUITY COM BONDS CREDIT ALTERNATIVES

Developed

SmallCap

Growth

Value

Dividend/Income

Commodities

Treasuries

EMDebt

HYBonds

RelativeValue

EventDriven

L/SEquity

Trend

AltBeta

RiskParity

Developed 0.92 0.93 0.85 0.93 0.52 -0.28 0.72 0.70 0.72 0.86 0.93 -0.04 0.21 0.48

Small Cap 0.92 0.94 0.79 0.90 0.48 -0.34 0.66 0.72 0.68 0.82 0.86 0.14 0.29 0.41

Growth 0.93 0.94 0.80 0.91 0.54 -0.32 0.67 0.74 0.73 0.83 0.88 0.11 0.22 0.45

Value 0.85 0.79 0.80 0.80 0.52 -0.31 0.71 0.72 0.77 0.81 0.83 0.00 0.18 0.33

Dividend / Income 0.93 0.90 0.91 0.80 0.53 -0.27 0.56 0.53 0.60 0.66 0.67 0.01 0.21 0.42

Commodities 0.52 0.48 0.54 0.52 0.53 0.07 0.63 0.49 0.61 0.54 0.61 0.20 0.23 0.65

Treasuries -0.28 -0.34 -0.32 -0.31 -0.27 0.07 0.08 -0.23 -0.26 -0.37 -0.37 0.04 0.00 0.37

EM Debt 0.72 0.66 0.67 0.71 0.56 0.63 0.08 0.68 0.72 0.71 0.70 -0.02 0.21 0.51

HY Bonds 0.70 0.72 0.74 0.72 0.53 0.49 -0.23 0.68 0.78 0.76 0.65 -0.12 0.11 0.36

Relative Value 0.72 0.68 0.73 0.77 0.60 0.61 -0.26 0.72 0.78 0.81 0.75 0.04 0.22 0.41Event Driven 0.86 0.82 0.83 0.81 0.66 0.54 -0.37 0.71 0.76 0.81 0.91 0.03 0.23 0.43

L/S Equity 0.93 0.86 0.88 0.83 0.67 0.61 -0.37 0.70 0.65 0.75 0.91 0.07 0.24 0.46

Trend -0.04 0.14 0.11 0.00 0.01 0.20 0.04 -0.02 -0.12 0.04 0.03 0.07 0.54 0.37

Alt Beta 0.21 0.29 0.22 0.18 0.21 0.23 0.00 0.21 0.11 0.22 0.23 0.24 0.54 0.38

Risk Parity 0.48 0.41 0.45 0.33 0.42 0.65 0.37 0.51 0.36 0.41 0.43 0.46 0.37 0.38

Adding Breadth


For illustrative purposes only. Past performance is not a guarantee of future results.

Proxies used in the correlation chart are as follows: Developed: Vanguard Global Equity Fund, Small Cap: Vanguard Small-Cap ETF, Growth: Vanguard Growth ETF, Value: UBAM - Neuberger Berman US E quity Value, Dividend/Income: BlackRock

Equity Dividend Fund, Commodities: PIMCO Commodity Real Return Strategy Fund, Treasuries: iShares 7-10 Year Treasury Bond ETF, EM Bonds: Franklin Templeton Investment Funds - Templeton Emerging Markets Bond Fund, HY Bonds:BlackRock Global Funds - US Dollar High Yield Bond Fund, L/S Equity: HFRI Equi ty Hedge (Total) Index, Trend: Salient Trend Index, Alt Beta: Salient Alternative Beta Index, Risk Parity: Salient Risk Parity V15 Index

Liquid Alternatives typically exhibit low correlation to traditional asset classes



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Fund Bonds Stocks Commodities Currencies High Yie ld Tilt Value Tilt Grow th Tilt Small Ca p Tilt Dev Ex US TiltEmerging

MarketTilt

Relative Value 0.38% 0.00 0.12 0.10 0.00 0.23 0.00 0.00 0.00 0.22 0.00

Event-Driven 0.35% -0.12 0.27 0.09 0.00 0.19 0.00 0.00 0.13 0.18 0.08

Long Short Equity 0.18% -0.12 0.36 0.13 -0.10 0.00 0.00 0.21 0.19 0.40 0.12

Trend 2.05% 0.00 -0.30 0.27 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Alt Beta 2.60% 0.00 0.00 0.22 0.36 0.00 0.45 0.00 0.24 0.00 0.28

Risk Parity 0.63% 1.19 0.33 0.45 0.00 0.00 0.00 0.00 0.00 0.00 0.41

Factor Analysis by Fund: Alternatives



High alpha indicates that theres a strong constantpremium over the exposures expressed by the betas.

Negative betas on stocks indicates a diversifying asset inthe area where the portfolio needs it the most.



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Fund Risk Contribution

Liquid Alternatives



an investor cannot invest directly in the Index.Trend: Salient Trend Index, Alt Beta: Salient Alternative Beta Index, Risk Parity: Salient Risk P arity V15+ Index

0%

20%

40%

60%

80%

100%

120%

Relative Value Event Driven L/S Equity Trend Alt Beta Risk Parity

RiskContributio

n(%)

Bonds Stocks Commodities US Dollar High Yield Value Growth Small Cap Dev Ex US Emerging Market Other



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Consider Alternatives through a Lens of Convergence



Correlation to Equities During Rising Volatility

0.800.87 0.90

-0.54

-0.33

0.87

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

HFRI Relative Value

(Total) Index

HFRI Event-Driven

(Total) Index

HFRI Equity Hedged Trend Alt Beta Risk Parity

Correlation



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Consider Alternatives with Meaningful Volatility



Volatility

4%

7%

9%

20%

15% 15%

0%

5%

10%

15%

20%

25%

HFRI Relative Value

(Total) Index

HFRI Event-Driven

(Total) Index

HFRI Equity Hedged Trend Alt Beta Risk Parity

Volatility(%)



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Adding Liquid Alternatives to a Well-Balanced Portfolio



Risk AllocationDollar Allocation

Developed, 3% Small Cap, 2% Growth, 2%

Value, 2%

Dividend /Income, 2%

Commodities,5%

Treasuries,35%

EM Bonds, 4%

HY Bonds, 15%

Trend, 10%

Alt Beta, 10%

RP, 10%

Stocks,29%

Commodities,27%

Bonds,11%

Credit,4%

Other,29%



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Adding the Right Liquid Alts May Enhance Potential Returns

Reduced Drawdown, Increased Potential Return


For illustrative purposes only. Past performance is not a guarantee of future results.

Return Vol Ret/Risk Max Drawdown

7.2% 11.2% 0.64 -36.9%

12.5% 7.1% 1.75 -11.5%



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Barclays Aggregate Bond Index - a U.S. Aggregate index that covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes government securities,

mortgage-backed securities, asset-backed securities and corporate securities all with a maturity of greater than one year. This index is subject to interest rate risk (as interest rates rise bond prices usually fall), the risk of

issuer default, and inflation risk.

Barclay CTA Index - is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 582 programs included in the calculation of the Barclay CTA Index for the year 2013,which is unweighted and rebalanced at the beginning of each year. This index is non-diversified and therefore may be m ore volatile than the S&P 500 Index.

Barclays U.S. Corporate High Yield Index - an index of U.S. below investment grade bonds.

Continuous Commodity Index - made up of 17 commodities whose futures trade on U.S. Exchanges. The index is a broad measure of overall commodity price trends. There are six component groups: Energy, Grains,

Industrials, Precious Metals, Livestock and Softs. Equal weighting is used for both arithmetic averaging of an individual commodity months and for geometric averaging of the 17 commodity averages. This index is subject

to commodity price risk.

60/40 Portfolio represented by 60% MSCI World Index and 40% Barclay 10 US Ye ar Treasury Index.

MSCI World Index- a stock market index of 1,500 'world' stocks. It is m aintained by MSCI Inc., formerly Morgan Stanley Capital International, and is often used as a common benchmark for 'world' or 'global' stock funds.

MSCI Emerging Market Equitycovers over 800 securities across 21 emerging markets and represents approximately 13% of world market cap.

Russell 3000 Growth Index - measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted

growth values.

Russell 3000 Value Index - measures the performance of the broad value segment of U.S. equity value universe. It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted

growth values.

Russell 2000- measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of

that index. It includes approximately 2000 of the smallest sec urities based on a combination of their market cap and current index membership.

S&P 500 Index - an unmanaged, capitalization weighted index comprising publicly traded common stocks issued by companies in various industries. The S&P 500 Index is widely recognized as the leading broad-based

measurement of changes in conditions of the U.S. equities market. This index can be affected by general market or economic conditions.

VIX- The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500

index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measur e of market risk and is often referred to as the "investor fear gauge."

HFRI Equity Hedge (Total) Index Investment managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to

arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net

exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios.

HFRI Relative Value Index Investment managers who maintain positions in which the investme nt these is predicated on realization of a valuation discrepancy in the relationship between multiple securities .

HFRI Event Driven Index Investment managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings,

financial distress, tender offers, shareholder buybacks, debt exchanges, secur ity issuance or other capital structur e adjustments.

US Dollar Index Spot Rate - is a geometrically-averaged calculation of six currencies weighted against the U.S. dollar.

Index Glossary



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