The Evolving World of Alternative InvestmentsPanel Detail:Tuesday, April 27, 2010 4:00 PM – 5:15 PM

Speakers:

Harold Bradley, Chief Investment Officer, Ewing Marion Kauffman Foundation

Alan Buerger, Co-Founder and CEO, Coventry

John Claisse, Head of Portfolio Group, Albourne America LLC

Hans Hufschmid, CEO, GlobeOp Financial Services

Anthony Scaramucci, Managing Partner, Skybridge CapitalAnthony Scaramucci, Managing Partner, Skybridge Capital

Moderator:

James Williams, Vice President, Chief Investment Officer and Treasurer, The J. Paul Getty Trust

1

Post-turbulence market trends

• Investor landscape • Hedge fund manager landscapep- Power shift to investors- Managed accounts- Transparency- Independent administration- Operational risk due diligence

g g p- Fertile investment environment- Investment bank prop desk closure- The return of start-ups- Credit exposure & derivatives

management

Source: GlobeOp Financial Services.

• Regulations- Risk reporting - Valuation processes & controls

2

Global single manager hedge fund assets beginning to recover Quarterly: 2003Q4 — 2009Q4

Source: Hedgefund.net.

3

Performance and investor inflows driving global single manager hedge fund assetsQuarterly: 2004Q1 — 2009Q4

Source: Hedgefund.net.

4

Breakdown of global hedge fund assets undermanagement by strategy type

Source: Eurekahedge.

5

Hedge fund returns: what a difference a year makes

Source: Credit Suisse/Tremont Hedge Fund Index.

6

Global hedge funds are beginning to hit high-water marks

Source: Eurekahedge.

7

Hedge fund strategies: return versus risk January 1994 — January 2010

Source: Credit Suisse/Tremont Hedge Fund Index. 8

Fee structure of global hedge funds shifting away from traditional “2 & 20”

Source: Eurekahedge March 2010.

9

Many hedge funds are charging below the standard 2% management fee

Source: Preqin April 2010.

10

Post-crisis hedge fund performance fees are relatively unchanged

Source: Preqin April 2010.

11

Hedge funds apt to charge lower management fees in exchange for longer lock-up period

Source: Preqin April 2010.

12

Hedge funds apt to charge lower performance fees in exchange for longer lock-up period

Source: Preqin April 2010.

13

Strong correlation between hedge fund performance fees and returns*Cumulative returns as of November 30, 2009

Source: Preqin April 2010.

14

Large institutional investors taking interest inmanaged hedge fund accounts

Source: Preqin February 2010.

15

Hedge fund investors continue to increase exposure to UCITS funds

Source: Credit Suisse 2010 Global Hedge Fund Investor Survey.

16

Transparency and liquidity influencing shift toward managed hedge fund accounts

Source: Preqin February 2010.

17

Hedge fund investors are receiving greatertransparency

Source: Credit Suisse 2010 Global Hedge Fund Investor Survey.

18

Hedge fund investors are doing their homework prior to investing

Source: Credit Suisse 2010 Global Hedge Fund Investor Survey.

19

Top 10 global hedge fund prime brokers End of year

Source: Eurekahedge.

20

Institutional investors reduced exposure to hedge funds in 2009

Source: Preqin.

21

Evolution of U.S. endowment portfoliosFiscal year-end: 2002 — 2009

Source: NACUBO - Commonfund Study of Endowments (2009).

22

Size of three largest U.S. endowment fundsFiscal year-end market value: 1998 — 2009

Source: NACUBO - Commonfund Study of Endowments (2009).

23

Yale Endowment strategy over last 10 years Fiscal year-end: 1999 — 2009

Source: Yale Endowment Annual Update.

24

Alternative investments rise as share of investment allocation at CalPERS Fiscal year-end: 2001 — 2009

Source: CalPERS Comprehensive Annual Financial Report (2001-2009).

25

Market value of CalPERS public employees’ retirement fund down 27% from peak in 2007 Fiscal year-end: 2002 — 2009

Source: CalPERS Comprehensive Annual Financial Report (2001-2009).

26

Evolution of CalSTRS portfolio Quarterly Calendar: 2006Q2 — 2009Q4

Source: CalSTRS Quarterly Activity Report.

27

CalSTRS market value recovering from 2009Q1 bottom: $30+ billion in Alt-investmentsQuarterly Calendar: 2006Q2 — 2009Q4

Source: CalSTRS Quarterly Activity Report.

28

Alternative investments account for trillions in global pension assets 2009 year-end

Source: Towers Watson 2010 Global Pension Asset Study.

29

Canada and U.S. hold large share of pension assets in alternative investments 2009 year-end

Source: Towers Watson 2010 Global Pension Asset Study.

30

Alternative investments grew from 7% to 20% of U.S. pension assets over last decade Year-end: 1999 vs. 2009

Source:Towers Watson 2010 Global Pension Asset Study.

31

$3.5 trillion sovereign wealth fund assets: major player in alternative investments

Source: 2010 Preqin Sovereign Wealth Fund Review.

32

Performance of hedge fund sector proxies versus major equity gauges Monthly: January 2004 – March 2010

Source: Bloomberg.

33

Market volatility now below historical averageVIX Index (Daily), January 2, 1990 — April 16, 2010

Source: Bloomberg.

34

U.S. commercial paper market still in free-fallMonthly: Jan. 2001 — Mar. 2010

Source: Federal Reserve.

35

U.S. real GDP expanding as economy recoversQuarterly: 1990Q1 – 2009Q4

Sources: BEA, NBER.

36

Home prices may have touched bottom Quarterly: 1988Q1 – 2009Q4

Sources: S&P/FiServ, NBER.

37

2009: first time on record that total U.S. household debt fell year-over-year Annual: 1945 – 2009

Source: Federal Reserve.

38

2009: first time on record that total U.S. household debt fell year-over-year Annual: 1945 – 2009

Source: Federal Reserve.

39

Households now deleveragingQuarterly: 1980Q1 – 2009Q4

Source: Federal Reserve.

40

U.S. household net worth beginning to riseQuarterly: 1995Q1 – 2009Q4

Source: Federal Reserve.

41

American consumers reluctant to take onadditional debt Monthly: Jan. 2007 – Feb. 2010

Source: Federal Reserve.

42

Does trough in consumer credit signal end of Great Recession? Monthly: Jan. 1969 – Feb. 2010

Sources: Federal Reserve, NBER.

43

U.S. economy beginning to add jobsMonthly: Jan. 2008 – Mar. 2010

Source: BLS.

44

U.S. unemployment rate improvingMonthly: Jan. 2008 – Mar. 2010

Source: BLS.

45

YieldsYear-end: 1962 – 2003

Source: Federal Reserve.

46

Lower expected returns in rising interest rateenvironment

Source: Bloomberg.

47

The picture today…

Endowments & Percentage of Percentage ofEndowments & Foundations

Percentage of Venture Capital

Pool

Percentage of Private Equity

Pool2008 13.1% 10.3%2009 3 2% 8 4%

Source: Dow Jones Private Equity Analyst, April 2010.

2009 3.2% 8.4%

48

Lerner’s Myth: Private equity has had spectacular returns

Returns by Category 01/01/73 – 09/30/09

Annualized Performance (average)

Annualized Performance (median)01/01/73 – 09/30/09 Performance (average) Performance (median)

S&P 500 Total Return 9.4% 9.4%U.S. Venture Capital 12.3% 3.9%

Early/Seed 15.1% 2.6%U.S. Buyout 8.7% 6.5%

Source: Josh Lerner, Harvard Business School.

Mid-market 11.1% 7.9%All Private Equity 10.8% 4.8%

Lower Quartile -2.0%

49

What cost illiquidity?Investment period: Jan. 1995 to Jan. 2010

Investment Returns Multiple Period (years)

Annualized Return(years) Return

GP Pitchbook 3.0 10 11.6%Net EMKF Venture Returns

1.16 15 1.5%

Net EMKF Private Equity 1.34 15 3.0%Russell 2000 Growth 1 09 15 0 9%

Source: Kauffman Foundation.

Russell 2000 Growth (same cash flows)

1.09 15 0.9%

Russell 2000 Growth Index

2.16 15 8.0%

50

Endowments demonstrate GP selection skill Future returns of “reups” v. “no reup”

Source: Lerner, Schoar and Wang [2007].

51

Outsourcing trends: the salesman’s move into the allocation seat

• Boards managing headline risk• Non-existent track record of success over timeNon existent track record of success over time• Need for General Investment Performance Standards (GIPs) Applied to Consultants (See CFA Institute)

- Standardized reporting performance to third parties (e.g. Morningstar)- Benchmarks- Pay for performance- Policy Portfolios

Source: Kauffman Foundation.

Policy Portfolios- Based on “policy’ asset allocation guidelines- Highest dollar value of assets in client’s accounts- Client Dispersion

52

A Different Way to Think “Alternatively”

Source: Kauffman Foundation.

53

How to measure hedge funds?(32% of HFR fund of funds vanished in 2008)

Source: HFR.

54

Ratio of distributed to paid-in capital by vintage yearU.S. VC funds

Source: Thomson/Reuters.*data as of 9/30/08, courtesy Josh Lerner - Harvard Business School.

1997 is last year with > 1 median and mean ratio

55

Venture capital time zero resultsVintage 95-07

Source: Kauffman Foundation.

56

Venture capital vintage multiples

Source: Kauffman Foundation.

57

Private equity time zero results vintage 95-07

Source: Kauffman Foundation.

58

Private equity vintage multiples

Source: Kauffman Foundation.

59

What’s an entrepreneur to do?

• The risks of direct investment may be far lower than the narrative- Preferred terms- Convertible at B or C round financing- Negotiated discount to later round values- Liquidity conversions if no financing required and IP ownership if company

fails- The White Swan…

Source: Kauffman Foundation.

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