the long and short of hedge funds: a complete guide to hedge fund evaluation and investing

P1: a/b P2: c/d QC: e/f T1: g

FM JWBK336-Strachman September 25, 2008 12:50 Printer: Yet to come

The Long andShort of

Hedge FundsA Complete Guide to Hedge Fund

Evaluation and Investing

DANIEL A. STRACHMAN

John Wiley & Sons, Inc.

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Copyright C© 2009 by Daniel A. Strachman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Strachman, Daniel A., 1971-The long and short of hedge funds : a complete guide to hedge fund evaluation and

investing / Daniel A. Strachman.p. cm. – (Wiley finance series)

Includes bibliographical references and index.ISBN 978-0-471-79218-5 (paper/dvd)

1. Hedge funds. I. Title.HG4530.S838 2009332.64′524–dc22

2008028066

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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OTHER BOOKS BY DANIEL A. STRACHMAN

Essential Stock Picking Strategies: What Works on Wall Street (John Wiley& Sons, 2002)

Getting Started In Hedge Funds, First Edition (John Wiley & Sons, 2000)

Getting Started In Hedge Funds, Second Edition (John Wiley & Sons, 2005)

Julian Robertson: A Tiger in the Land of Bulls and Bears (John Wiley &Sons, 2004)

The Fundamentals of Hedge Fund Management: How to SuccessfullyLaunch and Operate a Hedge Fund (John Wiley & Sons, 2007)

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iv



To Felice, Leah, and Jonah

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To achieve satisfactory investment results is easier than mostpeople realize; to achieve superior results is harder than it looks.

Benjamin Graham

The day is short; the task is great.

Ethics of the FathersChapter II Verse 20

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Contents

Acknowledgments xiii

Introduction 1

CHAPTER 1Hedge Funds Past, Present, and Future 3

The Father of the Hedge Fund Industry 3Why Invest in Hedge Funds? 5Understanding the Market 7What Happened at Bear, and Why 8Why This Book? 11

CHAPTER 2Hedge Funds Today 13

Hedge Funds in the News 14How Hedge Funds Are Regulated 16Recent Calls for Regulation 18Hedge Fund Fees 20Commission Give-Up 22Continuing the Jones Legacy 23

CHAPTER 3The Men Who Made the Industry What It Is Today 27

A Force to Be Reckoned With 28Hedge Fund Legends 29

George Soros 30How Soros Managed Money 31

Michael Steinhardt 32How Steinhardt Managed Money 34

Julian Robertson 36How Robertson Managed Money 37

Standing on the Shoulders of Giants 39

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x CONTENTS

CHAPTER 4Running Your Fund Transparently 41

When Good Funds Go Bad 42What You Can Learn from the Credit Crisis 43

What Went Wrong 43Perception versus Reality 45

Fraud 46Information Exchange 47

Giving Your Investors Their Due 48Explaining Your Strategy 49Keeping the Lines of Communication Flowing 50Communicating during a Crisis 50

Jumping on the Hedge Fund Bandwagon 51The Year of the Hedge Fund 52Where the Industry Is Heading 53

CHAPTER 5How Hedge Funds are Packaged 55

Funds of Funds 55How a Fund of Funds Works 57Fund of Funds Economics 58The Costs of Running a Fund of Funds 59Fund of Funds Growth 61Fund of Funds Buyouts 62Managers of Managers 63MOM Knows Best 64The Pros and Cons of Transparency 65Diversifying Your Portfolio 65Avoiding Common Problems 66

CHAPTER 6How to Raise Money 69

Friends and Family, Referrals, and Perfect Strangers 69Dialing for Dollars 69Making Connections 70

Capital Introduction Services 72Third-Party Marketing 73

Choosing a Third-Party Marketer 73When to Hire a Third-Party Marketer 75

The Road to Wealth 77Conducting Reconnaissance 77A Cautionary Tale 78



Contents xi

If You Build It, They Won’t Come 79Finding the Right Investors 80Taking Your Strategy to the Streets 80Vetting Your Investors 83

Preparing the Pitch Book 83A Few Final Thoughts on the Essence of Successful

Marketing 84

CHAPTER 7The Supporting Staff 87

The Cardinal Rule of Choosing a Service Provider 87The Lawyers 88

Choosing an Experienced Attorney 88What to Ask Your Attorney 89

The Accountants 89Prime Brokers 90Third-Party Administrators 91

Calculating Net Asset Values 91Size Matters 93Finding a Third-Party Administrator 94Using a Third-Party Administrator for Onshore

Funds 95Using a Third-Party Administrator for Offshore

Funds 96Insurance Companies 97Headhunters 98Matching Services 99Other Services 100Taking Advantage of Technology 101Parting Thoughts on Service Providers 102

CHAPTER 8Fraud, Collapse, and the Kitchen Sink 103

Why Fraud Exists 103Is Fraud Really Rampant in the Hedge Fund Industry? 104

Why the Popular Press Has it Wrong 104Why Hedge Funds Implode 105

In a Word: “Ego” 106Why Fraud Happens in the Hedge Fund Industry 107

The KL Financial Debacle 108Manhattan Investment Fund 108Lake Shore Fund Complex 109



xii CONTENTS

Hedge Fund Mismanagement 110The Amaranth Story 110DB Zwirn & Company 111Bear Stearns 111What Went Wrong 112

How to Protect Yourself 112Regulatory Moves to Stop Fraud and Mismanagement 113Investor Due Diligence 113Manager Due Diligence 114

Making a Good First Impression 115

CHAPTER 9A Few Parting Thoughts 117

APPENDIX ADue Diligence Questionnaire 121

APPENDIX BResource Guide 133

APPENDIX CHistoric Performance of Hedge Funds 145

Glossary 213

Notes 219

Index 223



Acknowledgments

H edge funds here, hedge funds there, hedge funds are everywhere thesedays. The media are filled with stories of hedge fund managers and their

exploits in the markets and beyond. Hedge funds have gone from obscurityto the mainstream in a very short period of time. The ascent of hedge fundsin the marketplace may have been rapid, but make no mistake, there is nogetting rid of these unique investment vehicles.

This project is the result of research and interviews with managers andinvestors around the world. It was quite a bit of work, but a lot of fun.Hopefully, you will find these pages worthwhile and a resource to turn toagain and again to answer questions you have about the hedge fund industry.

Two individuals who were particularly helpful were Viki Goldman, thefinest librarian I have ever met, and Sam Graff, a man who can make anyonelook good in print. Without their effort, support, and guidance, this bookwould probably not be sitting on any bookshelf. Thanks, also, to ChristineEnners for working to gather data, make charts, and deal with a multitudeof requests for ridiculous amounts of articles, papers, and information.

I also want to thank Kirsten Miller, who helped shape the manuscriptinto what it is today. I also want to thank Kate Wood and Pamela vanGiessen for green-lighting this project. I have never found a place moresupportive of my work. As I have said before, I hope this book is everythingthey intended it to be when they gave me the go-ahead to write it. I trulyappreciate all you have done to publish my work.

No acknowledgments would be complete without a thank-you to mywife, Felice, and my family, for dealing me with during the difficult days. Iappreciate your guidance, support, and understanding.

Daniel A. StrachmanFanwood, New Jersey

September 2008

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INTRO JWBK336-Strachman August 23, 2008 4:41 Printer: Yet to come

Introduction

When I first started writing about hedge funds in the mid-1990s, theindustry was something that people had heard a lot about but didn’t

know much about. Since then, it has evolved into a major force on WallStreet, reaching as far as Main Street. Hedge fund companies are now theplace where everyone wants to work, the industry that everyone wantsto do business with, and the big fish that everyone wants to be involvedwith their charity. The industry is a tour de force. Whether it’s new fundsbeing launched or existing funds getting more assets to manage, Wall Street’s“engine that could” is humming along at a great clip. Some industry-trackingservices forecast that the industry will double in size every five years. It istruly wild, and you and I are in the thick of it. What a great place to be!

There are, of course, a couple of things that we need to make clear—rulesfor the industry and for you that I believe will make things a bit smootheras you read this book. First and foremost, when I refer to a hedge fund, Iam talking about an investment vehicle that goes both long and short themarket. Second, it’s my opinion that most hedge fund managers don’t reallyknow how to hedge, and merely operate what I consider expensive mutualfunds. Make your way through this book and you will understand. For now,just keep these two thoughts in your head, and you’ll be OK. I promise.

Why is the hedge fund industry growing so rapidly? It’s simple, really.Investors have come to the conclusion that long-only investment vehicles(i.e., mutual funds), although important to a diversified portfolio, have onefatal flaw. They make money only when markets rise. Unfortunately, thatmeans when the markets fall, unless the manager has gone to 100 percentcash, the fund and its investors will lose money. There’s no way around thissimple fact. Proponents of actively managed mutual funds will tell you thattheir managers can outperform the indices in both good and bad markets.But you and I both know that you cannot eat relative returns. Simply put,it doesn’t matter if the fund you invested in lost only 10 percent while theindex lost 20 percent, because you’re still down 10 percent.

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INTRO JWBK336-Strachman August 23, 2008 4:41 Printer: Yet to come

2 THE LONG AND SHORT OF HEDGE FUNDS

It has taken some time, but investors of all stripes and all levels of in-vestment expertise have concluded that they need to allocate some moneyto hedge funds, or, more precisely, to funds that go both long and shortthe market. This will allow their portfolio to generate some alpha withoutalways getting stuck with beta! It makes sense because markets don’t alwaysrise, just as they don’t always fall. The best way to prepare for both pos-sibilities is to invest in vehicles that are able to go both long and short themarket.

Hedge funds’ dirty little secret is that investors use them to stay wealthy,not to get wealthy. That’s the story that the press has missed, and thatinvestors and the general public don’t really understand. Uneducated peoplewho think that hedge fund managers are all about taking as much risk aspossible in order to make outsized returns are simply wrong. Hedge fundmanagers make sophisticated, calculated, risk-evaluated trades in an effortto make money regardless of which way the market is going. This fact alonehas led some of the most sophisticated investors to use hedge funds. It iswhy all the major Wall Street firms and some of the minors are looking foran entry into the hedge fund industry. They’re the future of Wall Street, andit’s a glorious time to be getting into the business, either as a manager or aninvestor.

As the market continues to evolve over the next 5 to 10 years, I expect thelines between mutual funds and hedge funds will continue to blur. I believethere will always be a place for traditional long-only managers who operatemutual funds. Those same managers will lobby Congress to change the lawsthat govern mutual funds—in particular the Securities Act of 1940—and themutual fund industry will evolve into the hedge fund industry. This meansthat before we know it, there will no longer be “mutual funds” and “hedgefunds”—there will only be investment vehicles. There will be products forinvestors that will go long, products that will go short, and some that goboth long and short, all covered under the Securities Act of 1940. It maytake 10 years, but it is coming. This, dear reader, is where the investmentmanagement business is heading, and you need to make sure that you’repointed in the right direction.

That’s the purpose of this book, to serve as a roadmap to understandinghow hedge funds operate, how they raise money, and how they grow froman idea in somebody’s head into a living, breathing entity that managesassets for investors. Along the way, this guide should provide you with ideason how to take advantage of opportunities in the marketplace, particularlythose related to the evolution, creation, and development of a hedge fundorganization.

Let the journey begin.


c01 JWBK336-Strachman September 30, 2008 9:4 Printer: Yet to come

CHAPTER 1Hedge Funds Past,

Present, and Future

K nowledge is power. If you’ve picked up this book, chances are thatyou already have some knowledge of the hedge fund industry (and if

you don’t, go back and read my book Getting Started in Hedge Funds,John Wiley & Sons, 2005). Maybe you’re an investor, and you want theinside story on how to find the hedge fund that’s the right home for yourassets. Maybe you’re a new hedge fund manager, in need of tips on choos-ing an attorney or a third-party administrator. Or maybe you’re a veteranhedge fund manager, eager to learn from—and avoid—the fiascos that havebrought down some of the biggest names in the business in recent months.

This book is your ticket to that knowledge, and more. Throughoutthe following chapters, I’ll explain how hedge fund managers operate theirbusinesses and what potential investors need to know about these uniqueinvestment vehicles—in short, how hedge funds work from both the man-ager’s and investor’s side of the industry. You will learn how the hedge fundindustry evolved, how various funds operate, why some funds make moneyregardless of market conditions—and why others don’t.

This book is not a “get rich quick” book, and it’s not the last wordon how money is managed. Rather, this book is your roadmap to moneymanagement in the hedge fund industry.

Your mission, if you choose to accept it, is to stick with me throughoutthe following pages to gain insight into how money is managed. You willthen be equipped to apply your new knowledge to your own firm, the fundyou work for, or the investments in your personal account.

THE FATHER OF THE HEDGE FUND INDUSTRY

To understand how the hedge fund industry evolved into what it is today,you need to first understand how and why the product was developed. The

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hedge fund industry was launched by Alfred Winslow Jones, a sociologist,author and financial journalist, who became interested in the markets whilewriting about stocks for Fortune magazine in the late 1940s.

Jones’s early career spanned a number of industries and professions.Early on in his job experimentation, Jones realized that his varied interestswould not allow him to live the life he wanted for himself and his family.He knew that his journalist’s salary wasn’t going to cut it, so he looked tothe one place he knew would provide him the income he wanted in order tolive the way he wanted to live—Wall Street. “My father was a simple manwho had lots of ideas and executed most of them,” said Anthony Jones. “Ifhe had an interest in something he would explore it, become comfortablewith it, and move onto the next item on his list.”

“When he read a book, he would call the author and invite him todinner,” he continued. “That was the type of person he was. He wanted tolearn all the time.”

Jones, who died in June 1989 at the age of 88, devised the formula for hisinvestment vehicle while researching a freelance article, Fashion Forecasting,for the March 1949 issue of Fortune magazine. To research the piece, Jonesspent many hours speaking with the greatest money managers, traders andbrokers of the time, to understand how they operated and made investmentdecisions. Upon learning—or at least believing—that he had a thoroughunderstanding of how Wall Street operated, he set about creating his ownideas about what would and would not work in the market. And the hedgefund was born.

In 1949 in Lower Manhattan, Jones and four friends launched the firsthedge fund, with Jones as managing partner. Hedge funds initially began asa means to protect against risk in the markets, to “hedge one’s bets” and toleverage opportunities in the market through a combination of long-stockholding and short-stock selling.

Jones based his investment strategy on a very simple theory: that by“going long” (making money for the investor when the price of the secu-rity increases) and “going short,” (identifying overvalued shares and buyingthem when the price decreases), he could create a portfolio that wouldweather market fluctuations and deliver solid and consistent returns to in-vestors, regardless of which way the market moved. The concept worked:His investors lost money in only 3 of Jones’s 34 years in the business. Ashis son, Anthony Jones, has noted, “My father was not a great stock picker,he was a great idea man . . . He realized early on that he didn’t know howto pick stocks, and was able to find people who could help him manage theassets, while he managed and grew the business.”

Initially, upon launching the partnership, Jones called his investmentvehicle a “hedged fund,” a fund that is hedged and is protected againstmarket swings by a portfolio consisting of long and short positions. Over



Hedge Funds Past, Present, and Future 5

the years, the powers that be on Wall Street dropped the “d” and began tocall everything that is not a mutual fund, exchange-traded fund, or privateequity, a hedge fund. Today, hedge funds are classified based not on theirinvestment portfolios, but rather on their fee structures. If a fund has amanagement fee and an incentive fee, it is considered a hedge fund.

Although the Jones approach became the model for all future hedgefunds, today, hedge funds today come in all shapes and sizes. Trade strategieshave evolved, and now range from long/short equity and merger arbitrageto fixed income duration speculation and global macro. Estimates put thenumber of hedge funds operating worldwide at more than 15,000, managingmore than two trillion dollars in client assets.1

Hedge funds are not for everybody. These products are only availableto well heeled investors. That being said, one thing is certain: More than50 years after the birth of A.W. Jones and Company, hedge funds are hereto stay.

WHY INVEST IN HEDGE FUNDS?

Hedge funds are like most things on Wall Street. They sound complicated,but once they’re dissected, they’re quite easy to understand. The underlyingconcept is very simple: Hedge fund managers use a series of positions tominimize the risk of loss during a market collapse, thereby protecting yourportfolio. Again, this is simple in theory, but in practice, it can be quitedifficult to achieve.

So why would anyone invest in hedge funds? Certainly, there are otherways to grow your money with less risk. The “perfect” hedge doesn’t exist. Aperfect hedge would require taking all market risk out of the portfolio; whatyou’re left with, in that instance, is a portfolio that provides the risk-freerate of return, less the commissions charged by the broker.

Of course, this is problematic because anyone can get the risk-free rate ofreturn by buying Treasuries; more important, investors can buy exchange-traded funds with little effort. So why do they need you? Investors needhedge funds—and their managers—because they want to invest in productsthat deliver greater returns than the average of the markets. Hedge fundinvestors are more than willing to pay managers who can achieve this on aconsistent basis.

Your job, as a manager, is to create a portfolio that delivers solid, consis-tent returns by using all of the arrows in Wall Street’s quiver without takingon significantly more risk than the market as a whole. Hedge fund managersneed to know the market well enough to recognize opportunity: in otherwords, to know when stocks, bonds, options, futures, and synthetics—aswell as the other instruments that allow Wall Street to make a profit—are




undervalued, to buy accordingly, and to wait for the market to realize theinstrument’s value so that they can turn a profit. Unfortunately, it doesn’talways work that way.

In some cases, a hedge fund manager might believe that a stock orsecurity is undervalued based on his or her research or market intelligence,but the rest of the market may not see it. The result? The position losesmoney. Hedge fund managers are supposed to create portfolios that zigwhen the market zags, and zag when the markets zig, avoiding or at leastreducing losses through hedging. For the purposes of this book, hedging, inits simplest definition, is the reduction of volatility in a portfolio.

Hedge fund managers reduce volatility through shorting stocks, bondsor other financial instruments and through the use of various option strate-gies and other derivatives. Managers use straight short transactions andspreads, straddles and forward contracts to make sure the portfolio is pro-tected during up and down periods. Wall Street is very good at devising tradi-tional and synthetic short strategies, which are used by managers to managevolatility and risk. To learn more about options and derivatives, read Get-ting Started in Options (John Wiley & Sons, 2007) by Michael C. Thomsettand Getting Started in Futures (John Wiley & Sons, 2005) by Todd Lofton.

Since the first hedge fund was launched, these investment vehicles havebeen viewed with awe—and some suspicion—by professionals and the publicat large. Hedge funds are supposed to do “right” by investors, regardless ofmarket conditions. Because they are not governed by the rules of traditionalasset management firms, hedge fund managers literally can use any legalmeans at their disposal to extract money from the markets, going short orlong as market conditions warrant. Managers can employ a combinationof longs and shorts, throw in some futures for good measure, or focus onoptions and leverage in order to make money. Hedge fund managers do nothave to stick to one strategy, style or tool.

The general public—and even, perhaps, some fairly savvy mutual orhedge fund investors—often initially assume that hedge funds and mu-tual funds operate in the same way. Although both are pooled investmentvehicles—funds in which a number of investors entrust their money to amanager, who then buys and sells securities with those assets to, ideally,make a profit—that’s where the similarity ends.

One of the key differences between hedge funds and mutual funds isthat hedge fund managers are empowered to pursue absolute return strate-gies, whereas mutual funds typically only offer relative return strategies.This means, in essence, that hedge funds are measured on their specific per-formance and not on how their performance compares to a predeterminedbenchmark, such as the S&P 500 or Lipper Small Cap Index.

Mutual funds, by contrast, are for the most part equity based, fixed-income based, or a combination of both. That means that, with few




exceptions, mutual funds can only go long, and therefore can only makemoney when the markets rise. If a mutual fund is long, and the stock marketis doing well, the portfolio should increase in value. However, if the marketis not doing well, the portfolio will suffer losses. Here’s how mutual fundmanagers construct their portfolios: They use their stock-picking skills tobuild a portfolio that they expect to perform well over time, and that willprovide an edge over the indices used to benchmark their fund’s performance(again, for example, the S&P 500 or the Lipper Small Cap Index). If theycan outperform the index—even by just a few basis points—their investorsare generally happy, and the manager’s reputation remains intact.

Of course, there are other differences between mutual funds and hedgefunds, beyond simply their performance measurements. Mutual funds areopen-ended investment companies; they sell their shares to the general publicthrough multiple marketing channels. Hedge funds are limited in the numberof investors they can have, either 100 or 500, depending on their structure,and are open to only accredited investors or qualified purchasers. Mosthedge funds in the United States are either limited partnerships or limitedliability companies and as such, are exempt from the Securities Act of 1933.

Ultimately, as you compare mutual funds and hedge funds, you needto remember that a rising tide raises all boats, but when the tide rolls out,the boats will sink. Mutual funds are likely to suffer losses—sometimessevere—in bad economic times. But hedge funds don’t need a rising marketto make money. In a down market, hedge fund managers can go short, oruse other hedging strategies, to make money and/or protect profits. Mutualfunds don’t have the same flexibility.

Very few managers are able to completely minimize risk to the pointthat it does not cost some piece of the performance. However, there arehundreds of managers who use shorts and short-like positions to provide acushion to the portfolio that allows for protection when things head south.This isn’t an easy task, and few get it right consistently over the long term.Later chapters will provide more detail about how you can be one of theselucky few.

UNDERSTANDING THE MARKET

Before you learn what you need to know about money management in thehedge fund industry, you first need to learn about the current state of thehedge fund industry itself. In Chapter 2, we’ll examine this in more detail.

But you also need to give some thought to the state of the market today.And, as even the most casual market observer can tell you, in recent years,it has become extremely volatile. In the financial industry, 2007 and 2008




will be remembered as the years of the subprime mortgage meltdown andthe ensuing collapse of Bear Stearns Companies.

As of this writing, in May 2008, the jury is still out on what exactlyhappened to the credit markets. The finger pointing has begun, but it’s notyet clear if any action will be taken by the federal government to determinehow and why the markets collapsed. Although Washington’s blame machineimmediately called on Attorney General Michael B. Mukasey to begin aninquiry, he and his lieutenants seem unable to find anybody to go after. Inany event, it is clear that the Treasury, the Federal Reserve, and possiblyCongress, will all—either together or independently—issue reports on whatwent wrong. By the time they’re issued, these reports will likely be worthlittle more then the paper they were printed on.

However, the situation with Bear Stearns is much more fluid, interestingto follow, and easy to get one’s head around. On March 16, 2008, in thewake of the near-collapse/near-bankruptcy of the venerable Wall Street firm,its board of directors voted to sell the company for a fire sale price of $2.00per share, or $236 million, to JPMorgan Chase & Company. Just a few daysearlier, Bear Stearns had seen its stock valued at $3.5 billion, trading at nearly$33 per share. A year prior, Bear’s stock was selling for $170 per share.

Now, the firm had to choose between one of two options, both un-pleasant: Sell on the cheap or go bankrupt. In an extremely rare move, theFederal Reserve brokered a deal between a near-death Bear and a financiallystrong JPMorgan, providing nearly $30 billion in financing to cover BearStearns’s assets, which included massive pools of mortgage-backed secu-rities with little or no liquidity.2 According to the Wall Street Journal, theFederal Reserve’s move was the single largest advance to a single company bythe central bank. The speed of Bear Stearns’ collapse prompted the FederalReserve to move quickly to stave off a prolonged recession based on contin-ued defaults and dislocation in the credit markets. Many people, includingWall Streeters, Wall Street historians, and, most of all, Bear Stearns employ-ees, are still trying to figure out what caused the bank to fall so quickly andto wind up in such an untenable situation.

At this point, however, there isn’t anything that anyone can do it aboutit. On May 29, 2008, in a mere 10-minute shareholder meeting, JPMorganChase’s purchase of Bear Stearns was approved, heralding a speedy andignominious end to the 85-year-old firm.3

WHAT HAPPENED AT BEAR, AND WHY

This book is not going to help dispel any myths that might be circulating,or uncover new information about what happened—I’ll leave that to others.




But nonetheless, it is important that you understand some of what occurredand why. The credit market meltdown began in the summer of 2007, in thewake of the subprime lending crises. It became harder to borrow money,and both individuals and institutions began to worry that without liquidity,a recession would take grip of the economy. As summer turned to fall andfall to winter, the economy didn’t seem to be getting stronger. Oil, gold,and a number of other commodities reached record levels, while the equitymarkets continued to operate with extreme volatility. All the while, themarket for mortgage-backed securities and the pools of assets that make upthese securities were becoming less and less liquid.

“The spread for these securities was so wide you could drive a truckthrough it,” said Richard Bookbinder, managing partner of a New York-based fund of funds. “There were some funds that traded in this space thatwere unable to deliver a performance number because they couldn’t pricetheir portfolios. It was a very difficult time.”

One hedge fund firm of my acquaintance had to suspend calculating thefund’s net asset value at that point, because it could not nail down pricesfor many of its positions. It was in a tight spot, because it had to deal withshareholders who wanted to redeem their investments, and the fund andits administrator had no way to calculate the true value of the portfolio. Itwas the first time I saw something like this happen, which should tell yousomething about how the market was trending in the summer of 2007.

As a major player in the mortgage-backed market, Bear Stearns suf-fered significantly. The firm was trapped—it was running out of cash, andthe assets it carried on its books no longer could be priced at a level thatwould allow them to be sold. Bear borrowed as much as it could fromthe Federal Reserve through the structured deal with JPMorgan Chase, buteventually was left with no other alternative but to sell itself to the bankin order to avoid bankruptcy. As noted above, the initial sale price was$2 per share; however, JPMorgan revised that number to $10 per share aweek later.

There are many layers of this onion to peel away, and I am sure someonewill write a book about the actions that led to the company’s demise. For ourpurposes, think of it this way: The company was squeezed into nonexistencebecause it no longer had the cash to cover its operations. In the macrocosm,the firm was trapped in a situation not unlike that of many other Americanswho, in the microcosm, are on the verge of losing their homes because theycan’t pay the mortgage. Bear owed massive amounts of money and no longerhad the wherewithal to cover its bills.

The bailout by the Federal Reserve is not unprecedented; in fact, thegovernment has a way of sticking its nose into the business of the peo-ple, whether for good or ill. The actions taken by the Federal Reserve to




coordinate the Bear Stearns sale were somewhat reminiscent of the bailoutit orchestrated of Long-Term Capital Management in 1998, 10 years prior.That particular hedge fund was teetering on the brink of collapse, unable tomeet its margin calls and on the verge of being liquidated.

In that situation, the Federal Reserve worked with 14 investment housesand banks, persuading those firms to lend the company more than $3.625billion in return for control of the firm and its assets. The bailout workedout quite well for those who participated; the fund was wound down andthe positions in the fund were liquidated at a profit. The difference in theBear Stearns deal is that, in this case, the Federal Reserve (read, “you andme: the U.S. taxpayer”) has money at risk. If the deal, or more important,the positions, fail, the Federal Reserve is going to have to make good onthose losses.

In the short term, I suspect that many people believe this to be a smartmove on the Fed’s part. Over the long term, though, the questions will keepcoming: questions like, “Why did the Feds have to get involved and putmoney at risk?” Here’s my question: Why was Bear not allowed to fail, gobankrupt, and go through the bankruptcy process? Isn’t that what makesmarkets efficient? And isn’t that what Wall Street needs to do in order topreserve that market efficiency?

It’s still too early to predict what may happen, but as of this writing,investors expect their Bear Stearns deals to close somewhere north of $10 pershare. Most of us expect JPMorgan Chase to lay off a considerable numberof the 14,000-odd people who work for Bear Stearns. But JPMorgan willlikely also be able to take advantage of a number of opportunities, boughtliterally on the cheap, to solidify their own position both on Wall Streetand Main Street in terms of service provision to both retail and institutionalinvestors. In the end, the final chapter written on Bear Stearns will very likelybegin the book on the success of JPMorgan Chase.

The ripple effects of the mortgage mess and the Bear Stearns bailout willlikely be felt for some time. As of the spring of 2008, there’s talk of recessioneverywhere, with some economists believing we’re already in one. The U.S.economy lost a staggering 240,000 jobs in the first three months of 2008.4

What should you take away from all of this? If nothing else, this infor-mation should convince you that managing money is very difficult. It takesa lot of work and an enormous amount of research. You’ll need patience,discipline, and humility. Sure, the advent of technology and the ubiquity ofthe Internet mean that data and information flow freely with the click of amouse, but data and information are not equal to years of experience andtraining. Furthermore, having information does not mean that you knowhow to use it. Managing money is a skill. It is a skill that is taught, learned,and executed by professionals.




The news isn’t all bad. Financial managers—whether of hedge funds,mutual funds, or other investment vehicles—can ride out the bad timesby making sound and reasoned decisions. Historically, hedge funds haveactually gained popularity during market crashes. Although the hedge fundindustry has grown steadily over the past 60 or so years, it plateaued formost of the 1980s—until the market crash led traders, brokers, and bankersto reconsider their traditional income streams.

It’s important to remember that there are many people who call them-selves money managers, or even hedge fund managers, but the number ofpeople that actually manage money well over a consistent period of time arefew and far between. This is something that you need to understand if youwant to play the game. It is difficult to be successful: Many are called, butonly a few will make it. If you’re ready to take the plunge, read on.

WHY THIS BOOK?

Today, the Jones model provides the basic foundation for all hedge funds.Again, the concept is quite simple: to create a vehicle that goes long and shortthe market in an effort to make money, regardless of market conditions.When Jones was managing money, he went long and short equities. Today,however, hedge funds around the world use investment styles and strategiesof all shapes and sizes to make investments, and trade any and all types ofsecurities so that their investors will profit. We’ll talk about some of thesestrategies in the following chapters.

The hedge fund industry today is quite different from its birth, or evenfrom five or six years ago. Five or 10 years from now, it will likely lookdifferent than it does today. The industry today is made up of both massiveinvestment complexes that manage tens of billions of dollars in hedge fundsto small-time operators that only manage perhaps a million or two dollars.And there are funds of every size and shape in between.

In The Fundamentals of Hedge Fund Management (John Wiley & Sons,2007), I spent the better part of the book explaining how a hedge fundcomes to life and operates as a business. I discussed the infrastructure, thetechnology, the people, the documents, the legal aspects, the tax aspects andeverything else that goes into the day-to-day operations of hedge funds. Idid not cover how money is managed.

In this book, we’ll review some of those basics. But for the most part,this book is about how money is managed: how hedge fund managers takea dollar, put it to work in the marketplace, and make a return on it. I’llprovide you with a view of various strategies, across multiple disciplines,which all come down to one thing: making money for investors. We’ll talk




about how some specific hedge fund managers—the best of the best—haveleveraged these strategies to make money for their investors—and, in theprocess, for themselves.

This book is the story of how hedge funds manage money and howinvestors allocate assets to hedge funds.



CHAPTER 2Hedge Funds Today

F ifteen years ago, if you had asked a representative sample of MBA studentsfrom around the country where they wanted to work after graduation, the

response would have been Microsoft, Intel, IBM, General Motors, or Coca-Cola—well-respected Fortune 500 companies that offered the potential ofa long, stable, and rewarding career. Other newly minted MBAs wouldhave leaned toward Wall Street powerhouses like Goldman Sachs, MorganStanley, and J.P. Morgan. Still others might have cast their lot with firmslike Soros Capital Management and Tiger Management. All in all, the choicewas simple: Find a position at the finest institution around, and put youreducation to work.

Fast forward to 2008. Today, students all seem to say the same thing:They want to work for firms like SAC Capital, Citadel, Maverick, and TheClinton Group. Of course, if George Soros or Julian Robertson wanted tohire them, they wouldn’t say no. But the world is now consumed with hedgefunds. Although new MBAs have some interest in private equity firms, thefallout of the credit markets in 2007 has given them a compelling reasonto look elsewhere. Results from my completely unscientific poll of graduateand undergraduate students in Boston and Philadelphia bear this out: Bothgroups said that they’d work at any hedge fund that would have them upongraduation.

It’s not that the financial industry is inherently stable, or that there’sa guarantee that these students will make it big on Wall Street—we allknow that it can be a risky business, and there are no guarantees of suc-cess. As I noted in Chapter 1, 2007 and the first half of 2008 have beenamong the most volatile that the market has seen, and that’s not likely toease up anytime soon. As we enter the waning days of 2008, the UnitedStates is unofficially in a recession. Jobs are drying up, costs of stapleslike milk, bread, and eggs are on the rise, the price of oil is out of con-trol, and frankly, things look quite bleak around Wall Street and the restof the job market. However, hedge funds still seem to hold opportunities,

13




and MBA students are frothing at the mouth to land a job at one of theseshops.

So why do these students want to work in the hedge fund industry?As Willie Sutton purportedly said when asked why he robbed banks, “It’swhere the money is.”

And despite the market dislocation of the summer of 2007 and thecontinuing economic woes of 2008, the hedge fund industry is booming.Hedge funds truly are where the money is, for these students and for otherbudding Wall Street professionals.

HEDGE FUNDS IN THE NEWS

Throughout 2007, among the hottest things on the market were “hedgefund clones.” These products are operated and sold by some of Wall Street’sbiggest players: firms such as Merrill Lynch & Company, Goldman SachsGroup Inc. and JPMorgan Chase & Company. The firms analyze hedge fundreturns for a set period of time and try to determine how the return wasgenerated. Once they figure out the return streams, they use stocks, bonds,and other securities in an attempt to mimic the return over a set period oftime. These companies then develop sophisticated mathematic modeling tocome up with algorithms in order to create the return streams on a monthlybasis, ensuring that the product can deliver consistent, hedge fund-like re-turns.1 The appeal of these investment vehicles is that they allegedly providehedge-fund-like performance to investors with less risk, greater liquidity,and substantially lower fees.

The problem with these products, and with other products that attemptto mimic hedge fund returns, is that eventually the models fail, the algorithmsstop working, and the investors lose. The reason is simple—predicting anddefining hedge fund performance is notoriously difficult—and, more impor-tant, no one can truly predict how the market is going to move.

Why can’t we neatly define hedge fund performance? It’s easy enough forother investment vehicles, like mutual funds, or stocks and bonds. Mutualfunds, for example, strike a net asset value on a daily basis, as requiredby the NASD. That’s the price you see in the newspaper every day. Butunlike these traditional investment vehicles, hedge funds are not marked tomarket each day. There are no rules or guidelines that require a daily markor an establishment of a price/net asset value of hedge fund portfolio. Somehedge funds, then, don’t strike a net asset value until the manager decidesto, or unless and until the partnership documents call for it. In fact, hedgefunds typically strike their net asset values on a monthly or quarterly basis,depending on the fund’s offering documents.



Hedge Funds Today 15

It’s questionable, then, whether it’s possible to build a product thatmimics hedge fund performance, since the data used to create this imitationproduct is sporadically posted. As of the spring of 2008, there is no stan-dardized reporting requirement for hedge funds, and there is no one placethat an investor (or a Wall Street mad scientist), can go to get real-time dataon hedge fund performance. Until that happens, products that mimic hedgefund performance are at best well-educated guesses.

There are, however, a number of hedge fund databases and services thattrack the industry. These databases range from fee Web sites that track hedgefund styles and strategies to sophisticated and expensive services that pro-vide not only performance and asset information, but also in-depth researchabout the manager, the firm, its history, infrastructure, and operation. Al-though some of their data may be good, a lot of it may be tainted, making itunreliable. Part of the issue is that reporting to these databases is voluntary,and when managers have a bad month or series of months, they have everyincentive to simply stop reporting to the databases. In order to truly acquireaccurate data points on hedge funds, you need to go to each and every fund,get a copy of their audited track record, and crunch the numbers accord-ingly. This would be a monumental undertaking, and it is just not beingdone. Without that kind of data, it is safe to say that “hedge fund clones”are nothing more than the latest Wall Street gimmick to sell something tothe public. In fact, a number of the firms offering these products have ex-pressed doubt that the clones could deliver the returns characteristic of thebest hedge fund managers.2

It’s a mistake to think that a machine, or mathematical algorithm, cancome up with something that approximates the mind of a masterful moneymanager. You can’t clone a George Soros, Julian Robertson, Michael Stein-hardt, Steve Cohen, George Hall, Lee Ainslie, or Ken Griffin. These individ-uals are some of the brightest investment managers of all time, possessingunique skill sets that have made them extremely successful at managingmoney and exploiting market opportunities. Each has a distinct way of con-sidering how investments are valued, made, and executed. In essence, theyare capable of seeing the markets in ways that most of us simply cannotimagine, and it is this rare vision that allows them to determine whetheropportunities have value, thereby creating infinite windows to make money.That is what makes them great hedge fund managers.

Consequently, it is ludicrous to think that mathematicians can come upwith a way to operate and deliver similar returns. It’s unrealistic to thinkthat a recent MBA graduate at JPMorgan Chase & Company or GoldmanSachs Group Inc., with some product development knowledge, can come upwith a mechanism that clones the successful actions of the top hedge fundmanagers. My experience has been that this type of product might initially




work—maybe for six months or so—but will then fade into oblivion. Thereare only so many ways to skin the market, and trying to replicate a person’sinvestment skills is not one of them. In the long run, a hedge fund’s successdepends on the personality and prowess of the person behind the tradingdecisions. His or her skills and conviction are what allows the hedge fundmanager to win, lose, or draw, and that cannot be replicated with a machineor a series of trades.

So why would someone invest in a hedge fund clone? The appeal ofthese clones, according to a number of industry insiders, is that they canbe offered to investors at a cheaper price, with less of a lock-up. Lock-upsare, by definition, the term in which an investor is required to keep his orher assets invested in the fund. Most funds have a one-year lock-up; somehave a two-year lock-up, and still others require three- to five-year lock-ups.Investors who try to get their money out before the lock-up period ends willpay a hefty withdrawal fee.

HOW HEDGE FUNDS ARE REGULATED

Hedge funds have grown from a small, obscure pocket of the Street toan industry of more than 15,000 funds, managing more than $2 trillion.3

To put this into perspective, there are more than 2,781 publicly tradedcompanies on the New York Stock Exchange, which represents more than$18 trillion in market capitalization.4 There are also nearly 11,400 mutualfunds, representing nearly $11.4 trillion in assets under management.5

Given these numbers, hedge funds might seem lacking in comparison tostocks, bonds, and mutual funds. But stocks, bonds, and mutual funds areavailable to the masses, whereas hedge funds are available only to accreditedand super accredited investors. Rule 501, or Regulation D, of the SecuritiesAct of 1933 defines an accredited investor as any of the following:

� A bank, insurance company, registered investment company, businessdevelopment company, or small business investment company

� An employee benefit plan, within the meaning of the Employee Retire-ment Income Security Act, if a bank, insurance company, or registeredinvestment adviser makes the investment decision, or if the plan hastotal assets in excess of $5 million

� A charitable organization, corporation, or partnership with assets ex-ceeding $5 million

� A director, executive officer, or general partner of the company sellingthe securities

� A business in which all the equity owners are accredited investors




� A natural person who has individual net worth, or joint net worth withthe person’s spouse, that exceeds $1 million at the time of purchase

� A natural person with income exceeding $200,00 in each of the twomost recent years or joint income with a spouse exceeding $300,000for those years and a reasonable expectation of the same income levelin the current year

� A trust with assets in excess of $5 million, not formed to acquire thesecurities offered, whose purchases a sophisticated person makes6

In plain English, many hedge fund investors are extremely wealthy. Yet,despite their rarified clientele and relatively small holdings, everyone in thefinancial industry has these investment vehicles on the brain. Firms aroundthe globe continue to work toward ways to bring hedge funds to the masses.Hedge funds’ time has clearly come, and with it come opportunities forsmart, ambitious people to manage—and make—money.

So how are hedge funds regulated? In two words, “very loosely.” WhenJones launched the first hedge fund in 1949, it was his intent to create aninvestment vehicle that was not subject to the Securities Act of 1933 and theInvestment Company Act of 1940. These two acts govern the mutual fundindustry and investment managers, and, as a result, regulate the way thatmost money is managed in the United States.

Mutual funds are highly regulated investment vehicles. Governed bythe 1940 Act, they are commonly referred to as “40 Act” funds. The 1940Act limits the amount of leverage a fund can use and therefore limits (or“places a governor”) on how short a fund can be at any given time in itsoperation. This was troublesome to Jones, obviously, because shorting wasthe cornerstone to the success of his product. To get around the constraintsof the legislation and run the fund as he saw fit, Jones needed to create aproduct that was exempt from the 1940 Act.

The method for this was a limited partnership, which was open to100 investors. Why a limited partnership? Under this structure, the limitedpartners acted as the investors, and the general partner operated the fundand acted as money manager. The structure worked from both tax andliability purposes and, most important, avoided falling under the purviewof the 1940 Act.

Little has changed in the structure of hedge funds over the last almost60 years. The standard structure for hedge funds today is a limited liabilitycompany, or LLC. In this structure, the members are the investors and themanaging member operating the fund is its investment manager.

The tax issues are the same for an LLC as in a limited partnership, sincethe profits and losses flow through the entity to the investor or member di-rectly. From a liability standpoint, the LLC structure provides an additional




level of protection to the manager, and, as such, is now the structure ofchoice for new funds.

However—and you knew this was coming—there may be some changeson the horizon in how hedge funds are regulated, in part because of therecent market volatility.

RECENT CALLS FOR REGULATION

For as long as I’ve been following—and participating in—the hedge fundindustry, Congress and the federal government have attempted to regulatehedge funds and their managers. Now, I know it sounds crazy, but it’s true:The government wants to reign in the wicked hedge fund managers and putrestrictions on all those who invest in these products.

There’s a widespread view that hedge funds and their managers areunregulated; that they don’t, in fact, operate under the same guidelines orpurview of other, more traditional investment funds. In this case, as I’vealready noted, the conventional wisdom is true. Hedge funds aren’t subjectto the legislation that governs mutual funds. In part because of this lackof regulation, many people believe that whenever there’s a hiccup in themarkets, whether it’s volatility in the equity market, volatility in the creditmarkets, or, more recently, the meltdown in the subprime mortgage market,that hedge funds are to blame.

If you’ve read any of my other books, you know my view on presscoverage of hedge funds. The press has never met a hedge fund that it hasliked. Furthermore, most journalists and their editors don’t really understandhow hedge funds operate. Given this superficial (at best) understanding ofwhat hedge funds are and how they operate, its unsurprising that mediacoverage may lead readers to believe that hedge funds and their managersare gunslingers, buccaneers and swashbucklers bent on pillaging the globalmarkets. And here’s the larger problem: The media’s perception, in my view,has become Congress’ reality. And, I believe, as a result of the negative mediacoverage, the powers that be in Washington, D.C., have come to believe thatthe only solution to the hedge fund problem is to regulate.

In 2006, the Securities and Exchange Commission passed the most ag-gressive hedge fund regulation ruling yet, requiring all hedge fund managerswith 15 investors, or $40 million in assets under management, to becomeregistered investment advisors. Phillip Goldstein, manager of the hedge fundOpportunity Partners L.P., challenged that ruling in court. The U.S. Courtof Appeals for the District of Columbia reversed the ruling, leaving manyin the SEC scratching their heads wondering what to do next. Since then,everybody and their brother, in both houses of Congress and at the federal




level, have been trying to figure out what to do with hedge funds and theirmanagers. There have been hearings, inquiries, and lots of meetings. To date,there have been very few recommendations, with the notable exception ofguidelines recently released by the Treasury Department. The guidelines, de-veloped by two private-sector committees (one composed of asset managersand the other of investor groups), call for hedge fund managers to improvedisclosures of hard-to-value assets, including mortgage-backed securities.However, adopting these guidelines is voluntary on the part of hedge fundmanagers, and critics claim that little is likely to change as a result.7

Certainly, as a country, we have a lot of other things on our minds.As long as the war rages on in Iraq and Afghanistan and the economy isin the tank, the minds of many are off hedge funds. As is customary, theproblems of the day are being blamed on the White House (in this case, theBush administration), which, in turn, blames them on Congress (but onlythe Democrats). It’s politics as usual. And Wall Street is throwing a lot ofmoney into the presidential and congressional candidates’ campaigns. As aresult, it may be that the heat is off—for now.

The upcoming change in administration (regardless of which way ittrends) or a power shift in Congress could turn the heat on full blast; in fact,this is likely to occur in the not-so-distant future, in my opinion. For now,however, everything is status quo. Remember the phrase, “Don’t bite thehand that feeds you!” It is very relevant here. Hedge funds are contributingsignificant sums to both Presidential campaigns as well as the Congressionaland Senate races. Therefore, Congress is not likely to make any changes tothe laws that regulate hedge funds.

Granted, this is a fairly cynical viewpoint. But I also believe that thereason more has not been done to regulate hedge funds is because the powersthat be just don’t have any idea what to do with these products. Congressand the Commission do not know how to handle these massive pools ofcapital, which truly provide liquidity to the marketplace and offer investorsa good place to go for solid returns. Most thinking people understand thathedge funds do provide very important services to the capital markets and,as such, regulation will likely neither help nor hinder the service that theseinvestment vehicles provide to the markets around the globe. The other issueis, frankly, that regulation is something that could be a boon for the hedgefund industry. The more regulation, the more legitimate these investmentvehicles become, and therefore the greater influence they will have in themarkets.

Clearly, there will always be people who demand further regulation ofhedge funds. My question is always the same. What is it going to achieve,and are hedge fund regulators going to go far enough? Hedge funds areregulated by the SEC, FINRA, the IRS, the Department of Labor, and the




CFTC. That’s enough. If Congress were to put additional curbs either onhedge funds’ ability to trade or take assets, which it already has done to someextent, what would that do? Does anyone really believe that hedge fundsare capable of taking down the markets, either collectively or individually?If so, then that would assume that the markets are inefficient and incapableof self-correction. But we know that the converse is true—the markets areinherently efficient over the long term, and more important, the markets arecapable of adapting to situations to ensure not only stability over the shortterm, but also stability over the long term. Hedge funds are one piece of thispuzzle, and they help ensure the overall market stability.

If the goal of Congress is to make all stocks go up, then they have todo more than simply regulate hedge funds. But, if the goal of Congress isto ensure orderly and efficient markets, which is what the United Stateshas had since trading began around the Buttonwood Tree (where the firsttraders met on Wall Street), then regulations will do nothing more thancreate paperwork to cause lawyers to make more money. That’s all there isto it. There is no threat, in my opinion that hedge funds offer to the marketsthat investors need to be afraid of—the only real threat is the threat of fraud.

Fraud, however, cannot be controlled by Congress or the Feds. It canonly be controlled by due diligence. We’ll discuss due diligence more in laterchapters.

HEDGE FUND FEES

Hedge funds typically charge a 1 percent management fee and a 20 percentincentive fee. Incentive fees are the split of the profits between the managerand the investors. These fees are what make hedge funds so lucrative. Forexample, let’s say we’re looking at a fund with $100 million in assets undermanagement. Let’s further assume that the fund is up 10 percent within ayear and now has assets under management of $110 million. If this particularfund charges a 20 percent incentive fee, the fund manager is entitled to $2million of the $10 million earned, as incentive for making that money forthe fund. Many people believe that these fees are high—in some cases,egregious—as evidenced by a recent Google search that found more than1.85 million sites with the phrase “high hedge fund fees.”

However, in my experience, the only people complaining about hedgefund fees are the people who can’t charge them—often mutual fund man-agers. If these same firms had products that charged traditional hedge fundfees, you would not be hearing these cries of outrage. Instead, you would behearing that the skill that goes into the fund management warrants the feescharged.




Let me reiterate: I have never, in my more than 12 years of working inthe hedge fund community, come across an investor who complained aboutthe fees charged by a manager. In fact, when discussions about fees come up,I usually hear that investors believe the fee structure aligns the manager withthe investor: “When I win, he wins and when I lose, he loses.” Managersand investors sink and swim together.

The one constant in both the limited partnership and the LLC hedgefund structures is the incentive fee. Jones believed that he should share inthe wealth that he created for his investors and, more important, that heshould only be paid when and if he and his team were successful. As such,he charged a 20 percent incentive fee to investors on new profits. This meantfor every dollar that the investor made, Jones’ firm took 20 cents. Althoughviews differ on whether the fee is too large, too small, or just right, mostagree that it aligns the interests of the investor and manager. If the investormakes money, the manager makes money. If the investor loses money, themanager doesn’t get paid. The two are in it together.

To keep the interests of the two parties aligned, some funds also imposea high-water mark. A high-water mark is the highest point in value that aninvestment fund reached during the preceding period. A high-water marketensures that the investor earns back any losses taken by the portfolio beforethe manager receives an incentive fee. Unless the manager recovers the fund’slosses, he or she is not entitled to take any incentive fees. The high-watermark can be problematic for funds that incur substantial losses. These fundsneed to earn back such significant sums before they can charge a fee, and,in turn, compensate their employees, that it often does not make sense tocontinue operating. Although it is easy to see why fund managers do not likehigh-water marks, these devices do play an important role with investors.Investors like the idea that with a high-water mark, a fund manager’s successis truly aligned with their investors’ success. The fund manager does notearn a cent of incentive until the fund brings investors back to par. From aninvestor’s standpoint, what’s not to like about that?

Jones only charged his investors an incentive fee. According to RobertBirch, Jones’s son-in-law and the current co-operator of AW Jones and Co.,Jones never believed in management fees. “Jones believed that managementfees would only cause him to go out and raise more assets, which, in turn,would take away from the constant pursuit of performance,” he said. “Thesimple fact is that some people can make more money building assets thanthey can through performing. Jones focused on performance and did notwant to be distracted by asset gathering.”

Jones’s model worked well in both up and down markets. During thefirst 20 years of its operation, the system worked so well that the Jones Fundnever had a losing year. It was not until the bear market of late 1969 and




1970 that the fund posted losses. After that period, the company continuedto grow and was successful until the mid-1980s, when it switched frombeing a single strategy manager to a fund of funds, as it remains today.

COMMISSION GIVE-UP

In addition to being the father of the hedge fund industry, Jones is creditedwith perfecting the art of paying brokers to give up ideas. Although his firmexecuted most of its trades through Neuberger Berman, Jones was adamantabout paying brokers for ideas. The word quickly got out that if you had anidea, you should call the firm and talk to a trader. It was simple: If a brokercalled on one of the Jones managers with an idea, he knew that he wouldbe paid, regardless of where the order was executed. “We’d give up half thecommission to the guy who came up with the idea, whether he worked forus or not,” said Roy Neuberger. “That was how Alfred wanted it to happen.He wanted there to be a constant flow of ideas. At the time I didn’t thinkthe exchange would let us do it. But they did; no ifs, ands or buts; it wasperfectly all right with them.”

While Jones clearly perfected the sharing of commissions, which contin-ues to this day, he also made sharing in the profits a mainstay of the hedgefund industry. Sharing in profits is what truly defines a hedge fund in today’sinvestment world. Most mutual funds don’t have this sort of fee structure;in fact, it is extremely difficult for most funds to offer their managers a shareof the success. The mutual fund industry is focused on growing assets undermanagement. As the fund’s assets grow, the manager earns more income.The formula is simple, but it’s also what causes most mutual fund managersto manage assets for mediocrity. The managers do not want to take on theadditional risk necessary to try to outperform their benchmarks because ifthey fail, the fund will lose assets and, in turn, its revenue stream. There-fore, mutual fund managers manage toward the norm—or middle of theroad—not only in order to preserve the fund’s assets, but also to protecttheir own income streams.

By now it’s clear that the fee structure that allows a manager to sharein the success of the portfolio is what defines the hedge fund industry. Asthe industry has evolved over the last 60 years, hedge funds have taken onall sorts of investment styles and strategies. No market is safe from a hedgefund manager and their will and skill to make money.

Hedge fund fees are a funny thing. Chances are, if you ask outsidersabout hedge fund fees, they will say that they’re too high. Ask insiders, andthey’ll respond that the fees are too low. The real question comes down




to what investors will pay. For the most part, investors don’t seem to becomplaining about fees.

The current fee structures offered by managers to their investors consistof a management fee of 1 or 1.5 percent of assets, and an incentive fee of20 percent of the profits. Some fund managers charge variations on thesefees, such as 2 percent management fees or 40 to 50 percent incentive fees.The amounts of the fees can fluctuate based on a number of factors, includ-ing the manager’s track record, assets under management, strategy, pedigree,and marketing skill. Successful managers, such as Steve Cohen at SAC Cap-ital, have been known to charge higher fees because there is great demandby investors to invest in his funds. Conversely, some start-up managers havebeen known to charge lower fees simply because they want the assets andwant to get the fund up and running. Again, fees are not an issue for mosthedge fund investors. In my experience, as long as a manager continues todeliver solid, consistent returns, investors typically don’t care what they arecharged. Investors become concerned and/or angry only when the fund stopsdelivering on its expectations. I have never met an investor who said thatthe fees were too high, or who chose not to invest in a specific fund becauseof the fees. The investment community knows that you get what you payfor—plain and simple.

CONTINUING THE JONES LEGACY

As we’ve discussed, when Jones initially launched his investment company,it was with a fairly simple, straightforward idea: to create a portfolio thatwent long and short the market, providing for substantial profits in goodtimes and limited losses in bad times. He was able to achieve this by limitinghis net long exposure, or the amount of long exposure minus the amount ofshort exposure.

An example of net exposure is provided in Figure 2.1.Unfortunately, creating a portfolio that is net long or net short does not

mean that you are going to outperform the markets. In fact, just the oppositeis true: If the market is flying and your portfolio is 80 percent net long, then20 percent of your portfolio is lying fallow. The same is true in the converse.So what, if any, value are you offering to your investors? Your value comesin knowing when to go net long and when to go net short, and your abilityto work a portfolio that exploits inefficiencies in the market to earn profitsfor your investors—regardless of market conditions.

As I noted in Chapter 1, Jones posted losses in only 3 of his 34 yearsin the business. This may have been simply the result of being long andshort at the right times, or his ability to time market events, or maybe even




Fund X with Assets Under Management: $100,000,000.00

Net Long Example:Long Positions: $100,000,000.00

Short Positions: $60,000,000.00Net Long Exposure: 40%

Net Short Example:Long Positions: $100,000,000.00Short Positions: $110,000,000.00

Net Short Exposure: 10%

F IGURE 2.1 Examples of Net Long and Net Short Exposures

his employees’ skill at picking stocks. Most likely, it was a combination ofall of the above. To be successful, you need to take a page from Jones’splaybook—you need to understand how to go long, how to go short, andhow to use both strategies to make money.

To run a hedge fund, you have do more than charge a management andincentive fee to your investors. Simply put, you need to add value to theirportfolio. Hedging isn’t really that complicated, although, again, few peopledo it well. To really hedge the risk of the portfolio, you first need to reviewthe portfolio to determine where the risks are. Your next step is to workto create hedges that will dampen that volatility, should the market movein a direction other than the one you think it will move in. For example, ifyou have a long a series of equities in one sector of the market, you mayconsider going short a series of equities in another sector. To short yourseries of equities, you’ll choose a sector that moves in the reverse of thesector you are long. Hedging—really hedging—comes down to using anyand all financial instruments to extract profits from the market. This is whattruly sets hedge fund managers apart from mutual fund managers. Mutualfund managers are simply not able to use any (legal) strategy available tomake money; instead they simply can only go long.

Although there are now literally thousands of players in the hedge fundmarket, only one stands out as the heir apparent to Jones: Julian Robertson.Robertson, whom I wrote about in Julian Robertson: A Tiger in the Landof Bulls and Bears (Wiley, 2004), and who we’ll look at it in more detail inChapter 3, is considered by many Wall Streeters to be the person who tookover Jones’s role as true leader of the hedge fund industry.




Tiger Management ceased to exist as a manager of other people’s moneyin 2000, but Robertson has since gone on to seed and work with a significantnumber of managers who are truly shaping the future of the hedge fundindustry. It is clear that without his involvement with and investment inthese managers, many would not have gotten off the ground or been able toexpand and grow their businesses. The list of the “Tiger Cubs,” as they arecalled by the popular press, is quite extensive and includes not only peoplewho worked for Robertson at Tiger Management during the firm’s 20-yeartenure, but also those who helped him wind down the business and those hehas since found in his current capacity as elder statesman of the hedge fundindustry.

When I was researching the book on Robertson, I spent a lot of time in-terviewing people about how the company worked, how he ran the business,and what his effect was and is on the investment community. One person’scomment summed up Robertson’s role in the global money managementindustry as follows: “No one has had as much effect on how money is man-aged around the world than Julian Robertson,” Hunt Taylor said. “He hasworked with, seeded, and provided guidance to so many managers that hisreach is unlike any others in the investment community.”8

To truly understand how the industry has grown into what it is todayand to understand where it is going to grow in the future, we should lookat three very wise men. These individuals took the torch from Jones and, intheir own ways, shaped the hedge fund industry. No conversation of hedgefunds is complete without a discussion of George Soros, Julian Robertson,and Michael Steinhardt. It is their collective investment prowess that is to beblamed for the growth, expansion, popularity, and importance that hedgefunds play in today’s capital markets. In Chapter 3, we’ll explore theircontributions in detail.



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CHAPTER 3The Men Who Made the Industry

What It Is Today

Over the last 50 years, as hedge funds have evolved from a cottage indus-try to a high-stakes, high-visibility game, a few individuals have clearly

influenced their growth.Since the late 1970s, three individuals have shaped the current land-

scape: George Soros, Julian Robertson, and Michael Steinhardt. These mennot only fundamentally altered the way money is managed, but also showedthe world how important it is to employ a professional money manager.To fully grasp the importance of these three individuals, it is important tounderstand where each came from and how their fund complexes evolved.1

At first glance, Soros, Robertson, and Steinhardt seem to have very littlein common beyond their profession as hedge fund managers. Yet, these menhave demonstrated an extraordinary ability to extract value from market.Extracting money from the market may sound easy, but think of it this way:If it’s so simple, why can’t everyone do it?

Although all three have retired from managing money for the public,they are more active today than ever before. Articles detailing what they’redoing in the market have given way to stories about their charitable workand political involvement. But make no mistake: While Soros funds politicalmachine MoveOn.org, Steinhardt pursues Birthright Israel, and Robertsonhelps reshape New York City public schools, the three are also activelymanaging money.

“Julian is truly a money machine,” said David Saunders, managingpartner of K2 Advisors, a fund of funds, and former employee of Robertson’sTiger Management Inc. “He and his colleagues are still active in the markets,in making investments and making money.”

The tie that binds these three is clearly their impact on the way money ismanaged. Although Benjamin Graham and David Dodd may have providedthe blueprint for success in the markets with their work on value investing,

27




Soros, Steinhardt, and Robertson clearly have been the architects of hedgefund—and market—success.

“There are very few people who you can point to and say they have hadas much effect on the way money is managed as these three individuals,”said Hunt Taylor when I interviewed him for my book on Robertson. “Notonly did they build fabulously successful businesses for themselves, but indoing so, helped shape the industry into something that will probably lastforever.”

A FORCE TO BE RECKONED WITH

In 1968 the Securities and Exchange Commission estimated that there wereapproximately 140 investment partnerships, or hedge funds.2 Back then,many hedge funds were real hedge funds, because the managers used shortingto control downside risk. As the industry grew, some of the people who hadentered the arena were unable to go short and created portfolios whosesuccess was directly correlated to the overall success of the stock market.As the markets reeled in the late 1960s and early 1970s, these managerssuffered significant losses; according to Eichengreen and Mathieson AssetManagement, the 28 largest hedge funds’ assets had declined by 70 percentby 1970. As a result, many were liquidated. At the time, the hedge fundindustry managed just $300 million in assets, less than $1.5 billion in today’sdollars.

Throughout the rest of the 1970s and 1980s, the industry continued togrow, but at a very slow pace. Still, managers like Soros, Steinhardt, andRobertson managed to build their businesses, raised significant assets andput up great returns. By the mid-1980s, others began to make their mark,and the industry began to really take shape. It wasn’t, however, until 1992that the industry, and the power it wields, came into focus. For this, we canthank George Soros.

Soros, with his colleague Stanley Druckenmiller, put together the tradeof a lifetime when they broke the Bank of England in 1992. The pair investeda billion dollars in the belief that Great Britain would have to devalue thepound and pull out of the exchange rate mechanism, the system Europeused to stabilize its currencies before the euro was created. The exchangerate mechanism was a system introduced by the European community inMarch 1979 as part of the European Monetary System to reduce exchangerate variability and achieve monetary stability among the nations of Europeand their currencies. It was done in order to prepare for the Economicand Monetary Union—which combined European nations’ currencies intoa single currency called the euro on January 1, 1999.



The Men Who Made the Industry What It Is Today 29

The story behind Soros and Druckenmiller’s trade starts in 1990, whenthe United Kingdom decided to join the new Western European monetarysystem, agreeing to maintain its exchange rate at 2.95 German marks tothe pound. Soros believed this posed a threat to the country’s currency, asits economy was not as strong as that of the newly united Germany. Asthe British economy began to suffer problems, the pound was squeezed, butthe government, led by Prime Minister John Major, would not move. Heassured the world that the economy would improve and that the pound wassolid.

Soros and Druckenmiller believed that Britain’s economy was a lotworse off than Major insisted, and that the Conservative government wouldhave no choice but to devalue the pound. The opportunity began to re-ally take shape in the summer of 1992, when Italy, also a member of themechanism, devalued the lira.

Then, on September 15, Major announced that Britain was pulling outof the European rate mechanism. When the news broke, the pound dropped,causing havoc among currency traders around the globe, who were forcedto cover positions to stem losses. Soros and Druckenmiller were perfectlypositioned, though. Over the summer, they had sold short $10 billion worthof sterling. When they covered the short, their profit was nearly $1 billion.In the wake of this fabulously successfully trade, people around the worldbegan to look seriously at the power, influence and potential that hedgefunds offered. Soros and Druckenmiller became known, in many circles, as“the world’s greatest investors.”

From this point on, the world never looked at hedge funds the same wayagain. Thanks to Soros and Druckenmiller, hedge funds became a force tobe reckoned with. The markets needed to look out.

HEDGE FUND LEGENDS

Before we talk about each of these men individually and their contribu-tions to the hedge fund industry, let me make one thing clear: Although it’strue that men built the hedge fund industry and that Wall Street is a male-dominated world, there are a number of very successful women who workthroughout the financial services industry in all aspects of money manage-ment and the capital markets, including several who are extremely successfulin the hedge fund industry. Two that immediately come to mind are NancyHavens of Havens Partners, a New York City–based hedge fund that focuseson merger arbitrage and distressed securities, and Virginia Parker of Stam-ford, Connecticut–based Parker Global Strategies, a manager of managers.Both Havens and Parker have built extremely successful fund companies that




offer investors great products. Each has worked in various areas of the Streetand is well respected for their ability to manage money and run profitableorganizations. Women are clearly in the minority in terms of hedge fundownership and management; however, I believe that money management isan even playing field because the business is transparent. The numbers don’tlie, and investors don’t care who is managing the money—as long as theystick to the strategy and style, and put up numbers that are respectable.

Everyone in the industry—men and women alike—can learn a thingor two from the men who truly made the hedge fund industry what it istoday.

George Soros

In the fall of 2007, Forbes magazine estimated that George Soros was worthnearly $8.8 billion, making him the thirty-third richest person in the UnitedStates. While his wealth has been created from his ability to make money inthe markets, today more people seem to equate him with his philanthropyand political endeavors.

Soros had been a legend on Wall Street for more than 20 years before hebecame known around the world with his trade against the pound in 1992. In1997, he gained additional notoriety when he was personally blamed by theprime minister of Malaysia for the Asian flu that caused havoc in the globalcurrency markets. In the late summer of 1997, Malaysian Prime MinisterMahathir Mohamad blamed Soros for an “assault” on the Malaysian ringgit,which saw its value drop by more then 15 percent from July to September.Mahathir said at the time that Soros was trying to punish his country forits support of Myanmar. Although there has never been any direct proof ofMahathir’s allegations, the notion alone created quite a stir, and added tothe money manager’s mystique. Soros also gained additional fame duringthe 2000 and 2004 presidential elections for his anti-Bush work and effortsto derail Republican control of the House and Senate.

George Soros was born in Budapest, Hungary, in August 1930. Whenhe was 13, faced with Nazi occupation, his family fled Hungary and madetheir way to London. Soros eventually entered the London School of Eco-nomics, where he began to study under Karl Popper, under whose direction,Soros has said, he learned investment strategies and came to understand themarkets.

Soros left London for the United States in 1956 to begin a career onWall Street. In 1970, he launched Quantum fund with Jim Rogers, whichbecame one of the most successful hedge funds. In 1980, Rogers retired andSoros continued with a series of partners, including Druckenmiller and NickRoditi.




But it hasn’t been all gravy for Soros. During the Asian currency crisisand the technology bubble, his firm lost significant amounts. The currencycrisis was particularly cruel. In late August 1998, after weeks of specula-tion and rumor, Druckenmiller went on CNBC and told the world thatthe firm had lost nearly $2 billion in the wake of Russia’s bond defaultand the devaluation of the ruble. The crisis came from Russian officials’attempts to renegotiate foreign debt payments inherited from the formerSoviet Union in an effort to instill investor confidence. By mid-1997, itlooked as if things were going well, but by the end of the year workersweren’t being paid, taxes weren’t being collected, there was governmentaluncertainty, and the hard currency was beginning to soften. In early 1998,things looked worse. President Boris Yeltsin fired his entire government,appointed a relative newcomer as prime minister, and made enough mis-steps to cause investors to question the stability of both the government andthe economy.

Then, by early summer, things were at their worst. Liquidity had driedup as banks refused to lend to the government, based on their belief that itwould not be able to repay them. On August 13, the Russian stock, bond,and currency markets collapsed as investors realized that the government hadno choice but to devalue the ruble, and a default on the debt was imminent.On August 17, the government floated the exchange rate, devalued theruble, defaulted on its domestic debt, and declared a 90-day moratorium onpayments by commercial banks to foreign creditors.

For Soros and Druckenmiller, this spelled disaster, leaving them holdingnothing but worthless slips of paper. It was a tough summer for the pair,resulting in the closure of one of their funds, which lost more than 30 percentas a result of the default. Soros, however, was not alone in his losses. Just afew weeks later, Long-Term Capital Management, a well-known and once-respected hedge fund complex, was pushed to the brink of collapse, savedonly by a bailout orchestrated by the Federal Reserve.

Despite these missteps, Soros and his team are experts at taking advan-tage of political and economic trends and leveraging them into successfulfixed-income and currency plays. Soros is a speculator who makes signifi-cant trades based on his schooling by Popper, who taught him that financialmarkets are chaotic and unpredictable, largely dominated by a herd mental-ity. He has said that he believes that investments are priced by people whoact on emotion rather than logic.

How Soros Managed Money Soros is a prolific writer, defining his ideasand beliefs on how the markets work, how he views the markets, and howhe puts these ideas to work. All are based on what he learned under Popper,especially his theory of falsification.




Born in 1902 in Austria, Sir Karl Raimund Popper is considered to be oneof the most influential philosophers of the twentieth century. Falsification isdefined as the logical possibility that an assertion can be shown to be falseby an observation or a physical experiment. Something that is consideredfalsifiable does not mean that it is false, but, rather, that it is capable ofbeing disproved.

According to Popper, “all men are mortal” is unfalsifiable, since it isimpossible ever to demonstrate that is a falsehood. However, all it takes isone dead man to demonstrate that the statement “all men are immortal” isfalsifiable. It is this philosophy that became the backbone of Soros’s tradingand investment theories.

Soros also uses something called market fundamentalism when makinginvestment decisions. He bases this work on the common misconceptionthat the free market is always beneficial to society and that market forcesserve the common good.

He has said he believes that markets are, for the most part, unstable, andthat he does not agree with most students of the market who believe thatmarkets are in a state of continuous equilibrium. He believes that marketsare in a constant state of disequilibrium and provide for excesses, eitherup or down. Markets, according to Soros, are unpredictable, and thereforemust rely on government involvement to ensure that the public’s interest isupheld. He believes that without government involvement, markets will goto extremes, leading to financial ruin.

Soros’s philosophy, beliefs, and investment strategies defy conven-tional wisdom. Furthermore, a number of money managers and even someeconomists believe that financial markets are often at near-perfect equi-librium and dismiss Soros’s ideas altogether. Dismiss they may, but hiswork in these areas has led him to make and lose significant—in some casesobscene—amounts of money over the years. People may criticize or discounthis methods, but no one discounts his success.

Michael Ste inhardt

No conversation about the finest hedge fund managers would be completewithout a discussion of Michael Steinhardt. According to many reports, in-cluding his own biography, Steinhardt was born to a compulsive, high-riskgambling father and reared by a loving and selfless mother who taught himright from wrong. He is a kid of the streets who worked his way throughthe ranks of Wall Street, creating one of the most successful investmentpartnerships of all time, as well as a vast fortune for himself and his part-ners. Steinhardt was educated in brokers’ offices around Wall Street, learninghow the market worked, how to read charts, and how to develop investment




strategy. He took this love for the markets and combined it with his educa-tion at the University of Pennsylvania’s Wharton School to Wall Street, firstat the mutual fund company Calvin Bullock as a research analyst and thento the brokerage firm Loeb Rhodes.

In 1967, he co-founded a hedge fund that would eventually evolveinto Steinhardt Partners. His strength throughout his career was his pur-suit of making money regardless of market conditions. According toTheStreet.com’s Jim Cramer, Steinhardt pioneered the notion that downdays in the market were no excuse for losing money.

Steinhardt’s firm experienced incredible growth in its first few years ofoperation, seeing its managed assets grow nearly 140 percent. By the 1970s,the firm was managing more than $150 million and was the largest hedgefund in the world, according to a Securities and Exchange Commissionreport. Wyndham Robertson (a reporter at Fortune and sister of Julian)wrote extensively about the report and Steinhardt in a story titled “HedgeFund Miseries,” which ran in May 1971. The meteoric rise in assets at thefirm was attributed directly to its performance, not to an influx of newinvestors or capital.

To put up these numbers, Steinhardt and his colleagues remained ex-tremely focused on micro and macro trends, both in the market and in theeconomy. Micro trends are small activities that can be identified by moneymanagers and used as tools to forecast the direction of a specific sector ofthe market or region of the country. For example, a micro trend might be theobservation, and subsequent proof through research, that real estate pricesare increasing in a specific area of New Jersey based on new home sales andresale sales data. Macro trends are the big picture. For example, a macrotrend could be that home sales are decreasing around the country, based onnew home sales or resale sales data.

Steinhardt used a research process that combined gathering informationabout a particular security or area of the market, and his instincts and beliefsabout what was going on in the economy both here and abroad in order todetermine how it would move in the weeks and months ahead. As part ofthis process, he talked to as many people as possible, met with managementor government leaders, and gathered intelligence from various other WallStreet firms. This allowed him to predict which way the markets wouldmove and to trade accordingly. He said in an interview that he operatedon the assumption that while he had a lot of information and was capableof putting it to work, he always knew that he didn’t have the completepicture.

“You can never have all of the information,” he said. “What you canhave is as much information as you can gather and act accordingly. Whatmatters is what you do with the information you have.”




Throughout his career, Steinhardt put up stellar numbers. Accordingto one press account, a dollar invested with him in 1967 would have beenworth over $587.81 in 1995, when he retired from actively managing otherpeople’s money. That same dollar would have been worth just $12.77 hadit been invested in a Standard and Poor’s 500 index fund During this tenure,he only had one losing year and used equities, bonds, currencies, and otherfinancial instruments to put up the track record.

How Steinhardt Managed Money Steinhardt is a pure fundamentalist withthe tendencies of a trader. He operated both a shortterm and long-termstrategy based on macroeconomic views. This allowed him to pick stocksthat he believed made sense, based on how he thought the world was moving.According to some accounts, he constantly reviewed the positions in theportfolio in search of finding opportunities to extract more money from themarket. During investment idea meetings, he would know almost instantlyif a trade made sense and would act quickly. Steinhardt did this both withwinners and losers. Every position in his portfolio was reevaluated if andwhen his macro view changed. He’s an expert at mixing long-term positionswith short-term positions. It didn’t matter if the position was working ornot; if he changed his view, the position was up for review. All day long,day in and day out, Steinhardt worked with his team to review, refine, andbetter his decisions.

While Soros perfected the use of philosophy to generate trading strate-gies, Steinhardt believed in something else—commissions. It is estimated thatat the height of his operation in the late 1980s, his firm was regularly payingbetween $20 million and $35 million a year in commissions to brokeragefirms around Wall Street to make sure it got the first call and access to whatSteinhardt calls “the best merchandise.”

Steinhardt expected to access this information quicker and faster thaneveryone else because the brokers were loyal to him and his commissions. Ifnews about one of his positions broke, he expected to get the first call from abroker in order to take advantage of it. He didn’t expect inside information,but, rather, the first information. His brokers were his eyes and ears on theStreet. He paid them well, and he expected them to deliver.

Throughout his career, Steinhardt was an active trader. He executedthousands of orders to make money for his investors. He still believes thattrading is a catalyst, and by executing numerous orders he was able to“open up opportunities.” Going after different opportunities simultaneouslyallowed him to open even more doors for access to potential profits. Stein-hardt says the ability to “smell a lot of things” gave him insight to whatwas going on in the market because he was trading all across it. Even withall of this action and executions, Steinhardt said that most of his long-term




performance came from his ability to stick with a position and hold it fora year or longer. He picked a direction and followed it for a year or sountil it paid off. This was his core position. It allowed him to establish aposition in the portfolio that he felt was going to pay off in the long run,and trade both long and short to find other potent opportunities to add tohis core.

One inviolable rule was that Steinhardt never hedged one stock positionwith another from the same sector. For example, he would not have gonelong Pepsi and shorted Coca-Cola. To him, that meant that he was creatinga second problem. It meant that the sector was potentially in trouble, andif the sector was in trouble he didn’t want to be on both sides of the trade.Instead, Steinhardt would go long Pepsi and short another stock in an areaof the market that would react negatively to Pepsi’s success. He also did notbelieve in charts, even though he learned how to read them in his salad dayson the Street, and never felt that he made decisions to buy on strengths orweaknesses.

He based his trading on the idea of a balance between the convictionto follow his ideas and the flexibility to recognize when he made a mistake.“This balance of confidence and humility is best learned through extensiveexperience and mistakes,” he said.

Steinhardt says that throughout his career, he based a lot of his moveson being intellectually honest and respecting the people on the other side ofthe trade. It is important, he says, for traders to realize that once they’vemade a decision, they’re going to compete with people who have made theopposite decision, and that often these people will beat them because theyhave devoted more time, energy, and resources to the trade. He also saidthat he never saw patterns develop. He said that sometimes specific stocks orsectors would break out and be the ones he would follow over time, but thatthese break-outs would diminish and something else would evolve. That iswhy he took a macro view of the world and set out to trade around hisideas.

During his tenure, Steinhardt ran his fund, on average, 40 percent netlong. The range was 15 to 20 percent net short to more than 100 percentnet long. He managed this through the use of leverage. For example, let’ssay that he had 100 dollars to put to work. If he shorted 20 percent of theportfolio, he would gain, in theory, an additional $20 to put to work inthe market—the proceeds from the short sale. He could take that additionalcash and combine it with his portfolio and put it to work. This would allowhim to go both long and short. He believes that maintaining this flexibilityin market exposure provided him with an important tool that allowed himto be successful. “I was not constrained” he said. “I could do what I wantedto search out profits.”




Today, Steinhardt concentrates his efforts on two areas: philanthropyand exchange-traded funds. Since 1995, his philanthropic efforts have fo-cused on making schools around the country better and on bringing Jewsaround the world closer to their religion. In 2004, he financially backedand became a spokesperson for a company called WisdomTree Invest-ments, a firm that created ETFs based on earnings and dividends rather onindexes.

Jul ian Robertson

Julian Robertson could be classified as more than a legend. Prior to 1980,Robertson was not in the hedge fund business; rather, he held various po-sitions at Kidder Peabody & Co. Regardless of where he worked and whathe was doing, he is clearly one of the most successful money managers of alltime, and someone who revolutionized the hedge fund industry during histenure at Tiger Management.

Robertson has alternately been described as brash, aggressive, andcharming. People who meet him at a cocktail party or social event seehim as a Southern gentleman straight out of his hometown of Salisbury,North Carolina, while those who worked for him call him crass, mean, anddownright nasty. Never in my life have I experienced situations like thosewhile interviewing former employees and colleagues for my biography ofRobertson. People would spend hours on the phone or in interviews tellingme great stories about the way he operated and the reason behind Tiger’ssuccess and then call me back an hour later or request another meeting to tellme how hard it was to work for him and how badly they were mistreated.

“Julian is truly a singular influence,” said his former trader and currentfund of funds manager David Saunders. “He has touched so many differentmanagers that it is impossible to think what the hedge fund industry wouldbe like if he had not started Tiger.”

Tiger was launched in 1980 with approximately $8 million under man-agement. The firm had grown to just over $21 billion by the late 1990s, butwas shuttered as a single-manager organization in 2000 as the technologybubble burst.

Robertson’s father was an investor and successful businessman in thetextile industry in Salisbury, while his mother was heavily involved in com-munity work. His initial schooling in investing came from his father, whotaught young Julian how to read the stock tables in the local newspaper.Senior taught his son the value of owning well-priced stocks and the impor-tance of understanding a balance sheet. Together the two would often readabout companies, comparing their operations, organizations, and prospectsfor success.




In 1955, upon graduation from the University of North Carolina witha degree in business administration, Robertson entered the Navy. He wasstationed as a weapons officer aboard a munitions ship. It was there, Robert-son says, he learned the value of being a good leader and the importance ofgaining the respect of those who reported to him.

Toward the end of the 1950s, Robertson entered the training programat Kidder Peabody & Co., and by 1974 was running the firm’s in-housemoney management company, Webster Management Corp. It was duringhis time at Webster that he went from being a broker to being a moneymanager. He gained a reputation among colleagues and friends as someonewho really understood how to make money in the markets.

As the 1970s wore on, Robertson began to get restless at Webster. Hehad spent a fair amount of time with Bob Burch (Alfred Winslow Jones’sson-in-law) and had learned quite a bit about hedge funds, so he decided togive them a try. He partnered with his friend and Kidder colleague, ThorpeMcKenzie, to launch the Tiger Management hedge fund in 1980. The firmput up extremely good numbers for most of its life, until it caught the Asianflu and was clobbered by the downturn in technology.

How Robertson Managed Money Robertson’s trading and investment styleis based squarely on the work of Graham and Dodd. The writers, whoalso influenced Warren Buffet’s investment philosophy, shaped the wayRobertson makes investment decisions. Robertson is all about the research.Throughout his tenure as an investment professional, he has said that heknows of no substitute for careful and comprehensive analysis of investmentsituations, other than to get into the trenches and evaluate an opportunityfrom every angle. This is a guy who does more than simply look at researchreports and newspaper clippings; he is someone who sits with senior man-agement, gains access to customers and talks to competitors. Then he looksat the numbers and makes sure everything adds up. He likes to buy thingsthat are cheap and then watch their value rise. If hunting for value invest-ments were an Olympic sport, he’d be a gold medalist. Robertson learnedearly on at Kidder that information is the key to success. He understands thatgathering data and processing the material is what makes people smarter.Over the years, he has worked extremely hard to establish networks he canrely on for information and sources of data to help him make better, moreinformed decisions.

Through his relationship with Burch and his friendship with Jones,Robertson learned the ins and outs of the hedge fund business. He learnedhow to build a business and also the importance of constructing a portfoliothat included both long and short positions. Shorting allowed Robertson to




accomplish two goals: to hedge the portfolio against a down market, and totake advantage of companies that were destined for failure.

Like Soros, Robertson had one trade that the world saw as the definingmoment in an already illustrious career. It was his trade in copper.

When everyone thought that the price of copper would rise as demandincreased, he believed that the data behind the increase were flawed and themarket would fall. It was this contrarian idea that caused him to go shortthe copper market while it was rising. He was going against the grain andhe initially lost a bit of money on paper, but by maintaining his convictionhe was able to see it through to the end and reap significant rewards. Thereality of the situation was that Robertson’s facts, while correct, were shortof one thing: a catalyst to make them pay off.

Just as Soros needed Major to pull the rug from under the pound,Robertson needed an event to make the trade profitable. The catalyst forRobertson was a rogue trader at Japan’s famed Sumitomo. The trader hadamassed a massive amount of copper, so much so that he was rumored tobe close to cornering the market. The problem was that his bosses didn’twant the market cornered. When they found out what he had done, thepowers-that-be forced him to liquidate his positions. The fire sale floodedthe copper markets, caused their collapse and allowed Robertson and histeam at Tiger to make nearly $300 million in one day. It was a long, strange,but extremely profitable trip for Robertson and his team at Tiger. It was atrade that solidified Julian’s greatness in the annals of money managers.

By contrast, there are some that say the copper trade was the beginningof the end for the firm, as many believe that egos entered a trading deskthat had not been burdened with them before. It is clear that it launchedthe careers of many of the industry’s greatest managers. The roll call atTiger includes Steve Mandel of Lone Pine, John Griffin of Blue Ridge, LeeAinslie of Maverick, Andreas Halvorsen of Viking, and Dwight Andersonof Osprey.

Robertson’s focus on sticking to a value-orientated philosophy was ul-timately the downfall of Tiger Management as a hedge fund that managedmoney for outside investors. The firm completely missed the technologyboom and also got stuck in a number of very large positions that becameilliquid. That led to significant losses and investor withdrawals. The Tigerlegacy was its return, which on a compounded annual basis was 31.7 percentnet of fees during its lifetime.

By 2000, when it was apparent that Tiger was over, Robertson re-turned what was left to investors and turned the company into an invest-ment firm with one client—himself. To transition the company, Robertsonworked with a number of Tiger analysts and employees who were rewardedfor sticking around when their boss helped them launch their own hedge




funds. Today, at the firm’s offices in Manhattan, along with the peoplewho work solely for Robertson, there are more than 10 hedge funds thathave been seeded through the Tiger platform. Robertson is probably oneof the most prolific seeders in the hedge fund industry—he provides capitalto managers who fit his specific investment guidelines, working with themto help grow the firms. A number of his successes include Chase Coleman’sTiger Technology Fund, Tom Faciolla’s TigerShark Fund and Bill Hwang’sTiger Asia Fund. Although all of the funds have the Tiger name, none areowned outright by Robertson. He is a small, albeit important, part of theirexistence—but each is an independent entity.

It is quite a model that stretches from the building on Manhattan’s ParkAvenue to a network of managers and funds in offices around the world.These Tiger cubs are part of the vast network of individuals that exchangeinformation and ideas so all can make money in the markets.

Although he is now in retirement, Robertson is still quite active inmoney management, business ventures and philanthropy. He has developedgolf resorts and wineries in New Zealand and has embarked on a numberof educational, medical and environmental initiatives as well.

STANDING ON THE SHOULDERS OF GIANTS

It is unclear what the hedge fund industry would be like today with Soros,Steinhardt and Robertson. In fact, it’s apparent that some people in theindustry have little or no knowledge of their funds or money managementskills. I find it funny that sometimes when I give lectures and ask peopleabout these men, few, if any, people know what they have done to furtherthe hedge fund industry. But very few people have truly shaped the waymoney is managed like these individuals. They all took the concept thatJones created and developed it into something fantastic. They really didbuild a better mousetrap. Moreover, each, in their own way, became agreat teacher and mentor to the hundreds of people who passed throughtheir organizations over the course of their firms’ histories. A number ofyears ago, when I was writing my book on Robertson, some of his formercolleagues said that the Tiger network reached literally around the globeand was estimated to manage nearly 20 percent of all the assets allocatedto hedge funds. Even if that number is only half correct, that is a fantasticachievement. If we add in Soros and Steinhardt and even Jones to the mix,the number is undoubtedly much greater.

Together Soros, Steinhardt and Robertson have created legacies unlikeany others in the investment community. There are very few money managerswho have truly shaped the way money is managed. Although many people




believe that Warren Buffett and Charlie Munger are some of the smartestmoney managers ever to live and breathe the markets, there is a naggingquestion that surrounds them: What will happen when they retire fromrunning Berkshire Hathaway? The destiny of the firm, and the legacy of itsmanagers, is unclear. This is a problem. I don’t for one minute doubt theirinvestment prowess or skills; however, I do doubt their ability to pass thetorch to a second or even a third generation.

The same cannot be said about the three wise men of the hedge fundindustry. Together they have spawned literally dozens of successful moneymanagers. Their ability to create and develop organizations that not only putup solid and consistent performance numbers, but also operate as finishingschools of sorts for managers of the future, is unlike any others. The legaciesof these men will go on for years to come, as the people who helped buildplaces like Soros Fund Management, Steinhardt Management, and TigerManagement continue to create, launch, and operate hedge funds aroundthe globe. The reach into the markets of these men is wild. It is a trulyamazing accomplishment.

As a budding or existing manager looking to grow, it is important thatyou know where the roots of the industry are and how things evolved.There are two keys to your success: Determine a strategy that works, andimplement it with conviction. The people in this chapter did this in theirbusinesses, and continue to do so today. It’s why hedge funds are unique,and why they’re so profitable. It’s what breeds success.



CHAPTER 4Running Your Fund Transparently

As I’ve discussed in previous chapters, in the summer of 2007, marketsaround the world were rocked by the sub-prime meltdown in the U.S.

mortgage market. The chickens had come home to roost. All the lenders whohad been so gung-ho to give everyone with a heartbeat a mortgage realizedrather quickly that this was not a good idea. As the borrowers began todefault and the lenders began to realize that no one was interested in buyingthe mortgages, the bond and stock markets began to collapse and manyfinancial institutions—including some very big banks—were left holdingthe bag.

One of the first hedge fund managers to have massive problems wasAustralia’s Basis Capital Fund Management Ltd., which lost more than80 percent of its assets. After more than $1 billion in assets in May, it hadshrunk to less than $100 million in assets by the end of August, Basis wasforced to file for bankruptcy protection. The losses were caused not only bysubprime mortgage defaults, but also by its inability to meet margin calls.

“The banks squeezed us out of existence,” said Rick Bernie, the man-ager’s head of marketing.

At the time of the bankruptcy filing, the firm’s creditors includedJPMorgan Chase Bank NA, Goldman Sachs International, Citigroup GlobalMarkets Ltd., Morgan Stanley, Lehman Brothers International (Europe),and Merrill Lynch International. The creditors forced the bankruptcy afterissuing default notices to the fund following a massive devaluation of itsportfolio earlier in the summer because the bonds that it had purchaseddecreased significantly in value.

Basis, which was started in 1999 by Steve Howell and Stuart Fowler,had been known around the globe as an expert fixed-income manager. Itwas named Fund of the Year in 2005 by AsiaHedge and was MacquarieBank Ltd.’s Skilled Manager of the Year in 2004. The awards didn’t blockits losses, though, and by the time the dust settled in early November, the

41




firm had decided to file for bankruptcy protection for its other funds as well,citing similar problems and losses.

WHEN GOOD FUNDS GO BAD

Still, by far the most interesting failures of 2007 were at Bear Stearns AssetManagement, which saw its two flagship funds go basically to zero. Bothfunds made the same wrong bets on the single-family mortgage market,and the paper they were holding lost nearly all its value. Bear started havingproblems in the late spring, but saw it all come crashing down in the summer,after it orchestrated a $3 billion bailout of one fund in hopes of staving offfurther losses. No such luck, however, and both funds filed for bankruptcyprotection on July 31. The firm itself weathered the storm for a few moremonths until it collapsed under a massive weight of debt, and was soldto JPMorgan Chase for $10 per share. The sale was announced on theevening of March 16, 2008. At that time, the 52-week high for the stockwas $159.36. In January 2007, the stock had traded for as high as $171.51.

And while Basis and Bear saw their funds go down faster than theTitanic, the real marquee player to sink in the whole subprime mess wasneither of the two. It was Jeff Larson, a former Harvard Management Co.man, who went from hero to zero in just a few months.

His Sowood Capital Management LP saw its funds lose nearly 50 per-cent, or $1.5 billion. He was forced to liquidate and sell whatever scraps hecould find to a hedge fund manager who feeds at the bottom of the moneymanagement ocean—Ken Griffin, of Citadel Investment Group. Citadel isknown throughout Wall Street as the buyer of distressed assets and by someas the “Federal Reserve of the hedge fund industry” due to its ability tocome into a situation and take over assets of those firms that have sufferedmassive losses.

Since 2004, when Larson left the Ivy League where he’d helped manageHarvard’s endowment, he and his team had become the envy of the hedgefund world. Out of the gate, Sowood got nearly $500 million from Harvardand used that as a sales tool to bring aboard more than another $1.5 billionbefore shutting Sowood’s doors to new investors just a few months afterits launch in 2004. The firm traded various securities, including convertiblebonds, commodities, fixed income instruments, and equities.

But when the illiquidity that swept the markets in the second and thirdquarters of 2007 hit, Sowood was crushed. Its managers had not been pre-pared for such volatility. According to a Bloomberg report in July 2007,Larson had written to investors to say that although the firm did not ownany subprime loans, his team could not keep up with the volatility and deal



Running Your Fund Transparently 43

with the markdowns that the fund’s trading partners were demanding. Inplain speak, the portfolio held some mortgage-backed securities that mayhave not been quite subprime, but that were nonetheless difficult to pricewhen market demands evaporated in the wake of the credit crisis.

WHAT YOU CAN LEARN FROM THE CREDIT CRIS IS

It was a downright difficult time to be investing in anything, let alone hedgefunds. But these cases notwithstanding, hedge funds are exactly the rightplaces to be in such difficult and confusing times. Although liquidity driedup along with credit, there was as lot of money to be made in the summerand fall of 2007. Many who were caught with their pants down complainedabout all the problems they were having with their brokers and bankersonly because they had no one else to blame. Although the credit crisis wasa time of desperation, there still was money to be made. Many peoplewere desperate only because they did not have the expertise to managemoney during volatile times. They got into the hedge fund game becausethe barrier to entry was low and they were able to run a business based onmediocre performance that mirrored or performed slightly better then theindex. Volatility separated the pros from the Joes. Volatility, coupled withmarket dislocation and significant Federal Reserve interaction, takes thingsa bit further than a so-so player can master.

Again, remember that a rising tide raises all boats. The stock marketsince the technology bubble’s burst in 2000, and in the wake of the terroristattacks of 2001, experienced a nice ride for quite some time, with the S&Pgoing from 855.70 in January 2003 to 1549.38 in October of 2007.1 That isa nice return by any measure. Everyone looks smart when the market rises.It is when markets fall that you realize who is and who is not a true moneymanager.

A true money manager can protect the portfolio during down times,with hedges that cushion the blow of the downward pressure. Hedgingdoesn’t just mean going short or exercising option strategies. In some cases,managers hedge by getting defensive with their portfolio. For example, themanagers go to cash, buy bonds or move out of volatile stocks and intomore stable companies.

What Went Wrong

So, what happened? It was very simple. The days of easy money-makingcame to a screeching halt because the days of easy credit were over. Priorto March 2007, anybody with a pulse could buy a house and fulfill the




American dream of owning a home and living on a street paved with Amer-ican gold. Unfortunately, that all came to an abrupt and painful end when itbecame more and more apparent that borrowers with little or no economicmeans and those who had been given loans with a loan-to-value ratio of120 percent were probably going to have a hard time making their pay-ments. A loan-to-value (LTV) ratio is the percentage of loan in relation tothe value of the house, so, for example, a loan with an LTV of 80 percentmeans that if the price of the home is $100,000, the value of the loan is$80,000. A loan with an LTV of 120 percent in the same scenario meansthe value of the loan is $120,000. That might have worked if the housingmarket kept rising as fast as it had been, but it didn’t.

Most people take out mortgages with an LTV of 80 percent or lower,but low-income people and many first-time homeowners take out loans withhigher LTVs because they don’t have enough cash for a larger down paymentor they want to get more cash in their pockets. If it sounds like a recipe fordisaster, that’s because it is.

In my estimation, the mortgage company executives must have forgottento read Economics 101 (rules of supply and demand) before they decidedto make these loans. When people started defaulting on their mortgages,these execs couldn’t understand why their books of business went down thedrain. The ripple effect of the subprime meltdown reached into all aspectsof the economy. Equities and fixed-income instruments around the worldwere also pummeled, as investors became more and more worried abouteconomic health.

For a time over the summer of 2007, it felt as if the market was dying aslow and painful death. It was a nightmare for market participants, regard-less of the type, number, and size of their investments. As one hedge fundmanager told me, his fund had performed so poorly during the year that itwould have been better financially and mentally if he just stayed home allyear and collected his management fee.

“It kills me to know that I would have made more money sitting on mycouch watching television instead of coming to work,” he said.

As summer turned to fall and the holidays approached, a number of veryprominent Wall Streeters were shown the door because of their inability tomanage their companies before, during, and after the credit crises. The twomain losers in the meltdown were Merrill Lynch’s chief executive, E. StanleyO’Neal, and Citigroup’s chairman and chief executive, Charles O. PrinceIII. “Loser” is a relative term, though, as both got tens of millions of dollarsin severance and retirement packages.

The bottom line is, as President Truman said, the buck stops here! Sincethe summer of 2007, many heads in the executive offices on Wall Streethave rolled. Shareholders and boards of directors have demanded and




subsequently ensured that those who had gotten many of the large firmsinto the credit market crisis would lose their jobs. It was an extremely wildtime on Wall Street—probably the first time in history that so many seniorpeople, at so many different firms, were fired at the same time.

As the postmortem continues to be written, it is clear that many ofthe problems that came to light weren’t necessarily a direct result of thesepeople’s lack of leadership or oversight, but rather the market’s need forscapegoats. As of this writing, Citibank and Merrill had just recently an-nounced additional multibillion-dollar losses and additional layoffs. Thebloodletting on the Street is far from over.

Percept ion versus Real i ty

It all comes back to cheap money. Cheap money is what caused bankersand borrowers to act crazy, allowing credit to flow as freely as Opus Oneat The Annual Robin Hood Foundation Gala. If credit had been a bittighter, things would have been much different over the last few years.Hedge funds would probably not have done as well and, more importantly,would not have fallen so far, so quickly. When massive hedge funds likeBear, Basis, and Sowood get whacked, it isn’t an anomaly, it’s the tip of theiceberg.

The reason market observers have been so fascinated by the losses isbecause of the perception that the depth of talent at the big houses wasso strong that they were incapable of losing it all. The reality in 2007 wasquite different. Things in the hedge fund industry were bad because manymanagers simply did not know how to manage money.

As I noted in Chapter 1, according to a number of different mediaoutlets, there are more than 15,000 hedge funds managing $2 trillion. I don’tknow how they count funds or where they get their data, but there is onething that I know for sure: There are not 15,000 fund managers in the UnitedStates, or the world for that matter, who know how to hedge successfully. Iknow plenty of people who call themselves hedge fund managers who addlittle if any value to the portfolio, other than going long a stock or two.The reality of the situation, my friends, is that hedge funds have to hedge.Most people who invest in them don’t fully understand that, and, for themost part, the fund managers don’t know how to do it. Hedging, again,is using financial instruments to protect a portfolio from both expectedand unexpected market movements. Managers do this by putting on shortsof specific stocks or bonds, or in some cases elaborate options/derivativestrategies. The idea is to put a cushion, if you will, between the portfolio andthe floor so that when the market falls, there is something in the manager’sportfolio to soften the blow.




As I have said in previous chapters, the hedge fund industry includes alot of managers who run around the world preaching the hedge fund gospel,when all they are really doing is operating expensive mutual funds. Thismeans that the fund is basically 100 percent long and has zero hedging;its performance will mirror or look similar to that of the S&P 500 index.You read it here first. That is what a good chunk of the industry comesdown to. Again, you need to know how to hedge. Calling yourself a hedgefund manager does not mean that you hedge, or even know how to: It justmeans that you’ve created an investment partnership that is exempt fromthe Securities Acts of 1940 and 1933. That’s where we stand.

FRAUD

Fraud is a five-letter word that wreaks havoc in the marketplace. Fraud is abig problem in the hedge fund industry because the barrier to entry for thewould-be hedge fund manager is so low that anyone with $50,000 can hirea lawyer and—Bam!—he’s a hedge fund manager. The hedge fund businessattracts bad guys; heck, Wall Street attracts bad guys; heck, most placeswhere lots of dollars flow attract bad guys. Fraud is so rampant in the hedgefund community because many investors are anxious to believe what theyhear; particularly when they hear that they’re going to make a lot of money.

When people do not remember to do due diligence, they lose their abilityto make good decisions. People can be naı̈ve when it comes to makinginvestment decisions, saying, for example, “Oh, the fund was up 50 percentwhen the rest of the market was down 50 percent. This guy must be agenius!” No. This guy must be cooking the books.

Do some homework; find out where the returns are coming from. Seehow the money was made and then make a decision. Don’t take it on facevalue; the face value could be crap. Investors need to ask questions, reviewportfolio documents, and look at other similar strategies to determine if themanager is telling them the truth about where the returns are coming from.It is hard work, and fraud is rampant, so people need to tread carefully. Thekey thing to remember is that if you are the investor, it is your money, andyou have the right to ask and get answers to questions. Furthermore if theanswers are not satisfactory or given at all—my advice is to steer clear ofthe manager. As a manager, you need to remember this at all times in orderto build good relationships with existing and potential investors. We’ll talkmore about fraud later in the book.

Investors need to do more than just check to see if the manager reallywent to the college he said he did; or to make sure that the managers areactually using the accounting firm, the prime broker, the lawyer, and the




administrator that they say they are. This is real work, and it’s important.It’s your money.

As a hedge fund manager, your job is to provide good, solid succinctdata so people don’t have to ask a lot of follow-up questions. Answers needto be made readily available so that investors can learn what they need toknow to make an educated decision. Consistency is key to the due diligenceprocess. Arrogance is an error.

Over the years, I have had the pleasure of working with a large hedgefund complex that at one time was the envy of managers around the globe.The fund was managed by a smart person, surrounded by other smart peo-ple, who helped build an enviable organization. Unfortunately, the firm washit by some negative publicity that caused a loss of assets. There were newsreports that the firm was not pricing its portfolios correctly and that a num-ber of the regulators were looking into its operation. Over the next couple ofyears, as assets shrank even more and the staff turned over, the market de-cided things weren’t right with the firm and many potential investors turnedaway.

Management tried hard to right the ship, and while it didn’t sink, itclearly took on some water. Somehow it has been able to stay in business,albeit much smaller and less powerful than it once was before. The marketsees the firm as arrogant, standoffish, and not committed to the business.Why? Because it continues to introduce new funds that are not perceived tobe their core competence and it has continuous staff turnover. Unfortunately,that seems to be the case. Their people don’t seem invested, aren’t willing tolisten, and behave as though investors should give them money to managejust because of who they are. It is a weird place that is destined for failureunless management changes its tune and becomes more user friendly. Rightnow it operates with a woe-is-me attitude and sees little or no new money.Its arrogance is killing it—something to keep in mind as an investor seekingout a hedge fund.

INFORMATION EXCHANGE

The popular press loves to write that hedge funds operate under a veil ofsecrecy. It’s true: Many managers don’t want people to know what they aretrading and where they are making money. It is fine for a manager not towant to discuss portfolio positions in detail. It is not fine for the manager torefuse to answer questions about broad strategy and style.

Fraud occurs when questions are not asked or answered accurately andwhen investors do not do thorough due diligence (see Chapter 8). Hedgefund managers and investors need to establish a level of trust that allows




information to be exchanged without noses getting bent out of shape. Com-munication only enhances the relationship between the manager and in-vestors. Many managers operate under the assumption that they are thegreatest money managers on earth. As an investor, my comment is that it’smy money. If the manager doesn’t want to talk, then I am taking my moneyout for a walk. It’s just that simple. I understand the importance of keepingyour cards close to the vest, but partners are partners. The relationship be-tween the manager and the investor is a partnership, and in a partnershippeople communicate.

Let me put it another way: As a manager, you need to think of therelationship between you and your investors as symbiotic, similar to thatof gasoline and cars. If there is no gas, the car isn’t going anywhere. If themanagement doesn’t have cash, it cannot run its business. The cash powersthe fund’s engine and allows it to make even more money, for both managersand investors.

Giv ing Your Investors Their Due

One thing that burns me up is when a manager calls me, as an investor,stupid. Every once in a while, you get managers who think that they havetruly reinvented the wheel in such a complicated way that a dumb schmucklike me can’t understand what they have done. When they tell me this, I say,“Thanks for your time,” and walk away. I have no tolerance for this typeof manager, and neither should any self-respecting investor.

The most famous manager of this sort was John Meriwether of Long-Term Capital Management fame. He and his band of PhDs, including aNobel prizewinner, refused to disclose how their fund worked. They toldexisting and potential investors to trust them and not to worry about thestrategy, as it was too complicated for mere mortals to understand. Moreimportantly, they told investors and potential investors that if word got outabout what they were doing, the fund would lose its edge.

Transparency is measured by how much information managers provideto investors and potential investors about their portfolios. Many believethat transparency is good, as it allows people to see what is going on.Others—like LTCM—think it is bad because it lets the public know aboutthe fund’s actions. The reality is that most people don’t know what to dowith the data, and the disclosure has little if any effect on anything. As forLTCM, the result was that the “genius” failed and the fund, firm, and peoplebehind it crashed and burned. Two things went wrong: LTCM believed thatits trading models, which were built for the fixed income markets, couldbe used in any market (this proved to be wrong); and LTCM did not haveenough cash to meet the fund’s margin calls.




There’s an amusing postscript to all the secrecy behind LTCM. A fewmonths after the bailout of the fund was complete, Meriwether got togetherwith some people and formed a new hedge fund company called JWMPartners LLC. The new firm got off to a bit of a rocky start, as initiallymany investors were still licking their LTCM wounds. Still, over time, thefund saw money come in and has blossomed into a billion-dollar-plus hedgefund organization. Ironically, one of Meriwether’s first public appearancesafter the bailout of LTCM was at a Managed Funds Association conferencein February 2001, where he gave the keynote address on the virtues of trans-parency and the importance of communicating with investors. Anything fora buck, they say!

Expla in ing Your Strategy

When it comes to due diligence, things are quite simple. As a manager,when you discuss your strategy with potential investors, you need to go intogreat detail as to how the strategy works, why it works, and why you haveconviction that it will continue to work. To do this, you need to provideexamples of specific trades—trades that were successful, trades that weren’tsuccessful, and trades that are in the pipeline. Oftentimes, managers getbogged down during investor conferences with bios or with other items thatdon’t really matter. What investors want to know is how their money isgoing to be managed, so you need to tell them. Do not be afraid of revealingpositions that are currently in the portfolio, or positions you expect to putin the portfolio. The investor is not going to steal your idea. Furthermore, ifthey do steal it, they’ll most likely become investors in your fund. So don’t beshy or afraid. Rather, be open and frank. That’s what investors are lookingfor from the people who manage their money.

Don’t tell people that the strategy is too hard to understand, because ifyou do, they are going to take their money and run. Investors are going toask questions and demand answers. If you don’t give them answers to thequestions that they ask, then they have no reason to keep their money withyou. That’s the bottom line. As Mister Senor Love Daddy said in the finefilm Do the Right Thing, “That’s the truth, Ruth!”

Stay focused and stay on top of it—be prepared. Because if you don’t,then you’re going to lose out on investors, and the only person you’ll haveto blame is yourself.

Peter Lynch, the famed former manager of the Fidelity Magellan Fund,wrote that investors spend more time picking the color of their refrigeratorthan they do on their investments. That’s the problem. Investors, spend timewith your investments and your investment professional. Money managers,




encourage your investors to spend time with you and learn about what youare doing with their money.

Keeping the L ines of Communicat ion F lowing

Let me put it another way, managers. Is there any greater marketer for youthan your investors? You know the answer. Do investors have specialtiesthat may help you with your investment decisions? You know that answeras well. You need to create and maintain good relationships with investorsat all times. If you don’t get these last two points, read the following. If youdo, skip ahead a page.

Take, for example the long/short money manager who is focused onretail. If you know that one of your investors happens to have a retailorganization, say, one that sells bras and panties through a very successful,20-store retail chain in central New England, you must believe that he orshe will be able to give you insight on retail trends, what is selling, whatisn’t selling. Sure, it’s not going to tell you what is going on at the big-boxretailers like Costco, Wal-Mart or Sears, but it’s going to give you an ideaabout microtrends.

Investors can provide you with insight and information on aspects ofthe markets that may be out of your reach. They can tell you things that arehappening in areas you know nothing about, but where you are nonethelesslooking for returns.

Doctors, for example, in some cases can provide great information abouttrends in medicine, medical devices, and pharmaceuticals. For example, car-diologists would know which heart stents are working, which medical devicemakers are developing new technology, and which ones no one is using. Theyknow which stents are most efficient from a cost standpoint, as well as amedical standpoint and a lifesaving standpoint. It is insight that you willnot be able to get from a company or an investor relations professional. Itis what sometimes gives managers an edge!

Communicat ing during a Cris is

Dialogue with investors is never more important than during a crisis at thefund or a market meltdown. Managers need to open the lines of communi-cation to ensure the messages you are sending are received. In the summerof 2008, hedge funds of all shapes, sizes, and strategies were hammered.Some were off 6, 7, 8, or 9 percent a month, a quarter, and for the year.There were some funds that saw double-digit losses. Times were not goodfor many hedge funds during this time of inordinate volatility and economicuncertainty.




However, what allowed some of them to recover was that they kepttheir investors abreast of everything that was going on at all times with theirportfolios and answered questions, in some cases before they were asked.Communication, coupled with the strength of the fund’s organization, isgoing to allow many funds that performed poorly to survive to fight anotherday. The managers acted appropriately and sent their investors the message,“This is what went wrong, this is why we lost money, and here is where weerred in our ways. This is what happened, and more important, this is whatwe are going to do to fix the problem going forward.” The messages weredelivered loud and clear.

These managers realized two things that allowed them to maintain theirbusiness:

1. They need to be in constant communication with investors during badtimes as well as good. When the proverbial usual stuff hits the fan,investors know that they’re not only going to hear what’s going on, butthat they’re going to get the straight scoop from the people with whomthey’ve entrusted with their assets.

2. They can never give anybody too much information, nor too little in-formation. The key is to come up with the right amount of informationto give investors a clear and simple understanding of what’s going on inthe portfolio at all times.

Remember that when people start hiding things, whether it’s duringgood times or bad, there’s a problem. Investors can smell rats, especiallytoday in the wake of fraud and market malfeasance that has wiped outmany market participants. If you’re a smart money manager, you’ll listen towhat the market’s telling you, convert that information, and give it back toyour investors so that they have a clear understanding of what’s going on inyour portfolio.

JUMPING ON THE HEDGE FUND BANDWAGON

Now, there has been a lot of talk about the evolution of the hedge fundindustry over the last 25 or 30 years. It started with Jones, moved on toSoros and Steinhardt, and into the Robertson era. Since those days, theindustry has continued to evolve, as SAC, Lone Pine, Maverick, Blue Ridge,Clinton Group, and others paved the way for more and more asset growth.

All these individuals and organizations have created wealth for theirpeople, their investors, and their service providers. If you attend a hedgefund conference in Boca, Los Angeles, Geneva, London, or New York, you




always see and hear the same thing. Hundreds of people at these conferencesare trying to sell hedge fund managers something at the same time thathedge fund managers are looking for investors with significant assets to bemanaged. It’s all about the sale.

Whether it is administration, accounting services, legal services, financialservices, market data, or trade order management systems, the halls arelittered with all sorts of things to buy to make a hedge fund more efficient.

Over the last few years, a new phenomenon came on the hedge fundscene: lifestyle service providers. There are people trying to sell high-endmedical services, fractional ownership of jet airplanes, security, art consul-tations, and access to exclusive resorts and vacation clubs. It is fascinating.The hedge fund bandwagon is picking up speed by the minute.

A lot of people have their heads in the hedge fund trough and, frankly,I believe that a lot of people have their heads up the trough. My attitude hasbeen, and remains, that when everyone starts jumping onto a bandwagon,you need to get away from it as fast as you can. That bad boy’s going toflip, and you don’t want to get crushed.

Don’t read this incorrectly and think that I believe the hedge fund in-dustry is in trouble or that it’s going to go away. Quite the contrary, I thinkthe industry is ripe for continued growth for years to come. All I am sayingis that there is an inordinate amount of noise right now, and smart peopleare using noise-canceling headphones. In other words, if you are looking tostart a hedge fund or continue building your existing business, you need tomake sure you work with firms that have been around awhile. Be carefuland wary of new entrants to the marketplace.

The Year of the Hedge Fund

To put it a different way, I think we are about to enter the Age of the HedgeFund. I think 2009 and 2010 are going to be strong for the industry for fivereasons, which I list in no particular order:

1. It is relatively easy and inexpensive to start a hedge fund—the barriersfor entry are low.

2. Wall Street is going through a difficult time and laying off people—whenpeople lose their jobs, many tend to go out on their own and there isalmost no more lucrative career than hedge fund management.

3. The service providers have commoditized hedge fund services. For allintents and purposes, you can get a hedge fund in a box, if you want it.

4. Technology has made everyone an “expert” investor. Data are available24/7, 365 days a year, so people believe the playing field is level, forgood, bad, or indifferent reasons.




5. People like telling their neighbors at cocktail parties and on the sidelinesat their kids’ soccer games that they manage a hedge fund. It is a way tofeel glamorous or important, regardless of how much money you haveunder management.

For example, I know a guy who works in Rockefeller Center who starteda hedge fund with about $10 million in assets to invest in distressed securities.Sounds good, right? But this gentleman thinks that it’s all about the jeans.Blue jeans, that is. Now that he is a hedge fund manager, he thinks—and willtell anyone who will listen—that he needs to wear designer jeans to work.The outfit, you see, goes with the fund—or maybe the fund just demandsthe outfit. He speaks openly about this to friends and colleagues and thinkshe is the cat’s meow. I just think it is funny and a bit sad.

This gentleman and his partners were able to get the fund up and runningbecause the costs associated with launch were relatively inexpensive and aneasy hurdle to surmount. They have no experience in the fund businessand no experience managing money, except through their own personalinvestment accounts. They really have no idea what it takes. If the fundmakes it through two years, I will be impressed.

Where the Industry Is Heading

My conclusions from all of this are that that the hedge fund industry isprimed for growth. I believe that many, if not all, of the sophisticated in-vestors at pension plans, endowments, foundations and family offices aroundthe globe have realized that they need diversified portfolios created by man-agers who are going both long and short the market. These people havecome to the conclusion that investments that go one way, say, traditionallong-only investments, need to be dialed down, while those that go bothways need to be dialed up.

The real question is going to be posed to managers: Can you actuallydeliver on the hedge fund promise? Hedge funds are designed to deliveralpha. Simply put, alpha is a return in excess of the market. For example, ifthe market is up 10 percent and your fund returns 14 percent, the alpha yougenerated is the additional 4 percent. Alpha is the difference between yourfund’s return and the overall market’s return.

Can you create and manage portfolios that deliver alpha? Nobody hasthis answer; time is the only thing that will tell if the promise of hedgeperformance can be delivered. If the performance is uninspiring, investorswill walk away.

By contrast, as profits continue to flow into the industry, it is easy tosee that big hedge funds will only continue to get bigger. This means that




a fund complex that has $10 billion or $12 billion under management willsee the numbers grow to $20 billion or $25 billion, while the massive single-manager organizations and funds of funds with assets today north of $25billion or more will easily grow to $50 billion and then $100 billion. Thegrowth will come not only from new clients but also from performance.

If a fund has $250 million to $300 million right now with solid per-formance, I would expect that organization to grow to a billion over thenext few years. I believe that hedge funds with between a $100 million and$200 million under management, which would grow over the next few yearsat the same percentage rate. The simple explanation is that smaller fundswill grow as the big funds shut out “smaller” investors. It used to be thata million dollars was enough to get into a hedge fund, but as the funds getbigger and the slots fill up, some of the big firms are going to have to raisetheir minimums to $5 or $10 million. An endowment with $250 millionor pension plan with $150 million or even $500 million cannot afford totake its entire hedge allocation to one fund. Overall, the allocations by pen-sion plans, endowments, and other sorts of institutional investors will growover the next few years as investors continue to search for the alpha thattraditional investments do not provide.

Over the years, the hedge fund industry has had its share of both suc-cesses and failures, too many to write about (though we’ve gotten into someof the successes, and will discuss some of the failures in more detail later).There are funds that have been massively successful and funds that havebeen massively unsuccessful, but here’s what you need to know: At the endof the day, most funds are neither huge winners nor huge losers. They aresimply good businesses.



CHAPTER 5How Hedge Funds are Packaged

One of Wall Street’s greatest skills is its ability to create and sell productsto investors of all stripes. Whether it’s stocks, bonds, mutual funds,

mortgages, investment banking services, or anything else, every Wall Streetfirm is focused on selling. Selling to individuals, selling to institutions; it’s allabout selling. That’s where the bread-and-butter profits are made and it’sthe cash cow that allows firms to do other things, like trade for their ownaccounts or invest in real estate.

That’s why most successful Wall Streeters are excellent packagers. Creat-ing investment products such as hedge funds, mutual funds, exchange-tradedfunds, and funds of funds allows brokers and salespeople to develop revenuestreams from different areas of the marketplace. This translates into morecash—and more cash means more money in the pockets of the employees.This is not a bad thing; quite the contrary. Despite its reputation as money-grubbing (a reputation that’s unfortunately been burnished by the antics ofa few bad apples), Wall Street, for the most part, is a beneficial entity. Thinkof how difficult it would be to save for retirement, for example, without a401(k), 403(b), or IRA. I suspect most of us would stay into the work forcewell into our seventies without the returns that Wall Street can offer.

The key to success on Wall Street, whether you’re an investor, a broker,a hedge fund manager—regardless of your role, really—is to understandhow Wall Street makes its money. Wall Street is constantly evolving, andyou need to roll with it. Although this book is intended to provide you withinsight into the industry, you need to stay current through other sources aswell, such as industry Web sites and periodicals.

FUNDS OF FUNDS

When it comes to packaged products, funds of funds are one of Wall Street’sgreatest inventions. In the simplest definition, a fund of funds is exactly

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what its name implies: an investment vehicle that invests in other investmentvehicles. It makes money by charging a fee to the investors.

The evolution of the fund of funds business dates back to 1955 in Paris,when a social worker turned door-to-door salesman named Bernie Corn-field took over a company called Investors Overseas Services. Known asI.O.S., over the next two decades the firm took fund of funds investing toMain Street. At the firm’s height, Cornfield and his team of nearly 15,000salespeople went door to door to investors, primarily expatriates and service-men abroad, to sell them the company’s mutual funds, which, according toCornfield, invested in other mutual funds. I.O.S. became a huge organiza-tion, not only defining a new way for small investors to access the markets,but also setting the stage for what today is part of the $1.2 trillion hedge fundindustry. Initially, the investment community operated only single managerfunds, funds that either traded the whole stock market or a sector. However,over time, managers realized that they could build a product that investedin other funds, rather than just securities. And the fund of funds industrywas born.

From 1967 to 1974, the firm was the envy of every money manageron Wall Street, because it had billions of dollars under management. At itsheight, the firm was estimated to have more than $2.5 billion in assets undermanagement. To put that into perspective, $1 billion, in 1970, is equal toapproximately $1.8 billion in today’s money.1,2

Unfortunately for investors, I.O.S. turned out to be a massive fraud.Cornfield and company operated a very large pyramid scheme, with I.O.S.taking in money from one investor and using it to pay the “guaranteed” divi-dends of its existing investors. This, coupled with the bear market that sweptthrough the equity market in 1970, caused the firm to collapse. Cornfield andsubsequent owners and operators either went to jail or fled abroad. To learnmore about Cornfield and his antics, read a book titled Do You SincerelyWant to Be Rich?: The Full Story of Bernard Cornfield and I.O.S. (Libraryof Larceny, 2005), by Charles Raw, Bruce Page, and Godfrey Hodgson.

Despite Cornfield’s more-than-questionable ethics, the funds of fundsconcept works. It’s simple, elegant, and easy to understand. Funds of fundsallow investors to pool assets in order to gain access to more than onemanager by investing in a series of managers, creating a diversified portfolio.

Although Cornfield perfected the flair and excitement of the fund offunds business, the history of hedge funds of funds is a little less flashy.Cornfield and his salesman gave investors hope and tricked them into be-lieving that by investing in their products they would get rich. The conceptwas selling something that was too good to be true and ripping them offwith each and every sale. They were not only get rich quick artists but theyplayed on individuals’ patriotism, lust of money, greed, and desires.



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The roots of hedge funds of funds date back to the 1970s; however,the industry really began to grow in the wake of the October 1987 crashof the stock market. The stock market turmoil of the late 1980s promptedinvestors to demand greater access to hedge funds, and, in turn, access tohedge fund managers.

Within the past decade, a large number of organizations have gotten outin front of the fund of funds industry and have built fantastically successfulbusinesses. The premise for each and every one of these firms is that investors,particularly institutional investors, shun the responsibility that comes withallocating assets directly to hedge funds because there is potentially too muchrisk in allocating to a single manager. Funds of hedge funds provide coverfor their institutional rear-ends.

Assessing risk is hard work. Performing due diligence isn’t much easier.Naturally, most people want to avoid taking the blame for an investmentgone bad. Funds of hedge funds solve both problems—the investor getssomeone both to do the due diligence and to take the rap if things don’t gowell. Again, it’s simple, elegant—and very attractive to many investors.

HOW A FUND OF FUNDS WORKS

Here’s how it works: Clients invest their money in one fund. Its managertakes those assets, combines them with other investors’ assets, and spreadsthem among a number of hedge funds. This solves two other problems forthe investor, as well: how to diversify assets through a single entry point,and how to gain access to multiple managers, regardless of how little moneyyou are able to put to work.

The fund of funds industry has grown significantly over the last fewyears. Today, there are fund of funds complexes that range in asset sizefrom less than $30 million to well into the tens of billions. Organizationsoffer funds of funds in almost every corner of Wall Street, because theymake sense for a lot of investors. In light of the volatility and growth of themarket since 1987, institutional investors (e.g., pension plans) have realizedthat they need not only to make good investment decisions but also toprovide cover for their well-tailored behinds.

Funds of funds do both, and ensure the most important thing of all: jobsecurity. If investors weren’t concerned about their jobs, a lot fewer assetswould go into funds of funds. “Cover your ass!” should really be the rallyingcry of the fund of funds industry.

The industry is booming. Firms like K2, Mariner, Mann, GoldmanSachs, and others are expanding their operations in the fund of funds busi-ness. Where are they getting the assets? From the likes of the pension plans




of the State Teachers of Arkansas, the State Teachers of Massachusetts,and the Transit Workers Union. Hundreds, if not thousands, of pensionplan managers around the country want the opportunity to invest in hedgefunds. That’s where hundreds of millions of dollars are coming from forfund of funds managers to invest.

FUND OF FUNDS ECONOMICS

Size matters. On the one hand, a fund of funds with less than $50 millioncan be very difficult to run. Why? Because a fund of this size cannot afford tohire staff to operate a business or conduct thorough due diligence on morethan a handful of managers because the fees associated with the businessare low. A fund of funds with $500 million, $1 billion, or more, on theother hand, becomes a true cash cow, because the management fees it gen-erates can be quite substantial. For example, if a fund has $500 million or$1 billion in assets under management and assesses a one percent manage-ment fee, the fund is generating $5 or $10 million a year, respectively, in feesindependent of any performance income. Let’s say that the costs of runningthe organization is kept relatively low, maybe $2 million a year. For thehedge fund with $500 million in assets under management, the owner ofthe firm can clear nearly $3 million in management fees alone. However,the firm can become even more lucrative, because hedge funds incorporatea performance fee. More important, as the fund grows, the firm will need tohire more employees, but it will not need to double the size of its operationin order to manage double the amount of assets. It’s an economies-of-scaleissue.

Most funds charge a 1 percent management fee on invested assets, plus a10 percent manager incentive fee on the return to investors. So, for example,in a fund of funds with $100 million in assets under management, themanager would earn a 1 percent management fee, or $1 million a year, paidquarterly, as well as an incentive fee on the net new profits of the fund. Ifthe fund was up 10 percent, or $10 million, the manager would earn anadditional $1 million, for a total of $2 million.

In some cases, funds of hedge funds include hurdle rates attached totheir incentive fees. The hurdle is the performance bar that managers haveto leap before they can charge an incentive fee. Hurdle rates are structuredin various ways. Some allow the manager to be paid on all of the fund’sreturns once they exceed the hurdle, whereas others allow the manager toearn the incentive fee on only the return above the hurdle. These terms willbe outlined in the fund’s documents. Read them. I’ve outlined here howsome fees are earned.




Let’s say that a specific fund of funds has a hurdle rate of 9 percent. Ifthe fund earns a 10 percent return, the manager would receive 10 percentof the 1 percent, the amount earned in excess of the hurdle. If the fundearns 17 percent, the manager would receive 10 percent of the 7 percent,not 10 percent of the entire 17 percent.

Not all firms have hurdle rates; it depends, in large part, on the manager.The manager will impose a hurdle rate based on his or her beliefs aboutwhat the clients want. Some managers believe that a hurdle rate adds tothe marketability of a fund because the fees are lower if the fund does notperform; others think that because it limits the upside, it has a negativeeffect on the organization. I believe that the key to attracting investorsand their assets is to create products that they want—and if your investorswant hurdle rates, then you need to have them in place. As an investor,you need to be aware of the ways in which hedge fund fees are structured.As a manager, you need to communicate your fees properly so there is noconfusion.

Unfortunately, confusion can abound. For example, some firms imposea higher incentive fee based on use of leverage or based on just a straightinvestment strategy. For the most part, the way incentive fees are chargedreally depends on the manager and how the fund is structured. For example,if the fund employs no leverage, the fee might amount to a 1 percent man-agement fee and a 10 percent incentive fee. However, if the fund is leveraged,it may charge a 1.5 percent management fee and a 10 percent incentive fee.For the most part, though, investors pay a 1 percent management fee and a10 percent incentive fee when they invest in funds of funds.

As a fund of funds investor, the most important thing for you to knowis how much money the fund has under management. When you have thatfigure, you can do a back-of-the-envelope calculation to determine howstrong the organization is and how likely it is that it will be around yearafter year. A fund of funds with assets of more than $100 million has thepotential to earn at least $2 million a year in revenue. A fund of funds withassets of less than $100 million is likely to not generate significant revenueand might not be all that strong.

THE COSTS OF RUNNING A FUND OF FUNDS

As a budding fund of funds manager, you need to think about how muchit costs to run a business. Frugality is important, but even the most frugalorganization needs to spend at least a few hundred thousand dollars a year.Whether it’s on employees, rent, lights, water, insurance, travel, or otheroffice expenses, the numbers add up. A fund of funds with $100 million in




assets, earning $2 million a year, won’t necessarily be very profitable becauseits nut—the money it needs to keep its doors open—is so large.

Here’s why. Let’s say that a fund of funds is operating on a 1 percentmanagement fee and a 10 percent incentive, regardless of the hurdle, andthat it has $50 million in assets under management. On a $50 milliontrade, or for a $50 million organization, 1 percent is $500,000. If it earns10 percent on the $50 million, that’s $5 million. Ten percent of the $5 millionis another $500,000. So the net income for that fund is approximately$1 million a year.

On $1 million a year, you have to assume that the cost of running thebusiness is somewhere between 50 and 150 basis points (a basis point isone-tenth of 1 percent). So this particular fund is earning only 100 basispoints, which means that it is going to run the business at a net loss formost of the year. In real terms, then, it is probably not going to be able tohire good analysts, not going to be able to build that infrastructure, and notgoing to be able to compete against other organizations. And let’s not forgetmarketing costs—without marketing, you have nothing.

Let’s drill deeper. A hedge fund needs investment analysts. Let’s say agood analyst costs $200,000 a year in salary and a crappy analyst costs$100,000 a year in salary. For our hypothetical fund, let’s assume that themanager settles on a mediocre analyst with a salary, bonus, and extras,all totaling $200,000 or so. This analyst will check up on managers in theportfolio, source managers for the portfolio, and be in constant contact withthe Street in order to make sure all is well. This guy or gal is costing the firmat minimum 20 percent of its income—and that’s for just one person.

Most fund of funds that have less than $100 million under manage-ment are really just mom-and-pop shops. These organizations are run verylean and rely heavily on the founder for manager due diligence, portfoliocreation, and marketing. That’s a lot of hats to wear, and it’s very difficultto do successfully. I believe that many organizations of this size will have adifficult time growing, as the hedge fund industry becomes more and moreinstitutionalized.

Investors have gone from being just a group of high-net-worth individu-als and family offices to being pension plans, endowments, foundations, andinsurance companies. The bulk of the assets in most hedge funds now comefrom institutional investors, as opposed to individual investors. And institu-tional investors are far less apt to work with small funds because of the sizeof the assets under management. However, it’s not unheard of for a fundof funds with less than $100 million to get into a serious asset-growinggroove and become an organization managing $1 billion. As the firmgrows, it will naturally expand its infrastructure and all other aspects of itsoperation.




There are a few ways fund of funds managers can increase their successas the industry continues to grow. The first is to pay attention to trends ininvesting. If you’re a fund of funds manager, you need to stay focused andunderstand who is investing in fund of funds and what sort of allocationsare being made to the industry. Second, you need to understand what theright market for your product is, and who is and is not likely to invest in it.Know your market and build your product accordingly. I can’t emphasizethis enough. Finally, you need to focus on getting assets in the door andcreating a pipeline of new investors. Too often, fund of funds managers getso focused on the portfolio and spend so little time on marketing that theyend up with little or no money.

At the end of the day, it’s like saying that you’re going to build a greatengine. You’ve got all of the tools and materials that you need to build agreat engine, but if you don’t have access to gasoline, the engine will notbe able to run. That’s a real problem, and many fund of funds operatorsdon’t take the costs associated with the business into consideration prior tolaunch.

Now I know of a number of small funds of funds, and three in particularare run by a dear friend of mine. He has significantly less than $100 millionin assets under management, and it’s a nice little business. His biggest fundhas $30 million; the other two have $20 million and $5 million each. Theyall do fairly well and have compounded at 10 percent for a number ofyears. He runs an extremely lean shop and is considered a player in theindustry.

Even so, my friend cannot get arrested naked in front of new investors.I’ve known him for about five years, and within that period his firm hasshown little or no growth beyond portfolio returns. He’s failed at marketing.He understands the value of marketing. He’s willing to dip into his ownmoney, or the fund’s, to pay a marketer. But he can’t find a marketer towork for him. Hiring a marketing person is tough, because you need to putcapital at risk and nothing protects you from losing it all. A big firm canabsorb a mediocre marketer because he’s one of many. At a small firm, thebuck stops with you, and if you’ve hired a dud, then you’re finished! This iswhat has held my friend back. It’s why he cannot raise assets, and it’s whythe firm is not growing.

FUND OF FUNDS GROWTH

To hire a good marketing person to go out and raise assets for the firmcould cost at a minimum $100,000 for salary, plus benefits, and then thatperson is going to want at least 25 basis points of any income earned from




new assets that come into the fund as a result of his or her work. It gets tobe expensive. It also can be quite nerve wracking. There are a lot of issuesassociated with running a small business, and keeping costs under control isamong the most important, particularly as you’re attempting to grow andexpand.

But success isn’t unheard of. Several funds of funds have grown quitenicely over the years, and some that have become fantastically successful.One is located some miles outside of New York City in Summit, New Jersey.When I first started talking to the people there, it was small, say, just southof $150 million under management. Still, over the last few years, as theindustry has grown and investors have been in search of funds that they cansink their teeth into, the firm has experienced significant growth.

How has the firm done it? Its success stems from its ability to find asuccessful distribution partner—an organization that you can work with tohelp you raise assets. One of the principals of the firm in question founda high-net-worth retail broker who wanted to develop a relationship witha fund of funds. The broker got the fund cleared through his complianceoffice; since then, he’s been sending investors to the firm to the tune of $5million or so each month. Do the math: New assets to the fund at $5 milliona month, for 12 months, means $60 million in net new money. This has beengoing on for about two years, with little or no end in sight. The manager ishappy, the broker is happy, and most important, the clients seem happy. Itis truly a win-win-win situation for all parties involved.

This story is not an unusual one. Hedge fund managers will often strug-gle for a while and then see the business grow at a fantastic clip. It comesdown to distribution or the ability to raise assets and performance—the twomost important pieces of any asset management business.

At the time of this writing, some of the largest funds of funds had as-sets in the tens of billions. Some of the biggest ones are run by UBS, with$45 billion in assets under management; Man Investments, with $35.6 bil-lion; and Union Bancaire Privee, with $20.8 billion in assets. These aremassive organizations inside massive companies that are a making a for-tune both for themselves and their investors, all by picking successful fundmanagers.

FUND OF FUNDS BUYOUTS

Lately, several funds of funds have been bought out by, or have sold stakesto, larger, more sophisticated organizations. The jury’s still out on thesetransactions, but so far, they seem to be win-wins for all parties involved.K2 Advisors LLC, for example, which at the end of the first quarter of 2007




had over $5.5 billion under management, entered into a transaction with aprivate equity firm started in 1994 by David Saunders and Doug Douglas.In March 2007, it sold a minority stake to TA Associates Inc., a large andwell-respected private equity firm. The success of K2 is based on a numberof factors, including the founding partners’ pedigree, its infrastructure, andits ability to create diversified portfolios with little or no correlation to themarket.

Another example, albeit a little more dramatic, is the sale of CadoganManagement Inc. to Fortis Investment Management Inc. in late fall of 2006.Fortis purchased 70 percent of the equity in the firm from its founding part-ners and combined the assets of its fledging money management businesswith Cadogan’s. When the transaction was completed, the firm had nearly$3.7 billion under management and was able to take advantage of the in-frastructure of one of the world’s largest banks to continue to roll out newfunds and add to the distribution network.

These are just two of the many deals made in 2006. The hedge fund andthe fund of funds industries are poised for significant growth because larger,more sophisticated firms—such as investment banks, brokerage firms, com-mercial banks, private equity firms, and insurance companies—are alwayssearching for talent. By taking out or taking over funds of funds, they areable to gain access to talent that, when married to their distribution, willcreate one hell of a business.

MANAGERS OF MANAGERS

Over the last few years, as the hedge-fund industry has proliferated aroundthe world and developed into a must-have asset class, along with the topic dujour at cocktail parties, a new group of money management organizationshas evolved, called managers of managers. These managers of managers, orMOMs, are investment advisors who can provide separate account productsfor hedge-fund investors.

Here’s how it works. An institutional investor comes to a MOM andsays, “Look, I want to invest in a diversified portfolio of hedge funds but Idon’t want to use the fund of funds and I don’t want to go into individualfunds. What I want is separate accounts at the managers I like.”

Investors choose this strategy, because they (1) are looking for moretransparency, (2) want to negotiate terms, (3) don’t think any of the fundsof funds are worth their salt, or (4) don’t like the fee structures of the fund offunds. So what happens? The manager of managers says, “Great; I’ll createa diversified portfolio of investments for you, based on a separate accountstrategy.” To do this, the MOM goes through a series of questionnaires and




meetings with the investor to discuss various strategies, as well as variousideas on how the investor wants to earn money over the next few yearsthrough these investments, and provides a look at potential strategies forboth static and volatile times in the market.

With all of these data points in hand, the MOM goes out and identifieshedge fund or other alternative investment managers, and offers them anopportunity to manage a slice of this diversified portfolio. Once the managersare found, the MOM opens a separate account at each of the firms on behalfof the investor, and the assets are wired in for management. In some cases,the MOM will maintain custody of the assets and the manager will simplytrade the account, instead of housing the account at the underlying firm.It varies, depending on the needs of the investor and on both of the firmsinvolved.

MOM KNOWS BEST

Here’s what it looks like in practice: Say the investor wants to allocate $20million to five managers. The MOM will find five firms that meet both itsand the investor’s criteria and will open accounts at each of them. Usuallyonce a month, but sometimes once a quarter, the manager of managersreports back to the investor with a report that details the performance ofthe entire portfolio and the individual managers.

What is interesting about this structure is that the MOM has completecontrol over the assets at all times and can dial up or dial down an allocationbased on performance, market movement, or economic trends. To make thiswork, the MOM needs complete transparency over all of the accounts, anduses its own risk system to determine if the managers are delivering ontheir promises. In some cases, MOMs require real-time data on how theinvestments are being made and where the assets are being put to work inorder to gauge what’s working best at any given time. This is very valuableto investors because their advisors (in this case, their MOM) who get thesedata on a regular basis can then use them to make better investments fortheir other portfolios.

For example, it means that an investor can see, from the MOM’s report,that the Forex manager may not be doing so well, and can immediately shutdown that account and move the assets to another manager who they believewill do better. Or, better yet, if it’s an extremely volatile market or variousmarkets are doing better than others, the MOM can dial up or dial downthe exposure to these various managers and, in a sense, always be in controlof the diversification aspect.




THE PROS AND CONS OF TRANSPARENCY

Using funds of funds and managers of managers is a great way to allocateassets and a great way for investors of all shapes and sizes to access pro-fessional money managers. It’s important to realize, however, that in somecases, the manager of managers may be asking for too much information.Even though the MOM may be getting data on what is going on in theportfolios, it doesn’t necessarily need this information on a regular basis.There is such a phenomenon as information overload, and when you havetoo much data in front of you, it can be hard to push through the jungle tofind the right tree.

Furthermore, oftentimes investors misunderstand the value of trans-parency. Don’t get me wrong: Transparency is important and good, butmost people have little or no idea what to do with the data that they receiveonce they receive it. That means that having access to a trading blotter—thedaily list of trades that are executed by the fund manager—is of little or novalue because the person receiving the information doesn’t know what dowith it.

If, by some chance, some of your investors do request the data and doknow what to do with it, then that’s great—for both you and them—becauseit allows you to provide them with good information about what you aredoing, and it gives them the peace of mind that comes with knowing thattheir money is being well managed. It’s not going to affect the way you, asthe underlying manager, manage their assets.

DIVERSIFYING YOUR PORTFOLIO

As an investor, I am a firm believer in funds of funds. I’m a firm believer inmanagers of managers, and I’m also a firm believer in direct investment.

There are several reasons that all three of these investment vehicles makesense. Number one, you need to have a stake in how your money is managed.Number two, you need to evaluate your skill set to determine if you have theskills to manage money effectively. If you feel that you do, then you should beable to pick money managers. But if you don’t know how to manage moneyor you don’t understand how money is managed, it’s important for youto find professionals who can help you—smart people who are educated,understand the way of the market, and have a thorough background inthe way things work. You need that environment. Regardless of marketvolatility and regardless of what’s going on today, the key to successfulinvesting is understanding, as much as possible, what’s going to happen




tomorrow. Nobody knows for sure what’s going to happen tomorrow, butthe more tools you have in your shed that you know how to use, the moresuccess you’re likely to have.

To diversify, you need to create a portfolio that is going to take ad-vantage of the multiple opportunities in the market. Find investments thatare not simply concentrated in one area or one position of the market. Forexample, a diversified fund of funds will include equity-based funds, fixed-income funds, commodity funds, and potential hard asset funds. The idea isto make sure you are capturing profits from multiple areas of the market-place without being exposed to a single area of the market, should that areago bad. There are some funds of funds that concentrate in just equity-basedmanagers; to diversify, they choose various managers who trade different ar-eas of the equity markets. In effect, they try to create a portfolio of managersthat own different stocks.

Again, the key is to avoid concentrated positions because that can leadto losses. If all of the managers in your portfolio own the same positions andthose positions go down, your portfolio is going to take a significant hit.Funds of funds managers need to conduct good due diligence to understandwhat the underlying managers own in their portfolios.

AVOID ING COMMON PROBLEMS

Although MOMs and funds of funds are unique business, they’re stillbusinesses—and if they don’t follow a sound business model, they’re notlikely to stick around for the long haul. A lot of the problems with managersof managers and funds of funds stem from the fact that many of the orga-nizations can’t continue to provide a valuable service to investors, becausethey don’t have the skill and don’t generate enough income to afford theinfrastructure. The reason for this, simply put, is they just don’t have thefinancial capability to do it. Many managers of managers are not runninggood business models. Many of them are simply creating portfolios withoutan eye toward diversification, and in some cases, are working in a way thatprovides little or no value to the underlying managers.

The key for you, either as an investor or a manager, is to find peoplewho are sophisticated, who you believe understand what they’re doing, whocommunicate well, and who have a good understanding of what your needsand expectations are, and, most important, what you want from them. Inother words, if you’re an investor, you need to conduct due diligence on theinvestor as much as they do on you. Ask questions about their investmentstrategy, style, assets under management, allocation theories, expectations,and prospects. If you don’t feel like you’re getting that from these people, it




doesn’t matter what kind of operation they’re running or how impeccabletheir reputation—whether they’re a $1 billion fund of funds or a $5 billionfund of funds, or a $30 million fund of funds, a $50 million manager ofmanagers—get the hell out of there and stop using them. Stop giving themmoney to manage. Find people you can communicate with.

If you’re a money manager, your job is to communicate directly tothe funds of funds or managers of managers, so that they know what isgoing on with your fund at all times. There are thousands of people outthere who do both these jobs. There are registered investment advisors whoact as managers of managers, and there are hundreds of funds of fundsthat are putting assets to work. As a hedge fund manager, your job is togo out and talk to these people, get in front of them, show them whatyou’re doing, explain to them your strategy, develop a product for them,and create a marketing pitch for them. That way, when they give you $100,they’ll understand exactly what’s happening with that $100.

Many people discount funds of funds because they think that it’s fastmoney, or money that’s going to move quickly in and out of the funds. Notthe case. Most funds of funds are sophisticated and well established, andaren’t moving money around with great frequency. In fact, just the oppositeis true of most. They’re finding managers they like and sticking with them.It’s worth it to search them out. That’s where a lot of the money is.



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CHAPTER 6How to Raise Money

I t’s the money, stupid! If you’re just getting started—either as an investor ora hedge fund manager—that needs to be your rallying cry. Let’s be blunt:

In many instances, new (and some veteran) hedge fund managers have littleto no idea how to raise, acquire, and access capital to manage. These peoplebelieve that hanging out a shingle and telling a few people that they arein the hedge fund business means that money will literally flow into theirtrading accounts. The hedge fund industry doesn’t work that way; instead,assets are commonly raised from three different groups of investors duringthe life of a hedge fund.

FRIENDS AND FAMILY, REFERRALS, ANDPERFECT STRANGERS

The first and most common way to raise money is through friends andfamily. It’s simple. You set up a fund. You talk to the people you know.You tell them what you’re doing. You ask them for money. If they like you,they trust you, they know you’re smart and capable, and they have a littlecash to spare, boom, a wire comes in and you’re off to the races. The secondway to raise money is through acknowledgment from other people in theindustry. This money comes from people you know on the periphery—otherhedge fund managers, various institutional investors, and perhaps formercolleagues, people you know but who aren’t among those that you considerfriends or family.

These two groups are the low-hanging fruit: investors who are easilyidentified, defined, and accessible to new managers, resulting in the assetsneeded for the launch of the fund.

Dia l ing for Dol lars

The last group is made up of perfect strangers. Now, it’s time for sales-manship 101: dialing for dollars. Dialing for dollars is difficult. It’s scary.

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Nobody really wants to call someone solely to ask for money; further, manypeople believe that the practice runs afoul of hedge fund marketing rules.In the previous chapters, we learned that there are significant rules aboutwho you can contact (accredited and super-accredited investors, or qualifiedbuyers, for example). However, there are also a number of rules about howyou can prospect and the right and wrong ways to solicit new investors.

First, you need to know that you cannot call someone blindly or com-pletely cold, so proceed with extreme caution. To ensure that you act appro-priately, consult with your attorney first. Rules change, and your attorneycan advise you of the most up-to-date information on what you can andcannot do. Read those last three sentences again. Do not rush headlonginto this: Proceed carefully and cautiously, or you’ll put everything you’veworked so hard to achieve at risk.

Some of the rules are simple. For example, you cannot openly advertise,so don’t buy a Super Bowl ad for your fund or put up a billboard in TimesSquare. You’re not supposed to talk openly about your fund unless youare asked, and you have confirmed that the person asking is an accreditedinvestor. Another rule is that you cannot solicit blindly. This means thatyou can’t just go up to someone on the street and say, “Hi, I’m a hedgefund manager. Would you like to invest in my fund?” You need to have metthe person before you solicit, or the investor needs to solicit you—to call ore-mail you asking for information. Again, talk to your lawyer. He or shewill give a list of the dos and don’ts and you will be on your way.

Making Connect ions

That said, in today’s competitive environment, everyone calls everyone. Iwant you to stay on the straight and narrow here, but let’s not be naı̈ve. Thebest analogy I can use is that everyone knows the speed limit and everyonespeeds! Speeders know that they are breaking the law but they do it anyway.Marketers know that they are not supposed to cold call, but some peopledo it anyway, because they need to raise assets.

Let’s say you hear that the Verizon pension plan is investing in hedgefunds. You’re going to find out who runs investment allocations at thecompany and get that person on the phone. If you’re at a cocktail party andsomeone asks what you do, before you know it, you may be holding courtwith a group of people, discussing money and markets. Good luck.

The reality is this: As a hedge fund manager, your most important job isto gather assets and manage the hell out of them. Most managers think onlyof the latter and nothing of the former, because they do believe that “if youbuild it, they will come.” I’m sorry to tell you that it’s not true. That sortof thing happens only in the movies. You need to get in front of as many



How to Raise Money 71

people as you can. Talk to them about your strategy, your abilities, andmost important, how you are going to make money for them. Get out there.Market your product. Be a salesman. You need several different versionsof an “elevator speech”: a pitch that’s condensed, that’s souped up, andthat can be delivered in 30 seconds—the time it takes to ride an elevatorto your floor. You need to know your audience and know which versionto use. Your elevator speech should include the following information: sizeof the fund, investment strategy and length in operation and outlook forthe future. Performance is secondary and should be discussed at a formalmeeting. Performance is not something to be discussed right out of thebox. In my experience, when I lead with style and strategy I get a muchbetter response and interest than when I lead with numbers. Remember,past performance is no indication of future performance.

It is important to know what investors are looking for before you bom-bard them with information about your fund. Again, I suggest you call aformal meeting in which you ask about their allocation process, their cur-rent portfolio, their thoughts on the future, the performance expectations,their appetite for new investments, and other pertinent items about howthey make investment decisions. The key to this meeting is to listen. Listenand take notes. But really listen. That way, you will be able to present themwith an idea that will work for them, or, conversely, tell them that you don’thave anything for them but will keep them in mind.

Any time you meet with an investor, listening is what is important.Speaking is secondary.

One of the greatest people I ever knew in the hedge fund industry, afund of funds manager, told me that he decided whether or not to investin a fund based on marketing meetings with the salespeople and the moneymanager. If they told a story that made sense and had legs, it was a fund toget involved in. If the story was unclear or incomplete, well, it was a fundto pass on.

Here are some red flags. Let’s say a manager’s fund is making moneyin the technology sector when everyone else is losing money in that sector.It can happen. But if the manager can’t explain how and why his fund ismaking money in a sector that’s tanking, the investor will—or should—beconcerned. Other red flags include incomplete information about employ-ment or educational background. What are they hiding? In my opinion, ifsomeone lies about where they went to school or where they worked, mostlikely they are going to lie about the fund and its operation. You need toget the information, kick the tires, and feel comfortable. After all, it is yourmoney!

If you believe your product is truly the greatest thing since sliced bread,then you’ve got to shout that from the roof tops. Do it legally, but do it.




Again, talk to your attorney before you begin marketing or asset gath-ering. Realize, though, that your attorney is the “head of sales prevention.”Your attorney’s job has nothing to do with running a business or gatheringassets. All he or she is really trying to do is tell you how not to get in troublewith the law. Since attorneys are so good at sales prevention, and their jobsare so specialized, you’ll need to find other competent people to help yougrow your business. Some funds look to capital introduction services forthis help and guidance.

CAPITAL INTRODUCTION SERVICES

The capital introduction team is usually the group of people from your primebroker that is charged with raising money for you. Their job is to develop amarketing strategy and get you in front of potential investors. They’ll helpyou figure out who you need to talk to, to get your hedge fund funded. Thecapital introduction team will host capital introduction breakfasts, lunchesand dinners, in which you’ll make a 15-minute presentation where you de-scribe your fund, outline your strategy and, ideally, get people interested ininvesting in your fund. The idea is to meet potential investors—think of it asspeed dating for hedge fund managers and investors. Most of the big primebrokers, and even some smaller prime brokers, now offer capital introduc-tion services. Some are good; some are bad. But don’t put all of your eggs inthe capital introduction basket: Capital introduction teams’ compensationisn’t linked directly to their success. Whether they’re successful or not, theystill get paid. In other words, these people do not have any skin in the game.

From the business side, capital introduction is really just an add-on prod-uct. Most, if not all, brokerage firms feel that they need to offer value-addedservices, including technology resources and office space, to stay competi-tive in the prime brokerage business. But there’s a problem with this theory.The rules regarding how money is raised for hedge funds are so strict andstringent that it’s impossible for a brokerage firm to earn commission feesfrom the assets that are raised for a hedge fund through capital introductionefforts. If a hedge fund manager lands a client or two through the broker’scapital introduction efforts, there’s no way for the manager to compensatethe broker.

From the brokerage firm’s business standpoint, capital introduction isa cost center—essentially, an overhead expense rather than a profit center.And profit is the point: On Wall Street, no one wants to work on the costside of the business. This is not to say that the capital introduction servicesare useless, quite the contrary—they can add real value. Just don’t expectthem to show up at your door with buckets full of money. Use the services




they offer and then go out and meet with the investors they introduce youto. The capital introduction team can help get you in front of people, butit’s up to you and your team to bring in the assets.

THIRD-PARTY MARKETING

Third-party marketing is the evil stepchild of the hedge fund new business.It’s viewed as a bit sleazy, but frankly, it’s more than a little misunderstood.People who are not third-party marketers look at these folks as the used carsalespeople of the hedge fund industry.

I don’t subscribe to this theory. Third-party marketers are either in-dependent groups or individuals who raise money for hedge funds. Manythird-party marketers really do a good job, are quite plugged in, and arecapable of raising substantial sums of money for new and existing funds.There’s a widespread perception in the hedge fund industry that third-partymarketing attracts unsavory characters—people who can’t make it in otherareas of the industry. To this I say, “phooey.” You need money to run yourbusiness. Hedge funds run on money—it’s their gasoline. If you don’t haveany gasoline, guess what? Your car ain’t going anywhere—your fund willstall before you can turn the key in the ignition.

Third-party marketing is a very interesting business. For the most part,third-party marketers are very good at finding assets from funds of funds andother, more traditional, hedge fund investors. These people are experiencedasset raisers who have extensive contacts with investors. They have strongrelationships and often know how to get in front of the right people at largeinstitutions because of their past experience in bringing managers to thesecompanies. Third-party marketers know how to get to small, medium, andlarge endowments, foundations, and even insurance companies.

Choosing a Third-Party Marketer

There are two things that you need to be aware of when using a third-partymarketer. First, the marketer will need a strong incentive to raise assetsfor you. Second, you really need to understand from whom and how themarketer is going to raise assets. Who will be targeted, both from an investorprofile and a geographical profile? Ask a lot of questions. Find out how deepthe network of potential investors is, where the assets come from, where themarketer was successful and where he or she failed—basic, simple, thought-provoking questions about their business.

Many third-party marketers’ modus operandi comes down to gettinga fund manager and the marketing material in front of as many people as




they know in hopes of getting some assets to come in over the transom.The concept is simple: Throw as much spaghetti on the wall as possible andsee what sticks. There are advantages and disadvantages to this approach.The shotgun approach can work, but it is also very important to develop athoughtful, intentional plan of attack and target market. The plan shouldinclude details of who the marketer is going to contact; what material theyare going to use to communicate the fund’s story to potential investors; afollow-up plan for staying in front of the investor; and an action plan forbringing in the assets.

A combination of the shotgun approach and an intentional plan usuallyworks best. In most cases, the marketing company is only paid when themoney comes in, so it’s in their best interest to do two things: Pick investorsthat they believe they can successfully pitch, and build extremely strong rela-tionships with these investors so that they can spend time showing productrather than going after new investors. In their business, time truly is money.

When it comes to picking a third-party marketing agent, be sure thatthey truly understand your product, your style, your strategy, your firm,and, most important, you and your organization. You should provide theminformation on how the firm works, who makes decisions, which people arepartners, which are employees, and how each is compensated. Marketersneed to know the firm has the staying power needed to maintain its businessduring good and bad periods and that the partners are committed to itssuccess.

Most marketing people, regardless of whether they are inside (workingfor you in your office) or outside (are contracted by you, as third-party mar-keters), will say that they know every potential investor for your fund. It’shard, then, to judge how good these marketers’ relationships truly are untilyou see them in action. When one of my friends meets a potential mar-keting person for his fund, he asks them to provide a list of potentialinvestors. To his surprise, often these marketers don’t respond to this andfall off the map. Sometimes, a marketer will send him a directory of endow-ments and foundations. These directories aren’t hard to get your hands on,and are worth about as much as the paper they are printed on. It is very hardto determine who knows who, and the strength of their relationship withpotential investors. If you compensate your marketer solely on the basis ofasset flows, however, you can bet that person is fairly confident that he orshe can raise money for your fund. Let them eat what they kill and you willfind success.

My experience with third-party marketers to date has been short, some-what sweet, and a bit sour. Some groups are nothing short of awesome (Ireally mean that). Some are absolute dirtballs (and I mean that, too). Third-party marketers are an interesting breed. I had the pleasure of meeting a




three-person team that worked only with new managers: funds that werejust starting out, with $100 million in assets. In my opinion, if a fund has$100 million in assets, it doesn’t need this sort of third-party marketer. Theyneed a third-party marketer that is able to get them to $500 million in assets,who can help them reach the next level and also help them develop and im-plement an internal marketing system that works in conjunction with theirefforts.

Another third-party marketer of my acquaintance only works withfunds with assets of more than a billion dollars. This group works withfunds with internal marketing teams to help them exploit opportunitieswith large investors. The team has extremely close ties to many large insti-tutional investors, and works with these larger funds to get them in front ofthe investors. The group is able to get the big funds in front of the “right”people, but has had little success in reeling in the catch.

In the five years that they have been in business, they have raised in-significant, if any, sums of money for their managers. I work closely with thisgroup and give them advice from time to time on what to do and what notdo with their business. And they work hard going after people and puttingtheir managers in front of potential investors. A firm like this can stay inbusiness because they earn fees from the monies that they have placed (inmost cases, in perpetuity). Further, it does not cost the fund managers anymoney to bring them in, as they are only paid on success.

It’s a tough business, and it really comes down to relationships. Third-party marketers need to be great networkers. They need to be able topick up the phone and call anyone, without worrying about the reac-tion. In short, they need to “always be closing.” It’s not easy. Do yourhomework—understand their process and abilities to the extent possible,through interviews and reference checks. In the end, though, you need to gowith your gut. If you believe that this person or this team will be successful,try them out for a period of time and see what happens.

When to Hire a Third-Party Marketer

If you plan to use a third-party marketer to raise money, consider hiringthree groups: one for the East Coast, one for the West Coast, and one forEurope. You may also consider hiring a marketing group for Asia; however,in that part of the world, it can take an extremely long time for assets tomaterialize. If time is of the essence, then you might think about forgo-ing this region—at least until your fund is up and running and has a firmasset base.

You need to know where you stand with a third-party marketer beforeyou engage the company to raise assets for you. How many clients does it




have? If you are one of 20 groups that it raises money for, be sure that youknow why the marketer want to work with you and that you thoroughlyunderstand its plan of attack for your fund specifically. If yours is the onlygroup it is working with, you also need to understand why this is the caseand, again, how they plan to raise money. Either case or something in themiddle will work—you just need to ask a lot of questions. As I alreadymentioned, you need to know how they run their business, where theirrelationships are, and what success and failures they have had. Make sureyou get and understand the answers.

Over the last few years, as hedge funds have really gone mainstream,many third-party marketers have decided not to work with start-up funds.These marketers believe that institutional investors, or funds of funds, don’twant to risk their assets on new, untested organizations. There is sometruth to this theory, though not across the board. There are, in fact, manyinstitutional investors who like working with new managers and put plentyof money into these types of funds. However, most third-party marketerscharge a percentage of the management and incentive fee (usually 20 percentof each) earned on the assets they bring to the fund. From their perspective,it’s better to work with a fund with assets of $50 or $100 million, bringingtheir minimum ticket to somewhere between $5 and $10 million.

Investors are, by and large, cautious with their hard-earned cash, andno investor wants to make up more than 10 percent of the assets in anygiven fund. If a fund has less than $50 million in assets under management,the maximum amount an investor will want to put in is less than $5 million.For a third-party marketer, that translates into very modest fees for whatmost likely is quite a bit of work. Remember: In most cases, the marketerwill need to do the same amount of work to get someone to invest $25 to$50 million as to get someone to invest $1 or $5 million.

Get a third-party marketing firm to work for you when your fund’s as-sets range between $25 and $50 million. As I noted already, when your assetsare lower—closer to $25 million than $50 million—it may be challenging tofind someone to work with you. It’s still worth it to try to search someoneout. Talk to your lawyer, administrator and accountant—ask for referrals.Heck, you can e-mail me at [email protected] and I will give you afew names. And after you cross the $100 or $200 million mark, hire a full-time in-house marketing/investor relations person who will be in constantcontact with existing investors and will search out new sources of money.As your fund grows, you will find that some allocators, or hedge fund in-vestors (the terms are synonymous), will search you out through the varioushedge fund databases and other means. To some degree, new assets willfind you.

Don’t think for a minute that you have to stop marketing, though,regardless of how big your fund gets. You’ll always be in a search for new




assets. However, as your fund grows, you will pop up on radar screens andpeople will search you out, and, hopefully, invest with you.

The primary difficulty, again, in hiring a third-party marketing agent orfirm is that it is very hard to determine who is good and who is not good,and there’s no real methodology for it. Most third-party marketers will tellyou that they’ve raised considerable amounts of money over short periodsof time. Don’t take these claims at face value. Get their references and talkto their other clients to truly validate their ability and their skill set. Youneed to know how deep their Rolodex is and where their relationships are,both geographically and in terms of the size of their investments. You needto ask questions and get answers about their success—or lack thereof. Findout how much money they have raised and how quickly it has come into thefunds.

Again, unfortunately the hedge fund industry itself does not thinkhighly of third-party marketers. But there’s nothing wrong with usingthird-party marketers. They provide a very valuable service and can beintegral to the whole process of raising assets. If you find a good third-party marketer who can help you raise money, give it a try. A goodthird-party marketer can help you build your business.

THE ROAD TO WEALTH

You’ve learned about how to raise assets. Now you actually need to go outand do it. You likely already have your “friends and family” list, a list of100 to 200 people that you, a budding hedge fund manager, believe can andwill invest in your fund. Your list likely includes old friends, new friends,aunts, uncles, grand parents, existing colleagues, former colleagues, and ev-eryone in between—anyone you know who has a few nickels to rub together.These people are the warm call—people who will pick up the phone, takethe meeting, and exchange pleasantries.

Unfortunately, they rarely come up with assets. Most new hedge fundmanagers will have a hard time getting their seed money. Some will rely ontheir own assets to launch the fund; others will seek out partners. It reallyvaries. The most important thing to do is to get started! Just get started.Talk to as many people as you can. You never really know where themoney will come from, or who will be willing to take a chance on you andyour fund.

Conduct ing Reconnaissance

Before you communicate with potential investors, you need to prepare apitch book. The pitch book should be no more then 15 pages, including the




cover, the contact page, and the disclaimer page (a page full of legal mumbojumbo that your lawyer will require, and which will ideally keep you outof trouble with the securities regulators.) Including these pages means youhave about 12 pages to tell your story. And if you can’t do it in 10, includingbiographies of key members of your team, then you shouldn’t be in business.There is no hedge fund strategy that can’t be explained in 10 slides or fewer.Bigger doesn’t always mean better: A thick pitch book is no more likely toreel in investors than a thin one.

A Caut ionary Tale

When I launched Answers and Company in 2001, I struggled for the first fewmonths to get new clients. I was lucky to get a big firm out of the box. Overthe first six or seven months, I slowly got more; with that money coming in,I was able to go on. But I really got lucky in the late fall of 2003, when I raninto an old friend at a conference at the Waldorf Astoria. I hadn’t seen himfor about six years, so we spent some time catching up and talking aboutold times. And then he said that he had a fund to introduce me to that coulduse my help. The fund was still a fledgling—it hadn’t yet launched. As oftenhappens when a new fund launches, the schedule had been pushed back,and instead of launching in January of 2004, they now planned to launchon March 1, 2004.

I met the two principals in December 2003. We met in a conference roomin the old Bear Stearns building on Park Avenue, which had been convertedto a shared office environment. The only positive thing that came out of thetwo and half hours that we spent together was that the company who rentedthe room had a great selection of sparkling water. The two principals of thebudding fund were without question co-heads of sales prevention. The onlygoal of the meeting, as far as Naoshi (my partner at the time) and I could tell,was for us to think that they were smart. It was just awful. The principalswent on and on about their strategy and how it worked, why it worked,and what they were doing to make it work, with very few concrete plans formoving forward. Within 20 minutes, my head was spinning, and withoutthat sparkling water I probably would have passed out from boredom.

A little over two hours into the meeting, I looked at Naoshi and said,“These guys are fixed income guys who are predicting interest rates, right?”That, distilled to a single sentence, is what I deduced from the presentation.He said yes. I asked him if they couldn’t have just said that at the outset,and he said no, the meeting would have been too short. We spent the next15 minutes discussing how our two companies could work together, andplanned a follow-up meeting with their senior partner. Once we were en-gaged (after our third meeting), we went right to work on developing a new




pitch book and marketing presentation for them. Over the years, our twofirms have worked extremely well together. But in the beginning, it was likepulling teeth.

Presentation meetings should be short, to the point, and explicit. Poten-tial investors want to understand the process, learn about the manager, anddevelop a degree of comfort with the people that they will potentially dobusiness with. Don’t overwhelm your investors with too many details. Keepit simple, and you will win.

The point of the story is not to encourage you to call me for help onyour pitch book or marketing presentation, but to illustrate that more isnot always better. The key to successful marketing is to create clear andconcise messages and then to sit back and let your audience ask questions.Blinding people with science and statistics does not translate into assets. Theconverse is true: Investors like to think that they’re smart, and if they can’tunderstand what you’re saying, or more important, what you are doing withtheir assets, they’re not going to invest with you. Period. Keep it simple: Itwill pay off in the end.

By the way, by taking our advice and working together, this firm wentfrom $2 million in assets under management when launched in 2004 to morethan $500 million at year-end 2007. Some of it had to do with returns, someof it had to do with being in the right place at the right time, and some of ithad to do with the advice that my firm provided about their pitch book andmarketing material. The combination of all three led to their success.

I F YOU BUILD IT , THEY WON’T COME

If you take only one thing away from reading this book, it should be the fol-lowing: Every single place you think money is going to come from, is exactlywhere it’s not going to come from. If you think that Aunt Joanie, who’s got$25 million in T-bills doing nothing, is going to give you a million or twoto get your hedge fund off the ground, odds are that she ain’t giving youanything but her well wishes. The same can be said for other family mem-bers, former colleagues, associates, and friends. Some of this low-hangingfruit will likely fall into your fund, but you can’t count on it. This kind ofexchange of assets isn’t really healthy. A smart guy who works at MorganStanley and manages a bunch of high-net-worth brokers and private bankerstold me once that when he interviews people, he tells them that no matterhow much money is at stake, he doesn’t want them to go after their friendsor family for assets.

These types of clients can lead to only one thing—lonely holiday din-ners. In other words, don’t work with the people you’re close with. Your




relationships may not survive it. You run the risk of losing your relationshipwith your favorite aunt and potentially alienating other relatives or friends.Keep close to your friends and acquaintances, but not too close.

Let’s face it; you don’t know how much money anybody really has.Forbes magazine can tell you who the 400 richest people in America are,but when it comes down to the inner circle, it’s impossible to know unlessyou see the documents or they tell you directly. There are a lot of verywealthy people who are cash poor. They may have lots of assets but theircash is tied up, and they simply do not have discretionary cash on hand togive out. Further, when you’re dealing with wealthy people who you areclose to, remember that there is always someone with their hand in theirpockets. Don’t be that person. At the end of the day, people don’t wantto be asked for stuff from their friends—they just want to be friends. Theywant to be treated with respect. Keep that in mind at all times and yourbusiness will grow. I guarantee it.

F ind ing the Right Investors

So, Aunt Joanie is no longer a prospect. Then who is the right type of in-vestor for your product? Who do you need to get the fund into the market,and how are you going to access these potential investors? One problem isthat the markets are ever-changing, and as a result, investors’ needs are alsoever-changing. This is both good and bad for people who have new ideas. Asthe markets evolve, everyone thinks that they have a better way to skin thecat. This is just not true. There are only so many ways to make money, andthis number is countless and finite at the same time. How can something becountless and finite at the same time? There are only so many stocks, bonds,options, and futures contracts out there; there is only so much real estate, fac-toring, and manufacturing out there; and there are only so many good ideasout there. But you can come up with a new or better way to beat the market.

The question, however, is not whether you have a new strategy formaking money, but whether it makes sense and is worth pursuing, sincenot all good ideas will bear fruit. You need to make sure that there is anappetite for your product in the marketplace. Making money in the markets,regardless of which strategy you employ, is about exploiting opportunitiesand making good, solid bets on a position. The key is to buy somethingcheap and watch it appreciate, sell it when it becomes expensive, and thendo it all over again. That is how people make money year after year.

Taking Your Strategy to the Streets

Explaining this strategy to potential investors is simple, it can be elegant,and, most important, it can be easily understood by the masses. However,




the markets have evolved over the last 20-odd years. Investors know thatstocks don’t always go up and bonds don’t always provide good yield, andhave come to the conclusion that they need to create diversified portfo-lios. So, as with everything else in life, sometimes the market or investorsreally like certain strategies and sometimes they don’t. You need to un-derstand what investors are looking for. Target investors who want yourstrategy today, as well as those who may want it in the future. One brightside to all of this is that as investors, particularly institutional investors,create diversified portfolios, strategies that once were out of favor have aplace to go.

This works well for established, well-heeled (read, “big”) hedge funds,but for the new kid on the block, it’s harder. The hedge fund industryis really an old-boy (with some women) network. Although the numberof funds has grown to more than 10,000, with more than $2 trillion inassets, the big funds are getting bigger and the small funds do not seemto be growing. When you do your market research, put some calls intoinstitutional investors and take their temperature about the market, theiruse of hedge funds, and how they allocate their assets. It will help youdefine your market and provide you with a path to look for assets.

If you talk to some of the most impressive institutional investors—thepeople at large public and private institutions—you’ll find that for the mostpart, the people who make allocations to investment managers are concernedabout one thing and one thing only: covering their own posteriors.

Of course, they also have secondary motives: They want to perpet-uate their organizations. If they work for a pension plan, they’re think-ing about ensuring that there’s enough money in their account so thatwhen their retirees or pensioners need access to capital, they have it. Butthey aren’t willing to put their heads on the chopping block in the pro-cess. Many of these groups or organizations will hire consultants to helpthem slog through the investment landscape and to provide them with in-sight and guidance into two areas of the investment universe. These invest-ment professionals help organizations create a diversified portfolio and pickmanagers.

Often, people who are charged with managing a significant portionof the public pension money are sophisticated individuals with little or noinvestment experience or expertise. They need to look to professional con-sultants to provide guidance and support, and advice on how to allocateassets and find hedge fund managers. Because these people are often un-willing to go out on a limb, it can be very difficult for them to really be atthe cutting edge of the investment world. They are usually trend followersrather then trend creators, as they don’t want to risk losing their jobs. Itis my experience that most of them operate in the “bleeding edge” of the




investment world—by the time they make an allocation to a specific strategyit may be too late—rather then the leading edge.

Most of these investors operate with a check-the-box mentality. Thismeans that as long as they can check off on their list, this or that aboutthe manager, they are going to make an allocation. These investors lookfor things like a three-year track record, a consistent return over a longperiod of time, not being down more than three consecutive months, andhaving no down quarters. The investors also look for lawyers, accountants,administrators, and prime brokers that they recognize, people or firms thatare used by other hedge funds and are recognized as players or experts inthe hedge fund community. Once these boxes are checked, the due diligenceprocess for the most part ends and the assets start flowing. This is just a sillyway to make investment decisions, and yet it is what is used by countlessinstitutional investors around the globe. Checking the box means that thingsare fine and the manager is worthy of the investors’ money. If you believethat, I have a bridge in Brooklyn to sell you.

Making a decision based on who the lawyer, accountant, or primebroker is, is just silly. Obviously, investors need to use respected, well-knownfirms—that’s the cornerstone of good due diligence. Good due diligencemeans getting underneath the manager’s skin and learning about how heor she manages money. As a manager, you need to be ready for the check-the-box investor types and those who do serious due diligence. Both canprovide you with assets, and you’ll want to take whatever you can get—butremember who your audience is and provide each with what they need inorder for them to make their decision (in your favor).

It is easy to deal with substantive objections, such as lack of track recordor small amounts of assets under management. Be upfront and honest, andprovide the prospective investor with as much information about you, yourbackground and experience, and your firm and strategy. Tell them what youhave done in the past, what markets you have traded, where you have lostmoney, where you have made money, and how you expect to make moneygoing forward. Tell them how much you have in your fund and what youare going to do with your income. Explain to them why you are setting up orrunning a fund, and why they should invest with you along with or insteadof other hedge fund managers. Tell them how you do your research and howyou execute your ideas. Give them examples of trades that worked, tradesthat didn’t, and why you chose or chose not to make an investment. Tellthem about yourself.

When I am meeting a manager, regardless of whether they’re new to thebusiness or experienced, I ask a lot of personal questions. I ask about theirfamily, their kids, and their wife or husband. I ask about the movies and




music they like and what they do in their spare time. Sleuth a little beforeyou make the decision to invest into their fund.

Here’s why: You can learn a lot about someone in a casual conversation.Let’s say you’re thinking of investing in a low-risk fixed-income fund, andyou discover that the manager races cars or goes skydiving on the weekends.This kind of conversation will give you some insight into their personalityand what to expect in terms of management style. I would be wary of afixed-income low-volatility manager who races cars and skydives. That risk-taking personality might extend to the portfolio one day, and it could resultin a style or strategy shift that equals losses.

People understand that you are new, and most people want to giveyou a break. They are willing to listen, so tell them a good story. Knowupfront, though, that it is very difficult to deal successfully with objectionsthat lack substance, such as why you chose this lawyer, that accountant, orthe prime broker that nobody else uses. The way to deal with this is workwith well-known hedge fund service providers.

Vett ing Your Investors

This is a fairly simple point, but I’d be remiss not to mention it: Just asyour investors need to vet you, you need to ensure that you’re adhering toapplicable regulations regarding the number and type of investor you inviteinto your fund.

There are two things that you need to attend to, to ensure that you don’trun afoul of the law: The investment in question must meet or exceed theminimums required, and the investor or its representative must clear anyanti–money-laundering rules and regulations. The first issue is more impor-tant than the second. The name of the game is assets under management; theprocess you’ll need to follow is to get in front of as many potential investorsas possible to gather those assets. But be sure you’re paying attention to somebasic tenets. For example, 3c1 funds are open to only 100 investors, so youneed to be careful not to accept too many small accounts. By contrast, 3c7funds are open only to super-accredited or qualified purchasers, so while thenumber of investors is not limited to 100, there are greater hurdles to jumpin order for investors to qualify. Most newly launched funds are 3c1 funds.Pay attention to the details, and you’ll be fine.

PREPARING THE PITCH BOOK

I outlined what the substance of the pitch book should include. I believethat less is truly more in this instance, and as such, I caution all hedge fund




managers who are hell-bent on creating a 20- or 30-page document abouthow they manage money. The truth is that very few people actually read thepitch books. Most people just thumb through them with a manager duringa presentation and jot notes about things that they do not understand. Yourjob, then, is to create a document of substance and style that explains thefollowing things about who you are and what you do. It should includeseven features:

1. Strategy: Define your investment strategy and explain why you have anedge.

2. Examples: Provide an example of a trade that worked and one that didnot work, and explain both in detail.

3. Team: List in detail the people who work with you, what their functionsand responsibilities are, and provide organizational detail.

4. Track record: Come up with a slide show that provides information onhow you have done and use relevant benchmarks.

5. Service providers: List who you are working with and provide contactdetails.

6. Contact details: This is self-explanatory.7. Disclaimers: You will want the lawyers to draw this up—make sure you

have it.

In total, the book should be no more than 15 pages, including the coverand contact details. It is not about being short; it is about keeping thingssimple and easy to understand. If you can’t get it done in 15 pages, youprobably are not very sure of yourself. That is just my experience, based onwhat works and what does not work. Keep it short, keep it to the point, andkeep it factual. Remember to listen to what your clients and investors need,pay attention to the questions they’re asking, and answer those questionsappropriately. Do that, and you’ll do fine. Keeping things simple is a recipefor success.

A FEW FINAL THOUGHTS ON THE ESSENCE OFSUCCESSFUL MARKETING

Successful marketing comes from listening and asking questions. It alsocomes from being aggressive and not taking no for an answer. You need toget in front of as many people as possible. Get your story out there. Younever really know where assets might come from. Therefore, the more rocksyou turn over, the more likely you’ll be to find investors and assets hidingunder them.




However, this is not to say that you should go out and talk to everyonethat moves or that can fog a mirror; but rather, you should come up witha plan of attack that targets specific groups of investors. Marketing is noteasy, and it is not something that everyone can do. By developing a planthat keeps you focused and on target, as recommended in this chapter, youwill find success.



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CHAPTER 7The Supporting Staff

As hedge fund managers continue to proliferate around the world, there’sbeen a corresponding rise in the number of firms that provide services

to the hedge fund industry. These service providers—nonplayers, as they’reknown in the industry—include investment banks, brokerage firms, insur-ance companies, accounting firms, law firms, administration companies, realestate firms, and head hunters, all claiming to offer something “unique” toboth budding and existing hedge fund managers.

These individuals and organizations provide a number of services tohedge funds, which, in turn, allows the managers (at least in theory) tostay focused on the day-to-day management of the portfolio rather than themundane tasks that are part and parcel of running a business.

THE CARDINAL RULE OF CHOOSINGA SERVICE PROVIDER

One of the most important things to do when choosing a service provider isto hire a firm that is well recognized in the industry. Though it’s importantto conduct your own due diligence, when you hire a recognizable name youwill spend less time determining whether the firm can do the job—and lesstime defending your choice to potential investors. Get out there, ask lotsof questions, and get lots of answers about how the firm works. Find outeverything you can about the organization, its employees, and its clients. Itis important to work with people who have a good reputation both in theindustry and with investors. Recommendations will come from all walks oflife. If you’re not sure who to hire—or at least which firms you should beresearching and vetting—by all means, ask. If you need help, feel free toe-mail me at [email protected].

Working with firms that nobody’s heard of makes potential investorsnervous. It might have made sense to go this way 20 years ago. Today, it is

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foolishness. Why? Well, 20 years ago, when the hedge fund industry was stillrelatively new and operated in relative obscurity, many providers had yetto carve out their hedge fund niche—therefore, the investment communitydid not necessarily have a group of service providers that were accepted orrecognized.

And now? When you hire an unknown firm, you’ll immediately run intoobjections from potential investors, and with investors, the thing you wantto avoid at almost any cost is objections. As I have said before, investorsdo not want to work with funds that don’t use well-recognized serviceproviders. Although this is not always the case, investors believe that newfunds that work with well-known service providers have passed some levelof due diligence.

THE LAWYERS

A discussion of nonplayers in the hedge fund industry begins with thelawyers. We’ve discussed lawyers in the previous chapters, so I won’t spendtoo much time on them here. Lawyers are the people who will craft your doc-uments, set up your entities and, in a sense, put you in business. A numberof boutique firms specialize in hedge funds, and you can expect to find hedgefund experts at all major or large law firms as well. Choosing a lawyer fromeither of these two groups is the safest—and probably the smartest—wayto go.

Choosing an Experienced Attorney

There are two reasons to work with an experienced hedge fund lawyer:first, you’re less likely to encounter investor objections or questions. Second,you’ll save money in the long run. A local lawyer may seem less expensive inthe short term, but he or she will need time to conduct research and get upto speed—and time is money. Further, an inexperienced lawyer will makemistakes, and when your documents need to be fixed, that will cost you aswell. Trust me this much. Choose someone with experience: You’ll thankme later.

I like most of the lawyers who operate in the hedge fund community,and I believe, for the most part, that they are professional, efficient, andeffective. Your choice of lawyer will come down to price and to personality.Pay attention to both of these factors: Find a lawyer you like at a price youcan live with. You need good documents, good counsel, good advice, andgood answers to your questions—and you need them fast. As you launchyour hedge fund, your lawyer will be the person you’ll be spending the most



The Supporting Staff 89

time with. You’re going to need to call them from time to time, and youneed to have a good working relationship with them. You need to respectthem. They need to respect you. You need to be able to call on them and getgood answers to your questions.

What to Ask Your Attorney

When you meet with a potential hedge fund lawyer, you’ll first meet with apartner—the attorney who runs the practice. Because your relationship withyour attorney is so important, though, be sure to meet the attorney you willactually work with, whether it’s a second year associate or a junior partner.Understand the dynamic at the firm, understand the role that the firm playsfor you, and understand your role as a client at the firm.

You need to ask the lawyers about structure. Ask them if the fund shouldbe a limited partnership or limited liability company. Ask them if you needan offshore fund and an onshore fund (or both), and what it is going totake to get the firm up and running. You need to explain to them your styleand strategy and how you expect to run your business. Your lawyer shouldtalk to you about how to communicate with your potential investors, ifyou have any, as well as all of the rules about taking in both onshore andoffshore assets. Your attorney should also be able to give you guidance onhiring additional service providers as the fund commences operation. Youand your lawyer will do a lot of work together, from the beginning of theprocess to the fund’s ultimate creation. It’s important that you do this workright the first time, because it can be very difficult to make changes once allof the structures are in place.

Your lawyer will begin this process by giving you a questionnaire, whichwill include questions about name, style, strategy, fees, redemptions, lever-age, soft dollars, ownership, your experience, your expectations, and theother service providers you’re using. Give a lot of thought to every answer.If you have questions about the questions, ask the lawyer. Remember thatyour lawyer works for you, so he or she should work for you. It is not anerror to ask about something you don’t understand; in fact, the converseis true.

THE ACCOUNTANTS

Auditing and accounting are pretty straightforward. The auditors are yournumber crunchers—the ones who give you a full-on account of how yourhedge fund is performing. They’ll tell you the real value of the portfolioand the value of each investor’s individual account; by crunching all of the




trading data to determine what profits and losses occurred during the period,this will in turn allow you to determine the amounts that you will earn fromboth your management fee and incentive fee. This is important because it’syour livelihood, so pay attention.

Most mid-sized to large accounting firms offer hedge fund audit and taxservices. Each of these firms has many dedicated people focused on providingaccounting services to funds of all sizes and strategies. For a list of respectedauditing firms that specialize in hedge funds, turn to Appendix B.

On the accounting side, you’re not likely to work with the junior peopleon a day-to-day basis. You’re going to work with the person who runs thepractice, or the audit partner who signs off on it, and the people who actuallycrunch the numbers for the audit to be completed and the tax forms to befiled. Again, it’s important to know the team. I think you’ll find that in mostaccounting firms, the answers you need come from the audit partner andthat he or she will always be available to talk when needed.

The first thing you need to do is meet with the accounting firm and learnabout the organization. Interview them: Find out how long they’ve been inthe business of providing audit and tax service to hedge funds; how big thegroup that works in this area of the business is; and how many clients thefirm has. Question them about the strategies they excel in and whether thereare strategies that they try to avoid. Try to get a feel for how important yourfirm will be to them, and get answers about who is going to do the work onyour account and why they want your business.

Remember, neither lawyers nor accountants will help you build yourbusiness. Both will help you construct and maintain the business, but theywill not help increase assets under management.

PRIME BROKERS

With apologies to my many friends in the prime brokerage industry, I haveto say that for the most part, all prime brokerage services are essentiallythe same. The service levels are largely based on technology platforms thatprovide money managers with icons on their desktops, not only to have liveaccess to the markets, but to have the ability to slice and dice data to helpwith investment decisions, literally with the click of the mouse.

The prime broker’s function is simple: to provide a trading platform forthe manager to execute orders, either via the computer or the telephone. Theprime broker is able to provide the manager with reports and statements thatdetail the portfolio positions. This service, in theory, allows the managerto execute orders without having to worry about any of the back-officefunctions that need to take place once the trade is made.




As liquidity in the marketplace has increased, most brokers have seentheir services become commoditized, meaning that, for the most part, allprime brokers offer the same products and services. There has been massiveprice compression over the last few years when it comes to brokerage fees.Prime brokers vary in size, from Goldman Sachs and Morgan Stanley toVanthedgepoint and Grace Financial. Some firms only work with large, well-established funds, while others specialize in working with start-up funds.You need to meet with a series of prime brokers and learn about how theirsystems work, the services they can provide, and why you should do businesswith that particular firm.

THIRD-PARTY ADMINISTRATORS

In the onshore environment, the role of the third-party administrator is tocreate and manage the back-office functions of the hedge fund. The third-party administrator gathers all of the data from the prime broker and fromthe banks, and all of the financial information on every position in theportfolio, and processes it to come up with the net asset value, a profit andloss statement, a monthly net asset value, a quarterly performance report,and a yearly performance report. The third-party administrator will crunchyour fund’s numbers on a daily, weekly, monthly, quarterly, and annualbasis, keeping close track of what is going on inside the portfolio. Mostdomestic hedge funds don’t strike daily net asset values, or NAVs, for theirportfolios, and simply rely on a profit and loss report. Usually, onshore fundscreate a monthly performance report and put out a quarterly performancereport.

To calculate a net asset value in its most basic definition, the adminis-trator takes all the money that’s invested in the fund and divides that by thenumber of units sold. It’s very simple, very basic, and very straightforward.

Calculat ing Net Asset Values

There are two ways to calculate net asset values—Full NAV and NAV light.A full NAV is calculated when the third-party administrator confirms all ofthe prices and fees that the fund paid from third-party sources to come upwith a value of the portfolio. In these situations, the administrator does notsimply take the data provided by the manager and come up with information;rather, the administrator prices and verifies the portfolio independent of themanager’s books and records.

The task can be mundane. Let’s say that fund Y bought 200,000 sharesof IBM on January 13, for $14.75 and paid $100.00 in commission. The net




effect of the trade was X. The administrator will check various market datasources to acknowledge that, yes, the trade was completed at that price, andyes, the fund paid $100.00 in commission. The administrator will then pricethe portfolio and determine the value (profit or loss) of the position and howthe portfolio performed for the period. The administrator who conducts afull NAV will use pricing services, including the New York Stock Exchangeand the NASDAQ market, as well as others—including Bloomberg andReuters—in order to get pricing and market data. This service is done forthe entire portfolio.

There is no set schedule for your administrator to calculate the NAV;you as the manager can set the frequency, based on your needs and yourinvestors’ expectations. Talk to your administrator and accountant aboutit. Check with your lawyer, also, because your fund documents may specifythe frequency. In most cases, the actual NAV is calculated on a quarterlybasis and performance data are calculated on a monthly basis.

In the previous example, on January 13, the fund paid $14.75 for IBM,and on the mark date—January 31—the stock closed at $17.00 a share. With200,000 shares, that equals a paper profit of $550,000 (less commissions).

The hedge fund administrator conducts what seems, for all intents andpurposes, to be an audit of the funds in the portfolio, The only distinctionis that the administrator doesn’t actually sign off on it. The actual auditis conducted by an accounting firm, which does a full-on, IRS-sanctionedaudit of the fund’s portfolio. There are some funds that have semiannualaudits, and even one or two that I know of that do it quarterly, but for themost part audits are completed once a year. Along with making sure theportfolio is priced correctly, a full NAV provider also provides a level ofcomfort regarding fraud avoidance. Of course there is no way to rule outfraud in its entirety; however, it is much harder to pull off if someone iswatching over the portfolio. In a full NAV fund, there is very little oppor-tunity for mispricing and fraud, because there are quite a few checks andbalances.

Obviously, human error can occur. When an administrator conducts afull NAV, that firm is taking responsibility for all the prices in the portfolioand, as a result, is creating an auditable track record. When a full NAVservice is conducted for a fund, the audit moves that much more quickly;most of the work regarding pricing the portfolio has already been completedand the information just needs to be reviewed.

There are some strategies that do not require substantial oversight, and,as such, a light service is enough. For example, a traditional long/short equityfund can likely use a light provider, since the positions are priced daily andthe portfolio is easy to mark to market. Some fixed-income strategies thattrade very liquid securities can also use the light services.




It comes down to three things: What you think you need, what youcan afford, and what you think your investors will require. The latter is themost important. If an investor demands a full NAV, then you will have tohire a firm that will do it. There is no direct method to this madness. Someinvestors like the idea of an independent third party pricing the portfolio; itgives them confidence that the numbers the manager is quoting are on theup-and-up.

Size Matters

With administrators, size matters: The size of the fund and of the administra-tion company. All administration companies are not created equal—someare large financial conglomerates that operate literally around the world,whereas others are three- or four-person operations run out of a single lo-cation. Size does not always mean a better service or product, however.Some of the big firms are completely overworked and are really unable toprocess all of the funds that they are working with. Because the industry hasexperienced massive growth over the last few years, the resources at somefirms are strained, and it can sometimes be hard for them to get things done.Nonetheless, from a marketing standpoint, going with a well-known, largeadministration firm is the right thing to do.

As the hedge fund industry has experienced more and more fraud andblowups, many investors are demanding that their funds use a third-partyadministrator. The reason for this is twofold. The first is to offset thework so that the fund management company—the manager and his or hertraders—can stay focused on the job at hand, executing orders and findinginvestment ideas. The second reason to use an administrator is to create afirewall: a second or third, independent pair of eyes that reviews the portfolioand comes up with a performance reporting number.

We’ve talked about fraud and mismanagement blowups in previouschapters. These situations have increased the call for administration in theU.S. market by investors. Most funds with assets of more than $100 millionare using third-party administrators for their onshore funds. Today, thetechnology allows for most funds to see real-time profit and loss statementsthrough their prime brokerage trading systems. Since most funds can create adaily NAV by using the systems provided to them by their prime brokerageservice, administration services might seem a little redundant. However,these services provide a second or third pair of eyes—which are, importantly,independent eyes—and that allows many investors to sleep easier.

In the offshore environment, it’s a completely different type of situa-tion. All offshore funds operate as their own living, breathing entities, andalthough the manager who puts the fund together controls the business in




one sense, he or she isn’t really in control. There’s an independent boardof directors that acts on behalf of the fund and its investors. This boardapproves all contracts between the fund and its service providers. It workswith the auditors to make sure the fund is getting the best execution and bestprices for its trades and its commission from its brokers. Most important,it works with the administrator to make sure the fund’s manager is runninga consistent investment strategy. As a manager it is important to rememberthat the board is there to help you and that the board is independent andadds legitimacy to your organization. Most managers work well with theirboards because their interests are aligned.

The way that offshore funds are structured requires that the fund isadministered, since the fund needs somebody on its behalf to talk to investorsand to move money in and out of the fund as money comes in, is invested,or is redeemed. Because of these requirements, offshore environment fundshave been using administration companies since they were developed.

F ind ing a Third-Party Admin istrator

Hedge fund administration companies, like the funds they serve, come ina range of sizes, shapes and services. (For a complete list, see the back ofthis book.) Some of the big ones include Fortis, JPMorgan Chase, PFPC,and CITCO; the boutique firms include Bank of Butterfield and EquityTrust. If you check out any of the major hedge fund Web sites, such aswww.hedgeworld.com or www.albournevillage.com, you will probably find25 or 30 real players in the hedge fund administration business.

That number changes on a daily basis because there has been a lot ofconsolidation over the last couple of years, particularly with the smalleradministrators. Many administrators have been joining forces with largerfirms in order to achieve scale. One of the biggest consolidations in the lastfew years was the acquisition of Bisys by Citigroup.

For the most part, the administrators are independent and, therefore,the look that they provide into the fund is quite good. This means thatat the end of the day, the data points are salient. More importantly, itmeans that, more often than not, they can be trusted 100 percent. It is mypersonal experience that most administrators work very hard to get theportfolio priced right the first time. Remember, however, that nobody isperfect—and as the liquidity in the market continues to increase and moreand more transactions take place, the number of errors or potential errorswill probably increase. Make sure you deal with them immediately and rightthe wrongs so that the portfolio stays on track.

When a security is hard to price or difficult to trade because of anilliquid market (e.g., the subprime crisis and mortgage-backed securities),




the administrator will act in the best interests of the fund, which are notnecessarily the same as the manager’s. For example, let’s say that there’sbeen some market dislocation, and the manager believes that a securityshould be priced at X, but, because of volatility and other market factors,the administrator believes it should be priced at Y. This will sometimes putthem at odds with their clients and often results in friction, because themark to market or pricing of the portfolio by the administrator isn’t thesame as the fund manager’s. It happens, and it’s not fun.

This occurs when liquidity dries up and positions become impossible toprice. This was a significant problem for funds that traded mortgage-backedsecurities during the recent credit crisis. The liquidity, or market, for thesesecurities evaporated, and as such the positions were impossible to price.Obviously, the managers and the administrators knew the positions hada value. However, the market was claiming that there was no value, andthe administrator prices the portfolio based on the market. To deal withthis, some funds suspended the NAV calculation until the market stabilized.Others took the haircuts and saw the value of the portfolios slashed to nearlynothing.

Using a Third-Party Admin istratorfor Onshore Funds

Using an administrator allows you to run your business more efficiently. Anadministrator takes a lot of the day-to-day work out of your hands and putsit into the hands of a team of sophisticated and experienced people. If youhave an administration company doing the work, then all you really needto do is have someone on your staff review the work once it is completed.You don’t need full-time accounting people; you don’t need a big back-officeoperation; and you don’t need a big finance group that’s going to run thenumbers and crunch the data—you simply need a competent person whocan review the data once it is crunched.

That’s the onshore world. Onshore administration has really gainedsteam in the last three years in light of the frauds we’ve discussed and theCYA mentality we touched on earlier. As a result, a lot of the big investorshave said, we want a third party in there to give us advice, guidance, andsupport about what’s going on at the fund at all times. And most fundmanagers realize that if a big investor demands something, it’s worth it tohave.

It’s really a win-win situation in the onshore side, because, frankly, afund manager can save a considerable amount of money by handing offthe day-to-day number crunching that goes into the fund analysis by usingan administrator. Further, they can forgo some of the staff costs usually




associated with this work and save money by using outsourcers rather thanbuilding the organizational infrastructure needed for these tasks.

Using a Third-Party Admin istrator forOffshore Funds

Now, in the offshore world, it’s a completely different animal. We useadministrators in the offshore world because, as I discussed earlier in thechapter, offshore funds are truly living, breathing entities. The funds arecompanies created by fund managers, but once the manager creates them,he or she gives up their ownership stake and operates as an employee ofthe entity, which is based in Cayman, Bermuda, Dublin, or in some othertax-haven jurisdiction.

An offshore fund is very similar to an onshore 1940 Act domestic mu-tual fund that most people have in their 401(k) programs. These fundsare companies that have unlimited investors, are run by a large manage-ment company, and have an independent board of directors who can atany time vote to fire the management company in order to better serve theinvestors/shareholders. The offshore fund has a board of independent direc-tors that can hire and fire the money manager. They can hire and fire theauditor. The board can hire and fire the administrator. And so they takeon a lot of responsibilities and act in the best interest of the fund and itsinvestors.

Offshore managers don’t necessarily like this. Let’s say that I’m FundManager X and I pay Lawyer Y $20,000 to create a fund for me and and Ipay all of the filing fees. By then, I’m out of pocket, $25,000 and I’ve got thisfund. Why would I be willing to relinquish the opportunity to own it? Theanswer is that you have to! The benefits of nonownership far outweigh thebenefits of ownership. I’ll talk a bit more about this in the next paragraph,but if you’re really interested in this, you should read my recent book, TheFundamentals of Hedge Fund Management (John Wiley & Sons, 2007),which examines in great detail the tax opportunities that exist by managingoffshore hedge funds.

Here’s why it’s best to be independent of the offshore fund. Simply put,if you are deemed to be a control person of the offshore fund, the InternalRevenue Service will disallow your ability to defer your income from thefund and force you to bring the money back on shore and, in turn, pay a taxon it immediately. However, by being independent (read, “not in controlof the fund”), the Internal Revenue Service allows you to defer the incomeyou earn offshore for a set period of years, and not have to pay taxes on itimmediately. The IRS lets you keep the money offshore or defer the incomeand therefore it grows tax free, until you bring it back on shore. I’m not




giving you tax advice or guidance here, so to learn more about how thisapplies to your personal situation, you need to talk to an accountant.

To the best of my knowledge, a board of directors has never fireda manager who created the fund. It may happen, but I haven’t seen it.Certainly, there have been situations in which managers have resigned fromfunds because the fund has imploded or has the potential to implode. As aresult, the fund manager and the board of directors see that it’s in the bestinterest of the investors to push the manager out and put in a group whocan liquidate the fund’s assets.

Why don’t boards of directors fire managers? It’s very simple. Being anindependent board member is a very lucrative business. Many companiesand individuals (primarily outside of the United States) offer independentboard-of-director services at a very hefty fee, and they want to have as manyclients as possible. If these people start making noises about firing managers(the managers, who, in a sense actually hired them in the beginning), theywon’t be able to grow their businesses. The minute you start firing managersis the minute you start losing business. It is that simple.

The second reason is that even though the manager is not technically incharge, he or she did create the fund, gather the assets, and is running thevehicle. Therefore, pushing that person out may be more trouble than it’sworth. However, because the board is independent, it has the right to do soif it believes the manager is not acting in the best interests of the investors.Logistically, firing a manager is, from the board’s perspective, pretty easy.The board simply votes not to renew the manager’s contract and he or sheis out. Again, though, the odds of this happening are extremely slim.

Along with striking the net asset value of the fund and completing per-formance reporting, the administrator also performs a number of housekeep-ing duties for the fund. The administrator works directly with all investors,handles all investor paperwork, sees that all wires come in and go out, andkeeps track of all of the pertinent fund data that investors need. They arethe contact point between the fund and its investors from the business sideof getting things done. The manager and the marketing team work withinvestors to educate them about the portfolio and strategy. Administratorsdon’t perform any marketing functions, but all communications to and fromthe fund go through the administrator. The administrator is really runningthe day-to-day operation.

INSURANCE COMPANIES

Over the last few years, a lot of insurance companies have started to spe-cialize in providing services to both hedge fund managers and hedge funds.




These firms have decided to go where the money is, so whether it is a hedgefund that needs a directors and officers policy, or a manager who needs afine arts policy, these firms are going to sell them insurance. Today, manyinsurance brokers and companies focus on hedge fund managers. Thesepeople are looking to be a one- stop shop for all of hedge fund managers’personal and business insurance needs, and as such have built whole teamsto support these potential clients.

For example, many firms need a benefits policy for employees, as wellas property and causality insurance for the office. Most hedge funds thatoperate as partnerships have key-man life insurance policies, as well astraditional life insurance. The insurance brokers make it easy: They cometo the office and sell you insurance to cover both your personal and privateinsurance needs. In my experience, most of the large insurance brokeragefirms have wrapped their arms around the industry quite well and providegood solutions to insurance needs. The key with these folks is no differentthan with other service providers—find people who have experience, whocan understand your needs, and who won’t waste your time. You need toask what services they provide and whether they have experience in workingwith hedge funds. Get references and talk to their clients about how theywork and deliver.

HEADHUNTERS

Unless you’re capable of working 24 hours a day, seven days a week, whenyour fund is up and running and the assets are pouring in, you’re going toneed help. So where will you find these people? In earlier pages, I brieflytouched on my thoughts regarding headhunters. For the most part, I do notthink highly of these people. In my experience, headhunters are reactive ver-sus proactive, and I believe you need people around you who are proactive.Therefore, it is fair to say that I don’t see headhunters adding any value toyour operation. I have never found headhunters to be truly thinking people,most are simply mechanical. Not a good choice, plain and simple.

Headhunters don’t really get the business—or any business, for thatmatter. In my experience, they don’t see the big picture, and are oftenfocused on putting square pegs into round holes. They don’t know how toask the right questions. They don’t know how to get the right answers, andthey all seem to be operating with herd mentality versus actually gettingpeople placed in the right places at the right time. If anyone has a suggestionof a good headhunter, I’d be happy to talk to them or learn more aboutthem, but I just frankly haven’t run into any of them. I find most of them to




be rude and obnoxious, and as a result, I’d be hard-pressed to be convincedto work with them. However, you may want to find one that can be helpful.

Not too long ago, I got a call from a headhunter about a position at ahedge fund. The position sounded interesting, so I agreed to a meeting tolearn more about it. The person said that he knew all about me, had talkedto people about my experience, and that I had been referred to the firm bya number of people. When I went to the meeting, the person knew nothingabout me and couldn’t fathom how I could both work on Wall Street andwrite books. Furthermore, the job the company had called me about wasone that someone had seen on a Web site and the headhunters were trying tofill it without being asked by the company. It was a colossal waste of time.I also get tons of e-mail from headhunters asking me to recommend people.I used to call them up ask them how they got my name and what I could dofor them. The answer: nothing. These people don’t even know who they aresending their spam to. Avoid headhunters. You’ll just be wasting your time.

The best way is to go out and find people to work for your orga-nization through Web sites like www.albournevillage.com or www.efinancialcareers.com. There are other sites and services that may be goodas well; the only reason I recommend these two is that I have used them togreat success. Both have a deep reach in the financial services communityand are able to draw good candidates.

MATCHING SERVICES

In addition to the service providers we’ve already discussed, a fourth groupof people has arrived on the hedge fund scene—the matching services. Thesepeople have a new spin on third-party marketing—they operate like a datingservice and match investors and managers, raising assets and delivering theminto the hands of new and existing managers. As with most things, some ofthese services are good and some are bad.

The way to distinguish the good from the bad is by talking to clients andlearning how much, if any, assets have come in, and what sort of investordatabase they use to set up meetings. Some of these firms charge a fee tothe investors, while others charge fees to the managers. Others just operatein the ether. If you are a new manager and you’re trying to gain assets,after you exhaust the 50 or 100 people you know just out of the box, thenanything you can do to attract assets is a good thing.

It’s very important to get in front of as many people as possible. Ifthese sourcing organizations are worth anything, they’ll be able to get youin front of a large number of potential investors. The problem is this area ofthe service provider industry is still quite new and it seems that it is hard to




find many managers that have had much success with these organizations.The jury is still out on whether these services will make it. But if you can getin front of a group that can offer you a hedge fund “speed dating program,”you should try to do it. There are a lot of people who are trying to useinnovative ways to match investors with managers, and vice versa. Turnover as many rocks as you can.

When it comes to marketing and asset raising, you never know wherethe money’s going to come from, so don’t automatically discount an orga-nization with a short track record, or one that seems not to have a greatbusiness model. You never really know what value they can offer until yousee it first hand and experience how they work, who they know and whatkind of opportunities they are able to create for you. This is clearly a grow-ing trend in the hedge fund industry. It can be difficult for managers to getin front of investors, and people are trying to solve that problem. The ques-tion is whether the markets will allow for these types of matching servicesto be successful. I think the answer is yes. The rules about how people arecompensated are quite clear. In order to charge a success (i.e., a piece of thefees earned by the fund on the assets that are brought in as a result of thematching service efforts), the firm has to be affiliated with or directly be abroker dealer. You need to check with your lawyer on this to make sure youdo not get into trouble. As long as people play by the rules appropriately, itshould work. Managers and investors need to meet: It’s that simple. As theindustry continues to grow, it gets harder and harder to find the needle in thehaystack. These matching services create a platform that allows managers tomeet with investors who are looking for their particular strategy, fund sizeand pedigree. Again, think of it as a dating service. That’s just what it is.

OTHER SERVICES

From a real estate perspective, I found that it’s important to find space thatyou like, that is functional, is reasonably priced, and can be built out orexpanded as you grow your business. The best way to do that is to finda building or two and try to work with an agent in that building or workwith a broker or agent who can help you find the spot you’re looking forwithin a set location or area. Pick a neighborhood and stick with it. As fortechnology, there are literally tons of firms out there that are looking tocreate networks and the like for every hedge fund manager on the planet.Your prime broker should be a good source for referrals for these people.I suggest that you start small and let the technology grow on an as-neededbasis. I have never met a technology person who did not want to sell memore then I needed—it is just the way they operate. Stand strong and toughand you should be okay. There are many people who specialize in hedge




fund trading systems and accounting systems. There’s a big referral networkgoing around these days, and I would suggest you use it to get you whereyou need to be from a technological standpoint.

TAKING ADVANTAGE OF TECHNOLOGY

As the industry grows, news and information about the industry continuesto grow. The proliferation of Web sites that provide either real-time newson the hedge fund industry or information for people to gather data on thehedge fund industry is growing on a daily basis. Just a few short years ago,the only game in town was a Web site called www.hedgeworld.com, andthe only newsletter was Hedge Fund Alert, which is published by HarrisonScott Publications.

Today, there are thousands of sites and hundreds of publications. Allthe sites that I have seen are pretty good at gathering and processing data.Using these tools is a great way to get your finger on the pulse of what isgoing on in the industry, both in the United States and abroad. There is alot of information flying back and forth, and the more data points you have,the more successful you’ll be at getting things done.

These sites traffic in the obvious, focusing on current trends in the in-dustry, such as where assets are coming from, who is investing in variousstrategies, and what’s happening with new fund launches, market infor-mation, and performance data. Other more obscure information includesexecutive moves, new business starts by service providers, and conferenceand workshop dates and information. Many sites just traffic in hedge fundindustry news and information. Paying attention to these Web sites will al-low you to be better informed about what is going in the industry, and willprobably make you a better businessperson.

My favorite Web site—the one that I look forward to reading everyday—is www.albournevillage.com. This is a site run out of the United King-dom that collects and publishes news and information about the industryin a clear and concise manner. It does a great job in aggregating news andinformation about the hedge fund industry as well as the private equity in-dustry, and really provide a community to exchange ideas and gather data.Another good aggregator is www.opalesque.com. This service does a greatjob at gathering data from literally thousands of news services and publi-cations and filtering out the noise in a clear and concise morning brief. Allthese companies offer e-mail alerts.

One of the few things you cannot use the Internet for is a complete due-diligence package. Due diligence still requires that you hire someone—forexample, a private detective agency, a background checker, or a securitycompany—to get information, process it, and package it into a form that




is worthy of making an investment decision. This material is the final datapoint an investor needs in the manager due diligence process.

Googling someone is not the same as due diligence. The Web is a greatequalizer in that it allows people to access a lot of information, literally withthe click of a mouse. The Web has really done wonders for hedge fund duediligence and hedge fund manager selection in that there are now multipleplaces to search out managers, search out performance data and search outstrategy information. However, this sort of research is just the beginning.Whether you’re an investor or a manager, don’t fall into the trap of thinkingthat the Web is a silver bullet.

Why can’t you rely heavily on the Web? Although it will offer you alot of pertinent and valuable information, you won’t get the full picture.For example, let’s Google “Dan Strachman.” You’ll find information aboutmy books, old articles that I have written, some news articles that I havebeen quoted in over the years, and conferences that I speak at, run, andattend. What you won’t find is any information about my barbeque saucecompany and anything more than a small bit of information on job historyand education.

The Web is a starting point, but that’s all it is. You need to turn overmore rocks: Dig for information about the managers, their education, theirjob history, how they learned their investment strategy, how they implementthe strategy, how many assets they have under management, where the assetscome from, how their business is growing or slowing, and how they’readdressing either of those situations. Remember that the tools in front ofyou are only as good as the person who’s using them.

For investors, however, the Web has become a great equalizer. It’s fairlysimple for investors to use the Web to gather performance data about man-agers. Such data are available on the Web, but again it’s the first cut of thefirst draft of the first go-round. It’s a good place to start, but there needs tobe is a lot more behind it.

PARTING THOUGHTS ON SERVICE PROVIDERS

Service providers play a significant role in establishing and maintaining afund business. Deciding on one company versus another, while not missioncritical, is quite important and should not be taken lightly. Work with peopleyou like, work with people you respect, and work with people you can trust.Most importantly, work with people who are competent. Taking this adviceshould allow you to create, build, and operate a successful fund. The oneingredient that is missing is managing the money. That’s your job—don’tscrew it up.



CHAPTER 8Fraud, Collapse, and the

Kitchen Sink

Fraud is rampant in the hedge fund industry. Fraud is not rampant in thehedge fund industry. Which sentence do you believe? Which sentence

do you think sophisticated investors believe? Which sentence do you thinkthat individual investors believe? Ask a group of people, and you will get ahandful of answers.

The truth is, there’s fraud in all aspects of Wall Street: market timingwith mutual funds, churning of retail stock brokerages accounts, pumpingand dumping, front running, other types of stock fraud—and, of course, inthe hedge fund industry. There is fraud everywhere; as educated people, weknow it, we accept that it exists, and we do our best to avoid it.

It’s the nature of the beast. It began with tulip mania in the first part ofthe seventeenth century and is still going strong today, most recently withsome hedge funds that invest in both equities and fixed income securities.(Tulip mania is a metaphor for any economic bubble: an example of whendemand outstrips supply and the markets go crazy. Ultimately, the supplywill shift—think of the U.S. housing market of the past several years—andthe bubble will burst.)

WHY FRAUD EXISTS

Fraud exists, and people are so susceptible to it, because of one thing andone thing alone: greed. People like to make money, and many are willingto do whatever takes to make it. This applies to the criminals (those whoperpetuate the fraud) and the investors (who are taken in by the fraudsters,in part because of greed—remember, if something sounds too good to betrue, it very likely is).

103




Fraudsters understand this aspect of human nature. Often, they cansuccessfully take advantage of other people’s character flaws. On Wall Streetand Main Street, people still subscribe to the words of Gordon Gekko inWall Street: “Greed is good.” Granted, greed isn’t always bad. Greed drivesmany areas of Wall Street. Greed fuels ambition, and in some cases, it fuelssuccess. Unfortunately, in other instances, it fuels collapse.

IS FRAUD REALLY RAMPANT IN THEHEDGE FUND INDUSTRY?

If, in the last five years, you have read an article in the popular press abouthedge funds, you’ll most likely have heard two things about hedge funds: thatthey’re expensive, and that they screw their investors by taking unnecessaryrisks.

Furthermore, read any daily newspaper and you will see stories abouthow hedge funds are causing the markets around the world to collapse. Theheadlines blame hedge funds for every ill that affects Wall Street and theeconomy. The stories are about rampant fraud, outsized fees, and little ifany value added to investors. Some are true. Some are false. Some are justnonsense. Smart, well-educated, and thinking investors need to look throughthe ink to see what is truly out there. Investors who are thoughtful and whospend time thinking these things through will be able to separate the goodfrom the bad.

Obviously, not all hedge fund managers are fraudsters—but they’re notall quite saints, either. Regardless of your role in the industry, the questionyou need to ask yourself is, what drives managers and investors? Whatshould drive both is a desire and ability to make money in the markets anddeliver a good investment vehicle to investors.

Why the Popular Press Has It Wrong

Hedge funds are about providing solid investment vehicles that offer a goodservice to their clients. The idea is for the clients to be able to protect theirwealth and make more of it. Bill Michaelcheck, the founder of MarinerInvestor Group, an $11 billion hedge fund complex, told me years ago thatbuilding his business was about collecting “nickels and dimes” and that hewould let someone else pick up the quarters.

The idea is that by going after many small, profitable trades, one is morelikely to find long-term success than simply by going after the big trades,which have more risk and less potential for success. It is about being ableto sleep at night. It is about being able to realize that their investors athis company is providing them with a service that not only made money



Fraud, Collapse, and the Kitchen Sink 105

but protected their wealth. From my perspective, this is exactly why peopleshould invest in hedge funds.

Of course, there are exceptions to every rule, and though most hedgefund managers build their assets over time, there are many examples ofhedge fund managers making a huge amount of money by betting it all onone trade.

When George Soros bet against the British pound sterling, he madenearly a billion dollars and clinched his reputation as one of the greatestinvestors who ever walked the face of the earth. To the unpracticed eye,Soros and other hedge fund operators seem to be taking incalculable risks. Inreality, though, the risks that most hedge fund managers take when buildingtheir businesses and on behalf of investors are quite calculated. The problemsaying it this way is not what sells newspapers or earns ratings. Instead, thereneeds to be hype and excitement—in other words stuff that sells. I am notsaying that all managers act like Soros or for that matter like Michaelcheckbut rather some are like the former while others are like the latter. It is yourjob to understand how your manager operates and what you can expectbefore you make an investment decision. Both offer good services and thereis room for both types of managers in a diversified portfolio—the key forinvestors is to understand what they are investing in and act accordingly.

So don’t be fooled by what you read in the papers. Sophisticatedmanagers make sophisticated investors, and they understand the risks andrewards involved with the trades in their portfolios. They understand thatthe greater the risk, the greater the potential reward. It’s what they’repaid to do.

And consider this: Hedge fund investments come from some of the mostimpressive, sophisticated investors in the world. They come from peoplewho run pension funds, endowments, trust companies, family offices, andfoundations. Ivy-league schools like Yale, Harvard, and others have beeninvesting in hedge funds for years. Private and public pension plans servingteachers, municipal works, firefighters, and police officers invest in hedgefunds. Foundations put billions of dollars to work in these unique investmentvehicles. Investors of all shapes and sizes look to hedge funds for returns.Most of these investors put their money into hedge funds because they wantto protect it and see it grow. Read that last sentence again. It’s contrary toeverything the popular press writes about hedge funds, isn’t it?

WHY HEDGE FUNDS IMPLODE

If everybody believed hedge funds’ press, nobody would invest in them.There’s a misconception in the marketplace regarding the level of fraud inthe hedge fund industry. Of course there’s fraud in hedge funds. There’s




fraud in hedge funds because there is an ability in the hedge fund industry,unlike other areas of Wall Street, to take advantage of the little guy. The littleguy wants to taste the forbidden fruit. The forbidden fruit on Wall Streetis nothing other than hedge funds, for the simple reason that the massescannot invest in them and everyone wants what they cannot have!

So let’s talk about hedge fund fraud. Over the last 10 years, there havebeen a number of instances of hedge fund fraud that were truly remarkable.There’s the Bayou case, there’s the KL Financial case, and then there is therecent case of Lake Shore. These three firms have the dubious distinctionof being caught in the act of overt frauds, which did nothing but line thepockets of their managers with the assets of their investors.

I’ll discuss these frauds in detail later in this chapter, but first, I wantyou to understand that there’s an important distinction between this typeof fraud and poor investment management. Other hedge funds have blownup, not because of criminal activity, but simply as a result of poor man-agement. Think Amaranth Advisors LLC, Solwood Capital, and, of course,Bear Stearns Asset Management.

And chances are, you’ve heard of the collapse and bailout of LongTerm Capital Management. That particular fund complex, led by JohnMeriwether, lost more then $4.6 billion in the wake of the credit crisisof 1998 and was bailed out by a consortium put together by the FederalReserve.1 Let’s also not forget Victor Neiderhoffer, whose fund collapsedafter his ill-advised bet that, in the wake of the Asian financial crisis, theThai market would be propped up by its government. When the Thai gov-ernment failed to act and the U.S. equity markets posted a loss of more than7 percent in October, his fund collapsed.2 Both are unique in their ownrights, and both offer fascinating stories of ego, greed, and mismanagement.But we’ll leave that discussion for another book.

In a Word: “Ego”

Why do hedge funds implode? Usually, it’s because managers get cockyand let their egos get in the way of making good investment decisions.Assuming an absence of fraud, there’s usually one primary reason that hedgefunds experience massive losses through mismanagement: ego. Ego can leadmanagers and traders to believe that they know more than everyone else, aresmarter than everyone else, and can beat everyone else at the money-makinggame. It may work sometimes, but, friends, it does not work all of the time.What happens when it doesn’t work? You’ll be wiped out. Your assets willbe marked to zero. Ego is what gets people in trouble time and again.

It’s ego that causes the manager to let a trade continue even when it’sgoing bad, rather than taking the profits or losses and walking away. Ego




causes managers to think that if their particular strategy worked well inone area of the market, it’ll work well in another. For example, at LongTerm Capital Management, the men behind the money management modelsbelieved that because their trading strategies worked well in fixed income,the strategies would work well in equities. Unfortunately, this was not thecase, and was one of the factors that led to the firm’s collapse. As a newmanager, pay attention to ego. Know that there’s a fine line between self-confidence and arrogance.

Don’t let your ego or arrogance get the best of you. Remember whatseparates a good manager from a bad manager: A good manager knows thathe needs to have money available to trade the market tomorrow. Live tofight another day!

WHY FRAUD HAPPENS IN THEHEDGE FUND INDUSTRY

So that’s where mismanagement can lead you. But why does fraud oc-cur in the hedge fund industry? For three, very simple, reasons: (1) In-vestors are gullible; (2) fraudsters understand that investors are gullible; and(3) fraudsters are able to create a hedge fund vehicle with very little effort.Further, many investors are not only gullible, but uneducated about theirinvestments—and unwilling to admit to their lack of knowledge.

Fraud is perpetrated by criminals. The people who do this—for example,the people who created, implemented, and ran firms like Bayou—shouldgo to jail for a long time. Now, I don’t entirely understand the thoughtprocess that drives these people, but let’s indulge in some conjecture. Let’ssay that the principals of Bayou woke up one morning and said, “I want tosteal from investors.” They may have considered other venues—for example,real estate, straight retail brokerage, or maybe even a mutual fund fraud.

While I never spoke with any of the principals of Bayou, I can onlybelieve that the reason they chose to use a hedge fund for their scheme wasbecause hedge funds are glamorous, have cache, are easy to get up and run-ning, and deal in big numbers. These individuals made a conscious decisionto steal money from both sophisticated and unsophisticated investors. Theirscheme included creating their own accounting firm and their own admin-istration, all the while effecting a massive Ponzi scheme that allowed themto live high on the hog by stealing their investors’ money. A Ponzi scheme,named for Charles Ponzi, is a fraud that pays significantly high returnsfrom money paid in by new investors, instead of from the actual business.This is no different than someone going out and robbing a bank. It’s just a




bit more sophisticated and extensive than walking into a bank branch andbrandishing a gun.

Other frauds have unfolded the same way. The perpetrators went togreat lengths to let investors know that things were okay with their funds,when, in fact, things were not. Don’t join their ranks.

The KL F inancia l Debacle

Jung Bae Kim (also known as John B. Kim), his brother Yung Bae Kim, and athird person named Won Sok Lee were the architects of a massive hedge fundfraud operating under the moniker of KL Financial Group, LLC. The KL“fund,” operated from 2000 to 2005. It used fictitious trade blotters, which,in turn, were used to create phony marketing material that the fund usedto scam investors out of their money. The fake trade blotter and statementsdocumented wildly successful trades in many well-known stocks, all of whichnever occurred. One sheet, in particular, showed a $22 million profit ona trade of Research in Motion Ltd., the maker of the Blackberry phone.This trade only existed in the minds of its creators and those who sawhis handiwork. The phony documents and material conned investors out ofmore than $194 million.3 The fraud was perpetrated on many of Palm BeachCounty’s wealthy and elite. Those who were defrauded included a numberof professional golfers and a prominent trust and estates lawyer, who hadalso referred many of his clients into the fund.

In mid-April, Kim pleaded guilty to the fraud. At the time of this writing,he was awaiting sentencing.

This fraud was not unique in that it used phony material that lookedofficial. It’s not clear whether investors might have smelled a rat prior toinvesting, because the documents were quite good. That in itself is one of theproblems with technology today. It’s relatively easy to create official-lookingdocuments and materials, and many take this information at face value. Thelesson to be learned here is that data need to be checked and verified foraccuracy by a third party. If a manager does not want to refer you to peoplewho can verify statements or materials, then stay clear of that fund.

Manhattan Investment Fund

Michael Berger and his Manhattan Investment Fund are at the center ofone of the greatest hedge fund fraud stories in the industry’s history. Ac-cording to a CNN/Money story,4 at the time the fraud came to light, it wasamong the first widely reported hedge fund misdeeds. The fraud capturedheadlines—and the public’s attention—when Berger skipped town, went onthe lam, and ended up on the FBI’s most wanted list.




Berger’s fall from grace began with simple mismanagement, but quicklyescalated to full-blown fraud. The Manhattan Investment Fund launchedin 1995; at its height, it had assets of more than $575 million under man-agement. Unfortunately, for his investors, Berger did not understand theconcept of Wall Street bubbles, and shorted the technology market a fewyears too early. Like any good criminal, he decided he was better off hidingthe losses than owning up to them. One thing led to another, and before hisinvestors knew what hit them, Berger had lost more than $400 million ofinvestors’ money and was charged with securities fraud.5

Berger pleaded guilty to the charge in 2000, but instead of facing hisday in court, went on the run. He finally was tracked down in July 2007 inAustria, and was brought back to the United States to face the music.

So how did Berger’s criminal enterprises come to light? According toone former investor, the beginning of the end came during a routine dinnerparty conversation. It seems that at dinner parties, hedge fund managers andinvestors like to brag about their funds and investments.

During this dinner party, Investor A was bragging about this great fundthat he invested in, which was doing really well shorting the technologysector while the technology sector was rallying. Unfortunately for Berger,the person Investor A was talking to worked at the fund’s prime broker andknew that the fund wasn’t doing nearly as well as this investor seemed tobelieve. The problem was that the fund’s performance did not jive with themarket.

It turns out that Berger had created fake statements and sent them outon the prime broker’s letterhead. He was telling his investors, through thesestatements, that he was making money in technology, when in fact he waslosing it like the rest of the market. When the investor found this out as aresult of the conversation at the dinner party, the jig, as they say, was up.

Lake Shore Fund Complex

One of the latest members of this elite club of hedge fund fraudsters isthe Lake Shore fund complex. Lake Shore, which was based in London andToronto, specialized in managed futures and worked hard to develop tradingsystems that allowed it to make significant profits for investors, regardlessof market conditions. Everything seemed aboveboard: The firm appearedto be well established and sophisticated. Its London offices were on “hedgefund row” in Mayfair. Its salesforce was scattered across the globe, raisingassets for a series of funds that, according to the firm’s marketing literature,were doing quite well.

There was just one small problem. According to the Commodity FuturesTrading Commission (CFTC), the whole operation was a sham.6 Court




documents allege that the principal of the firm manufactured performanceand asset levels for its marketing materials, all the while siphoning off assetsfor his personal use.

As recently as February 2008, the CFTC filed an additional, or amended,complaint against Lake Shore and its principal, alleging that hundreds ofinvestors were defrauded out of at least $273 million.7 The jury is still outon Lake Shore; the principal refuses to acknowledge CFTC’s jurisdiction,since Lake Shore was not based in the United States and did not operatewithin its borders. The saga came to light in June 2007, and looks as if itwill continue for some time.

These stories illustrate true fraud—crimes against investors and in thehedge fund industry. But other funds have gone under through simple mis-management. Fraud is easy to avoid, but mismanagement can happen toyou, if you’re not careful. Read on for a few cautionary tales.

HEDGE FUND MISMANAGEMENT

What happened at funds like Amaranth, DB Zwirn, and Bear Stearns wasnot fraud, at least in the sense of the criminal aspect. The managers of thesefunds misread the markets, misinterpreted their own intelligence, and causedtheir investors to suffer because of their inability to run their organizations.

The Amaranth Story

At its height, Amaranth was a $9 billion, multistrategy fund complex. Thefirm lost nearly $6 billion after it bet the wrong way in the natural gasmarkets—according to some sources, the largest collapse in hedge fundhistory. It is clearly the biggest ego bust up in the hedge fund industry. Thefirm’s energy trader, a Canadian named Brian Hunter, believed that he knewmore than the rest of the energy traders and put a trade on that bet that theenergy markets would spike in light of a massive hurricane season like theone the year before. He, in essence, thought the rest the world was wrongand he was right. The year before his massive loss, 2005, Hunter had betthat the markets would rally, and sure enough, when Hurricane Katrina hit,the markets went through the roof. He was truly a master of the universe.But lightning—and hurricanes—don’t hit twice, and in 2006 the markets fellinstead of rallying. It was an error in judgment, it was a function of greed, andit was ego and his belief that he was right and everyone else was wrong thatled to the losses. As of February 2008, there was still some investor litigationpending, so Mr. Hunter and his colleagues’ fates have not yet been revealed.In the wake of Amaranth’s collapse, both Hunter and the firm’s founder,




Nicholas Maounis, got back on the horse and are working on developingnew funds. This time, however, they seem to be doing it separately!

DB Zwirn & Company

Another hedge fund that fell prey to mismanagement is DB Zwirn & Com-pany, which, in late February 2008, announced that it was shutting its mainfunds in the wake of internal control problems, which resulted in the fund’sinvestors withdrawing more than $2 billion in assets.8 This particular sagabegan in March 2007, when the company (which at the time had nearly $5billion assets under management) announced that it had found some “ac-counting irregularities” (never a good sign, in the financial world) and thatit had hired an independent auditor to review the organization’s allocationof operating expenses. The findings of accounting problems were minimal,in the scope of things, and the company did pay investors back the expenses,plus interest.

Despite the company’s efforts and willingness to make things right, thetrust had been broken and one thing led to another—“another” being mas-sive redemptions. The firm’s fortunes took another turn for the worse whenit announced that the company would be able to distribute approximately60 percent of the assets due to its inability to sell some holdings.9 Some ofthe holdings, it turns out, are illiquid. In order to avoid a fire sale, the firmwill wind down the positions in an orderly process, which could take years.

Bear Stearns

In June 2007, when the first wave of the mortgage crisis hit, Bear Stearnsannounced that two of its mortgage funds experienced massive losses andwould be forced to liquidate in light of investor redemptions and collapsingmarket prices. In short, the fund’s manager had taken a page from BrianHunter’s playbook and had bet that lightning would strike twice. The man-ager got burned, and the fund and its investors suffered for it. In order toshore things up with the fund and Wall Street, the firm committed to a $3.2billion loan to bail out one of the funds and worked with other investmentbanks to bail out a second, larger, fund that was hit by the mortgage crisis.10

This led to the eventual collapse of the entire firm. In March of 2007, Bearwas sold through a Federal Reserve brokered deal to JPMorgan Chase for$10 a share. The firm for all intents and purposes is now just a memory.However the story of the collapsed funds is far from over. Besides a numberof investor lawsuits against the management of the funds, and its managers,in June of 2008 the fund’s managers Matthew Tannin and Ralph Cioffi werearrested and charged with conspiracy, securities fraud, and wire fraud for




allegedly misleading investors. It will take years for this litigation to playout. It seems however that one thing is for sure: the fund investors got hitbecause the managers were too focused on themselves instead of the goodof the investors.

What Went Wrong

I firmly believe that it was arrogance—and not fraud—that caused mosthedge funds to suffer losses that cost investors billions.

When the dust settles, the suits are completed, and the post-mortemis written, each of these companies will likely be faulted for not havingproper risk controls and oversight in place. That seems to be what gets mostof these funds in trouble. Had there been proper checks and balances inplace, I believe that all three of these situations could have been avoided.Furthermore, if investors had completed thorough background checks anddue diligence, the folks at Manhattan, Bayou and Lake Shore would nothave been so successful. Remember, greed is a very powerful emotion. Itmakes people do crazy things and causes them to overlook the obvious.

These frauds and blow-ups grabbed a lot of news headlines over thelast few years. How can investors avoid this type of situation? The answeris simple, elegant, and, to some degree, bogus: due diligence. Why bogus?Because only those with 20/20 hindsight say they could have avoided any ofthese funds.

I don’t believe that it’s possible to avoid any possibility of fraud. Some-times the fraudsters are just too good, and will catch anyone in their net.However, thorough due diligence is a good place to start. But understandthat thorough due diligence by even the best investors would not have caughtall of them. One or two of the funds may have raised red flags, but if I wasa betting man, I would not bet on all of them failing due diligence tests.Investors are lazy, and they don’t see what it is in front of them becausethey are blinded by reputation and experience and their own belief in theirinvestment expertise. But if investors had not been lazy and had thoroughlychecked out the funds, it is possible that they still would have been burnedbecause sometimes things are just too hard to see. Nevertheless, if you dothe work and still get snookered, at least you can say you did the work.

HOW TO PROTECT YOURSELF

There’s only one thing that you can do to separate good investments frombad: due diligence. Due diligence comes down to two parts research andone part instinct. Research can be faked, but instinct cannot. If your gut




tells you that something is wrong, double-check the research, but still pass.The biggest mistake you can make by not investing in a fund is missedopportunity, and in the grand scheme of things, missing an opportunity is abetter option than losing the farm. Continue to watch the fund; if it checksout, you can always choose to invest a year or two later. But if it blows upor turns out to be a fraud, your options are few and far between.

Remember, there are plenty of good managers out there, and it takestime and effort to find them. Work hard, and you probably will be able tofind at least a few funds worthy of your assets. There are more than a few. Infact, there are likely thousands that trade the markets well and earn moneyfor their investors. But it is like finding the proverbial needle in the haystack.So don’t be lazy: Work hard, do some thorough due diligence, and you’llcome out ahead.

Regulatory Moves to StopFraud and Mismanagement

In the wake of the recent blow-ups and frauds, there has been a lot oftalk regarding hedge fund regulation by Congress, the Securities ExchangeCommission, and many mutual fund management companies (refer back toChapter 2 for more details on this). But here’s a question for you: Wouldit have made a difference in terms of any of the fraud and mismanagementwe’ve discussed in this chapter?

In my opinion, more stringent regulation would not have helped avoidany of these situations—or any other instance of fraud, for that matter.Remember that the two largest frauds ever perpetrated against investorswas the mutual fund timing scandal and the research scandal that literallyaffected hundreds of thousands of investors. Both mutual funds and WallStreet research were and are highly regulated; regulation does not necessarilymean things are safer; it just means that there is more paperwork. Themarket will dictate the future of hedge funds and hedge fund regulation.Investors will continue to demand more from their managers, and, as such,the industry will change and adapt to these demands. Remember, moneymanagers are engines, and engines cannot run without gasoline. Gasolinecomes in the form of one thing—assets—and assets come from investors. Itis pretty simple.

Investor Due Di l igence

I’m happy to report that I have a great solution for avoiding fraud: Dothe right thing. Do the right thing by your investors, do the right thing by




yourself, and do the right thing by employees and you won’t have a problemwith fraud. It’s pretty simple.

If you are an investor and you want to understand how to avoid fraud,you really need to do due diligence. You really need to do more than justlook at investment performance and a private placement memorandum.You need to do more than just simply interview the manager or interviewhis or her people. You need to talk to other investors. You need to talk toconsultants. You need to talk to service advisors. You need to do generalbackground checks. You need to do criminal background checks. You needto make sure that what everyone is telling you is truthful and is relevant towhat you’re doing.

Despite what they may tell you, most hedge fund investors don’t do highlevels of due diligence. There are two reasons for this. First, investors areafraid to ask questions. They forget that it’s their money and that they havethe right to ask questions and get answers. Often, they’re intimidated, andtake the view that the manager is doing them a favor by generating returnson their investments. That’s bull. At the end of the day, it’s your money. Ifyou don’t like what the manager or his people are telling you, then get thehell out of the fund.

The way to perform due diligence is to really kick the tires, look underthe hood and get a level of information about the fund, its people and itsorganization sufficient enough to tell you what kind of investment you’retruly making. That’s the only way to do it, and you can’t do it yourself.You need to hire people to help you. You need to hire someone who cando a full background check. Get as much information about the personas possible. You need to hire people who can analyze the returns to see ifthey’re accurate. You need to hire people who can potentially review theaudits. Yes, it’s expensive. Yes, it’s time consuming. But it’s your money,and there’s nothing more important than making sure that you’re putting itin the right place.

The second reason investors make bad decisions is the fear of missingan opportunity. But that old saw—that “opportunity only knocks once”—israrely true in the world of investing. Another opportunity—maybe from thesame fund, maybe not—will come along. I’d much rather have you kickyourself for missing an opportunity than for squandering your funds andyour future on a fund that’s not above board.

Manager Due Di l igence

There are a number of theories on due diligence. Most people performwhat I would call a rather simple but elegant level of due diligence onpotential managers. These investors start with a premise that they have




already decided to give the fund money and are looking for a reason tochange that decision. As a manager, these are types of investors you want.If you don’t understand why, then leave the business right now. You wantinvestors to give you money to manage, and you want them to come to youwith their checkbooks open.

For the budding manager, I recommend a few things to get over theinitial shock of the first due diligence. First, never lie. Never. Never lie inan interview, on paper, in person—just don’t do it. Obviously, lying is justplain wrong, and I hope that’s a sufficient deterrent to keep you from doingit. But you also need to recognize that you will be found out—sooner orlater—and you will never recover. Just don’t do it! Second, if you don’tknow the answer to a potential investor’s question, say that you don’t havean answer—and then go find it. He or she will respect you more for sayingthat than if you make something up on the fly that does not pan out. Third,make sure that you have all your ducks in a row and that you have a duediligence questionnaire (DDQ) ready.

A DDQ is a document that covers a lot of material about the fundmanager, the strategy, the style, the people, the service providers and otherpertinent (and some not-so-pertinent) information. (See Appendix A for asample DDQ.)

MAKING A GOOD FIRST IMPRESSION

You need to be ready to answer questions, you need to be ready for anintense interrogation and you need to be able to explain in simple, yetdetailed information how you manage money and how you are going tomanage money going forward. It’s a job interview, and you need to bebothered! If all else fails, ask the potential investor for a sample list ofquestions and build a response around the questions. It is going to be thelittle things that get you, so pay attention to detail and make sure thingsare 100 percent before you go to market. Remember, you only get one firstimpression. Make it a good one.

The way to do this is to be prepared. As I said before, the first rule ofthis jungle is that if you don’t know an answer to a question, admit it: Saythat you don’t know and that you’ll get back to the investor. Don’t makeit up. If you do, you’ll lose the client. The second (and related) rule is toalways be truthful. It never hurts to tell the truth. Money comes and moneygoes. Integrity is all you have. Be sure to keep it.

As for the meeting, conduct a practice meeting a few times with col-leagues and friends to play the part of various investors. This will allowyou to be prepared. Ask your friends to give you honest, helpful feedback.




Listen to the whole question before you respond. Don’t be rude. Pay atten-tion. Make sure that the person in front of you knows that they matter toyou.

If you can do all of this and put up good numbers, you can build a goodbusiness—one that’s successful for both you and your investors. Hard workand sweat are important. Keep that in mind, and you should find success.



CHAPTER 9A Few Parting Thoughts

Congratulations, you are almost through. Before you know it, you willhave finished reading this book and your journey through the world of

hedge fund money management will be complete. By now, you should have abasic, yet thorough, understanding of how hedge funds manage money, howhedge funds are created, how hedge funds gather assets, and how investorsseek out and find hedge fund investments.

You should also have a good understanding of hedge fund serviceproviders and the critical role each plays in the success or failure of a hedgefund management company. Ideally, you’ve gained a bit of knowledge andinsight into hedge fund fraud and blow-ups, and have an idea of how to avoidtraveling down that same path. You know where hedge funds came from;how the industry has evolved; and why Soros, Steinhardt, and Robertsonwere so important to the growth of the industry.

I hope you’ve also learned one more vital thing—that hedge funds arenot evil weapons run by maniacal people trying to control the capital marketsand wreak havoc on millions of people around the globe through tradingand investing while lining their own pockets with gold. Despite what thepress says, hedge funds aren’t bad. Remember that one—it is important.

I wrote this book to provide you with insight into (a) how moneywas raised, (b) how hedge funds are structured, (c) how hedge funds raisemoney, (d) how an investor should look at hedge funds, (e) how to cor-rectly develop a marketing strategy, and (f) general information and knowl-edge about the hedge fund industry. I hope you have gathered that knowl-edge from this book. Please let me know your thoughts via e-mail [email protected]. As other people who have e-mailed me will tellyou, I read all of your e-mails and I respond to them all. I want to hear fromyou. Also check out my blog at www.hedgeanswers.blogspot.com.

Fortunately for all of us, as time goes on, the hedge fund industry hasnot stopped growing. It is a force that is in a constant state of motion thatexpands and contracts as the markets move. In the wake of the market

117




dislocation of 2007 and 2008, many managers were forced out of businessand many others decided it was the right time to either launch new funds orexpand their businesses.

Mark my words: Hedge funds, in one shape or another, are here to stay.Managers will come and managers will go, but the business will remain.Think about it for one minute. Name another business where the barrier toentry is so low, the reward so high, and where the customer and the owner’sinterests are so closely aligned. Can you come up with any? Me, neither.

That alone is enough to keep the industry going, but that’s not theonly reason hedge funds will continue to grow and prosper. The reasonis simple: Investors aren’t dumb, and they understand the simple conceptthat markets do not always rise. Therefore, they want to invest in prod-ucts that can take advantage of both good and bad markets. Hedge fundsoffer that opportunity.

That being said, the hedge fund industry is still evolving, and will con-tinue to do so for many years to come. Unlike the mutual fund industry,which for the most part offers only one-way investment products (and, let’sface it, can be just the smallest bit boring), the hedge fund industry is full oflife and extremely vibrant.

Hedge funds are one of the purest forms of capital left in today’s click-of-the-mouse world. However, not all is good with the hedge fund industry, andthings are probably going to get worse before they get better. Throughoutthe market volatility of 2007 and the early part of 2008, many hedge fundmanagers found that they could not successfully manage assets, and as such,put up very poor performance. As a result, many funds saw significantredemptions as investors realized that these managers were offering nothingmore than expensive mutual funds. These vehicles were unable to hedge therisk of the markets (or hedge at all, frankly), which caused their portfoliosto lose value.

I believe that as 2009 gears up, many more hedge funds will returncapital to their investors, liquidate their portfolios, and go out of busi-ness, because their managers cannot keep up with the pressure to deliverperformance.

However, on the flip side of this gloom-and-doom outlook, institutionalinvestors are clamoring for more and more product. It seems that everybodyin the institutional space is looking for more and more hedge fund or hedge-fund-like products as homes for their assets. Whether these products have anew moniker (alternative investments) or continue to be called hedge funds,investors are looking for products that are going to perform regardless ofmarket condition. In my opinion, this trend will continue for the next 5 to10 years. It will continue to grow stronger, in part, because, as the marketscontinue to be volatile, it’s important that investors are invested in products



A Few Parting Thoughts 119

that are managed by people who can use all the arrows in their investmentquiver to make money. That’s what hedge funds offer.

Hedge funds offer investors a promise of performance, regardless ofmarket conditions, plain and simple. That is the global promise of theseunique investment vehicles. The problem is that not all managers can deliveron that promise. Many hedge funds are unable to deliver because theirmanagers do not know how to hedge.

Investors demand returns. And hedge fund managers face a considerableamount of pressure to deliver. If a manager cannot hedge, then he or sheis going to be redeemed. Investors are not putting their money into theseproducts for mediocre returns without alpha. They want alpha, and theywant it consistently.

If you look at many of the successful firms, you will find their success isbased on their ability to deliver alpha time and time again. As a hedge fundmanager, this is what you should strive for, and as an investor, these arethe types of funds you want to find for your assets. The inability to deliveris what causes managers to go out of business, with no one to blame butthemselves.

From any angle, it’s a pressure cooker. There is pressure from within,from the investors, and from the service providers. People are looking atyou to deliver, and you don’t want to let them down. It is a tough job,but somebody has to do it. Don’t forget that when you do it right, you arerewarded quite handsomely.



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APPENDIX ADue Diligence Questionnaire

121



Appendix A: Due Diligence Questionnaire 123

b) Please detail the investment process from trade assessment, execution and risk management.




c) How do you calculate your hedges and what instruments do you use?




G. Liquidity & Fees




H. Compliance


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APPENDIX BResource Guide

Following is a list of service providers that can help you with most aspectsof your business. The list has been gathered from a number of industry Websites, publications, and personal contacts I have made over the years. Underno circumstances should you believe that since a firm is listed here I amendorsing it or its ability to provide you with the services you need. This listshould be used solely as a guide to service providers who may prove usefulto you in building your business.

PRIME BROKERS

Barclays Capital Prime Services200 Park AvenueNew York, NY 10166(212) 412-2180www.barclays.comJohn Stracquadanio

Citigroup Global Prime Brokerage390 Greenwich Street, 5th FloorNew York, NY 10013(212) 723-4813www.primebroker.citigroup.com

Credit Suisse11 Madison AvenueNew York, NY 10010www.creditsuisse.com(212) 325-6527Todd Walters

133




Cuttone & Company111 Broadway, 10th FloorNew York, NY 10006(212) 374-9797www.cuttone.comPaul Mandile

Fidelity Prime ServicesWorld Trade Center200 Seaport BoulevardBoston, MA 02210(800) 988-4794www.fidelityprime.comJames Coughlin

Goldman SachsOne New York Plaza, 44th FloorNew York, NY 10004(212) 902-2938www.gs.comRon Artzi

Grace Financial Group436 Willis Ave. 2nd FL.Williston Park, NY 11596(516) 240-8195Charlie Fisher

Jefferies & Co.520 Madison Avenue, 12th FloorNew York, NY 10022(212) 284-2429www.jefferies.comDavid Conover

UBS HedgeFund Services1285 Avenue of the AmericasNew York, NY 10019(800) 838-6096www.ibb.ubs.comChristopher Hagstrom



Appendix B: Resource Guide 135

VanthedgePoint Group, Inc.61 BroadwaySuite 1915New York, NY 10006(212) 514-8639Geoff Tudisco

LAWYERS

Akin, Gump, Strauss, Hauer & Feld590 Madison Avenue, 20th FloorNew York, NY 10022(212) 872-1030www.akingump.comSteven Vine

Arnold & Porter LLP399 Park AvenueNew York, NY 10022-4690(212) 715-1000www.arnoldporter.comMichael Griffin

Baker & Hostetler LLP666 Fifth AvenueNew York, NY 10103(212) 589-4200www.bakerlaw.comSteven H. Goldberg

Davis Graham & Stubbs LLP1550 Seventeenth Street, Suite 500Denver, CO 80202(303) 892-9400www.dgslaw.comRonald R. Levine

Dechert LLP30 Rockefeller Plaza, 23rd FloorNew York, NY 10112-2200(212) 698-3500www.dechert.comGeorge J. Mazin




Goodwin Procter LLPExchange Place53 State StreetBoston, MA 02109(617) 570-1559www.goodwinprocter.comElizabeth Shea

Herrick, Feinstein LLP2 Park AvenueNew York, NY 10016(212) 592-1558www.herrick.comIrwin Latner

Holland & Knight200 South Orange Avenue, Suite 2600Orlando, FL 32801(407) 244-5239www.hklaw.comScott MacLeod

Katten Muchin Rosenman LLP575 Madison AvenueNew York, NY 10022-2585(212) 940-8930www.kattenlaw.comWilliam Natbony

Kirkpatrick & LockhartState Street Financial CenterOne Lincoln StreetBoston, MA 02111-2950(617) 261-3208Thomas Hickey

Lowenstein Sandler PC65 Livingston AvenueRoseland, NJ 07068-1791(973) 597-2424www.lowenstein.comRobert G. Minion




Mayer, Brown, Rowe & MawHearst Tower214 North Tryon Street, Suite 3800Charlotte, NC 28202(704) 444-3500www.mayerbrown.comKris Manzano

Sadis & Goldberg551 Fifth Avenue, 21st FloorNew York, NY 10176(212) 573-6660www.sglawyers.comRon Geffner

Schulte Roth & Zabel919 Third AvenueNew York, NY 10022(212) 756-2567www.srz.comSteve Fredman

Seward & KisselOne Battery Park PlazaNew York, NY 10004(212) 574-1231www.sewkis.comSteve Nadel

Strook & Strook & Lavan180 Maiden LaneNew York, NY 10038-4982(212) 806-5400Sarah Davidoff

Tannenbaum Helpern900 Third AvenueNew York, NY 10022(212) 508-6700www.thshlaw.comMichael Tannebaum




Wachtell, Lipton, Rosen & Katz51 West 52nd StreetNew York, NY 10019www.wlrk.comIan L. Levin

WalkersWalkers HouseP.O. Box 265GTMary StreetGeorge Town, Grand Cayman KY1-9001Cayman Islands(345) 914-4223www.walkers.com.kyMark Lewis

ADMINISTRATORS

Bank of Butterfield/Butterfield Fund ServicesP.O. Box HM 195Hamilton, BermudaHMAX (441) 299-3954www.butterfieldbank.com

BNY Alternative Investment ServicesOne Wall Street, 42nd FloorNew York, NY 10286(212) 495-1784www.bankofny.comPeter Mastriano

Columbus Avenue Consulting LLC152 West 57th StreetNew York, NY 10019(212) 500-6200www.columbusavenue.comJoe Holman




Conifer Securities, LLCOne Ferry Building, Suite 255San Francisco, CA 94111(415) 677-1570www.conifersecurities.comPhilip Stapleton

Equity Trust747 Third Avenue22nd FloorNew York, NY 10017(646) 290-6475Robert Schaeffer

Fortis Prime Fund Solutions153 East 53rd Street, 27th FloorNew York, NY 10022(212) 340-5545www.fortisclearingus.comJacques Bofferding

HSBCs Alternative Fund Services330 Madison AvenueNew York, NY 10017(212) 715-6491www.us.hsbc.comMichael Regan

MadisonGrey Consulting10 Glenlake Parkway, Suite 900Atlanta, GA 30328(866) 473-2955www.madisongrey.comChristine Kain

PFPC Trust Company301 Bellevue ParkwayWilmington, DE 19809(302) 791-2000www.pfpc.comGerald Barbara




Price Meadows11747 NE First StreetBellevue, WA 98005(425) 454-3770www.pricemeadows.comFrank Duffy

Spectrum Global Fund Services200 North LaSalle StreetChicago, IL 60601(312) 697-9900www. sgfallc.comChris Farr

ACCOUNTANTS

Anchin, Block, Anchin LLP1375 Broadway, 18th FloorNew York, NY 10018(212) 840-3456www.anchin.comGerry Ranzal

BDO Seidman LLP330 Madison Avenue, 4th FloorNew York, NY 10017(212) 885-8505www.bdo.comRobert V. Castro

Coleman, Epstein, Berlin & Company LLP515 North State Street, Suite 2300Chicago, IL 60610(312) 245-0077www.cebcpa.comPatrick O’Malley

Deloitte & ToucheParamount Building1633 BroadwayNew York, NY 10019(212) 436-2165www.deloitte.comJames H. Quigley




Eisner LLP750 Third AvenueNew York, NY 10017-2703(212) 891-4062www.eisnerllp.comChristian Bekmessian

Ernst & Young5 Times SquareNew York, NY 10036(212) 773-2252www.ey.comArthur Tully

Grant Thornton LLP60 Broad Street24th FloorNew York, NY 10004(212) 422-1000www.grantthornton.comCynthia Keveney

Halpern & Associates, LLC143 Weston RoadWeston, CT 06883(203) 227-0313www.halpernassoc.comBarbara Halpern

KPMG LLP345 Park AvenueNew York, NY 10154-0102(212) 758-9700www.kpmg.comKendi Ullman

PricewaterhouseCoopers300 Madison Avenue24th FloorNew York, NY 10017(646) 471-7830www.pwc.comTony Artabane




McGladrey & Pullen, LLP1185 Avenue of the Americas, Suite 500New York, NY 10036-2602(212) 372-1535www.mcgladreypullen.comPeter W. Testaverde

Rothstein Kass1350 Avenue of the Americas15th FloorNew York, NY 10019(212) 997-0500www.rkco.comHoward Altman

INSURANCE

Baronsmead Insurance Brokers Limited5th Floor21 Bruton StreetLondon NA W1J6QDLondon, United Kingdom+44 (20) 7529 2300Robert Kelly

Frank Crystal & Co., Inc1 Financial SqFl 17New York, NY, 10005(212) 504-1871Ari Kleinman

Hub International1065 Avenue of the AmericasNew York, NY 10018Phone: (212) 338-2252Felice Luxenberg

Theodore Liftman Insurance, Inc.101 Federal StreetBoston, MA 02110(617) 439-9595Andrew Fotopulos




The Ross CompaniesRockefeller Center, 20th Floor1270 Avenue of the AmericasNew York, NY 10020(212) 582-2524Norman Ross

USI Insurance Services301 Merritt 7Norwalk, CT 06851(203)-354-4900Marilyn Maffucci



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APPENDIX CHistoric Performance

of Hedge Funds

The following series of charts provides historical performance data for anumber of hedge fund strategies and indexes. The trends tracked in thesecharts indicate that over time hedge funds provide investors with stronginvestment returns and outperform traditional indices during good and badmarkets. This data is here for illustration purposes only. Remember thatpast performance is no guarantee of future returns and furthermore remem-ber that what happened yesterday is not going to happen tomorrow andtherefore you need to create a portfolio for the future which is for the mostpart completely uncertain. That being said, using historical data can provideyou with insight into how strategies perform against each other and thebenchmarks which in turn can be used as one building block of a portfolio.

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TABLE C.1 Greenwich Monthly US Hedge Fund Index3

Primary Strategy1 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07

Greenwich US Hedge FundIndex3 1.42% −2.33% 0.63% −1.49% 3.00% 2.57% −1.28% 0.13%

Greenwich US Market NeutralGroup Index 0.66% −1.69% 0.24% −0.99% 2.09% 1.54% −0.98% 0.27%

Greenwich US Equity MarketNeutral Index 0.82% −1.82% 1.07% 0.15% 2.26% 1.75% −1.79% 0.01%

Greenwich US Event-DrivenIndex 0.72% −2.64% 0.26% −2.00% 2.58% 1.38% −0.84% 0.21%

Greenwich US DistressedSecurities Index 0.12% −2.35% 0.04% −2.05% 1.86% 0.53% −1.10% −0.38%

Greenwich US Merger ArbitrageIndex 0.39% −2.23% −0.52% −2.17% 1.54% 2.07% 0.45% −1.20%

Greenwich US Special SituationsIndex 1.01% −2.87% 0.49% −1.94% 3.14% 1.74% −1.06% 1.08%

Greenwich US Arbitrage Index 0.55% −0.82% −0.18% −0.51% 1.57% 1.61% −0.81% 0.43%Greenwich US Convertible

Arbitrage Index −2.55% −0.91% −1.89% −2.46% 1.54% 1.32% −2.47% −0.41%Greenwich US Fixed Income

Arbitrage Index 0.56% 0.53% 0.18% 1.31% 1.01% 1.50% −0.22% 1.45%Greenwich US Statistical

Arbitrage Index 1.16% −2.03% 0.45% −0.74% 2.35% 1.63% 1.15% −0.08%Greenwich US Long/Short Equity

Group Index 0.87% −4.04% 0.79% −2.22% 3.16% 2.77% −0.74% −0.19%Greenwich US Growth Index 0.48% −6.40% 0.65% −2.82% 4.21% 3.24% −0.17% −0.04%Greenwich US Opportunistic Index 1.95% −4.83% 1.85% −2.64% 4.20% 3.94% −0.74% 1.71%Greenwich US Short Selling

Index 3.21% 4.50% 0.71% 6.84% 0.55% −1.37% 1.40% 3.39%Greenwich US Value Index 0.64% −3.40% 0.56% −2.34% 2.65% 2.46% −1.03% −1.08%Greenwich US Directional Trading

Group Index 5.13% 2.20% 1.32% −0.18% 3.87% 4.61% −3.60% −0.23%Greenwich US Futures Index 7.71% 4.43% 1.59% 0.21% 3.83% 5.05% −5.62% −2.09%Greenwich US Macro Index 2.56% −0.11% 1.04% −0.44% 3.95% 3.99% −1.21% 2.54%Greenwich US Market Timing

Index 0.95% −3.17% 0.83% −3.36% 3.68% 4.65% −1.14% 0.51%Greenwich US Specialty Strategies

Group Index 1.48% −2.47% 0.43% −1.50% 3.89% 2.58% −1.16% 1.44%Greenwich US Emerging Markets

Index 1.71% −5.97% 1.43% −3.23% 7.22% 5.01% −1.76% 3.92%Greenwich US Fixed Income

Index 0.23% 1.81% −0.15% −0.28% 0.65% 0.65% −1.11% −1.08%Greenwich US Multi-Strategy

Index2 2.15% −2.67% 0.02% −0.99% 3.67% 1.78% −0.77% 0.39%

©2008 Greenwich Alternative Investments, LLC and/or its licensors.1Please see Explanatory Notes.2Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich US HedgeFund Index. Historical returns for the Index have been restated to exclude funds of funds.4Index returns from January 1988 to December 2002 are based on quarterly compounded index results, whilereturns from January 2003 to present are based on monthly compounded index results.



Appendix C: Historic Performance of Hedge Funds 147

Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06

0.90% 1.95% 1.77% 0.71% 0.69% 1.20% 1.16% 1.95% 1.69% 0.09% 1.01% −0.28% −0.40%

0.57% 1.33% 1.07% 0.90% 1.18% 1.38% 1.23% 1.18% 1.29% 0.41% 0.69% 0.37% 0.20%

0.42% 1.08% 1.14% 1.02% 0.36% 1.21% 1.04% 0.80% 1.12% 0.32% −0.20% 0.53% 0.45%

0.07% 1.97% 1.56% 1.05% 1.65% 1.84% 1.47% 1.73% 1.85% 0.20% 0.89% −0.17% −0.15%

0.44% 1.67% 1.60% 0.94% 1.79% 1.68% 1.56% 1.92% 1.65% 0.23% 1.04% 0.09% −0.21%

−0.67% 2.47% 1.68% 0.83% 0.77% 2.38% 1.21% 1.07% 1.85% 0.59% 0.53% 0.44% 0.79%

−0.05% 2.08% 1.51% 1.21% 1.74% 1.87% 1.40% 1.68% 2.00% 0.03% 0.83% −0.55% −0.31%1.03% 0.88% 0.56% 0.69% 1.17% 1.02% 1.11% 0.86% 0.87% 0.66% 0.92% 0.88% 0.44%

0.16% 0.87% −0.15% 0.62% 1.41% 1.40% 1.24% 0.72% 0.42% 0.99% 0.94% 0.95% 0.17%

2.05% 0.39% 0.46% 0.60% 1.48% 0.75% 0.92% 0.80% 0.76% 0.44% 1.09% 0.09% 0.09%

0.74% 1.21% 1.37% 1.59% 0.24% 0.75% 1.35% 1.08% 1.21% 0.48% 0.64% 0.90% 2.39%

0.66% 2.33% 2.02% 1.12% 0.70% 1.20% 1.29% 2.21% 2.19% 0.11% 1.32% −0.31% −0.19%0.48% 3.16% 2.11% 1.19% 0.45% 1.30% 1.35% 2.67% 2.26% 0.03% 1.52% −0.37% 0.15%1.02% 1.97% 2.00% 1.18% 0.61% 1.45% 1.28% 2.54% 2.16% −0.60% 0.69% −0.60% −1.04%

3.40% −2.48% −2.71% 0.06% 1.42% −1.26% 0.83% −2.96% −2.41% −2.00% −1.88% 3.81% 1.32%0.46% 2.39% 2.20% 1.13% 0.78% 1.19% 1.29% 2.17% 2.37% 0.47% 1.62% −0.41% −0.15%

1.90% 2.10% 2.64% −1.38% −0.70% 0.70% 0.07% 2.95% 0.95% −1.35% 0.86% −2.01% −2.59%2.65% 2.52% 3.89% −2.88% −1.80% 0.79% −0.44% 3.81% 0.82% −1.68% 1.23% −3.21% −4.18%0.71% 1.51% 0.95% 0.51% 0.87% 0.66% 0.67% 1.92% 0.96% −1.14% 0.29% −0.19% 0.03%

0.55% 1.63% 2.00% −0.09% −0.19% 0.23% 0.76% 1.83% 1.49% −0.48% 0.83% −0.04% −0.06%

1.24% 2.40% 2.01% 1.19% 0.99% 1.26% 1.78% 2.06% 1.89% 0.83% 0.94% −0.06% −0.39%

2.63% 3.60% 3.13% 1.37% 0.54% 0.33% 2.75% 3.60% 2.62% 0.25% 0.94% 0.14% −1.34%

0.58% 1.07% 0.99% 0.21% 1.13% 1.01% 0.95% 1.09% 0.88% 0.81% 1.09% 0.75% 0.22%

0.18% 2.18% 1.83% 1.82% 1.25% 2.16% 1.60% 1.49% 2.00% 1.24% 0.84% −0.80% −0.18%

(continues)




TABLE C.1 (Continued)

Primary Strategy1 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05

Greenwich US Hedge FundIndex3 −1.05% 1.97% 1.88% 0.00% 3.36% 1.3% 1.7% −1.2%

Greenwich US Market NeutralGroup Index 0.23% 1.24% 1.54% 0.59% 2.21% 1.0% 0.5% −0.5%

Greenwich US Equity MarketNeutral Index −0.68% 1.53% 0.97% 0.12% 1.49% 1.0% 0.4% −0.4%

Greenwich US Event-DrivenIndex −0.02% 1.46% 2.08% 0.37% 2.77% 1.2% 1.1% −1.1%

Greenwich US DistressedSecurities Index 0.80% 1.91% 2.00% 0.33% 2.54% 1.3% 1.0% −0.3%

Greenwich US Merger ArbitrageIndex 0.19% 0.89% 1.78% 0.72% 3.00% 1.2% 0.9% −0.9%

Greenwich US Special SituationsIndex −0.68% 1.29% 2.26% 0.32% 2.98% 1.1% 1.1% −1.7%

Greenwich US Arbitrage Index 0.87% 0.89% 1.15% 1.00% 1.85% 0.7% 0.1% 0.1%Greenwich US Convertible

Arbitrage Index 1.78% 0.41% 1.02% 1.39% 2.56% 0.5% −0.2% 0.0%Greenwich US Fixed Income

Arbitrage Index 0.60% 1.06% 0.91% 0.54% 0.82% 0.7% 0.3% 0.5%Greenwich US Statistical

Arbitrage Index −1.63% 1.44% 2.26% 1.30% 1.13% −0.6% 1.2% −0.2%Greenwich US Long/Short Equity

Group Index −1.99% 1.46% 2.18% 0.08% 4.50% 1.8% 1.9% −1.8%Greenwich US Growth Index −3.06% 0.69% 2.50% 0.12% 5.37% 1.5% 2.2% −2.3%Greenwich US Opportunistic Index −2.54% 1.73% 2.58% −0.31% 5.07% 2.0% 2.1% −2.5%Greenwich US Short Selling

Index 4.08% −0.04% −2.32% 0.35% −3.30% −0.5% −3.8% 2.9%Greenwich US Value Index −1.84% 1.75% 2.20% 0.16% 4.32% 1.9% 2.0% −1.7%Greenwich US Directional Trading

Group Index −1.23% 5.45% 2.21% −2.38% 2.48% −0.1% 3.9% −1.2%Greenwich US Futures Index −1.52% 7.28% 3.55% −3.13% 1.87% −1.1% 5.7% −1.2%Greenwich US Macro Index −0.47% 2.37% 0.17% −1.25% 3.62% 1.9% 1.4% −1.0%Greenwich US Market Timing

Index −1.63% 2.47% 0.38% −0.64% 2.86% 0.1% 0.9% −1.9%Greenwich US Specialty Strategies

Group Index −1.24% 2.18% 1.37% 0.61% 3.48% 2.2% 2.0% −1.2%Greenwich US Emerging

Markets Index −3.46% 3.82% 1.59% 0.98% 6.16% 4.0% 3.7% −2.9%Greenwich US Fixed Income

Index 0.87% 0.51% 0.81% 0.77% 0.84% 0.9% 0.4% 0.2%Greenwich US Multi-Strategy

Index2 −0.77% 1.91% 1.51% 0.16% 2.90% 1.6% 1.7% −0.8%




Sep-05 Aug-05 Jul-05 Jun-05 May-05 Apr-05 Mar-05 Feb-05 Jan-05 Dec-04 Nov-04 Oct-04 Sep-04

1.4% 0.6% 2.2% 1.6% 1.2% −1.9% −0.9% 1.7% −0.7% 1.6% 3.3% 0.7% 1.9%

0.9% 0.7% 1.6% 1.1% 0.2% −1.4% −0.2% 0.9% −0.1% 1.6% 2.2% 0.6% 0.9%

0.8% 0.5% 1.0% 1.0% 0.2% −0.4% 0.3% 0.9% 0.2% 1.2% 2.3% −0.4% 1.7%

0.8% 0.9% 2.1% 1.4% 0.5% −1.5% −0.2% 1.9% −0.3% 2.6% 3.8% 1.4% 1.6%

1.3% 1.5% 1.9% 1.4% −0.4% −0.8% 0.6% 1.2% 0.3% 2.9% 3.3% 1.6% 1.0%

−0.2% 0.6% 1.6% 0.9% 0.6% −0.7% 0.8% 0.6% 0.2% 1.1% 1.2% 0.5% 0.2%

0.7% 0.6% 2.5% 1.4% 1.1% −2.0% −0.7% 2.4% −0.6% 2.5% 4.0% 1.3% 2.0%1.1% 0.5% 1.2% 0.7% −0.2% −1.7% −0.3% 0.1% −0.1% 0.8% 0.8% 0.3% 0.1%

1.5% 0.6% 1.8% 1.4% −1.2% −4.3% −1.7% −0.7% −0.8% 0.6% 1.0% −0.2% 0.0%

0.9% 0.4% 0.8% 0.2% 0.3% 0.2% 0.3% 0.6% 0.3% 0.3% −0.2% 0.6% 0.4%

−0.3% 0.6% 0.9% −0.5% 0.6% −0.3% 0.6% −1.5% 0.6% 0.5% 0.3% 1.3% −1.4%

1.9% 0.6% 3.3% 2.2% 2.2% −2.6% −1.3% 2.1% −1.3% 1.8% 4.2% 0.6% 2.7%1.6% −0.1% 4.1% 2.6% 3.1% −3.2% −2.5% 2.0% −3.5% 2.1% 6.3% 1.2% 4.5%2.7% 0.7% 4.8% 2.8% 2.8% −3.3% −1.8% 2.1% −1.0% 1.9% 4.4% −0.7% 2.4%

1.4% 2.6% −2.3% −0.6% −3.7% 4.0% 2.5% −0.1% 2.9% −5.2% −6.5% −0.2% −2.6%1.8% 0.7% 2.8% 2.0% 2.0% −2.6% −1.0% 2.3% −1.0% 2.2% 4.2% 0.8% 2.5%

0.8% 0.7% 0.5% 2.0% 2.4% −2.8% −0.7% 0.5% −2.0% −0.2% 4.9% 4.1% 2.3%0.0% 1.0% 0.0% 2.5% 3.5% −4.2% −0.4% 0.0% −2.8% −0.8% 6.4% 6.1% 3.3%2.8% 0.4% 1.5% 0.9% 0.9% −0.5% −1.1% 1.4% −0.9% 0.4% 2.8% 0.7% 0.6%

0.4% 0.0% 0.7% 1.2% 1.0% −1.2% −1.1% 0.7% −0.8% 0.6% 1.9% 0.9% 1.4%

1.7% 0.4% 2.0% 1.3% 0.8% −0.7% −1.5% 2.2% 0.2% 1.6% 2.7% 1.3% 1.8%

3.5% 0.5% 2.8% 1.8% 1.7% −1.5% −3.5% 3.9% 1.2% 2.9% 5.1% 2.0% 4.5%

0.6% 0.4% 1.0% 0.8% 0.6% 0.3% −0.1% 1.1% 1.0% 0.9% 1.4% 1.1% 1.2%

1.2% 0.4% 2.0% 1.3% 0.3% −0.8% −0.9% 1.6% −0.8% 1.0% 1.7% 0.8% 0.5%

(continues)





Primary Strategy1 Aug-04 Jul-04 Jun-04 May-04 Apr-04 Mar-04 Feb-04 Jan-04

Greenwich US Hedge FundIndex3 0.0% −1.3% 0.8% −0.2% −1.6% 0.0% 0.9% 2.1%

Greenwich US Market NeutralGroup Index 0.2% −0.1% 0.6% −0.1% −0.5% 0.2% 0.7% 1.9%

Greenwich US Equity MarketNeutral Index −0.2% 0.3% 0.9% 0.4% −2.3% 0.2% 0.8% 1.5%

Greenwich US Event-DrivenIndex 0.0% −1.0% 1.5% 0.0% −0.5% −0.2% 1.1% 3.2%

Greenwich US DistressedSecurities Index 0.4% 0.1% 2.5% 0.3% 1.4% 0.0% 1.3% 3.6%

Greenwich US Merger ArbitrageIndex −0.1% −0.7% 0.0% 0.1% −0.2% 0.1% 0.3% 0.8%

Greenwich US Special SituationsIndex −0.1% −1.6% 1.0% −0.1% −1.2% −0.2% 1.0% 3.0%

Greenwich US Arbitrage Index 0.4% 0.4% −0.3% −0.3% 0.2% 0.4% 0.5% 1.2%Greenwich US Convertible

Arbitrage Index 0.7% 0.4% −1.0% −1.7% 0.1% 0.6% 0.0% 1.2%Greenwich US Fixed Income

Arbitrage Index 0.5% 0.5% 0.4% 0.7% 0.1% 0.3% 1.1% 1.0%Greenwich US Statistical

Arbitrage Index 0.0% −0.2% −0.6% 1.3% 0.8% −0.1% 0.1% 0.5%Greenwich US Long/Short Equity

Group Index −0.2% −2.4% 1.1% −0.1% −2.3% −0.2% 0.9% 2.4%Greenwich US Growth Index −1.2% −4.7% 1.2% −0.5% −3.6% −0.6% −0.2% 3.3%Greenwich US Opportunistic Index 0.2% −2.7% 0.6% −0.1% −1.9% −0.3% 1.3% 2.4%Greenwich US Short Selling

Index 1.2% 6.2% −1.6% −0.1% 3.1% −1.6% −0.1% −1.3%Greenwich US Value Index 0.0% −1.8% 1.4% 0.1% −2.3% 0.2% 1.4% 2.3%Greenwich US Directional Trading

Group Index −1.0% −0.6% −1.5% −0.7% −5.1% 0.7% 3.9% 1.0%Greenwich US Futures Index −1.4% −0.4% −2.5% −0.6% −6.8% 1.1% 6.4% 0.8%Greenwich US Macro Index −0.7% −0.7% −0.6% −1.4% −2.5% 0.3% 1.2% 1.5%Greenwich US Market Timing

Index −0.2% −0.8% 0.5% 0.1% −2.1% −0.1% 0.4% 1.2%Greenwich US Specialty Strategies

Group Index 0.8% 0.7% 0.6% −0.7% −2.0% 0.2% 1.3% 1.8%Greenwich US Emerging Markets

Index 1.3% 0.8% 0.1% −2.3% −3.4% 1.5% 3.3% 2.1%Greenwich US Fixed Income

Index 1.2% 1.3% 1.1% 0.3% −0.8% 0.6% 0.9% 0.7%Greenwich US Multi-Strategy

Index2 0.3% 0.3% 0.6% −0.1% −1.8% −1.2% 0.5% 2.3%




Dec-03 Nov-03 Oct-03 Sep-03 Aug-03 Jul-03 Jun-03 May-03 Apr-03 Mar-03 Feb-03 Jan-03 Dec-02

1.9% 1.3% 2.8% 0.7% 1.7% 1.1% 1.2% 4.1% 2.8% 0.4% −0.3% 0.5% −0.4%

1.2% 1.0% 1.6% 1.0% 0.6% 0.2% 0.8% 1.8% 1.6% 0.5% 0.4% 1.4% 1.3%

0.0% 0.6% 1.4% 0.4% 0.7% 0.1% 0.8% 1.2% 0.5% −0.1% −0.1% 0.5% 1.6%

2.1% 1.7% 2.7% 1.4% 1.5% 1.2% 2.0% 3.2% 2.8% 0.9% 0.0% 1.1% 0.7%

2.3% 1.9% 2.7% 2.2% 1.2% 1.5% 2.3% 2.4% 2.6% 1.1% 1.0% 2.4% 1.6%

2.1% 1.5% 2.7% 1.1% 1.7% 1.1% 1.9% 3.6% 2.9% 0.9% −0.6% 0.4% 0.1%0.8% 0.7% 1.0% 1.0% −0.1% −0.3% −0.1% 1.1% 1.2% 0.4% 0.9% 1.8% 1.6%

2.0% 1.7% 3.6% 0.3% 2.2% 2.0% 1.6% 5.7% 3.7% 0.4% −0.9% −0.1% −1.9%0.8% 1.2% 4.9% −0.1% 2.8% 2.4% 2.3% 8.1% 4.4% 0.3% −1.6% −0.2% −5.0%2.8% 1.7% 3.8% 0.4% 3.1% 2.5% 1.8% 5.2% 4.5% 0.6% −0.7% −0.2% −0.9%

−1.7% −1.3% −5.4% 0.7% −3.1% −3.2% −1.6% −5.8% −5.5% −0.6% 1.8% 0.7% 5.2%2.6% 2.1% 3.4% 0.5% 2.0% 2.0% 1.5% 5.2% 3.7% 0.5% −0.7% 0.0% −1.1%

3.7% 0.1% 2.0% 0.5% 1.3% −1.0% −1.7% 4.5% 1.1% −3.7% 3.9% 3.1% 3.5%4.1% −0.2% 1.7% −0.3% 1.2% −1.7% −3.5% 5.6% 0.5% −7.4% 7.5% 6.0% 6.5%3.9% 0.6% 2.5% 2.8% 1.5% −0.8% −0.6% 4.5% 1.9% −0.2% 0.8% 1.2% 4.3%

2.0% 0.4% 2.2% 0.3% 1.4% 0.2% 0.9% 2.6% 1.3% 0.0% 0.0% −0.5% −1.9%

3.4% 0.7% 2.6% 1.4% 2.3% 0.0% 1.2% 3.9% 3.7% −0.1% 0.5% 0.8% 0.2%

6.4% 0.4% 4.6% 2.0% 4.9% 1.8% 3.5% 4.7% 4.7% −0.5% 1.0% −0.3% −0.1%

2.2% 0.8% 1.0% 1.6% 0.4% −1.4% 0.0% 2.5% 1.7% 0.4% 1.1% 0.6% 2.3%

1.5% 0.9% 1.9% 0.6% 2.3% 0.7% 0.5% 5.4% 5.2% −0.3% −0.9% 2.1% −1.9%

(continues)





Primary Strategy1 Nov-02 Oct-02 Sep-02 Aug-02 Jul-02 Jun-02 May-02 Apr-02

Greenwich US Hedge FundIndex3 2.8% 1.0% −1.4% 0.5% −3.1% −2.0% 0.1% 0.2%

Greenwich US Market NeutralGroup Index 1.6% 0.3% −0.1% 0.7% −1.8% −0.7% 0.6% 0.8%

Greenwich US Equity MarketNeutral Index 0.1% 0.9% 0.2% 1.9% −1.3% 0.5% 1.4% 1.9%

Greenwich US Event-DrivenIndex 3.1% −0.3% −1.5% 0.1% −3.2% −2.8% 0.4% 0.4%

Greenwich US DistressedSecurities Index 1.9% −0.3% −1.5% −0.3% −1.8% −1.6% 1.0% 1.2%

Greenwich US Merger ArbitrageIndex

Greenwich US Special SituationsIndex 3.8% −0.3% −1.5% 0.4% −3.9% −3.6% −0.2% −0.1%

Greenwich US Arbitrage Index 1.2% 0.4% 0.7% 0.5% −1.2% 0.0% 0.3% 0.6%Greenwich US Convertible

Arbitrage IndexGreenwich US Fixed Income

Arbitrage IndexGreenwich US Statistical

Arbitrage IndexGreenwich US Long/Short Equity

Group Index 3.7% 1.5% −2.3% 0.3% −4.3% −3.2% −0.2% −0.3%Greenwich US Growth Index 5.4% 2.1% −2.2% 0.4% −4.2% −4.9% −2.1% −2.7%Greenwich US Opportunistic Index 3.1% 0.2% −1.7% 0.1% −2.9% −2.4% 0.4% 0.4%Greenwich US Short Selling

Index −5.9% −3.8% 5.8% −0.4% 7.4% 4.9% 3.9% 5.4%Greenwich US Value Index 3.9% 2.2% −3.6% 0.5% −6.3% −3.6% 0.2% 0.5%Greenwich US Directional Trading

Group Index −0.5% −2.3% 2.1% 2.0% 0.8% 3.2% 1.5% −0.3%Greenwich US Futures Index −2.7% −4.5% 4.4% 3.6% 3.3% 7.6% 2.7% −0.9%Greenwich US Macro Index 1.8% −1.2% −1.6% 0.5% −3.6% 0.2% 2.5% 3.4%Greenwich US Market Timing

Index 1.7% 0.5% 0.6% 0.3% −1.1% −1.9% −0.4% −1.3%Greenwich US Specialty Strategies

Group Index 3.4% 2.4% −2.7% 0.6% −2.6% −1.5% 0.3% 0.6%Greenwich US Emerging Markets

Index 3.3% 2.8% −1.4% 0.0% −3.0% −2.0% 0.4% 1.8%Greenwich US Fixed Income

Index 1.1% −1.5% −0.1% 1.6% 0.1% 0.6% 0.7% 1.1%Greenwich US Multi-Strategy

Index2 8.6% 8.6% −6.8% −0.4% −6.3% −4.6% −0.4% −1.3%




Mar-02 Feb-02 Jan-02 Dec-01 Nov-01 Oct-01 Sep-01 Aug-01 Jul-01 Jun-01 May-01 Apr-01 Mar-01

2.3% −1.1% 0.5% 1.7% 2.7% 2.3% −3.0% −0.7% −0.6% 0.3% 1.5% 2.7% −1.7%

0.9% −0.3% 0.9% 0.5% 1.5% 1.1% −0.1% 0.8% 0.1% −0.2% 1.5% 1.1% 0.6%

−0.1% 0.0% 1.0% 0.6% 1.4% −0.1% 0.8% 0.7% 0.3% 0.1% 2.0% 0.8% 1.7%

1.6% −0.6% 0.1% 0.9% 1.5% 0.5% −0.5% 0.7% −0.1% −0.8% 2.0% 0.9% −0.5%

0.6% −0.2% 1.5% 0.5% 1.0% 0.4% −1.1% 1.2% 1.7% 2.4% 5.1% 1.3% 0.8%

2.1% −0.9% −0.5% 1.1% 1.8% 0.6% −0.3% 0.5% −0.6% −1.8% 1.2% 0.9% −1.0%0.9% −0.2% 1.4% 0.4% 1.5% 1.9% −0.3% 1.0% 0.3% 0.3% 0.8% 1.2% 1.0%

3.3% −1.8% 0.3% 2.3% 3.4% 3.0% −5.1% −1.8% −1.2% 0.5% 1.5% 3.5% −3.0%3.9% −3.7% −0.8% 2.9% 4.1% 2.6% −5.4% −3.8% −2.7% −0.8% 0.9% 4.0% −4.6%3.0% −0.7% 0.3% 1.9% 2.2% 1.3% −2.9% −0.8% −0.6% 0.4% 0.9% 2.3% −3.2%

−3.1% 3.3% 5.2% −2.3% −5.0% −3.4% 5.8% 7.7% 5.0% 1.8% 0.6% −9.5% 7.0%3.8% −1.7% 0.4% 2.8% 4.9% 5.1% −7.2% −2.0% −1.4% 1.3% 2.4% 5.1% −2.7%

0.3% −1.0% −1.0% 1.5% −2.5% 4.1% 1.2% −0.7% −1.9% 0.0% 1.2% −1.1% 2.9%−0.7% −1.8% −1.7% 1.1% −7.1% 4.7% 4.4% 1.7% −2.2% −0.9% 0.7% −5.2% 7.4%−0.1% −1.1% 0.6% 2.6% 1.0% 5.2% −6.7% −6.6% −3.5% 0.0% 1.9% 3.6% 0.6%

2.1% 0.1% −0.7% 1.4% 2.4% 3.1% 1.1% −1.9% −0.7% 1.5% 1.7% 2.8% −3.2%

2.8% −0.2% 1.0% 2.2% 2.5% 1.8% −1.9% 1.2% 0.4% 0.1% 2.0% 2.5% −1.1%

4.7% −0.2% 4.5% 4.6% 2.9% 4.5% −5.6% 2.2% −3.3% 0.0% 4.0% 2.8% −1.8%

−0.1% 0.0% 0.6% −0.4% −0.1% 1.4% 0.6% 1.8% 0.4% 0.2% 1.1% 1.7% −0.3%

3.8% −0.4% −1.6% 2.7% 3.8% 0.9% −1.8% −1.3% 2.6% 0.2% 1.9% 3.4% −1.6%

(continues)






Greenwich US Hedge FundIndex3 −2.5% 3.2% 2.0% −3.0% −1.5% −0.7% 4.9% −0.4%

Greenwich US Market NeutralGroup Index 0.5% 1.6% 1.9% −0.2% −0.4% 0.7% 2.9% 0.6%

Greenwich US Equity MarketNeutral Index 1.7% 1.3% 4.0% 1.8% 1.2% 1.2% 3.8% −0.1%

Greenwich US Event-DrivenIndex −0.4% 2.2% 1.5% −2.1% −1.3% 0.9% 3.6% 0.8%

Greenwich US DistressedSecurities Index −0.3% 9.3% −1.0% −1.8% −1.5% −0.6% 1.5% 0.3%


Greenwich US Special SituationsIndex −0.4% 0.8% 2.6% −2.2% −1.3% 1.4% 4.4% 1.0%

Greenwich US Arbitrage Index 0.9% 1.3% 1.0% 0.1% −0.6% 0.2% 1.7% 0.7%Greenwich US Convertible




Group Index −4.4% 4.0% 2.1% −4.8% −1.8% −0.8% 5.9% −0.9%Greenwich US Growth Index −7.7% −0.3% 1.4% −7.7% −4.1% −2.1% 8.8% −4.4%Greenwich US Opportunistic Index −5.3% 4.2% 1.9% −3.4% −1.9% −1.1% 5.4% −0.1%Greenwich US Short Selling

Index 9.3% 0.1% 1.1% 15.4% 9.8% 11.7% −14.3% 6.5%Greenwich US Value Index −2.7% 7.7% 2.9% −5.5% −1.2% −1.0% 6.1% −0.1%Greenwich US Directional Trading

Group Index −1.5% 0.1% 5.7% 1.8% −0.6% −3.7% 4.6% −1.9%Greenwich US Futures Index 0.8% −0.5% 10.0% 6.3% 1.2% −3.3% 4.1% −1.6%Greenwich US Macro Index −2.7% 1.8% −1.9% 0.0% −5.9% −4.6% 4.5% −4.0%Greenwich US Market Timing

Index −4.2% 0.5% 3.5% −3.7% −1.0% −4.0% 5.2% −1.9%Greenwich US Specialty Strategies

Group Index −0.7% 5.7% 2.8% −2.8% −3.1% −1.2% 5.0% 0.3%Greenwich US Emerging Markets

Index −2.8% 15.1% 1.1% −4.6% −3.0% −4.5% 4.5% 2.3%Greenwich US Fixed Income

Index 0.9% 3.1% 4.3% 1.2% −3.7% 1.6% 3.1% −0.3%Greenwich US Multi-Strategy

Index2 −1.5% −0.8% 3.0% −4.9% −2.9% −1.4% 5.9% −0.6%




Jun-00 May-00 Apr-00 Mar-00 Feb-00 Jan-00 Dec-99 Nov-99 Oct-99 Sep-99 Aug-99 Jul-99 Jun-99

4.7% −2.0% −2.3% 1.4% 10.1% 1.0% 9.5% 5.8% 1.9% 0.8% 0.5% 0.8% 3.5%

3.9% −0.3% −1.0% −0.4% 7.2% 1.3% 5.6% 3.4% 0.5% 0.5% −0.1% 1.1% 2.8%

2.1% 0.5% −0.8% −2.5% 8.1% 1.5% 7.6% 2.3% 1.4% 1.9% 1.1% 1.8% 3.2%

6.6% −1.0% −2.2% −0.3% 10.7% 0.8% 5.4% 4.6% 0.5% −0.8% −1.2% 1.2% 2.8%

2.1% 0.1% −2.6% −0.9% 7.8% 2.3% 1.2% 1.0% 0.3% −1.0% 0.2% −0.3% 1.3%

8.3% −1.4% −2.1% −0.1% 11.7% 0.3% 7.6% 6.2% 0.7% −0.7% −1.8% 1.6% 3.5%1.7% −0.1% 0.3% 1.1% 2.5% 1.7% 4.1% 3.1% −0.2% 1.1% 0.5% 0.5% 2.5%

5.1% −3.1% −2.6% 2.4% 13.2% 1.1% 11.9% 7.3% 2.7% 1.1% 1.2% 1.0% 3.4%8.2% −6.0% −6.9% −1.3% 20.1% −0.2% 18.7% 10.7% 4.2% 1.7% 1.4% 0.6% 6.8%5.2% −4.1% −5.5% 1.1% 21.2% 0.6% 15.7% 8.5% 4.6% 1.6% 0.4% 1.3% 2.6%

−11.2% 10.4% 19.2% 1.0% −21.3% 2.9% −13.3% −10.6% −4.3% 5.3% 3.5% −2.2% −4.9%5.4% −2.4% −2.2% 4.7% 9.9% 1.9% 9.6% 7.6% 1.9% 0.0% 1.3% 1.4% 4.1%

2.2% −0.7% −2.7% −0.3% 4.5% 0.7% 6.8% 3.9% −1.5% 0.7% −0.4% −0.5% 4.8%−1.6% 1.0% −0.7% −1.6% −0.3% 1.9% 1.0% 2.3% −6.5% 0.4% −0.7% −0.5% 2.1%

8.4% −7.5% −9.9% 2.5% 1.7% −4.8% 15.0% 3.4% 0.6% 3.3% −2.7% −1.7% 10.1%

4.9% 1.4% −1.6% 0.1% 12.7% 1.8% 11.1% 6.6% 4.5% −0.8% 0.9% −0.2% 5.8%

4.3% −2.3% −4.4% 2.4% 3.2% 0.5% 7.9% 5.7% 1.8% 0.2% −0.4% 0.2% 3.0%

6.1% −7.2% −12.0% 4.2% 6.1% 0.0% 16.2% 10.9% 1.9% −2.2% −1.1% −0.5% 5.1%

2.8% 0.7% −0.4% −0.4% 1.0% 1.0% 1.8% 1.2% 0.2% −0.1% −0.3% 0.9% −0.1%

3.9% −1.2% −1.6% 2.8% 4.5% 0.4% 8.8% 6.7% 3.3% 2.4% 0.3% 0.2% 2.8%

(continues)





Primary Strategy1 May-99 Apr-99 Mar-99 Feb-99 Jan-99 Dec-98

Greenwich US Hedge FundIndex3 1.4% 4.8% 2.6% −2.0% 3.2% 4.0%

Greenwich US Market NeutralGroup Index 1.3% 3.8% 1.7% −0.5% 1.3% 2.5%

Greenwich US Equity MarketNeutral Index 0.6% 1.4% 1.9% −0.1% 0.9% 3.5%

Greenwich US Event-DrivenIndex 2.1% 5.3% 1.3% −1.0% 1.7% 1.6%

Greenwich US DistressedSecurities Index 1.2% 6.1% 2.0% −0.4% 1.4% −0.5%


Greenwich US Special SituationsIndex 2.5% 4.9% 1.1% −1.3% 1.9% 2.7%

Greenwich US Arbitrage Index 0.8% 3.8% 1.8% 0.0% 1.2% 2.6%Greenwich US Convertible




Group Index 1.8% 5.7% 2.9% −3.4% 4.4% 5.3%Greenwich US Growth Index 0.5% 5.2% 5.7% −5.1% 6.4% 12.2%Greenwich US Opportunistic Index 4.6% 6.3% 3.2% −3.1% 3.2% 4.3%Greenwich US Short Selling

Index 1.8% −2.1% 0.7% 5.0% −6.6% −12.9%Greenwich US Value Index 1.2% 6.5% 2.2% −3.8% 5.4% 4.7%Greenwich US Directional Trading

Group Index −1.8% 4.8% 0.2% −0.3% 1.0% 3.5%Greenwich US Futures Index −2.7% 4.0% −3.1% 3.7% −2.5% 2.4%Greenwich US Macro Index 1.7% 12.0% 3.3% −2.1% 5.1% 2.0%Greenwich US Market Timing

Index −3.6% 1.7% 3.8% −5.6% 4.2% 5.5%Greenwich US Specialty Strategies

Group Index 0.9% 4.0% 3.5% 0.1% 2.8% 1.8%Greenwich US Emerging Markets

Index 1.5% 6.6% 5.2% 1.2% 1.4% 2.0%Greenwich US Fixed Income

Index −0.3% 1.8% 0.9% −0.5% 1.4% 0.7%Greenwich US Multi-Strategy

Index2 2.1% 4.5% 3.6% −1.9% 5.7% 3.2%




Nov-98 Oct-98 Sep-98 Aug-98 Jul-98 Jun-98 May-98 Apr-98 Mar-98 Feb-98 Jan-98

4.0% 1.6% 1.3% −6.1% −0.9% 0.8% −1.5% 1.1% 3.6% 3.4% −0.3%

1.9% 0.7% −1.2% −3.5% −0.2% 0.7% 0.2% 1.6% 2.8% 2.2% 0.5%

0.3% 1.4% −1.3% −1.4% 0.3% 0.1% 0.5% 1.5% 2.7% 1.2% 0.0%

2.2% 0.1% −1.5% −6.9% −0.9% 1.2% −0.4% 1.6% 2.9% 3.4% −0.2%

1.5% −0.7% −3.0% −3.5% 0.8% 2.3% 0.4% 2.6% 2.2% 1.6% 0.7%

2.6% 0.6% −0.8% −8.0% −1.3% 1.0% −0.7% 1.3% 3.1% 4.0% −0.4%3.1% 0.9% −0.7% −1.0% 0.2% 0.7% 0.7% 1.9% 2.6% 1.5% 2.0%

5.5% 2.4% 4.0% −7.7% −1.6% 1.3% −1.8% 1.2% 4.1% 3.9% −0.2%9.2% 3.2% 7.2% −11.4% −2.2% 4.7% −3.0% 1.1% 4.2% 5.8% 1.7%5.4% 2.7% 2.4% −7.9% −0.6% 2.0% −1.2% 1.0% 4.2% 3.8% −1.2%

−8.2% −18.7% −7.5% 29.1% 1.7% 0.6% 10.5% −4.2% −0.4% −7.3% −0.9%5.2% 3.5% 5.1% −9.1% −2.2% −0.8% −2.3% 1.6% 4.5% 4.3% −0.6%

2.3% −0.6% 1.6% 6.4% −0.7% 0.7% 0.6% −2.8% 2.2% 2.1% 0.3%−0.2% −1.4% 4.4% 11.9% 0.1% 0.3% 2.8% −3.8% 0.4% 0.5% 1.3%−2.9% −8.7% −3.2% 2.0% −2.4% −0.4% −0.9% −8.3% 4.7% 0.8% −0.2%

7.9% 5.8% 0.8% 0.3% −0.9% 3.1% −1.9% 1.0% 3.5% 5.2% −1.0%

3.8% 2.0% −1.7% −12.5% 0.9% −2.2% −5.4% 0.4% 3.4% 4.1% −3.2%

5.3% 3.4% −10.0% −18.9% 1.4% −4.6% −11.1% −0.5% 2.5% 5.0% −8.0%

2.6% 0.2% 0.3% −7.0% 0.6% −2.0% 0.1% 1.2% 2.5% 4.1% 0.6%

3.6% 2.1% 3.4% −9.6% 0.2% 0.3% −1.1% 0.5% 5.1% 3.1% −2.5%




TABLE C.2 Greenwich Investable Hedge Fund Index (GI2)

Apr-08 Apr-08 Mar-08 Mar-08 Feb-08 Feb-08 Jan-08 Jan-08(20th (7th (20th (7th (20th (7th (20th (7th

Primary Strategy1 Bus Day) Bus Day) Bus Day) Bus Day) Bus Day) Bus Day) Bus Day) Bus Day)

Greenwich Investable HedgeFund Index (GI2) 98.67 97.48 97.26 98.47 97.88 97.48 97.37 99.98

Greenwich Market NeutralGroup Investable Index 100.35 99.18 98.94 99.88 98.92 98.19 98.17 99.98

Greenwich Long/Short EquityGroup Investable Index 97.70 95.18 94.56 97.03 96.83 96.65 95.45 99.98

Greenwich Directional TradingGroup Investable Index 98.80 99.58 99.44 99.68 98.16 97.55 96.92 99.98

Greenwich Specialty StrategiesGroup Investable Index 98.82 98.53 98.83 98.94 99.04 98.78 100.27 99.98


Primary Strategy1 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06

Greenwich Investable HedgeFund Index (GI2) 96.90 95.20 93.65 92.33 91.96 91.16 90.95 91.57 92.90

Greenwich Market NeutralGroup Investable Index 94.85 94.02 92.88 91.50 91.09 90.59 90.44 90.32 90.02

Greenwich Long/Short EquityGroup Investable Index 92.37 90.16 88.47 87.17 86.57 85.63 85.57 86.00 88.50

Greenwich Directional TradingGroup Investable Index 106.73 104.50 102.96 102.72 102.78 101.57 101.95 103.27 104.56

Greenwich Specialty StrategiesGroup Investable Index 103.27 101.41 99.36 97.98 97.96 96.94 96.09 96.61 97.04


Primary Strategy1 Mar-05 Feb-05 Jan-05 Dec-04 Nov-04 Oct-04 Sep-04 Aug-04 Jul-04

Greenwich Investable HedgeFund Index (GI2) 83.13 84.07 82.98 83.37 82.19 80.35 79.64 78.98 79.34

Greenwich Market NeutralGroup Investable Index 82.62 83.01 82.41 82.33 81.58 80.60 80.28 80.26 80.19

Greenwich Long/Short EquityGroup Investable Index 75.48 76.85 75.62 76.59 74.61 72.05 71.35 69.93 70.59

Greenwich Directional TradingGroup Investable Index 100.47 100.53 100.89 100.84 102.60 100.48 99.46 103.14 109.90

Greenwich Specialty StrategiesGroup Investable Index 87.70 88.89 86.92 87.11 85.98 84.06 82.90 81.47 80.63

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1Please see Explanatory Notes.As of Jan 2008, the Investable Index values are now calculated twice monthly, on the 7th and 20th business day,to provide investors more frequent performance data. The prior month’s returns of the Index constituents arethe basis of the calculation on t.




Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07

100.00 100.10 102.77 100.94 98.98 101.83 102.85 102.67 100.82 99.34 98.59 98.15

100.00 99.55 100.92 98.16 96.78 99.21 99.87 99.79 98.39 97.73 97.36 96.18

100.00 100.38 103.17 100.82 98.63 100.91 100.98 100.67 98.39 96.46 94.67 94.22

100.00 99.29 102.44 103.21 100.71 106.49 110.83 110.44 108.21 106.25 107.18 107.67

100.00 100.31 105.37 105.01 102.71 106.01 107.23 107.39 105.54 103.67 103.15 103.48

Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05 Sep-05 Aug-05 Jul-05 Jun-05 May-05 Apr-05

91.82 90.55 89.59 87.52 86.67 85.76 86.75 85.49 85.08 83.44 82.32 81.77

89.23 88.00 87.46 86.02 85.28 84.63 85.06 84.15 83.41 82.03 81.42 81.62

87.26 85.50 84.09 80.90 79.56 78.62 80.76 79.47 78.81 76.15 74.46 73.16

103.77 103.75 103.21 101.97 103.18 101.47 100.86 98.41 100.57 99.86 101.44 99.90

95.76 95.27 94.36 93.30 91.91 90.89 90.71 89.52 89.12 89.35 87.93 87.59

Jun-04 May-04 Apr-04 Mar-04 Feb-04 Jan-04 Dec-03 Nov-03 Oct-03 Sep-03 Aug-03 Jul-03

80.24 79.85 80.19 81.07 80.44 79.18 77.77 76.15 75.00 72.93 72.29 71.24

80.28 80.35 80.89 81.06 80.90 80.45 78.84 78.21 77.50 76.55 76.23 76.04

73.12 72.10 72.09 73.30 72.55 70.94 69.46 67.66 66.03 63.22 62.42 60.91

108.61 110.39 112.98 115.57 115.75 115.44 115.67 114.17 114.02 113.96 113.03 113.06

80.05 79.64 79.86 80.01 78.78 77.27 76.17 73.50 73.47 71.92 71.50 70.39

(continues)





Primary Strategy1 Jun-03 May-03 Apr-03 Mar-03 Feb-03 Jan-03 Dec-02

Greenwich Investable HedgeFund Index (GI2) 69.97 69.00 66.71 65.14 64.84 64.83 6458.1%

Greenwich Market NeutralGroup Investable Index 76.02 75.64 74.91 74.03 73.74 73.11 72.42

Greenwich Long/Short EquityGroup Investable Index 58.77 57.52 54.43 52.47 52.02 52.46 52.38

Greenwich Directional TradingGroup Investable Index 112.58 112.62 110.34 110.07 109.59 109.13 109.04

Greenwich Specialty StrategiesGroup Investable Index 70.15 68.87 66.87 65.11 65.52 65.06 65.12




TABLE C.3 Greenwich Investable Hedge Fund Index (GI2)

Primary Strategy1 YTD-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07

Greenwich Investable HedgeFund Index (GI2) −2.52% −1.01% 1.01% −2.52% −0.10% −2.60% 1.81% 1.98%

Greenwich Market NeutralGroup Investable Index −0.82% −0.71% 1.73% −1.81% 0.45% −1.36% 2.82% 1.42%

Greenwich Long/Short EquityGroup Investable Index −4.82% −1.91% 0.39% −3.35% −0.38% −2.70% 2.33% 2.22%

Greenwich Directional TradingGroup Investable Index −0.42% −0.09% 2.18% −2.45% 0.72% −3.08% −0.75% 2.49%

Greenwich Specialty StrategiesGroup Investable Index −1.47% −0.41% 0.16% −1.22% −0.31% −4.80% 0.34% 2.24%

Comparative BenchmarksLehman Brothers Aggregate

Bond 2.17% 0.34% 0.14% 1.68% 0.28% 1.80% 0.90% 0.76%S&P 500 −9.45% −0.43% −3.25% −6.00% −0.69% −4.18% 1.59% 3.74%MSCI EAFE −8.91% −1.05% 1.43% −9.24% −2.25% −3.26% 3.94% 5.37%MSCI EMF −11.10% −5.40% 7.38% −12.48% 0.36% −7.08% 11.16% 11.05%Nikkei 225 −18.18% −7.92% 0.08% −11.21% −2.38% −6.31% −0.29% 1.31%



Greenwich Investable HedgeFund Index (GI2) −2.80% −0.99% 0.17% 1.84% 1.49% 0.76% 0.45% 1.29%

Greenwich Market NeutralGroup Investable Index −2.45% −0.66% 0.08% 1.42% 0.68% 0.38% 1.23% 1.40%

Greenwich Long/Short EquityGroup Investable Index −2.26% −0.07% 0.31% 2.31% 2.00% 1.90% 0.47% 2.00%

Greenwich Directional TradingGroup Investable Index −5.43% −3.91% 0.35% 2.06% 1.85% −0.87% −0.46% 0.88%

Greenwich Specialty StrategiesGroup Investable Index −3.11% −1.14% −0.15% 1.75% 1.81% 0.50% −0.32% 0.21%


Bond 1.23% 0.83% −0.30% −0.76% 0.54% 0.00% 1.54% −0.04%S&P 500 1.50% −3.10% −1.66% 3.49% 4.43% 1.12% −1.96% 1.51%MSCI EAFE −1.54% −1.46% 0.15% 1.89% 4.53% 2.60% 0.82% 0.68%MSCI EMF −2.09% 5.33% 4.73% 4.98% 4.64% 4.02% −0.58% −1.04%Nikkei 225 −3.94% −4.90% 1.47% 2.73% 0.65% −1.80% 1.27% 0.91%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1 Please see Explanatory Notes.As of Jan 2008, the Investable Index values are now calculated twice monthly, on the 7th and 20th business day,to provide investors more frequent performance data. The prior month’s returns of the Index constituents arethe basis of the calculation on t.





Primary Strategy1 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06

Greenwich Investable HedgeFund Index (GI2) 1.78% 1.66% 1.43% 0.40% 0.88% 0.23% −0.68% −1.43%

Greenwich Market NeutralGroup Investable Index 0.88% 1.23% 1.51% 0.45% 0.55% 0.16% 0.14% 0.33%

Greenwich Market NeutralGroup Investable Index 2.46% 1.91% 1.49% 0.69% 1.10% 0.07% −0.50% −2.83%

Greenwich Long/Short EquityGroup Investable Index 2.14% 1.49% 0.24% −0.06% 1.19% −0.37% −1.28% −1.23%

Greenwich Directional TradingGroup Investable Index 1.83% 2.06% 1.41% 0.02% 1.05% 0.89% −0.54% −0.44%


Bond −0.58% 1.16% 0.66% 0.88% 1.53% 1.35% 0.21% −0.11%S&P 500 1.40% 1.90% 3.26% 2.58% 2.38% 0.62% 0.14% −2.88%MSCI EAFE 3.15% 3.02% 3.90% 0.17% 2.78% 1.00% 0.04% −3.76%MSCI EMF 4.51% 7.45% 4.75% 0.84% 2.60% 1.50% −0.21% −10.45%Nikkei 225 5.85% −0.76% 1.69% −0.08% 4.42% −0.31% 0.24% −8.51%


Primary Strategy1 Apr-05 Mar-05 Feb-05 Jan-05 Dec-04 Nov-04 Oct-04 Sep-04

Greenwich Investable HedgeFund Index (GI2) −1.64% −1.11% 1.31% −0.47% 1.44% 2.29% 0.89% 0.84%

Greenwich Market NeutralGroup Investable Index −1.21% −0.47% 0.73% 0.09% 0.92% 1.22% 0.40% 0.02%

Greenwich Market NeutralGroup Investable Index −3.07% −1.78% 1.62% −1.26% 2.65% 3.55% 0.99% 2.03%

Greenwich Long/Short EquityGroup Investable Index −0.57% −0.06% −0.35% 0.05% −1.72% 2.11% 1.03% −3.57%

Greenwich Directional TradingGroup Investable Index −0.13% −1.34% 2.27% −0.22% 1.31% 2.29% 1.40% 1.75%


Bond 1.35% −0.51% −0.59% 0.63% 0.92% −0.80% 0.84% 0.27%S&P 500 −1.90% −1.77% 2.10% −2.44% 3.40% 4.05% 1.53% 1.08%MSCI EAFE −2.24% −2.47% 4.34% −1.83% 4.39% 6.86% 3.42% 2.63%MSCI EMF −2.67% −6.59% 8.78% 0.32% 4.81% 9.26% 2.40% 5.78%Nikkei 225 −5.66% −0.61% 3.10% −0.88% 5.41% 1.19% −0.48% −2.33%




Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05 Sep-05 Aug-05 Jul-05 Jun-05 May-05

1.18% 1.40% 1.07% 2.36% 0.99% 1.06% −1.14% 1.47% 0.48% 1.96% 1.37% 0.67%

0.88% 1.40% 0.62% 1.68% 0.86% 0.77% −0.50% 1.08% 0.88% 1.68% 0.75% −0.24%

1.43% 2.06% 1.67% 3.94% 1.69% 1.19% −2.65% 1.63% 0.84% 3.49% 2.27% 1.77%

0.76% 0.02% 0.52% 1.22% −1.18% 1.69% 0.60% 2.49% −2.14% 0.71% −1.56% 1.54%

1.33% 0.52% 0.96% 1.14% 1.51% 1.12% 0.20% 1.33% 0.45% −0.26% 1.62% 0.39%

−0.18% −0.98% 0.33% 0.01% 0.95% 0.44% −0.79% −1.03% 1.28% −0.91% 0.55% 1.08%1.34% 1.24% 0.27% 2.65% 0.03% 3.78% −1.67% 0.81% −0.91% 3.72% 0.14% 3.18%4.85% 3.34% −0.20% 6.15% 4.66% 2.47% −2.91% 4.47% 2.56% 3.07% 1.37% 0.15%7.14% 0.90% −0.10% 11.23% 5.92% 8.28% −6.53% 9.32% 0.90% 7.08% 3.45% 3.52%

−0.90% 5.27% −2.67% 3.34% 8.33% 9.30% 0.24% 9.35% 4.32% 2.72% 2.73% 2.43%

Aug-04 Jul-04 Jun-04 May-04 Apr-04 Mar-04 Feb-04 Jan-04 Dec-03 Nov-03 Oct-03 Sep-03

−0.46% −1.12% 0.49% −0.43% −1.08% 0.78% 1.59% 1.82% 2.12% 1.54% 2.83% 0.89%

0.09% −0.11% −0.09% −0.66% −0.21% 0.19% 0.56% 2.05% 0.80% 0.92% 1.23% 0.42%

−0.94% −3.46% 1.41% 0.02% −1.65% 1.03% 2.27% 2.13% 2.67% 2.46% 4.44% 1.29%

−6.15% 1.18% −1.61% −2.29% −2.24% −0.16% 0.27% −0.20% 1.32% 0.13% 0.05% 0.82%

1.05% 0.72% 0.51% −0.27% −0.19% 1.56% 1.95% 1.45% 3.64% 0.04% 2.15% 0.59%

1.91% 0.99% 0.57% −0.40% −2.60% 0.75% 1.08% 0.80% 1.02% 0.24% −0.93% 2.65%0.40% −3.31% 1.94% 1.37% −1.57% −1.51% 1.39% 1.84% 5.24% 0.88% 5.66% −1.06%0.46% −3.23% 2.23% 0.43% −2.18% 0.60% 2.33% 1.42% 7.82% 2.24% 6.24% 3.10%4.19% −1.77% 0.46% −1.97% −8.18% 1.28% 4.61% 3.55% 7.25% 1.23% 8.51% 0.73%

−2.15% −4.50% 5.54% −4.47% 0.40% 6.10% 2.40% 1.00% 5.70% −4.35% 3.33% −1.20%

(continues)






Greenwich Investable HedgeFund Index (GI2) 1.47% 1.82% 1.40% 3.43% 2.41% 0.47% 0.02% 0.38%

Greenwich Market NeutralGroup Investable Index 0.25% 0.03% 0.50% 0.98% 1.19% 0.39% 0.86% 0.96%

Greenwich Long/Short EquityGroup Investable Index 2.48% 3.63% 2.18% 5.67% 3.75% 0.86% −0.84% 0.16%

Greenwich Directional TradingGroup Investable Index −0.02% 0.42% −0.03% 2.06% 0.25% 0.44% 0.42% 0.08%

Greenwich Specialty StrategiesGroup Investable Index 1.57% 0.34% 1.87% 2.99% 2.70% −0.62% 0.70% −0.10%


Bond 0.66% −3.36% −0.20% 1.86% 0.83% −0.08% 1.38% 0.09%S&P 500 1.95% 1.76% 1.28% 5.27% 8.24% 0.97% −1.50% −2.62%MSCI EAFE 2.43% 2.44% 2.47% 6.15% 9.92% −1.89% −2.29% −4.17%MSCI EMF 6.71% 6.26% 5.70% 7.18% 8.91% −2.84% −2.70% −0.44%Nikkei 225 8.16% 5.29% 7.82% 7.57% −1.77% −4.67% 0.28% −2.79%




TABLE C.4 Greenwich Monthly Global Hedge Fund Index3

Primary Strategy1 YTD-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07

Greenwich Global Hedge Fund Index3 −1.00% 1.84% −2.79% 0.59% −1.66% 2.96% 2.60% −1.64%

Greenwich Global Market NeutralGroup Index −0.62% 0.81% −1.42% 0.19% −1.13% 1.94% 1.39% −1.14%

Greenwich Global Equity MarketNeutral Index −1.04% 0.71% −1.74% 0.63% −0.51% 1.79% 1.67% −1.24%

Greenwich Global Event-Driven Index −1.80% 0.76% −2.54% 0.18% −1.94% 2.37% 1.18% −1.11%Greenwich Global Distressed Securities

Index −2.06% 0.19% −2.25% −0.09% −1.69% 1.72% 0.37% −1.32%Greenwich Global Merger Arbitrage

Index −2.09% 0.12% −2.21% −0.41% −1.97% 1.76% 1.50% 0.17%Greenwich Global Special Situations

Index −1.63% 1.16% −2.76% 0.43% −2.07% 2.87% 1.60% −1.35%Greenwich Global Arbitrage Index 0.41% 0.90% −0.49% 0.01% −0.76% 1.69% 1.43% −1.13%

Greenwich Global ConvertibleArbitrage Index −1.08% −0.92% −0.16% −1.24% −1.92% 1.84% 1.45% −1.89%

Greenwich Global Fixed IncomeArbitrage Index 0.17% 0.02% 0.15% 0.22% 0.17% 1.17% 0.99% −0.79%

Greenwich Global Other ArbitrageIndex 1.08% 1.83% −0.74% 0.36% −0.77% 1.93% 1.74% −0.68%

Greenwich Global Statistical ArbitrageIndex 0.56% 1.97% −1.38% 0.34% −0.87% 1.93% 1.51% −1.84%

Greenwich Global Long/Short EquityGroup Index −3.15% 1.37% −4.46% 0.67% −2.40% 3.10% 2.80% −1.42%

Greenwich Global Growth Index −4.94% 1.58% −6.42% 0.37% −2.81% 3.80% 3.53% −0.98%Greenwich Global Opportunistic Index −2.95% 1.73% −4.60% 1.49% −2.03% 3.87% 3.71% −1.56%Greenwich Global Short Selling Index 5.42% 2.37% 2.98% 1.06% 5.41% 0.77% −0.90% 1.39%Greenwich Global Value Index −2.94% 1.13% −4.02% 0.50% −2.71% 2.71% 2.43% −1.64%Greenwich Global Directional Trading

Group Index 5.28% 4.70% 0.55% 1.03% −0.12% 3.31% 3.90% −2.60%Greenwich Global Futures Index 8.84% 6.64% 2.06% 1.15% 0.12% 3.60% 4.19% −3.40%Greenwich Global Macro Index 1.56% 2.62% −1.03% 1.03% −0.42% 2.98% 3.59% −1.58%Greenwich Global Market Timing

Index 0.16% 1.95% −1.76% 0.29% −0.47% 2.71% 3.02% −1.47%Greenwich Global Specialty Strategies

Group Index −1.66% 2.34% −3.91% 0.72% −2.01% 3.98% 3.17% −2.05%Greenwich Global Emerging Markets

Index −3.22% 3.15% −6.18% 1.29% −2.81% 5.13% 4.54% −2.47%Greenwich Global Fixed Income Index 0.21% 0.05% 0.16% −0.25% −0.80% 0.98% 1.01% −1.70%Greenwich Global Multi-Strategy

Index2 0.03% 1.98% −1.91% 0.19% −1.14% 3.68% 2.09% −1.58%Comparative BenchmarksLehman Brothers Aggregate Bond 1.82% 0.14% 1.68% 0.28% 1.80% 0.90% 0.76% 1.23%S&P 500 −9.06% −3.25% −6.00% −0.69% −4.18% 1.59% 3.74% 1.50%MSCI EAFE −7.94% 1.43% −9.24% −2.25% −3.26% 3.94% 5.37% −1.54%MSCI EMF −6.02% 7.38% −12.48% 0.36% −7.08% 11.16% 11.05% −2.09%Nikkei 225 −11.14% 0.08% −11.21% −2.38% −6.31% −0.29% 1.31% −3.94%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1Please see Explanatory Notes.2 Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3 Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich GlobalHedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4 Index returns from January 1988 to December 2002 are based on quarterly index results, while returns fromJanuary 2003 to present are based on monthly index results.

(continues)





Primary Strategy1 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06

Greenwich Global Hedge Fund Index3 0.40% 0.93% 2.04% 1.80% 0.87% 0.63% 1.19% 1.54%

Greenwich Global Market NeutralGroup Index 0.27% 0.40% 1.26% 1.09% 0.99% 1.10% 1.38% 1.27%

Greenwich Global Equity MarketNeutral Index 0.43% 0.85% 0.99% 1.10% 0.98% 0.41% 1.11% 1.13%

Greenwich Global Event-Driven Index 0.32% 0.20% 1.81% 1.52% 1.18% 1.53% 1.85% 1.57%Greenwich Global Distressed Securities

Index −0.40% 0.47% 1.67% 1.61% 1.08% 1.55% 1.63% 1.63%Greenwich Global Merger Arbitrage

Index −0.88% −0.71% 2.13% 1.68% 0.76% 0.61% 2.15% 1.34%Greenwich Global Special Situations

Index 1.37% 0.21% 1.82% 1.44% 1.40% 1.80% 1.95% 1.52%Greenwich Global Arbitrage Index 0.15% 0.35% 0.96% 0.73% 0.84% 1.10% 1.13% 1.10%

Greenwich Global ConvertibleArbitrage Index −0.34% 0.05% 0.84% 0.18% 0.72% 1.33% 1.51% 1.39%

Greenwich Global Fixed IncomeArbitrage Index 0.35% 0.33% 0.67% 0.55% 0.86% 1.33% 0.92% 0.86%

Greenwich Global Other ArbitrageIndex 0.29% 0.67% 1.35% 1.02% 0.89% 0.99% 1.22% 1.29%

Greenwich Global Statistical ArbitrageIndex −0.16% 0.15% 1.04% 1.75% 0.87% 0.07% 0.86% 0.84%

Greenwich Global Long/Short EquityGroup Index 0.16% 0.73% 2.33% 1.93% 1.26% 0.66% 1.22% 1.57%

Greenwich Global Growth Index 0.25% 0.73% 3.11% 2.01% 1.37% 0.35% 1.28% 1.54%Greenwich Global Opportunistic Index 1.32% 1.02% 2.09% 1.90% 1.27% 0.71% 1.36% 1.69%Greenwich Global Short Selling Index 3.60% 2.47% −2.48% −2.97% −0.15% 1.55% −1.50% 0.56%Greenwich Global Value Index −0.37% 0.59% 2.32% 2.06% 1.27% 0.71% 1.23% 1.57%Greenwich Global Directional Trading

Group Index −0.56% 1.50% 2.26% 2.45% −0.91% −0.86% 0.84% 1.01%Greenwich Global Futures Index −2.09% 1.98% 2.62% 3.40% −1.91% −1.76% 1.09% 1.13%Greenwich Global Macro Index 1.43% 0.94% 1.73% 1.08% 0.41% 0.36% 0.53% 0.95%Greenwich Global Market Timing

Index 1.06% −0.01% 1.90% 1.80% 0.66% 0.46% 0.27% 0.35%Greenwich Global Specialty Strategies

Group Index 2.07% 1.79% 2.65% 2.25% 1.41% 1.11% 1.08% 2.41%Greenwich Global Emerging Markets

Index 3.41% 2.40% 3.42% 2.79% 1.76% 1.25% 0.74% 3.25%Greenwich Global Fixed Income Index −1.69% −0.56% 0.91% 1.04% 0.34% 0.94% 1.00% 0.94%Greenwich Global Multi-Strategy

Index2 1.14% 1.64% 1.99% 1.96% 1.33% 0.97% 1.63% 1.65%Comparative BenchmarksLehman Brothers Aggregate Bond 0.83% −0.30% −0.76% 0.54% 0.00% 1.54% −0.04% −0.58%S&P 500 −3.10% −1.66% 3.49% 4.43% 1.12% −1.96% 1.51% 1.40%MSCI EAFE −1.46% 0.15% 1.89% 4.53% 0.82% 0.82% 0.68% 3.15%MSCI EMF 5.33% 4.73% 4.98% 4.64% 4.02% −0.58% −1.04% 4.51%Nikkei 225 −4.90% 1.47% 2.73% 0.65% −1.80% 1.27% 0.91% 5.85%




Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05

1.93% 1.67% 0.01% 0.87% −0.21% −0.38% −1.30% 1.92% 1.88% 0.29% 3.37% 1.7%

1.14% 1.30% 0.34% 0.69% 0.33% 0.18% 0.22% 1.23% 1.49% 0.69% 2.19% 1.0%

0.87% 1.23% 0.19% 0.12% 0.29% 0.10% −0.64% 1.33% 1.40% 0.43% 1.47% 1.0%1.65% 1.81% 0.20% 0.83% −0.08% −0.04% 0.19% 1.53% 1.94% 0.51% 2.78% 1.2%

1.81% 1.90% 0.31% 0.97% −0.03% −0.18% 1.03% 2.04% 1.93% 0.37% 2.61% 1.1%

1.01% 1.70% 0.46% 0.51% 0.42% 0.66% 0.16% 0.73% 1.54% 0.73% 2.76% 1.3%

1.61% 1.78% −0.03% 0.75% −0.33% −0.17% −0.48% 1.44% 2.13% 0.52% 3.05% 1.3%0.87% 0.94% 0.52% 0.84% 0.73% 0.41% 0.63% 0.91% 1.11% 0.96% 1.90% 0.9%

0.87% 0.48% 0.88% 1.05% 0.80% 0.21% 1.29% 0.49% 1.05% 1.29% 2.58% 0.8%

0.63% 0.86% 0.41% 0.75% 0.65% 0.27% 0.48% 1.16% 0.90% 0.58% 0.87% 0.6%

1.25% 1.34% 0.43% 0.90% 0.73% 0.35% 0.61% 1.11% 1.16% 0.89% 2.21% 1.4%

0.82% 1.21% 0.40% 0.27% 0.84% 1.96% −0.96% 0.85% 1.76% 1.19% 0.83% 0.1%

2.11% 2.11% −0.10% 1.29% −0.19% −0.46% −2.39% 1.53% 2.28% 0.22% 4.32% 2.2%2.22% 2.43% −0.35% 1.57% −0.38% −0.31% −3.58% 0.63% 2.52% 0.10% 5.17% 2.1%2.53% 2.12% −0.23% 0.79% −0.27% −0.78% −2.47% 1.95% 2.63% 0.16% 4.80% 2.6%

−3.34% −2.64% −2.20% −1.85% 4.32% 1.38% 4.26% −0.33% −2.54% 0.26% −3.14% −0.4%2.12% 2.16% 0.12% 1.50% −0.30% −0.49% −2.29% 1.78% 2.31% 0.27% 4.16% 2.3%

2.17% 0.96% −0.87% 0.20% −1.75% −1.24% −1.10% 3.62% 1.97% −1.26% 2.44% 0.6%2.68% 1.09% −0.96% 0.58% −2.72% −2.19% −1.49% 4.69% 3.04% −1.95% 2.29% −0.2%1.54% 0.71% −0.83% −0.42% −0.46% 0.13% −0.41% 2.01% 0.39% −0.11% 2.60% 1.8%

1.46% 1.38% −0.32% 0.91% 0.08% 0.50% −0.90% 2.11% 0.74% −0.79% 2.90% 0.6%

2.74% 2.04% 0.46% 0.89% 0.14% −0.50% −2.16% 2.87% 1.61% 1.06% 4.37% 2.6%

3.92% 2.58% 0.37% 1.11% 0.27% −0.82% −3.66% 3.93% 1.62% 1.66% 6.13% 3.5%1.07% 0.91% 0.72% 1.13% 0.99% 0.09% 0.66% 0.47% 0.83% 0.64% 0.90% 1.0%

1.52% 1.60% 0.50% 0.50% −0.48% −0.28% −0.78% 2.17% 1.95% 0.23% 3.09% 2.0%

1.16% 0.66% 0.88% 1.53% 1.35% 0.21% −0.11% −0.18% −0.98% 0.33% 0.01% 1.0%1.90% 3.26% 2.58% 2.38% 0.62% 0.14% −2.88% 1.34% 1.24% 0.27% 2.65% 0.0%3.02% 3.90% 0.17% 2.78% 1.00% 0.04% −3.76% 4.85% 3.34% −0.20% 6.15% 4.7%7.45% 4.75% 0.84% 2.60% 1.50% −0.21% −10.45% 7.14% 0.90% −0.10% 11.23% 5.9%

−0.76% 1.69% −0.08% 4.42% −0.31% 0.24% −8.51% −0.90% 5.27% −2.67% 3.34% 8.3%

(continues)






Greenwich Global Hedge Fund Index3 1.8% −1.3% 1.8% 0.8% 2.0% 1.5% 0.8% −1.5%

Greenwich Global Market NeutralGroup Index 0.6% −0.4% 1.0% 0.7% 1.5% 0.9% 0.1% −1.2%

Greenwich Global Equity MarketNeutral Index 0.8% −0.5% 0.8% 0.6% 1.2% 1.1% 0.3% −0.4%

Greenwich Global Event-Driven Index 1.0% −1.0% 0.9% 1.0% 2.0% 1.3% 0.5% −1.3%Greenwich Global Distressed Securities

Index 1.1% −0.2% 1.3% 1.5% 1.8% 1.3% −0.3% −0.7%Greenwich Global Merger Arbitrage

Index 0.8% −0.8% 0.0% 0.4% 1.5% 0.8% 0.7% −0.5%Greenwich Global Special Situations

Index 1.0% −1.5% 0.8% 0.8% 2.3% 1.3% 0.9% −1.7%Greenwich Global Arbitrage Index 0.2% 0.0% 1.1% 0.5% 1.3% 0.6% −0.3% −1.4%

Greenwich Global ConvertibleArbitrage Index 0.0% −0.1% 1.5% 0.6% 1.7% 1.3% −1.3% −3.4%

Greenwich Global Fixed IncomeArbitrage Index 0.4% 0.5% 1.0% 0.2% 1.0% −0.1% 0.2% 0.1%

Greenwich Global Other ArbitrageIndex 0.2% −0.2% 1.2% 0.7% 1.3% 0.8% −0.3% −1.1%

Greenwich Global Statistical ArbitrageIndex 0.8% −0.1% −0.1% 0.8% 0.8% −0.2% 0.7% −0.1%

Greenwich Global Long/Short EquityGroup Index 2.1% −1.9% 2.2% 0.9% 3.1% 2.1% 1.7% −2.3%

Greenwich Global Growth Index 2.6% −2.1% 2.1% 0.4% 4.1% 2.3% 2.4% −3.0%Greenwich Global Opportunistic Index 2.2% −2.2% 2.9% 1.0% 4.1% 2.6% 2.0% −2.6%Greenwich Global Short Selling Index −4.3% 3.0% 1.7% 2.7% −2.4% −0.8% −4.0% 4.3%Greenwich Global Value Index 2.2% −1.9% 2.1% 0.9% 2.6% 2.1% 1.7% −2.2%Greenwich Global Directional Trading

Group Index 3.6% −1.1% 1.4% 0.6% 0.3% 1.9% 1.6% −2.1%Greenwich Global Futures Index 5.0% −1.4% 0.8% 0.7% −0.3% 2.6% 2.1% −3.2%Greenwich Global Macro Index 1.8% −0.5% 2.8% 0.4% 1.3% 0.7% 0.7% −0.4%Greenwich Global Market Timing

Index 0.8% −1.7% 0.3% 0.0% 0.7% 1.0% 0.9% −1.0%Greenwich Global Specialty Strategies

Group Index 2.1% −1.8% 2.7% 1.0% 2.0% 1.3% 0.3% −0.8%Greenwich Global Emerging Markets

Index 2.8% −2.8% 4.1% 1.1% 2.5% 1.5% 0.8% −0.7%Greenwich Global Fixed Income Index 0.4% −0.1% 0.8% 0.6% 1.1% 0.7% 0.0% −0.2%Greenwich Global Multi-Strategy

Index2 1.8% −1.0% 1.6% 1.0% 1.8% 1.2% −0.2% −1.1%Comparative BenchmarksLehman Brothers Aggregate Bond 0.4% −0.8% −1.0% 1.3% −0.9% 0.6% 1.1% 1.4%S&P 500 3.8% −1.7% 0.8% −0.9% 3.7% 0.1% 3.2% −1.9%MSCI EAFE 2.5% −2.9% 4.5% 2.6% 3.1% 1.4% 0.2% −2.2%MSCI EMF 8.3% −6.5% 9.3% 0.9% 7.1% 3.5% 3.5% −2.7%Nikkei 225 9.3% 0.2% 9.4% 4.3% 2.7% 2.7% 2.4% −5.7%





−0.8% 1.7% −0.1% 1.5% 2.7% 0.6% 1.5% 0.0% −0.9% 0.6% −0.5% −1.2%

−0.2% 0.9% 0.1% 1.3% 1.8% 0.4% 0.6% 0.2% −0.1% 0.3% −0.2% −0.2%

0.1% 1.0% 0.8% 1.2% 1.8% −0.4% 1.2% 0.0% 0.0% 0.7% 0.1% −1.4%−0.1% 1.8% −0.2% 2.4% 3.3% 1.2% 1.4% 0.2% −0.7% 1.2% −0.2% −0.2%

0.4% 1.4% 0.3% 2.8% 3.2% 1.4% 1.0% 0.5% 0.2% 2.0% 0.0% 1.3%

0.7% 0.6% 0.2% 1.1% 1.1% 0.4% 0.2% 0.0% −0.8% 0.0% 0.0% −0.1%

−0.5% 2.1% −0.5% 2.2% 3.3% 1.1% 1.6% 0.0% −1.2% 0.8% −0.2% −0.8%−0.3% 0.3% 0.1% 0.7% 0.8% 0.1% −0.1% 0.3% 0.2% −0.4% −0.4% 0.3%

−1.5% −0.5% −0.8% 0.6% 0.9% −0.3% −0.4% 0.4% 0.1% −1.1% −1.5% 0.3%

0.4% 1.0% 0.5% 0.4% 0.2% 0.6% 0.2% 0.4% 0.4% 0.7% 0.4% 0.5%

−0.2% 0.6% 0.1% 0.9% 1.0% 0.1% 0.2% 0.1% 0.4% −0.3% −0.1% 0.3%

0.6% 0.0% 1.4% 0.5% 1.0% 0.0% −0.6% 0.1% 0.5% −0.7% 0.8% 0.3%

−1.1% 2.0% −0.5% 1.8% 3.5% 0.6% 2.3% −0.3% −2.0% 1.1% −0.3% −1.7%−2.1% 1.5% −2.2% 2.0% 5.0% 0.9% 3.3% −1.1% −4.2% 1.0% −0.6% −3.0%−1.4% 2.2% −0.4% 1.6% 3.6% 0.0% 2.1% 0.0% −2.0% 0.8% −0.5% −1.6%

2.5% −0.5% 2.3% −5.2% −6.4% −0.5% −2.4% 1.3% 5.2% −1.3% −0.4% 3.2%−0.8% 2.3% −0.1% 2.4% 3.6% 0.7% 2.3% −0.2% −1.6% 1.4% −0.1% −1.6%

−0.4% 1.0% −2.1% 0.1% 4.4% 2.7% 1.6% −1.0% −0.7% −1.6% −0.7% −4.5%−0.3% 0.9% −3.3% −0.3% 6.1% 4.0% 2.7% −1.4% −0.8% −2.9% −0.6% −7.1%−0.5% 1.2% −0.4% 0.6% 2.4% 0.8% −0.2% −0.7% −0.5% −0.2% −1.2% −1.1%

−1.1% 0.9% −0.6% 0.9% 1.5% 0.6% 0.9% 0.0% −0.9% 0.3% 0.4% −1.6%

−1.4% 2.8% 0.7% 1.7% 2.8% 1.4% 2.0% 0.8% 0.1% 0.1% −1.3% −2.4%

−2.2% 3.9% 1.5% 2.2% 3.8% 1.8% 3.4% 1.3% −0.2% −0.1% −2.3% −3.7%−0.2% 1.3% 0.8% 1.1% 1.1% 1.0% 0.9% 1.0% 0.9% 1.0% 0.0% −0.1%

−0.8% 1.9% −0.4% 1.1% 2.1% 1.1% 0.5% −0.1% 0.2% 0.1% −0.5% −1.2%

−0.5% −0.6% 0.6% 0.9% −0.8% 0.8% 0.3% 1.9% 1.0% 0.6% −0.4% −2.6%−1.8% 2.1% −2.4% 3.4% 4.1% 1.5% 1.1% 0.4% −3.3% 1.9% 1.4% −1.6%−2.5% 4.3% −1.8% 4.4% 6.9% 3.4% 2.6% 0.5% −3.2% 2.2% 0.4% −2.2%−6.6% 8.8% 0.3% 4.8% 9.3% 2.4% 5.8% 4.2% −1.8% 0.5% −2.0% −8.2%−0.6% 3.1% −0.9% 5.4% 1.2% −0.5% −2.3% −2.2% −4.5% 5.5% −4.5% 0.4%

(continues)





Primary Strategy1 Mar-04 Feb-04 Jan-04 Dec-03 Nov-03 Oct-03 Sep-03 Aug-03

Greenwich Global Hedge Fund Index3 0.2% 1.0% 2.0% 1.9% 1.0% 2.5% 0.8% 1.7%

Greenwich Global Market NeutralGroup Index 0.3% 0.7% 1.7% 1.0% 0.9% 1.4% 1.0% 0.5%


Greenwich Global Event-Driven Index −0.1% 1.0% 2.8% 2.0% 1.5% 2.4% 1.5% 1.3%Greenwich Global Distressed Securities

Index 0.3% 1.2% 3.2% 2.2% 1.8% 2.6% 2.3% 1.3%Greenwich Global Merger Arbitrage

Index 0.0% 0.3% 0.9% 0.8% 0.3% 0.4% 0.3% 0.2%Greenwich Global Special Situations

Index −0.3% 0.8% 2.7% 1.8% 1.3% 2.3% 1.1% 1.3%Greenwich Global Arbitrage Index 0.5% 0.5% 1.1% 0.7% 0.7% 0.9% 1.0% −0.1%

Greenwich Global ConvertibleArbitrage Index 0.6% 0.2% 1.2% 0.4% 0.9% 1.6% 1.8% −0.8%


Greenwich Global Other ArbitrageIndex 0.8% 0.7% 1.4% 0.9% 0.6% 0.5% 0.9% 0.0%

Greenwich Global Statistical ArbitrageIndex 0.5% 0.0% 0.8% 0.1% 0.5% −0.5% 1.2% −0.2%

Greenwich Global Long/Short EquityGroup Index 0.0% 1.0% 2.4% 1.8% 1.3% 3.4% 0.2% 2.2%

Greenwich Global Growth Index −0.2% 0.1% 3.0% 0.9% 1.0% 4.7% −0.3% 2.9%Greenwich Global Opportunistic Index 0.1% 1.4% 2.1% 2.1% 1.1% 3.6% 0.5% 2.6%Greenwich Global Short Selling Index −1.7% 0.0% −1.4% −2.0% −1.3% −6.0% 0.7% −3.3%Greenwich Global Value Index 0.3% 1.4% 2.5% 2.4% 1.7% 3.4% 0.3% 2.1%Greenwich Global Directional Trading

Group Index 0.2% 3.4% 1.2% 3.4% 0.1% 1.8% 0.9% 1.2%Greenwich Global Futures Index 0.2% 6.4% 1.2% 4.1% −0.2% 2.1% −0.3% 0.7%Greenwich Global Macro Index 0.6% 0.5% 1.1% 2.9% 0.5% 1.3% 2.9% 1.4%Greenwich Global Market Timing

Index −0.7% 0.3% 1.4% 2.2% 0.2% 2.1% 0.7% 2.0%Greenwich Global Specialty Strategies

Group Index 0.8% 1.8% 2.2% 3.8% 0.7% 3.1% 2.1% 3.1%Greenwich Global Emerging Markets

Index 1.4% 2.7% 2.8% 5.4% 0.8% 4.5% 3.2% 4.8%Greenwich Global Fixed Income Index 0.4% 0.4% 0.8% 1.6% 0.8% 1.0% 1.4% 0.2%Greenwich Global Multi-Strategy

Index2 −0.2% 1.0% 1.7% 1.8% 0.6% 1.6% 0.5% 2.0%Comparative BenchmarksLehman Brothers Aggregate Bond 0.8% 1.1% 0.8% 1.0% 0.2% −0.9% 2.7% 0.7%S&P 500 −1.5% 1.4% 1.8% 5.2% 0.9% 5.7% −1.1% 2.0%MSCI EAFE 0.6% 2.3% 1.4% 7.8% 2.2% 6.2% 3.1% 2.4%MSCI EMF 1.3% 4.6% 3.6% 7.3% 1.2% 8.5% 0.7% 6.7%Nikkei 225 6.1% 2.4% 1.0% 5.7% −4.4% 3.3% −1.2% 8.2%




Jul-03 Jun-03 May-03 Apr-03 Mar-03 Feb-03 Jan-03 Dec-02 Nov-02 Oct-02 Sep-02 Aug-02

1.0% 1.3% 3.6% 2.6% 0.3% −0.1% 0.6% 0.0% 2.2% 0.8% −1.4% 0.5%

0.3% 0.8% 1.6% 1.6% 0.4% 0.4% 1.3% 1.1% 1.5% 0.3% 0.0% 0.5%

0.2% 0.7% 1.2% 0.9% −0.2% −0.1% 0.5% 1.2% 0.4% 0.4% 0.1% 1.2%1.2% 2.2% 3.1% 3.0% 0.9% 0.2% 1.2% 0.6% 2.8% −0.3% −1.3% 0.0%

1.4% 2.5% 2.7% 3.0% 1.2% 1.2% 2.3% 1.5% 2.0% −0.1% −1.3% −0.3%

0.0% 0.1% 0.8% 0.5% 0.2% 0.4% 0.5% 0.5% −0.1% 0.1% 0.1% 0.7%

1.0% 2.0% 3.4% 3.0% 0.7% −0.6% 0.5% −0.1% 3.3% −0.4% −1.4% 0.2%−0.1% 0.1% 1.0% 1.1% 0.4% 0.8% 1.6% 1.3% 1.2% 0.6% 0.7% 0.5%

−0.5% −0.5% 1.3% 1.6% 0.8% 1.4% 2.8% 1.6% 2.6% 1.2% 1.6% 0.6%

−0.3% 0.9% 1.5% 1.2% 0.0% 0.9% 1.2% 1.5% 1.3% 0.5% −1.7% 0.7%

0.1% 0.2% 0.8% 0.8% 0.2% 0.4% 1.3%

1.2% 0.7% 0.0% 0.3% 0.2% −0.6% 0.5% 0.8% 2.0% −0.1% 0.6% 3.1%

1.9% 1.7% 5.1% 3.3% 0.3% −0.7% 0.0% −1.2% 2.9% 1.2% −2.0% 0.2%2.3% 2.5% 7.7% 4.2% 0.3% −1.4% −0.2% −4.2% 5.3% 1.8% −2.0% 0.2%2.5% 1.5% 4.5% 3.5% 0.5% −0.4% 0.2% 0.3% 2.0% 0.0% −1.5% 0.1%

−3.3% −1.7% −5.7% −6.2% −0.8% 1.5% 0.8% 4.9% −5.9% −3.9% 5.9% −0.5%1.9% 1.6% 4.9% 3.7% 0.2% −0.6% −0.2% −1.3% 3.1% 1.9% −3.4% 0.4%

−0.8% −1.2% 4.5% 0.8% −3.2% 3.4% 2.8% 3.3% −0.5% −2.6% 2.5% 1.9%−1.6% −2.8% 6.0% 0.5% −6.4% 6.4% 5.7% 6.7% −2.6% −4.9% 4.8% 3.4%−0.1% 0.2% 4.0% 1.0% −0.1% 0.9% 0.6% 1.4% 1.5% −1.0% −0.4% 0.3%

0.1% 0.6% 2.2% 1.3% −0.1% −0.2% −0.6% −1.6% 1.7% 0.2% 0.8% 0.7%

0.8% 2.2% 4.3% 3.8% 0.3% 0.2% 0.7% 0.8% 2.5% 1.7% −4.4% 1.0%

1.9% 3.6% 5.5% 5.1% 0.5% 0.0% 0.0% 0.7% 2.3% 1.6% −6.0% 1.5%−1.2% 0.3% 2.1% 1.8% 0.2% 0.9% 0.8% 1.8% 1.5% −0.8% 0.1% 1.2%

0.5% 0.8% 4.2% 2.8% −0.2% −0.1% 2.0% 0.2% 4.2% 4.9% −4.4% −0.3%

−3.4% −0.2% 1.9% 0.8% −0.1% 1.4% 0.1%1.8% 1.3% 5.3% 8.2% 1.0% −1.5% −2.6%2.4% 2.5% 6.2% 9.9% −1.9% −2.3% −4.2%6.3% 5.7% 7.2% 8.9% −2.8% −2.7% −0.4%5.3% 7.8% 7.6% −1.8% −4.7% 0.3% −2.8%

(continues)





Primary Strategy1 Jul-02 Jun-02 May-02 Apr-02 Mar-02 Feb-02 Jan-02 Dec-01

Greenwich Global Hedge Fund Index3 −2.7% −1.9% 0.0% 0.2% 1.9% −0.6% 0.8% 1.5%

Greenwich Global Market NeutralGroup Index −1.3% −0.8% 0.3% 0.7% 0.9% −0.3% 1.0% 0.6%

Greenwich Global Equity MarketNeutral Index −0.7% 0.1% 1.0% 1.6% 0.1% −0.3% 0.9% 0.7%

Greenwich Global Event-Driven Index −3.2% −2.8% 0.0% 0.4% 1.6% −0.6% 0.6% 1.3%Greenwich Global Distressed Securities

Index −1.6% −1.6% 0.8% 1.1% 0.5% −0.1% 1.0% 0.3%Greenwich Global Merger Arbitrage

Index −1.2% −0.8% 0.0% 0.1% 0.5% −0.3% 1.0% 0.6%Greenwich Global Special Situations

Index −4.1% −3.6% −0.8% 0.0% 2.1% −0.9% 0.4% 1.9%Greenwich Global Arbitrage Index −0.7% −0.1% 0.2% 0.5% 0.8% −0.2% 1.2% 0.3%



Greenwich Global Other ArbitrageIndex

Greenwich Global Statistical ArbitrageIndex 3.1% 0.0% 0.3% 0.2% 0.3% −1.1% 0.5% 1.1%

Greenwich Global Long/Short EquityGroup Index −3.5% −2.6% −0.3% −0.2% 2.8% −1.3% 0.5% 1.8%

Greenwich Global Growth Index −4.0% −4.8% −1.9% −2.8% 3.8% −2.8% −0.8% 2.2%Greenwich Global Opportunistic Index −2.0% −1.6% 0.0% 0.3% 2.5% −0.7% 0.2% 1.6%Greenwich Global Short Selling Index 7.1% 4.6% 3.3% 5.2% −3.2% 2.9% 4.4% −1.8%Greenwich Global Value Index −5.5% −3.2% 0.2% 0.5% 3.2% −1.1% 0.8% 2.3%Greenwich Global Directional Trading

Group Index 1.2% 3.4% 1.7% −0.3% 0.8% −1.1% −0.7% 1.0%Greenwich Global Futures Index 4.1% 7.9% 2.8% −0.9% 0.1% −2.3% −1.4% 1.1%Greenwich Global Macro Index −3.0% −1.1% 1.9% 2.1% 0.9% −0.5% 1.1% 0.6%Greenwich Global Market Timing

Index −0.9% −0.8% −0.1% −0.6% 2.0% 0.3% −0.7% 1.3%Greenwich Global Specialty Strategies

Group Index −4.9% −2.7% −0.4% 0.2% 2.0% 1.1% 1.7% 3.4%Greenwich Global Emerging Markets

Index −7.2% −4.0% −0.9% −0.1% 2.6% 2.2% 3.2% 5.0%Greenwich Global Fixed Income Index 0.4% 1.0% 0.9% 1.0% 0.1% 0.2% 0.6% 0.4%Greenwich Global Multi-Strategy

Index2 −4.4% −3.2% −0.4% −0.5% 2.4% −0.7% −0.7% 2.2%Comparative BenchmarksLehman Brothers Aggregate BondS&P 500MSCI EAFEMSCI EMFNikkei 225




Nov-01 Oct-01 Sep-01 Aug-01 Jul-01 Jun-01 May-01 Apr-01 Mar-01 Feb-01 Jan-01 Dec-00

2.3% 2.1% −2.3% −0.4% −0.9% 0.3% 1.4% 2.3% −1.2% −2.0% 3.1% 1.8%

1.0% 1.0% −0.3% 0.9% 0.1% 0.0% 1.3% 1.1% 0.6% 0.9% 1.7% 1.3%

1.2% −0.1% 0.4% 0.9% 0.2% −0.1% 1.3% 0.9% 1.6% 1.8% 1.4% 3.4%1.2% 1.0% −0.9% 0.9% −0.3% −0.5% 1.8% 1.3% −0.3% 0.0% 2.2% 1.0%

0.9% 0.7% −0.7% 1.2% 1.5% 2.3% 4.1% 1.0% 0.7% 0.1% 5.7% −0.7%

0.2% 0.6% −1.7% 0.6% 0.6% −0.3% 1.2% 0.6% −0.4% 0.3% 1.5% 1.2%

1.4% 1.2% −1.0% 0.8% −0.8% −1.5% 1.3% 1.4% −0.8% −0.1% 1.2% 1.8%0.8% 1.4% −0.2% 1.0% 0.3% 0.3% 0.9% 1.1% 0.8% 1.0% 1.5% 0.6%

0.8% 1.2% 0.9% 1.5% 0.9% 0.2% 0.5% 1.7% 2.0% 1.8% 3.8% −0.1%

0.9% 1.5% 0.3% 1.0% 0.6% 0.1% 1.1% 0.9% 0.7% 0.8% 1.4% 0.6%

−0.1% 0.8% −2.2% 0.1% −0.4% −1.7% 0.7% 2.1% 1.2% 1.0% 3.9% 3.1%

2.7% 2.6% −3.4% −1.4% −1.2% 0.4% 1.4% 3.2% −2.4% −3.9% 3.4% 1.9%4.1% 2.5% −4.6% −3.7% −2.5% −0.1% 0.8% 4.3% −5.0% −8.1% −0.6% 0.7%1.5% 0.9% −0.8% −0.2% −0.5% 0.3% 0.8% 2.4% −2.1% −3.6% 3.7% 2.6%

−4.9% −3.2% 6.5% 7.3% 4.2% 1.3% 0.7% −9.5% 6.7% 10.3% 0.1% 1.5%3.6% 4.6% −5.6% −1.7% −1.8% 0.7% 2.2% 4.2% −2.0% −3.0% 6.3% 2.6%

−2.3% 3.6% 2.0% 0.1% −1.3% −0.3% 1.0% −1.0% 2.5% −1.5% 0.4% 5.3%−6.5% 4.1% 5.2% 1.9% −1.5% −0.7% 0.8% −4.7% 6.8% 0.6% −0.2% 8.7%

1.2% 2.7% −2.5% −1.5% −1.6% −1.1% 0.8% 1.1% −0.5% −0.5% 1.9% 0.0%

2.0% 3.4% 0.2% −1.7% −0.9% 1.2% 1.5% 3.8% −2.7% −6.0% 0.6% 3.9%

5.3% 3.1% −3.9% 0.1% −2.4% 0.9% 2.3% 1.5% −1.4% −1.6% 6.4% 2.1%

7.7% 4.5% −6.6% 0.0% −5.0% 1.1% 3.2% 1.4% −2.5% −2.3% 9.6% 1.4%0.1% 1.2% −0.3% 1.5% 0.4% 0.4% 1.0% 0.4% 0.5% 0.9% 2.2% 3.3%

3.9% 1.9% −2.3% −1.8% 1.4% 0.9% 1.3% 2.7% −1.4% −2.8% 2.1% 1.8%

(continues)






Greenwich Global Hedge Fund Index3 −2.6% −1.3% −1.5% 4.4% −0.5% 4.2% −2.1% −2.5%

Greenwich Global Market NeutralGroup Index 0.0% −0.1% 0.5% 2.3% 0.5% 2.9% 0.0% −0.4%

Greenwich Global Equity MarketNeutral Index 1.9% 0.9% 1.3% 3.3% 0.0% 1.8% 0.7% −1.6%

Greenwich Global Event-Driven Index −1.7% −0.9% 0.3% 2.8% 0.8% 5.0% −0.6% −1.3%Greenwich Global Distressed Securities

Index −1.3% −0.5% −0.3% 1.0% 0.3% 1.6% 0.1% −1.5%Greenwich Global Merger Arbitrage

Index 0.9% 0.6% 1.8% 1.2% 1.4% 1.7% 1.2% 2.6%Greenwich Global Special Situations

Index −1.9% −1.0% 0.5% 3.6% 1.1% 6.4% −0.9% −1.3%Greenwich Global Arbitrage Index 0.2% −0.2% 0.3% 1.5% 0.6% 1.6% 0.0% 1.0%




Greenwich Global Statistical ArbitrageIndex 1.9% 2.8% −0.5% 1.3% 1.9% 1.4% 2.5% 5.0%

Greenwich Global Long/Short EquityGroup Index −4.3% −1.8% −1.3% 5.5% −0.8% 4.9% −3.0% −2.6%

Greenwich Global Growth Index −7.5% −4.7% −2.8% 9.3% −4.4% 8.4% −6.2% −6.2%Greenwich Global Opportunistic Index −2.7% −1.9% −1.3% 4.9% −0.8% 4.9% −4.4% −5.3%Greenwich Global Short Selling Index 14.7% 9.6% 10.5% −12.4% 6.5% −9.7% 9.4% 18.1%Greenwich Global Value Index −5.7% −1.2% −1.8% 5.4% 0.1% 4.9% −2.4% −2.6%Greenwich Global Directional Trading

Group Index 1.4% −0.8% −3.3% 4.5% −1.9% 1.5% −0.5% −2.8%Greenwich Global Futures Index 5.4% 1.1% −2.7% 3.4% −1.4% −1.9% 1.1% −1.0%Greenwich Global Macro Index −0.7% −4.8% −4.0% 4.9% −2.1% 4.8% −5.8% −9.6%Greenwich Global Market Timing

Index −3.3% −1.4% −3.8% 5.6% −2.4% 4.6% 0.8% −1.2%Greenwich Global Specialty Strategies

Group Index −2.9% −2.3% −4.3% 4.0% −0.9% 4.7% −3.9% −6.7%Greenwich Global Emerging Markets

Index −3.9% −2.8% −7.1% 3.6% −1.2% 5.3% −5.4% −9.1%Greenwich Global Fixed Income Index 1.8% −1.1% 1.0% 2.6% −0.3% 2.7% −0.2% −0.7%Greenwich Global Multi-Strategy

Index2 −3.8% −2.1% −1.7% 5.9% −0.4% 4.3% −1.4% −2.5%Comparative BenchmarksLehman Brothers Aggregate BondS&P 500MSCI EAFEMSCI EMFNikkei 225





1.9% 8.6% 1.0% 9.0% 5.5% 1.8% 0.7% 0.3% 0.5% 4.3% 1.3% 5.8%

0.1% 5.1% 1.3% 4.5% 3.2% 0.7% 0.6% −0.1% 1.1% 2.5% 1.5% 3.5%

−1.7% 6.2% 1.4% 6.7% 2.9% 1.2% 1.6% 1.0% 1.7% 2.7% 0.8% 1.6%0.0% 7.9% 0.7% 4.1% 4.1% 0.6% −0.3% −0.9% 1.0% 2.6% 2.1% 4.9%

−0.5% 5.4% 1.5% 1.1% 1.6% 0.2% −0.8% 0.0% 0.2% 1.4% 1.1% 4.8%

1.4% 1.9% 1.6% 0.9% 1.9% 0.9% 1.6% 0.8% 1.7% 1.8% 1.9% 1.9%

0.2% 8.9% 0.3% 5.6% 5.2% 0.7% −0.1% −1.3% 1.3% 3.3% 2.5% 5.0%1.1% 2.2% 1.5% 3.7% 2.7% 0.4% 0.9% 0.1% 0.7% 1.9% 1.2% 2.7%

2.5% 2.7% 2.5% 2.7% 1.6% 0.5% 0.8% 0.6% 0.9% 1.0% 1.6% 3.1%

0.8% 1.2% 0.9% 1.5% 1.1% 1.5% 1.4% 0.2% 0.5% 0.8% 1.0% 1.8%

6.4% 0.6% 6.7% −1.0% 1.2% 1.0% −0.9% 0.7%

2.7% 11.8% 1.1% 11.0% 6.9% 2.6% 1.1% 1.0% 1.0% 3.8% 1.7% 5.8%−0.5% 18.4% 0.7% 18.3% 10.7% 4.6% 1.4% 1.6% 0.8% 7.2% 0.6% 6.5%

1.9% 18.2% 0.3% 14.0% 8.2% 3.7% 1.3% −0.2% 1.3% 2.7% 3.5% 5.1%−0.1% −24.3% 2.6% −12.0% −10.1% −3.2% 5.3% 3.7% −1.7% −4.4% 2.0% −2.3%

4.7% 9.7% 1.6% 9.2% 7.0% 2.0% 0.0% 1.0% 1.3% 4.5% 1.3% 6.8%

−0.7% 4.9% 1.6% 6.2% 3.8% −1.3% 0.1% −0.2% −0.5% 5.0% −1.6% 4.8%−1.5% −0.3% 2.3% 1.4% 2.3% −5.1% 0.0% −0.6% −0.6% 2.5% −2.2% 3.9%−0.3% 6.3% −2.0% 10.5% 2.3% 0.4% 1.2% −1.8% −0.6% 9.1% −0.3% 9.6%

0.3% 11.7% 2.7% 10.8% 6.8% 3.4% −0.9% 1.1% −0.3% 6.1% −2.1% 2.7%

3.6% 5.4% 0.3% 12.5% 6.2% 1.6% −0.1% −0.8% −1.8% 7.2% 0.5% 9.4%

4.7% 7.2% 0.1% 20.0% 9.8% 1.9% −0.8% −1.4% −2.8% 10.5% 0.9% 12.8%−0.5% 1.3% 0.1% 1.5% 1.1% 0.3% −0.1% 0.0% −0.1% 0.2% −1.2% 2.3%

3.4% 5.2% 1.0% 7.7% 5.8% 2.3% 1.7% −0.1% 0.4% 2.8% 1.8% 4.3%

(continues)





Primary Strategy1 Mar-99 Feb-99 Jan-99 Dec-98 Nov-98 Oct-98

Greenwich Global Hedge Fund Index3 3.2% −1.4% 1.9% 2.6% 4.0% 1.2%

Greenwich Global Market NeutralGroup Index 1.8% −0.4% 1.4% 2.0% 2.3% 0.1%

Greenwich Global Equity MarketNeutral Index 2.3% −0.2% 0.6% 2.6% 1.3% 0.7%

Greenwich Global Event-Driven Index 1.7% −0.9% 1.6% 1.6% 2.5% 0.5%Greenwich Global Distressed Securities

Index 2.0% −0.6% 1.6% 0.3% 1.7% −0.6%Greenwich Global Merger Arbitrage

Index 1.5% 1.2% 1.6% 1.6% 2.3% 1.3%Greenwich Global Special Situations

Index 1.5% −1.0% 1.7% 2.3% 2.9% 1.0%Greenwich Global Arbitrage Index 1.5% 0.2% 1.8% 2.1% 3.1% −1.1%

Greenwich Global ConvertibleArbitrage Index 1.3% 0.8% 2.3% 1.6% 2.4% −1.0%

Greenwich Global Fixed IncomeArbitrage Index 1.6% 2.6% 2.8% 2.1% 0.9% −7.2%


Greenwich Global Statistical ArbitrageIndex

Greenwich Global Long/Short EquityGroup Index 2.5% −2.8% 3.7% 4.0% 4.8% 1.7%

Greenwich Global Growth Index 4.1% −4.1% 6.0% 10.1% 9.0% 3.7%Greenwich Global Opportunistic Index 2.7% −2.2% 2.4% 2.6% 4.2% 0.3%Greenwich Global Short Selling Index 0.5% 5.2% −4.6% −9.7% −7.4% −16.1%Greenwich Global Value Index 2.2% −3.7% 4.4% 3.8% 4.9% 3.6%Greenwich Global Directional Trading

Group Index 0.4% −0.4% 0.4% 3.4% 2.0% −0.4%Greenwich Global Futures Index −2.2% 2.8% −2.0% 2.4% −0.4% −1.4%Greenwich Global Macro Index 2.5% −2.8% 2.5% 3.8% 0.6% −5.1%Greenwich Global Market Timing

Index 3.1% −4.0% 2.8% 4.8% 6.8% 4.8%Greenwich Global Specialty Strategies

Group Index 7.2% 0.4% −1.9% −1.5% 5.4% 2.0%Greenwich Global Emerging Markets

Index 10.0% 0.7% −4.6% −2.9% 7.3% 2.4%Greenwich Global Fixed Income Index 1.3% 0.1% 1.1% 0.9% 2.8% 0.2%Greenwich Global Multi-Strategy

Index2 3.6% −0.8% 4.6% 2.4% 3.5% 2.2%Comparative BenchmarksLehman Brothers Aggregate BondS&P 500MSCI EAFEMSCI EMFNikkei 225




Sep-98 Aug-98 Jun-98 May-98 Apr-98 Mar-98 Feb-98 Jan-98

0.8% −7.9% −0.5% −1.6% 0.4% 3.5% 4.7% −0.9%

−1.5% −3.7% 0.7% 0.0% 1.5% 2.7% 2.0% 0.6%

−1.1% −1.2% 0.7% 0.3% 1.2% 2.6% 1.5% −0.2%−1.7% −7.2% 0.7% −0.3% 1.6% 2.9% 2.7% 0.5%

−2.4% −4.7% 1.1% 0.3% 2.1% 1.8% 1.7% 0.8%

1.7% −4.9% 0.9% 0.6% 1.7% 0.7% 1.6% 0.6%

−1.3% −8.2% 0.5% −0.6% 1.3% 3.3% 3.1% 0.4%−1.6% −1.3% 0.7% 0.4% 1.7% 2.6% 1.4% 1.2%

−1.3% −1.5% 0.0% 0.6% 1.4% 1.7% 1.5% 1.5%

−1.0% −0.6% 0.4% 0.6% 0.8% 1.3% 0.7% 0.4%

3.4% −7.9% 1.1% −1.5% 1.0% 4.1% 4.4% −0.3%7.6% −12.2% 4.3% −2.9% 1.0% 4.5% 7.3% 1.2%1.6% −7.4% 1.2% −1.2% 0.5% 3.7% 4.2% −0.9%

−6.1% 24.9% 0.4% 9.2% −2.7% −0.2% −7.1% −1.8%4.4% −10.1% −0.6% −1.9% 1.5% 4.6% 4.7% −0.7%

2.2% 3.8% 0.6% 0.5% −2.4% 3.0% 2.2% 0.6%4.7% 10.8% 0.3% 2.7% −3.4% 1.5% 0.9% 1.7%

−1.0% −1.7% −0.4% −1.5% −4.0% 5.3% 2.7% −0.8%

0.8% −4.1% 2.4% −1.5% 0.4% 3.7% 4.5% 0.2%

−1.6% −16.2% −6.3% −5.4% −2.2% 2.7% 9.4% −5.1%

−3.3% −19.9% −8.6% −8.9% −3.2% 2.3% 12.1% −7.9%−1.3% −7.2% −2.2% −0.3% 0.5% 1.9% 2.8% 0.8%

2.4% −8.4% 0.5% −0.8% 0.6% 4.6% 2.8% −1.9%




TABLE C.5 Greenwich Investable US Hedge Fund Index (GI2)

Primary Strategy1 2008 2007 2006 2005 2004 2003

Greenwich Investable HedgeFund Index (GI2) −2.52% 3.20% 10.7% 5.0% 7.2% 20.4%

Greenwich Market Neutral GroupInvestable Index −0.82% 5.43% 10.3% 4.5% 4.4% 8.9%

Greenwich Long/Short Equity GroupInvestable Index −4.82% 8.25% 14.2% 5.6% 10.3% 32.6%

Greenwich Directional Trading GroupInvestable Index −0.42% −6.31% 4.7% 1.1% −12.8% 6.1%

Greenwich Specialty Strategies GroupInvestable Index −1.47% −3.16% 10.7% 7.1% 14.4% 17.0%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1Please see Explanatory Notes.



TABLE C.6 Greenwich Ytd International Hedge Fund Index3

Primary Strategy1 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998

Greenwich International HedgeFund Index3 11.3% 12.3% 9.7% 7.2% 17.3% 0.5% 7.2% 4.8% 36.4% −2.0%

Greenwich InternationalMarket Neutral Group Index 7.7% 11.4% 5.6% 5.7% 10.8% 4.5% 8.8% 11.1% 19.4% 4.9%

Greenwich International EquityMarket Neutral Index 8.1% 7.7% 8.2% 5.5% 7.4% 2.5% 4.4% 23.7% 20.7% 8.3%

Greenwich InternationalEvent-Driven Index 8.5% 14.1% 7.3% 10.8% 21.4% −0.6% 10.6% 4.5% 18.4% 6.0%

Greenwich International DistressedSecurities Index 6.2% 15.4% 9.5% 17.3% 28.2% 3.2% 14.1% 2.6% 13.7% 0.9%

Greenwich International MergerArbitrage Index 6.5% 11.8% 5.9% 3.4%

Greenwich International SpecialSituations Index 11.1% 13.3% 6.8% 7.7% 17.7% −3.6% 9.0% 5.4% 21.3% 9.4%

Greenwich International ArbitrageIndex 6.9% 10.8% 3.6% 3.1% 7.9% 7.5% 10.0% 10.8% 18.8% 0.6%

Greenwich International ConvertibleArbitrage Index 5.0% 12.7%−0.8% 0.3%

Greenwich International FixedIncome Arbitrage Index 6.5% 8.3% 5.9% 6.2%

Greenwich International StatisticalArbitrage Index 4.5% 8.9% 6.0% 3.5%

Greenwich InternationalLong/Short Equity Group Index 11.0% 12.3% 13.4% 8.1% 19.2% −3.1% 4.5% 6.1% 41.0% 9.4%

Greenwich International GrowthIndex 13.1% 9.8% 11.5% 3.7% 26.2%−11.4%−8.7% −4.7% 85.2% 25.7%

Greenwich InternationalOpportunistic Index 15.0% 15.0% 15.4% 7.8% 20.4% −2.3% 9.4% 10.7% 35.6% 0.4%

Greenwich International ShortSelling Index 8.0%−7.0% 1.7%−10.8%−26.7% 25.9% 15.8% 14.4%−13.9%−14.0%

Greenwich International ValueIndex 8.9% 12.6% 13.8% 11.1% 21.0% −5.4% 5.9% 8.6% 35.3% 11.2%

Greenwich International DirectionalTrading Group Index 10.7% 6.0% 6.1% 2.5% 13.9% 11.1% 5.8% 8.3% 17.6% 14.5%

Greenwich International FuturesIndex 10.5% 5.8% 3.5% 3.3% 14.6% 18.9% 8.8% 11.5% 4.1% 17.4%

Greenwich International MacroIndex 10.3% 5.5% 10.0% 1.9% 15.0% 3.8% 0.6% 6.2% 26.1% 7.5%

Greenwich International MarketTiming Index 11.4% 11.2% 1.9% 1.5% 10.6% 3.0% 5.3% 2.5% 35.2% 16.3%

Greenwich International SpecialtyStrategies Group Index 17.8% 18.7% 13.3% 10.4% 30.7% −1.9% 11.6% −5.1% 55.4%−21.5%

Greenwich International EmergingMarkets Index 23.1% 23.2% 16.8% 12.7% 42.2% −3.6% 13.2%−10.1% 76.7%−26.1%

Greenwich International FixedIncome Index 0.6% 9.7% 5.7% 7.4% 8.9% 10.1% 10.3% 2.6% 6.6% −5.8%

Greenwich InternationalMulti-Strategy Index2 13.5% 12.4% 8.5% 6.5%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1 Please see Explanatory Notes.2 Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3 Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich Interna-tional Hedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4 Index returns from January 1988 to December 2002 are based on quarterly index results, while returns fromJanuary 2003 to present are based on monthly index results.

179




TABLE C.7 Greenwich Quarterly International Hedge Fund Index3

Primary Strategy1 4Q07 3Q07 2Q07 1Q07 4Q06 3Q06 2Q06 1Q06

Greenwich International Hedge Fund Index3 1.69% 1.30% 5.15% 2.77% 5.48% 0.57% 0.72% 5.86%

Greenwich International Market NeutralGroup Index 0.76% 0.27% 2.93% 3.54% 3.77% 1.09% 1.60% 4.48%

Greenwich International Equity MarketNeutral Index 1.01% 1.39% 3.08% 2.44% 3.51% −0.20% 0.37% 3.89%

Greenwich International Event-Driven Index 0.36% 0.09% 3.21% 4.64% 5.10% 0.90% 2.11% 5.34%Greenwich International Distressed

Securities Index −0.04% −1.67% 3.71% 4.20% 5.61% 0.58% 3.41% 5.03%Greenwich International Merger

Arbitrage Index −0.28% 0.40% 2.93% 3.32% 4.04% 1.26% 1.30% 4.76%Greenwich International Special Situations

Index 0.74% 1.48% 2.90% 5.64% 4.80% 0.66% 1.37% 5.98%Greenwich International Arbitrage Index 0.94% −0.07% 2.65% 3.25% 2.99% 1.70% 1.78% 3.98%

Greenwich International ConvertibleArbitrage Index −0.26% −0.18% 1.73% 3.69% 3.10% 2.49% 1.67% 4.94%

Greenwich International Fixed IncomeArbitrage Index 1.03% −0.62% 2.70% 3.33% 2.30% 1.34% 2.01% 2.42%

Greenwich International StatisticalArbitrage Index 1.10% −1.47% 3.41% 1.49% 2.48% 1.21% 1.66% 3.32%

Greenwich International Long/Short EquityGroup Index 1.05% 1.28% 5.00% 3.27% 6.00% 1.00% −1.94% 6.98%

Greenwich International Growth Index 0.80% 2.61% 6.03% 3.11% 6.21% 0.58% −4.49% 7.64%Greenwich International Opportunistic Index 3.25% 2.35% 5.18% 3.46% 6.73% 0.74% −0.89% 7.91%Greenwich International Short Selling Index 6.52% 4.82% −2.65% −0.66% −6.72% 0.40% 5.21% −5.61%Greenwich International Value Index 0.16% 0.42% 4.77% 3.35% 5.99% 1.12% −1.75% 6.91%Greenwich International Directional Trading

Group Index 3.85% 0.66% 6.65% −0.69% 4.32% −2.86% 0.86% 3.69%Greenwich International Futures Index 4.53% −0.68% 8.52% −1.90% 5.33% −3.92% 0.33% 4.15%Greenwich International Macro Index 3.06% 2.37% 3.63% 0.87% 3.07% −2.20% 1.63% 3.02%Greenwich International Market Timing

Index 2.76% 1.69% 3.24% 3.26% 2.25% 3.40% 1.82% 3.25%Greenwich International Specialty Strategies

Group Index 2.58% 3.23% 7.26% 3.69% 7.91% 1.98% −0.03% 7.88%Greenwich International Emerging

Markets Index 3.18% 5.11% 9.04% 4.09% 10.21% 2.42% −0.62% 9.82%Greenwich International Fixed Income

Index −0.33% −3.24% 2.08% 2.23% 2.92% 3.39% 0.68% 2.36%Greenwich International Multi-Strategy

Index2 2.70% 1.72% 5.05% 3.39% 4.70% 0.30% 1.19% 5.81%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1 Please see Explanatory Notes.2 Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3 Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich Interna-tional Hedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4 Index returns from January 1988 to December 2002 are based on quarterly index results, while returns fromJanuary 2003 to present are based on monthly index results.




2005 4Q05 3Q05 2Q05 1Q05 4Q04 3Q04 2Q04 1Q04 4Q03 3Q03 2Q03

9.7% 2.6% 5.0% 0.5% 1.4% 4.4% 0.4% −1.2% 3.5% 4.8% 3.6% 7.1%

5.6% 1.4% 3.3% −0.2% 1.0% 2.8% 0.5% −0.2% 2.5% 2.8% 1.6% 3.9%

8.2% 1.5% 2.8% 1.2% 2.4% 2.2% 0.8% −0.4% 2.8% 2.3% 1.8% 3.2%7.3% 1.4% 3.8% 0.5% 1.4% 5.9% 1.0% 0.5% 3.1% 5.1% 3.7% 8.7%

9.5% 1.9% 4.6% 0.5% 2.2% 7.2% 2.2% 2.4% 4.6% 6.3% 5.3% 9.2%

5.9% 1.5% 1.9% 1.0% 1.4% 2.6% −0.5% 0.0% 1.3%

6.8% 1.0% 4.3% 0.5% 1.0% 5.2% 0.4% −0.3% 2.3% 4.6% 2.9% 8.6%3.6% 1.5% 3.0% −1.1% 0.2% 1.3% 0.1% −0.5% 2.2% 2.0% 0.9% 2.2%

−0.8% 1.2% 3.7% −3.0% −2.6% 0.7% −0.3% −2.2% 2.1%

5.9% 1.6% 2.1% −0.2% 2.3% 1.5% 0.7% 1.9% 1.9%

6.0% 0.9% 1.6% 0.6% 2.8% 1.2% 0.7% 0.0% 1.6%

13.4% 3.3% 6.8% 1.4% 1.4% 5.2% −0.4% −0.7% 3.9% 5.7% 4.0% 8.7%11.5% 4.2% 8.1% 0.5% −1.5% 6.0% −2.8% −2.5% 3.3% 6.2% 4.7% 14.1%15.4% 3.7% 8.0% 1.7% 1.4% 4.8% 0.3% −1.2% 3.8% 5.2% 5.1% 7.8%1.7% −2.4% 2.2% −0.8% 2.7% −12.0% 3.1% 1.6% −3.3% −10.2% −6.0% −13.9%

13.8% 3.0% 6.2% 1.6% 2.5% 6.1% 0.1% −0.1% 4.8% 7.0% 4.0% 10.0%

6.1% 3.3% 2.6% 1.3% −1.1% 6.1% −0.9% −6.3% 4.0% 4.7% 1.5% 4.4%3.5% 3.2% 1.6% 1.3% −2.6% 8.2% −0.2% −10.8% 7.2% 6.5% −1.8% 4.5%

10.0% 3.6% 4.3% 0.9% 0.8% 3.7% −1.7% −1.7% 1.6% 3.3% 4.8% 4.9%

1.9% 0.3% 0.9% 0.8% −0.1% 2.4% −0.6% −0.4% 0.1% 4.0% 4.2% 3.2%

13.3% 2.9% 6.5% 0.6% 2.8% 6.2% 2.8% −4.1% 5.4% 8.2% 7.4% 11.4%

16.8% 3.0% 8.0% 1.5% 3.5% 7.5% 4.2% −6.1% 7.2% 10.8% 10.6% 15.3%

5.7% 1.0% 2.9% −0.3% 2.0% 3.1% 2.0% 1.2% 0.9% 2.7% 0.2% 4.0%

8.5% 3.0% 5.1% −0.8% 1.1% 5.0% 0.3% −1.8% 3.0%

(continues)






Greenwich International Hedge Fund Index3 0.9% 2.6% −2.7% −1.0% 1.7% 5.0% −1.2% 3.0%

Greenwich International Market NeutralGroup Index 2.0% 2.9% −0.1% −0.1% 1.8% 2.2% 0.9% 2.1%

Greenwich International Equity MarketNeutral Index −0.1% 0.4% 1.0% 0.5% 0.6% 1.8% 0.5% 0.8%

Greenwich International Event-Driven Index 2.4% 2.6% −4.0% −1.6% 2.6% 4.2% 0.0% 3.8%Greenwich International Distressed

Securities Index 4.9% 4.2% −2.4% 0.2% 1.3% 1.7% 2.1% 5.3%Greenwich International Merger

Arbitrage IndexGreenwich International Special Situations

Index 0.7% 0.9% −4.8% −2.9% 3.4% 5.6% −1.1% 3.1%Greenwich International Arbitrage Index 2.5% 3.9% 1.3% 0.3% 1.8% 1.7% 1.4% 2.0%

Greenwich International ConvertibleArbitrage Index

Greenwich International Fixed IncomeArbitrage Index

Greenwich International StatisticalArbitrage Index

Greenwich International Long/Short EquityGroup Index −0.3% 1.1% −3.9% −0.9% 0.6% 4.3% −0.9% 3.3%

Greenwich International Growth Index −0.5% 2.1% −5.7% −6.7% −1.4% 7.4% −5.9% 6.2%Greenwich International Opportunistic Index 1.1% −0.2% −3.4% 0.0% 1.3% 3.0% 3.4% 2.6%Greenwich International Short Selling Index 0.9% −3.0% 12.4% 12.0% 3.1% −6.5% 18.3% −8.2%Greenwich International Value Index −1.2% 2.2% −6.5% −1.4% 0.4% 6.3% −4.5% 4.1%Greenwich International Directional Trading

Group Index 2.6% −0.8% 7.0% 5.1% −0.4% 1.2% 3.3% −1.0%Greenwich International Futures Index 4.9% −1.6% 13.3% 10.2% −3.2% −1.2% 6.9% −3.4%Greenwich International Macro Index 1.2% 0.3% 0.1% 0.5% 2.9% 2.3% 1.5% −2.1%Greenwich International Market Timing

Index −1.2% −0.6% 2.3% 0.5% 0.8% 4.5% −2.4% 6.7%Greenwich International Specialty Strategies

Group Index 1.0% 5.6% −7.4% −3.1% 3.5% 12.9% −7.0% 4.9%Greenwich International Emerging

Markets Index 0.6% 6.3% −9.7% −4.4% 5.0% 17.0% −9.9% 6.5%Greenwich International Fixed Income

Index 1.7% 2.9% −0.1% 4.8% 2.2% 4.0% −0.4% 0.8%Greenwich International Multi-Strategy

Index2




1Q01 4Q00 3Q00 2Q00 1Q00 4Q99 3Q99 2Q99 1Q99 4Q98 3Q98 2Q98 1Q98

0.3% −1.7% 0.7% −2.0% 8.0% 16.5% 0.9% 12.2% 3.4% 6.0% −7.8% −5.8% 6.5%

3.3% 0.6% 2.1% 2.2% 5.8% 6.2% 2.2% 6.9% 2.9% 3.6% −6.2% 1.2% 6.7%

1.2% 5.6% 3.2% 2.0% 11.3% 8.6% 3.6% 4.8% 2.4% 3.7% −1.5% 0.8% 5.2%2.3% −1.4% 0.9% 1.6% 3.4% 4.2% 1.3% 9.1% 2.8% 5.2% −9.0% 0.8% 9.8%

4.4% −1.0% 1.7% −0.6% 2.5% 3.2% 0.3% 7.1% 2.6% 3.1% −9.7% 1.6% 6.7%

1.2% −1.7% 0.5% 2.6% 4.0% 4.9% 1.9% 10.2% 3.0% 6.5% −8.5% 0.3% 11.9%4.6% −0.1% 2.3% 2.6% 5.7% 6.7% 2.4% 5.3% 3.3% 1.6% −6.2% 2.2% 3.3%

−2.1% −3.1% 1.9% −2.5% 10.2% 20.3% 2.5% 10.7% 3.3% 8.4% −6.1% −0.1% 7.6%−14.9% −13.9% 1.7% −7.3% 17.4% 40.7% 3.2% 15.5% 10.4% 18.6% −9.0% 1.7% 14.5%

0.1% 0.4% 1.6% −6.0% 15.4% 22.0% 1.1% 7.4% 2.4% 2.3% −4.9% −1.6% 4.9%14.0% 20.3% 4.4% 13.2% −19.5% −19.0% 8.6% −5.8% 3.9% −20.4% 16.1% 5.8% −12.0%0.2% −3.9% 1.9% 0.3% 10.6% 18.3% 1.3% 13.5% −0.5% 14.0% −10.7% −1.4% 10.8%

2.2% 6.1% −0.3% −1.5% 3.9% 9.6% −0.8% 7.0% 1.1% 2.6% 5.7% −0.2% 5.8%6.6% 13.3% −0.4% −2.1% 0.9% 0.9% −1.3% 4.5% 0.0% 0.5% 10.8% 0.6% 4.8%

−1.0% 1.6% −0.9% −1.9% 7.5% 13.3% −1.0% 10.9% 1.4% 0.6% −0.9% −0.7% 8.6%

−3.2% −3.4% 0.3% −0.1% 5.9% 21.5% 0.4% 7.7% 2.9% 8.7% 3.3% −1.1% 4.7%

1.3% −3.7% −2.6% −6.3% 8.0% 27.0% −3.0% 20.7% 4.5% 5.7% −14.7% −17.2% 5.2%

0.8% −6.0% −4.7% −8.1% 9.2% 38.8% −4.4% 27.3% 4.6% 6.4% −17.5% −20.3% 5.6%

5.6% 4.8% 4.2% −5.4% −0.7% 3.7% −0.9% 0.8% 2.9% 3.3% −7.2% −4.0% 2.4%




TABLE C.8 Greenwich Quarterly Global Hedge Fund Index3


Greenwich Global HedgeFund Index3 1.85% 1.32% 4.84% 2.71% 5.23% 0.67% 0.21% 5.62%

Greenwich Global MarketNeutral Group Index 0.98% 0.50% 2.77% 3.51% 3.76% 1.37% 1.64% 4.43%


Greenwich GlobalEvent-Driven Index 0.56% 0.38% 3.56% 4.63% 5.11% 0.95% 1.68% 5.31%

Greenwich Global DistressedSecurities Index −0.09% −1.35% 3.79% 4.32% 5.44% 1.25% 2.91% 4.98%

Greenwich Global MergerArbitrage Index −0.65% 0.78% 3.11% 3.55% 4.10% 1.40% 1.56% 5.10%

Greenwich Global SpecialSituations Index 1.17% 1.60% 3.50% 5.24% 4.99% 0.39% 0.78% 5.79%

Greenwich Global ArbitrageIndex 0.93% 0.43% 2.05% 3.10% 2.94% 2.10% 1.96% 4.02%

Greenwich Global ConvertibleArbitrage Index −1.35% −0.81% 1.07% 3.60% 2.76% 2.75% 2.00% 4.99%

Greenwich Global FixedIncome Arbitrage Index 1.56% 0.54% 1.56% 3.14% 2.37% 1.82% 1.92% 2.37%

Greenwich Global Other ArbitrageIndex 1.51% −1.79% 3.07% 3.13% 3.93% 2.07% 2.08% 4.32%

Greenwich Global StatisticalArbitrage Index 1.39% −0.43% 2.96% 1.81% 2.90% 1.52% 1.84% 3.83%

Greenwich Global Long/ShortEquity Group Index 1.30% 1.50% 5.07% 3.17% 5.90% 1.00% −1.35% 6.93%

Greenwich Global GrowthIndex 1.26% 2.77% 5.95% 3.03% 6.32% 0.83% −3.27% 7.93%

Greenwich Global OpportunisticIndex 3.28% 3.44% 5.09% 3.38% 6.47% 0.29% −1.34% 7.73%

Greenwich Global Short SellingIndex 7.35% 4.09% −3.04% −0.12% −5.36% 0.14% 5.35% −5.35%

Greenwich Global Value Index 0.43% 0.38% 5.04% 3.24% 5.96% 1.32% −1.04% 6.85%Greenwich Global Directional

Trading Group Index 4.25% 0.63% 6.34% −0.94% 4.19% −2.41% 1.21% 3.14%Greenwich Global Futures Index 4.92% −1.46% 8.21% −2.59% 4.97% −3.10% 0.87% 3.34%Greenwich Global Macro Index 3.60% 3.41% 3.80% 1.31% 3.23% −1.70% 1.72% 2.89%Greenwich Global Market Timing

Index 2.52% 2.58% 3.72% 1.40% 3.22% 0.67% 1.70% 2.84%Greenwich Global Specialty

Strategies Group Index 2.62% 3.15% 6.84% 3.64% 7.36% 1.50% 0.14% 7.17%Greenwich Global Emerging

Markets Index 3.49% 5.43% 8.86% 3.79% 10.07% 1.76% −0.69% 9.64%Greenwich Global Fixed Income

Index −0.08% −2.39% 1.39% 2.30% 2.95% 2.87% 1.22% 2.39%Greenwich Global Multi-Strategy

Index2 2.69% 1.62% 5.69% 3.98% 4.85% 0.52% 1.09% 5.34%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1Please see Explanatory Notes.2Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich GlobalHedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4Index returns from January 1988 to December 2002 are based on quarterly index results, while returns fromJanuary 2003 to present are based on monthly index results.




4Q05 3Q05 2Q05 1Q05 4Q04 3Q04 2Q04 1Q04 4Q03 3Q03 2Q03 1Q03

2.2% 4.7% 0.8% 0.8% 4.9% 0.6% −1.1% 3.2% 5.5% 3.5% 7.7% 0.8%

1.2% 3.2% −0.2% 0.8% 3.5% 0.7% −0.1% 2.7% 3.3% 1.8% 4.1% 2.1%

1.3% 2.6% 1.0% 1.9% 2.6% 1.2% −0.6% 2.7% 2.3% 1.6% 2.8% 0.2%

1.2% 3.9% 0.5% 1.5% 7.1% 0.9% 0.8% 3.7% 6.0% 4.1% 8.5% 2.3%

2.0% 4.7% 0.3% 2.1% 7.6% 1.7% 3.3% 4.8% 6.7% 5.1% 8.4% 4.8%

1.3% 1.9% 1.0% 1.5% 2.6% −0.6% −0.1% 1.2% 1.5% 0.5% 1.4% 1.1%

0.8% 3.9% 0.5% 1.1% 6.7% 0.4% −0.2% 3.2% 5.5% 3.4% 8.6% 0.6%

1.1% 2.9% −1.1% 0.1% 1.6% 0.4% −0.5% 2.1% 2.3% 0.8% 2.2% 2.8%

0.7% 3.8% −3.4% −2.8% 1.2% 0.1% −2.3% 2.0% 2.9% 0.5% 2.4% 5.1%

1.5% 2.2% 0.2% 1.9% 1.2% 1.0% 1.6% 2.0% 2.2% 0.8% 3.6% 2.1%

1.4% 3.2% −0.6% 0.5% 2.0% 0.7% −0.1% 2.9% 2.0% 1.0% 1.8% 1.9%

0.8% 1.5% 0.4% 2.0% 1.5% 0.0% 0.4% 1.3% 0.1% 2.2% 1.0% 0.1%

2.4% 6.3% 1.4% 0.4% 6.0% 0.0% −0.9% 3.4% 6.6% 4.4% 10.4% −0.4%

2.6% 6.7% 1.6% −2.8% 8.1% −2.1% −2.6% 2.9% 6.7% 5.0% 15.0% −1.3%

2.6% 8.2% 1.9% 0.4% 5.3% 0.1% −1.3% 3.6% 6.9% 5.7% 9.8% 0.3%

−1.8% 1.9% −0.7% 4.3% −11.7% 4.0% 1.5% −3.1% −9.1% −5.8% −13.1% 1.5%2.6% 5.7% 1.6% 1.4% 6.8% 0.5% −0.3% 4.2% 7.7% 4.4% 10.5% −0.6%

3.1% 2.3% 1.4% −1.5% 7.3% −0.1% −6.7% 4.9% 5.4% 1.3% 4.1% 2.9%3.3% 1.2% 1.4% −2.7% 10.0% 0.5% −10.3% 7.9% 6.1% −1.2% 3.5% 5.3%3.1% 4.6% 1.0% 0.3% 3.8% −1.4% −2.5% 2.2% 4.8% 4.2% 5.3% 1.4%

−0.3% 1.0% 0.9% −0.8% 3.0% 0.0% −0.9% 1.0% 4.6% 2.8% 4.1% −0.9%

2.9% 5.8% 0.8% 2.1% 6.0% 2.9% −3.6% 4.9% 7.8% 6.1% 10.6% 1.2%

3.4% 7.9% 1.6% 3.1% 8.0% 4.5% −6.0% 7.1% 11.0% 10.2% 14.9% 0.5%

1.3% 2.5% 0.5% 1.9% 3.2% 2.8% 0.9% 1.6% 3.4% 0.4% 4.2% 1.9%

2.8% 4.5% −0.1% 0.7% 4.4% 0.6% −1.6% 2.5% 4.0% 3.0% 8.0% 1.7%

(continues)






Greenwich Global HedgeFund Index3 3.2% −3.3% −1.3% 1.6% 5.7% −2.7% 3.9% −0.5%

Greenwich Global MarketNeutral Group Index 3.2% −0.4% 0.4% 1.7% 2.1% 1.0% 2.2% 3.1%


Greenwich GlobalEvent-Driven Index 3.2% −4.6% −1.6% 2.1% 2.8% 0.1% 2.8% 1.5%

Greenwich Global DistressedSecurities Index 4.0% −3.5% 0.3% 1.8% 2.0% 1.6% 6.6% 4.2%

Greenwich Global MergerArbitrage Index 0.5% 0.0% −0.7% 1.1% 1.5% −0.6% 1.4% 1.4%

Greenwich Global SpecialSituations Index 2.4% −5.2% −3.1% 2.2% 3.2% −0.6% 1.3% 0.4%

Greenwich Global ArbitrageIndex 4.1% 1.1% 0.7% 1.9% 1.9% 1.5% 1.9% 4.3%

Greenwich Global ConvertibleArbitrage Index 5.6% 0.9% 1.2% 2.0% 2.1% 3.1% 2.3% 7.6%

Greenwich Global FixedIncome Arbitrage Index 3.7% −0.2% 3.5% 3.3% 3.5% 1.9% 2.0% 2.8%


Greenwich Global StatisticalArbitrage Index 1.4% 7.5% 0.5% −0.3% 1.8% −2.4% 0.9% 6.0%

Greenwich Global Long/ShortEquity Group Index 2.8% −5.0% −2.3% 0.9% 7.2% −5.0% 5.0% −2.8%

Greenwich Global GrowthIndex 2.9% −5.4% −7.9% −2.6% 9.1% −9.2% 6.7% −12.0%

Greenwich Global OpportunisticIndex 1.5% −5.1% −0.7% 2.4% 4.6% −0.4% 2.8% −2.1%

Greenwich Global Short SellingIndex −3.3% 14.1% 12.6% 4.0% −7.7% 17.9% −10.1% 14.5%

Greenwich Global Value Index 4.2% −7.3% −2.4% 1.6% 10.5% −8.1% 7.4% 1.1%Greenwich Global Directional

Trading Group Index 0.3% 5.1% 4.5% −1.2% 1.8% 1.5% 0.2% 1.3%Greenwich Global Futures Index −1.6% 12.5% 10.3% −3.5% −1.2% 4.7% −3.9% 7.1%Greenwich Global Macro Index 4.4% −1.8% 1.1% 0.8% 4.6% −2.9% 0.7% −0.6%Greenwich Global Market Timing

Index −0.4% −2.2% −2.8% 1.0% 4.9% −0.4% 7.7% −7.3%Greenwich Global Specialty

Strategies Group Index 5.0% −6.7% −2.3% 3.5% 10.8% −4.4% 4.8% 1.0%Greenwich Global Emerging

Markets Index 6.1% −8.4% −3.8% 5.8% 16.4% −8.9% 6.4% 0.9%Greenwich Global Fixed Income

Index 2.3% −0.1% 3.5% 2.0% 2.2% 2.0% 2.5% 3.7%Greenwich Global Multi-Strategy

Index2 4.6% −8.6% −4.8% 0.0% 5.3% −2.1% 3.9% −1.9%




4Q00 3Q00 2Q00 1Q00 4Q99 3Q99 2Q99 1Q99 4Q98 3Q98 2Q98 1Q98

−2.3% 2.1% −0.7% 9.4% 19.4% 1.7% 11.2% 3.9% 8.6% −6.9% −1.9% 7.2%

1.0% 3.2% 2.2% 6.4% 9.0% 2.0% 8.8% 3.4% 4.3% −5.3% 1.4% 6.3%

5.3% 4.1% 3.4% 8.9% 10.5% 4.6% 6.5% 2.7% 4.7% −2.9% 1.4% 5.1%

−1.1% 3.7% 1.4% 5.9% 10.5% 0.3% 11.5% 4.0% 5.2% −7.7% 0.9% 8.2%

−2.7% 1.6% −0.3% 3.8% 3.3% −0.6% 7.6% 2.8% 1.7% −8.6% 2.2% 5.1%

3.2% 4.4% 5.5% 4.8% 3.8% 4.1% 5.7% 4.4% 5.3% −2.5% 2.9% 2.7%

−0.3% 4.5% 2.2% 6.9% 14.0% 0.9% 13.4% 4.5% 7.0% −7.3% 0.5% 9.4%

0.5% 2.3% 2.4% 5.6% 6.8% 2.4% 6.1% 3.4% 2.8% −3.9% 2.5% 4.0%

−0.4% 3.7% 4.9% 8.0% 5.0% 2.2% 5.3% 3.9% 3.9% −4.7% 2.1% 5.7%

1.5% 2.5% 1.9% 2.9% 4.2% 1.9% 3.6% 7.2% −4.4% −2.3% 1.3% 2.5%

8.1% 2.8% 8.7% 14.4% 1.4% 0.7% 6.9% −0.3%

−4.3% 2.8% −1.5% 12.1% 25.4% 2.9% 10.7% 3.7% 12.0% −5.9% 1.2% 8.0%

−12.3% 1.9% −4.9% 15.1% 39.4% 4.1% 14.8% 8.3% 24.4% −7.9% 2.7% 12.3%

−1.9% 2.6% −4.5% 17.9% 30.3% 2.6% 10.3% 3.7% 7.1% −3.6% 0.7% 6.1%

23.0% 4.4% 15.9% −20.2% −22.7% 8.9% −6.7% 2.6% −23.9% 18.1% 5.6% −10.2%−3.9% 3.4% −0.1% 12.4% 23.0% 1.4% 11.7% 1.9% 14.4% −10.2% −0.1% 9.4%

6.5% −0.2% −1.1% 6.1% 11.3% −0.1% 7.2% 1.6% 5.3% 6.8% 0.4% 6.3%15.7% −0.5% −1.7% 0.5% −1.0% −1.0% 3.7% −1.0% 0.5% 12.8% 0.2% 3.5%−2.0% −0.6% −2.8% 10.8% 23.5% −0.1% 15.3% 2.8% −1.5% −0.9% −1.7% 10.3%

−2.4% 0.5% 0.8% 11.9% 22.8% 1.4% 6.7% 5.2% 19.3% 3.1% 2.9% 7.8%

−2.3% −1.3% −4.0% 7.6% 21.9% −1.9% 17.0% 4.7% 6.6% −15.4% −13.9% 5.7%

−5.2% −4.8% −7.3% 9.2% 36.7% −4.2% 24.7% 4.7% 7.8% −21.2% −19.4% 4.6%

4.4% 4.8% −0.6% 0.3% 3.8% −0.8% 1.2% 2.7% 3.4% −4.6% −2.8% 4.6%

−4.3% 2.4% 3.2% 9.3% 16.7% 2.2% 9.2% 7.0% 6.8% −8.5% 0.1% 10.6%



TABLE C.9 Greenwich YTD Global Hedge Fund Index3


Greenwich Global HedgeFund Index3 11.1% 12.1% 8.6% 7.7% 18.6% 0.1% 6.3% 8.4% 40.3% 6.3%

Greenwich Global MarketNeutral Group Index 8.0% 11.6% 5.1% 7.0% 11.8% 5.0% 8.7% 13.3% 25.1% 6.5%

Greenwich Global EquityMarket Neutral Index 8.5% 8.2% 7.0% 6.0% 7.1% 5.1% 7.7% 23.4% 26.4% 8.3%

Greenwich GlobalEvent-Driven Index 9.4% 13.6% 7.3% 12.9% 22.5% −1.1% 7.4% 10.1% 28.5% 6.0%

Greenwich Global DistressedSecurities Index 6.7% 15.3% 9.3% 18.4% 27.4% 2.5% 15.1% 2.3% 13.6% −0.2%

Greenwich Global MergerArbitrage Index 6.9% 12.7% 5.8% 3.1% 4.6% 0.9% 3.7% 19.1% 19.2% 8.5%

Greenwich Global SpecialSituations Index 12.0% 12.4% 6.4% 10.4% 19.2% −3.9% 4.3% 13.8% 36.3% 9.1%

Greenwich Global ArbitrageIndex 6.7% 11.5% 3.0% 3.6% 8.4% 8.0% 9.9% 11.2% 20.0% 5.3%

Greenwich Global ConvertibleArbitrage Index 2.5% 13.1% −1.8% 1.0% 11.3% 10.0% 15.9% 17.0% 17.4% 6.9%

Greenwich Global FixedIncome Arbitrage Index 7.0% 8.7% 5.9% 6.0% 9.0% 10.6% 10.6% 9.1% 17.9% −3.0%

Greenwich Global OtherArbitrage Index 9.3% 13.0% 4.6% 5.6% 6.9%

Greenwich Global StatisticalArbitrage Index 5.8% 10.4% 4.8% 3.2% 3.4% 9.2% 6.3% 38.2% 8.8%

Greenwich Global Long/ShortEquity Group Index 11.5% 12.8% 10.8% 8.6% 22.4% −3.7% 3.9% 8.6% 48.1% 15.2%

Greenwich Global GrowthIndex 13.6% 11.9% 8.1% 6.0% 27.1% −12.7% −7.0% −2.2% 80.4% 32.1%

Greenwich GlobalOpportunistic Index 16.1% 13.5% 13.5% 7.7% 24.4% −2.1% 4.8% 13.3% 52.9% 10.3%

Greenwich Global ShortSelling Index 8.2% −5.5% 3.7% −9.7% −24.4% 29.2% 12.0% 18.8% −19.4% −14.8%

Greenwich Global ValueIndex 9.3% 13.5% 11.6% 11.5% 23.4% −4.2% 10.3% 11.6% 42.0% 12.3%

Greenwich Global DirectionalTrading Group Index 10.5% 6.1% 5.3% 4.9% 14.3% 8.8% 4.9% 11.5% 21.1% 20.0%

Greenwich Global FuturesIndex 9.0% 6.0% 3.1% 6.9% 14.2% 17.8% 6.5% 13.7% 0.6% 17.6%

Greenwich Global MacroIndex 12.7% 6.2% 9.2% 2.1% 16.5% 4.5% 1.7% 4.9% 46.2% 5.8%

Greenwich Global MarketTiming Index 10.6% 8.7% 0.8% 3.1% 11.0% −4.4% 4.3% 10.6% 39.8% 36.4%

Greenwich Global SpecialtyStrategies Group Index 17.2% 17.0% 12.0% 10.3% 28.0% −0.9% 12.1% −0.4% 46.5% −17.9%

Greenwich Global EmergingMarkets Index 23.3% 21.9% 16.9% 13.6% 41.3% −1.1% 13.8% −8.6% 71.0% −28.4%

Greenwich Global FixedIncome Index 1.2% 9.8% 6.4% 8.8% 10.3% 7.9% 10.8% 9.1% 7.0% 0.3%

Greenwich GlobalMulti-Strategy Index2 14.7% 12.2% 8.0% 5.9% 17.7% −9.0% 5.1% 10.5% 39.4% 8.2%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1Please see Explanatory Notes.2Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich GlobalHedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4Index returns from January 1988 to December 2002 are based on quarterly index results, while returns fromJanuary 2003 to present are based on monthly index results.

188




TABLE C.10 Greenwich MonthlyInternational Hedge Fund Index3


Greenwich International Hedge FundIndex3 2.06% −3.05% 0.56% −1.76% 2.94% 2.62% −1.85% 0.57%

Greenwich International Market NeutralGroup Index 0.90% −1.25% 0.16% −1.22% 1.84% 1.27% −1.25% 0.27%

Greenwich International Equity MarketNeutral Index 0.67% −1.70% 0.36% −0.84% 1.50% 1.62% −0.94% 0.72%

Greenwich International Event-DrivenIndex 0.79% −2.45% 0.11% −1.90% 2.19% 1.00% −1.33% 0.43%

Greenwich International DistressedSecurities Index 0.23% −2.18% −0.18% −1.45% 1.61% 0.24% −1.48% −0.43%

Greenwich International Merger ArbitrageIndex −0.06% −2.19% −0.32% −1.83% 1.90% 1.09% −0.07% −0.61%

Greenwich International Special SituationsIndex 1.28% −2.66% 0.37% −2.20% 2.63% 1.46% −1.61% 1.66%

Greenwich International Arbitrage Index 1.08% −0.30% 0.11% −0.91% 1.76% 1.31% −1.32% −0.04%Greenwich International Convertible

Arbitrage Index 0.30% 0.40% −0.80% −1.50% 2.08% 1.56% −1.44% −0.28%Greenwich International Fixed Income

Arbitrage Index −0.27% −0.05% 0.23% −0.46% 1.26% 0.71% −1.07% −0.25%Greenwich International Statistical

Arbitrage Index 2.36% −1.01% 0.29% −0.95% 1.77% 1.47% −2.84% −0.06%Greenwich International Long/Short Equity

Group Index 1.69% −4.75% 0.59% −2.53% 3.06% 2.83% −1.92% 0.42%Greenwich International Growth Index 2.23% −6.43% 0.18% −2.80% 3.52% 3.76% −1.58% 0.48%Greenwich International Opportunistic

Index 1.62% −4.47% 1.28% −1.67% 3.68% 3.56% −2.18% 1.03%Greenwich International Short Selling

Index 1.75% 1.57% 1.34% 4.08% 0.99% −0.47% 1.39% 3.87%Greenwich International Value Index 1.49% −4.48% 0.46% −2.98% 2.76% 2.42% −2.07% 0.12%Greenwich International Directional

Trading Group Index 4.49% −0.26% 0.90% −0.09% 3.02% 3.53% −2.05% −0.74%Greenwich International Futures Index 6.15% 0.86% 0.94% 0.07% 3.48% 3.78% −2.25% −2.09%Greenwich International Macro Index 2.65% −1.50% 1.02% −0.40% 2.43% 3.37% −1.79% 0.84%Greenwich International Market Timing

Index 2.30% −1.37% 0.15% 0.17% 2.43% 1.99% −1.71% 1.44%Greenwich International Specialty Strategies

Group Index 2.57% −4.37% 0.81% −2.17% 4.01% 3.35% −2.35% 2.29%Greenwich International Emerging Markets

Index 3.38% −6.22% 1.27% −2.74% 4.76% 4.45% −2.59% 3.31%Greenwich International Fixed Income

Index −0.07% −1.20% −0.33% −1.23% 1.25% 1.24% −2.27% −2.21%Greenwich International Multi-Strategy

Index2 1.91% −1.61% 0.26% −1.21% 3.69% 2.21% −1.94% 1.49%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1 Please see Explanatory Notes.2 Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3 Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich Interna-tional Hedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4Index returns from January 1988 to December 2002 are based on quarterly index results, while returns fromJanuary 2003 to present are based on monthly index results.

(continues)





Primary Strategy1 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06 Nov-06

Greenwich International Hedge FundIndex3 1.16% 2.10% 1.81% 0.98% 0.59% 1.18% 1.80% 1.92%


Greenwich International Equity MarketNeutral Index 1.06% 0.93% 1.06% 0.95% 0.45% 1.02% 1.21% 0.93%

Greenwich International Event-DrivenIndex 0.03% 1.66% 1.49% 1.29% 1.42% 1.86% 1.67% 1.57%

Greenwich International DistressedSecurities Index 0.38% 1.67% 1.62% 1.21% 1.35% 1.58% 1.70% 1.69%

Greenwich International Merger ArbitrageIndex −0.69% 1.93% 1.68% 0.73% 0.50% 2.06% 1.42% 0.98%

Greenwich International Special SituationsIndex −0.02% 1.53% 1.37% 1.62% 1.87% 2.05% 1.65% 1.53%

Greenwich International Arbitrage Index 0.76% 1.02% 0.85% 0.95% 1.05% 1.22% 1.09% 0.89%Greenwich International Convertible

Arbitrage Index 0.42% 0.81% 0.49% 0.81% 1.24% 1.60% 1.54% 1.00%Greenwich International Fixed Income

Arbitrage Index 1.26% 0.83% 0.59% 1.02% 1.25% 1.02% 0.83% 0.54%Greenwich International Statistical

Arbitrage Index 0.49% 0.97% 1.92% 0.57% 0.00% 0.91% 0.58% 0.67%Greenwich International Long/Short Equity

Group Index 0.73% 2.34% 1.86% 1.38% 0.63% 1.23% 1.81% 2.03%Greenwich International Growth Index 0.93% 3.07% 1.92% 1.55% 0.27% 1.26% 1.72% 1.75%Greenwich International Opportunistic

Index 1.11% 2.18% 1.81% 1.34% 0.78% 1.30% 1.97% 2.53%Greenwich International Short Selling

Index 3.38% −2.49% −3.43% −0.50% 1.75% −1.88% 0.12% −3.96%Greenwich International Value Index 0.47% 2.28% 1.96% 1.39% 0.66% 1.26% 1.82% 2.08%Greenwich International Directional

Trading Group Index 1.82% 2.35% 2.34% −0.64% −0.96% 0.92% 1.57% 1.72%Greenwich International Futures Index 2.47% 2.67% 3.15% −1.41% −1.74% 1.26% 1.98% 2.04%Greenwich International Macro Index 0.59% 1.85% 1.15% 0.35% 0.06% 0.46% 1.12% 1.34%Greenwich International Market Timing

Index −0.53% 2.22% 1.54% 1.63% 1.30% 0.30% −0.11% 1.10%Greenwich International Specialty Strategies

Group Index 2.02% 2.73% 2.34% 1.49% 1.15% 1.01% 2.63% 2.99%Greenwich International Emerging Markets

Index 2.67% 3.39% 2.72% 1.83% 1.39% 0.82% 3.34% 3.98%Greenwich International Fixed Income

Index 0.22% 0.75% 1.10% 0.47% 0.75% 0.99% 0.92% 1.04%Greenwich International Multi-Strategy

Index2 1.04% 1.92% 2.01% 1.12% 0.85% 1.38% 1.67% 1.54%




Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05

1.66% −0.04% 0.76% −0.16% 0.36% −1.50% 1.89% 1.87% 0.52% 3.38% 2.0% 2.0%

1.31% 0.28% 0.68% −0.16% 0.17% 0.21% 1.22% 1.45% 0.79% 2.18% 1.1% 0.7%

1.33% 0.08% 0.36% 0.29% −0.18% −0.62% 1.18% 1.72% 0.67% 1.45% 1.1% 1.1%

1.78% 0.20% 0.76% 0.02% 0.07% 0.41% 1.62% 1.79% 0.67% 2.80% 1.2% 0.9%

2.12% 0.40% 0.90% −0.20% −0.14% 1.31% 2.22% 1.85% 0.41% 2.70% 0.9% 1.2%

1.59% 0.35% 0.49% 0.41% 0.56% 0.14% 0.60% 1.35% 0.75% 2.60% 1.4% 0.8%

1.55% −0.11% 0.66% −0.06% 0.00% −0.24% 1.61% 1.96% 0.78% 3.14% 1.4% 0.9%0.98% 0.42% 0.79% 0.58% 0.39% 0.45% 0.93% 1.07% 0.92% 1.94% 1.1% 0.4%

0.53% 0.77% 1.15% 0.64% 0.24% 0.84% 0.58% 1.06% 1.21% 2.60% 1.1% 0.2%

0.91% 0.39% 0.51% 0.44% 0.37% 0.41% 1.22% 0.89% 0.61% 0.90% 0.6% 0.5%

1.21% 0.36% 0.11% 0.82% 1.74% −0.63% 0.55% 1.50% 1.14% 0.65% 0.5% 0.5%

2.04% −0.28% 1.26% −0.08% −0.72% −2.78% 1.60% 2.38% 0.36% 4.12% 2.8% 2.4%2.62% −0.79% 1.63% −0.38% −0.84% −4.22% 0.56% 2.55% 0.08% 4.88% 2.9% 3.2%

2.09% 0.06% 0.87% −0.01% −0.56% −2.42% 2.14% 2.66% 0.57% 4.52% 3.2% 2.4%

−2.99% −2.54% −1.81% 5.17% 1.48% 4.63% −0.91% −2.90% 0.12% −2.91% −0.3% −5.1%1.97% −0.19% 1.38% −0.19% −0.81% −2.72% 1.82% 2.41% 0.37% 4.01% 2.7% 2.5%

0.97% −0.61% −0.21% −1.58% −0.40% −1.01% 2.30% 1.81% −0.55% 2.41% 1.0% 3.4%1.22% −0.60% 0.16% −2.37% −0.83% −1.47% 2.68% 2.70% −1.13% 2.57% 0.4% 4.5%0.58% −0.67% −0.80% −0.60% 0.18% −0.37% 1.82% 0.50% 0.39% 2.11% 1.7% 2.1%

1.25% −0.10% 1.02% 0.29% 0.00% 0.27% 1.55% 1.34% −1.05% 2.97% 1.2% 0.6%

2.09% 0.34% 0.88% 0.22% −0.54% −2.57% 3.16% 1.70% 1.25% 4.77% 2.8% 2.2%

2.57% 0.38% 1.14% 0.30% −0.71% −3.71% 3.95% 1.63% 1.82% 6.13% 3.3% 2.6%

0.93% 0.65% 1.18% 1.35% −0.09% 0.35% 0.42% 0.85% 0.53% 0.96% 1.1% 0.4%

1.42% 0.13% 0.33% −0.28% −0.34% −0.79% 2.34% 2.22% 0.28% 3.22% 2.3% 1.8%

(continues)





Primary Strategy1 Oct-05 Sep-05 Aug-05 Jul-05 Jun-05 May-05 Apr-05 Mar-05

Greenwich International Hedge FundIndex3 −1.4% 2.1% 1.0% 1.8% 1.3% 0.5% −1.3% −0.7%

Greenwich International Market NeutralGroup Index −0.4% 1.0% 0.8% 1.5% 0.8% 0.0% −1.0% −0.2%

Greenwich International Equity MarketNeutral Index −0.7% 0.8% 0.7% 1.3% 1.2% 0.4% −0.4% 0.0%

Greenwich International Event-DrivenIndex −0.7% 0.9% 1.1% 1.8% 1.1% 0.4% −1.0% −0.1%

Greenwich International DistressedSecurities Index −0.2% 1.3% 1.5% 1.7% 1.1% −0.1% −0.5% 0.3%

Greenwich International Merger ArbitrageIndex −0.7% 0.1% 0.3% 1.5% 0.7% 0.7% −0.4% 0.6%

Greenwich International Special SituationsIndex −1.3% 1.0% 1.1% 2.1% 1.2% 0.7% −1.4% −0.3%

Greenwich International Arbitrage Index 0.0% 1.2% 0.5% 1.3% 0.5% −0.3% −1.3% −0.4%Greenwich International Convertible

Arbitrage Index −0.1% 1.5% 0.6% 1.6% 1.1% −1.3% −2.8% −1.4%Greenwich International Fixed Income

Arbitrage Index 0.5% 1.0% 0.0% 1.1% −0.4% 0.1% 0.1% 0.4%Greenwich International Statistical

Arbitrage Index −0.1% 0.0% 0.9% 0.7% −0.1% 0.7% 0.0% 0.6%Greenwich International Long/Short Equity

Group Index −1.9% 2.6% 1.3% 2.8% 2.0% 1.3% −1.9% −0.8%Greenwich International Growth Index −1.9% 2.8% 1.0% 4.1% 1.8% 1.6% −2.8% −1.6%Greenwich International Opportunistic

Index −1.9% 3.1% 1.4% 3.3% 2.3% 1.4% −2.0% −1.1%Greenwich International Short Selling

Index 3.2% 2.1% 2.8% −2.6% −1.1% −4.3% 4.8% 2.5%Greenwich International Value Index −2.2% 2.3% 1.3% 2.5% 2.1% 1.3% −1.8% −0.6%Greenwich International Directional

Trading Group Index −1.1% 1.9% 0.5% 0.2% 1.9% 1.0% −1.6% −0.3%Greenwich International Futures Index −1.6% 1.4% 0.6% −0.4% 2.7% 1.2% −2.5% −0.3%Greenwich International Macro Index −0.2% 2.8% 0.3% 1.2% 0.6% 0.6% −0.3% −0.2%Greenwich International Market Timing

Index −1.5% 0.0% 0.1% 0.8% 0.8% 0.8% −0.8% −1.1%Greenwich International Specialty Strategies

Group Index −2.1% 3.2% 1.2% 2.0% 1.3% 0.1% −0.8% −1.3%Greenwich International Emerging Markets

Index −2.8% 4.2% 1.2% 2.4% 1.5% 0.6% −0.6% −1.9%Greenwich International Fixed Income

Index −0.5% 1.1% 0.7% 1.1% 0.6% −0.4% −0.5% −0.3%Greenwich International Multi-Strategy

Index2 −1.1% 1.9% 1.4% 1.7% 1.2% −0.6% −1.4% −0.8%




Feb-05 Jan-05 Dec-04 Nov-04 Oct-04 Sep-04 Aug-04 Jul-04 Jun-04 May-04 Apr-04 Mar-04

1.7% 0.4% 1.5% 2.2% 0.6% 1.1% 0.0% −0.7% 0.4% −0.7% −0.9% 0.5%

0.9% 0.3% 1.2% 1.4% 0.2% 0.3% 0.2% 0.0% 0.1% −0.4% 0.1% 0.4%

1.1% 1.3% 1.2% 1.4% −0.4% 0.8% 0.1% −0.1% 0.4% −0.1% −0.7% 0.4%

1.6% −0.1% 2.2% 2.7% 0.9% 1.1% 0.3% −0.4% 0.9% −0.4% 0.0% −0.1%

1.6% 0.3% 2.7% 3.1% 1.2% 1.1% 0.7% 0.4% 1.4% −0.2% 1.2% 0.6%

0.6% 0.2% 1.2% 1.0% 0.4% 0.2% 0.1% −0.8% 0.0% 0.0% 0.0% 0.0%

1.7% −0.4% 1.9% 2.4% 0.8% 1.1% 0.1% −0.8% 0.6% −0.4% −0.5% −0.5%0.4% 0.2% 0.6% 0.8% −0.1% −0.2% 0.2% 0.1% −0.4% −0.4% 0.3% 0.6%

−0.4% −0.8% 0.5% 0.7% −0.5% −0.6% 0.3% 0.0% −1.2% −1.3% 0.3% 0.6%

1.2% 0.7% 0.4% 0.6% 0.5% 0.0% 0.3% 0.4% 0.9% 0.2% 0.8% 0.1%

0.5% 1.7% 0.5% 1.2% −0.5% −0.2% 0.1% 0.8% −0.7% 0.6% 0.1% 0.7%

1.9% 0.3% 1.9% 2.7% 0.5% 1.7% −0.5% −1.6% 1.0% −0.6% −1.1% 0.3%0.9% −0.8% 1.8% 3.5% 0.6% 1.7% −1.0% −3.5% 0.6% −0.9% −2.2% 0.4%

2.3% 0.2% 1.3% 2.8% 0.6% 1.9% −0.2% −1.4% 0.9% −0.8% −1.3% 0.4%

−1.2% 1.4% −5.3% −6.3% −0.8% −2.3% 1.3% 4.2% −0.9% −0.8% 3.3% −1.8%2.3% 0.8% 2.5% 2.9% 0.6% 2.0% −0.5% −1.4% 1.4% −0.5% −1.0% 0.4%

1.3% −2.1% 0.4% 4.0% 1.6% 0.9% −1.0% −0.8% −1.7% −0.7% −4.0% −0.2%1.4% −3.7% 0.1% 5.8% 2.2% 2.2% −1.4% −1.0% −3.3% −0.5% −7.3% −0.7%1.1% −0.1% 0.7% 2.2% 0.8% −0.6% −0.8% −0.3% −0.1% −1.1% −0.5% 0.6%

1.3% −0.3% 1.2% 1.0% 0.2% 0.0% 0.4% −1.0% −0.3% 0.9% −1.0% −1.6%

3.1% 1.0% 1.7% 2.9% 1.5% 2.1% 0.8% −0.1% −0.1% −1.5% −2.5% 1.0%

3.9% 1.5% 2.0% 3.6% 1.7% 3.2% 1.4% −0.4% −0.2% −2.2% −3.8% 1.4%

1.6% 0.7% 1.3% 0.9% 0.9% 0.6% 0.8% 0.6% 0.9% −0.2% 0.5% 0.1%

2.0% −0.1% 1.3% 2.4% 1.2% 0.5% −0.3% 0.1% −0.2% −0.7% −0.9% 0.4%

(continues)






Greenwich International Hedge FundIndex3 1.1% 1.9% 1.8% 0.7% 2.2% 1.0% 1.7% 0.9%


Greenwich International Equity MarketNeutral Index 0.8% 1.6% 0.4% 0.6% 1.3% 0.4% 1.1% 0.3%

Greenwich International Event-DrivenIndex 0.8% 2.4% 1.7% 1.2% 2.1% 1.5% 1.1% 1.1%


Greenwich International Merger ArbitrageIndex 0.3% 1.0%

Greenwich International Special SituationsIndex 0.6% 2.2% 1.6% 1.1% 1.8% 1.1% 0.9% 0.9%

Greenwich International Arbitrage Index 0.5% 1.1% 0.6% 0.7% 0.7% 1.0% −0.1% 0.0%Greenwich International Convertible

Arbitrage Index 0.4% 1.1%Greenwich International Fixed Income

Arbitrage Index 0.8% 1.0%Greenwich International Statistical

Arbitrage Index 0.0% 0.9%Greenwich International Long/Short Equity

Group Index 1.3% 2.3% 1.7% 0.7% 3.2% 0.0% 2.2% 1.8%Greenwich International Growth Index 0.5% 2.4% 1.2% 0.5% 4.4% −0.6% 3.0% 2.3%Greenwich International Opportunistic

Index 1.5% 1.9% 1.4% 0.4% 3.3% 0.5% 2.1% 2.4%Greenwich International Short Selling

Index 0.1% −1.6% −2.4% −1.4% −6.7% 0.7% −3.4% −3.4%Greenwich International Value Index 1.5% 2.8% 2.3% 1.2% 3.4% −0.1% 2.4% 1.7%Greenwich International Directional

Trading Group Index 3.0% 1.2% 3.1% 0.0% 1.6% 1.2% 1.0% −0.7%Greenwich International Futures Index 6.4% 1.5% 4.1% −0.2% 2.5% −0.4% 0.2% −1.6%Greenwich International Macro Index 0.1% 0.9% 2.3% 0.4% 0.6% 3.0% 1.4% 0.3%Greenwich International Market Timing

Index −1.5% 0.0% 1.7% 2.4% −0.2% 1.8% 1.5% 2.8%Greenwich International Specialty Strategies

Group Index 2.0% 2.3% 4.0% 0.7% 3.3% 2.4% 3.5% 1.3%Greenwich International Emerging Markets

Index 2.6% 3.0% 5.2% 0.9% 4.4% 3.6% 4.8% 1.9%Greenwich International Fixed Income

Index 0.0% 0.8% 1.1% 0.7% 0.9% 1.0% 0.0% −0.8%Greenwich International Multi-Strategy

Index2 1.3% 1.3%




Jun-03 May-03 Apr-03 Mar-03 Feb-03 Jan-03 Dec-02 Nov-02 Oct-02 Sep-02 Aug-02 Jul-02

1.4% 3.1% 2.4% 0.2% 0.1% 0.6% 0.4% 1.6% 0.6% −1.4% 0.5% −2.3%

0.8% 1.5% 1.6% 0.4% 0.4% 1.2% 0.9% 1.4% 0.3% 0.1% 0.4% −0.9%

0.7% 1.2% 1.3% −0.3% −0.2% 0.4% 0.9% 0.8% −0.2% −0.1% 0.3% −0.1%

2.3% 3.0% 3.2% 0.8% 0.4% 1.2% 0.5% 2.3% −0.3% −1.2% −0.2% −3.2%

2.6% 2.9% 3.4% 1.2% 1.4% 2.2% 1.4% 2.0% 0.1% −1.1% −0.3% −1.4%

2.1% 3.2% 3.1% 0.6% −0.4% 0.5% −0.5% 2.6% −0.6% −1.2% −0.1% −4.3%0.2% 1.0% 1.0% 0.4% 0.7% 1.4% 1.1% 1.3% 0.8% 0.7% 0.6% −0.3%

1.7% 4.1% 2.7% 0.1% −0.4% 0.0% −0.2% 1.5% 0.7% −1.5% 0.1% −2.3%3.0% 6.8% 3.7% 0.5% −0.8% −0.2% −2.1% 5.0% 1.1% −1.8% −0.1% −3.5%

1.2% 3.9% 2.5% 0.4% −0.1% 0.8% 1.6% 0.8% −0.2% −1.3% 0.2% −1.1%

−1.8% −5.5% −7.2% −1.1% 1.2% 0.8% 4.7% −5.9% −4.0% 5.9% −0.6% 6.7%1.8% 4.3% 3.6% −0.2% −0.5% −0.5% −1.5% 1.8% 1.5% −2.9% 0.3% −4.1%

−0.8% 4.6% 0.6% −2.7% 2.9% 2.5% 3.0% −0.4% −2.9% 2.8% 1.9% 1.5%−2.2% 6.4% 0.4% −5.5% 5.4% 5.3% 6.8% −2.6% −5.3% 5.1% 3.2% 4.8%

0.7% 3.7% 0.5% −0.1% 1.0% 0.3% −0.2% 1.4% −0.8% 0.3% 0.1% −2.6%

0.2% 1.7% 1.3% −0.1% −0.4% −0.7% −1.1% 1.8% −0.5% 1.0% 1.3% −0.3%

2.6% 4.5% 3.9% 0.4% 0.0% 0.6% 1.1% 2.1% 1.4% −5.2% 1.2% −6.1%

3.7% 5.7% 5.2% 0.7% −0.2% 0.1% 0.8% 2.1% 1.4% −7.0% 1.8% −7.8%

0.6% 1.3% 2.1% 0.0% 0.5% 1.2% 1.4% 2.2% 0.6% 0.2% 0.4% 1.2%

(continues)





Primary Strategy1 Jun-02 May-02 Apr-02 Mar-02 Feb-02 Jan-02 Dec-01 Nov-01

Greenwich International Hedge FundIndex3 −1.7% −0.2% 0.3% 1.4% 0.0% 1.1% 1.4% 2.0%

Greenwich International Market NeutralGroup Index −0.9% 0.0% 0.6% 0.9% −0.4% 1.1% 0.7% 0.6%

Greenwich International Equity MarketNeutral Index −0.5% 0.4% 1.2% 0.3% −0.8% 0.8% 0.8% 1.1%

Greenwich International Event-DrivenIndex −2.7% −0.4% 0.5% 1.5% −0.6% 1.3% 1.9% 0.8%

Greenwich International DistressedSecurities Index −1.5% 0.6% 1.0% 0.4% 0.0% 0.5% 0.2% 0.8%

Greenwich International Merger ArbitrageIndex

Greenwich International Special SituationsIndex −3.7% −1.8% 0.2% 2.2% −0.9% 1.8% 2.9% 0.8%

Greenwich International Arbitrage Index −0.2% 0.1% 0.5% 0.8% −0.2% 1.2% 0.3% 0.4%Greenwich International Convertible

Arbitrage IndexGreenwich International Fixed Income

Arbitrage IndexGreenwich International Statistical

Arbitrage IndexGreenwich International Long/Short Equity

Group Index −1.8% −0.3% 0.0% 1.7% −0.5% 0.7% 1.0% 1.6%Greenwich International Growth Index −4.6% −1.5% −2.9% 3.5% −1.4% −0.7% 0.9% 4.0%Greenwich International Opportunistic

Index −0.7% −0.6% 0.2% 1.8% −0.6% 0.1% 1.2% 0.5%Greenwich International Short Selling

Index 4.3% 2.7% 5.1% −3.3% 2.4% 3.8% −1.3% −4.9%Greenwich International Value Index −2.6% 0.2% 0.6% 1.6% −0.3% 1.4% 1.3% 1.7%Greenwich International Directional

Trading Group Index 3.5% 2.1% −0.3% 1.3% −1.2% −0.2% 0.6% −2.2%Greenwich International Futures Index 8.1% 3.0% −1.0% 0.8% −2.8% −1.1% 1.0% −5.8%Greenwich International Macro Index −1.9% 1.3% 0.1% 1.6% −0.1% 1.4% −0.6% 1.3%Greenwich International Market Timing

Index 1.0% 1.3% 0.4% 1.8% 0.8% −0.6% 1.1% 1.0%Greenwich International Specialty Strategies

Group Index −3.3% −0.7% −0.2% 1.7% 1.5% 2.0% 4.0% 6.4%Greenwich International Emerging Markets

Index −4.4% −1.1% −0.6% 2.1% 2.4% 3.0% 5.1% 8.7%Greenwich International Fixed Income

Index 1.6% 1.2% 1.0% 0.4% 0.3% 0.7% 1.1% 0.3%Greenwich International Multi-Strategy

Index2




Oct-01 Sep-01 Aug-01 Jul-01 Jun-01 May-01 Apr-01 Mar-01 Feb-01 Jan-01 Dec-00 Nov-00

1.9% −1.4% 0.0% −1.2% 0.3% 1.3% 1.8% −0.7% −1.3% 2.9% 1.4% −2.0%

0.9% −0.4% 1.1% 0.1% 0.2% 1.0% 1.1% 0.7% 1.3% 1.8% 0.6% 0.3%

−0.2% 0.0% 1.1% 0.2% −0.2% 0.6% 0.9% 1.5% 2.0% 1.5% 2.3% 1.9%

1.8% −1.5% 1.3% −0.8% 0.0% 1.6% 2.0% −0.1% 0.7% 2.1% 0.1% −1.1%

1.2% −0.3% 1.4% 1.2% 2.2% 2.2% 0.6% 0.6% 0.7% 2.1% −0.3% −0.8%

2.1% −2.2% 1.2% −1.4% −1.0% 1.4% 2.5% −0.4% 0.7% 2.1% 0.4% −1.2%1.1% −0.2% 0.9% 0.4% 0.4% 1.0% 0.9% 0.7% 1.1% 1.7% 0.3% 0.3%

2.0% −1.0% −0.8% −1.2% 0.3% 1.2% 2.7% −1.3% −3.0% 2.2% 1.7% −3.5%2.4% −3.0% −3.4% −1.9% 1.1% 0.7% 5.0% −6.3% −9.5% −1.2% −0.8% −7.2%

0.3% 1.6% 0.6% −0.2% 0.2% 0.5% 2.4% −0.7% −1.2% 2.7% 3.9% −1.5%

−2.9% 7.3% 6.8% 3.3% 0.9% 0.8% −9.4% 6.4% 11.5% 0.1% 1.8% 14.1%3.7% −3.1% −1.3% −2.3% −0.2% 1.9% 2.7% −0.9% −3.3% 4.0% 2.0% −5.9%

3.0% 2.6% 1.1% −0.8% −0.6% 0.5% −1.0% 2.1% −1.4% 1.0% 5.0% 1.1%3.6% 6.0% 2.1% −0.7% −0.4% 0.9% −4.2% 6.2% 0.4% 0.1% 7.4% 4.4%1.6% −0.2% 0.6% −0.8% −1.8% −0.3% −0.4% −1.3% 0.3% 2.1% 1.4% −1.4%

4.6% −1.0% −1.0% −1.1% 0.8% 0.8% 6.4% −2.0% −11.6% 1.3% 4.3% −2.4%

3.8% −5.1% −0.4% −3.8% 1.3% 2.4% 0.9% −1.6% −2.1% 6.7% 1.4% −2.9%

4.5% −6.8% −0.4% −5.2% 1.4% 3.0% 1.2% −2.7% −2.2% 8.4% 1.6% −3.8%

0.5% −1.6% 0.9% 0.4% 0.8% 0.8% −1.1% 1.7% 0.7% 1.0% 2.2% 2.9%

(continues)





Primary Strategy1 Oct-00 Sep-00 Aug-00 Jul-00 Jun-00 May-00 Apr-00 Mar-00

Greenwich International Hedge FundIndex3 −1.1% −2.4% 3.8% −0.6% 3.7% −2.3% −2.8% 2.5%


Greenwich International Equity MarketNeutral Index 0.6% 1.5% 2.3% 0.1% 1.3% 1.1% −2.6% 0.0%

Greenwich International Event-DrivenIndex −0.1% −0.6% 1.3% 0.9% 1.8% 0.1% 0.2% 0.5%



Greenwich International Special SituationsIndex −0.4% −1.1% 1.9% 1.1% 2.3% 0.0% 0.3% 0.7%

Greenwich International Arbitrage Index 0.1% 0.4% 1.4% 0.5% 1.6% 0.1% 1.7% 1.2%Greenwich International Convertible




Group Index −1.7% −2.1% 4.9% −0.7% 4.6% −2.9% −2.5% 3.3%Greenwich International Growth Index −6.4% −4.1% 10.5% −4.5% 8.7% −6.5% −5.2% 1.9%Greenwich International Opportunistic

Index −1.9% −1.7% 4.1% −2.3% 4.5% −4.8% −5.1% 3.0%Greenwich International Short Selling

Index 9.3% 9.2% −10.6% 6.6% −8.2% 8.4% 16.8% −1.4%Greenwich International Value Index −1.2% −2.9% 4.6% 0.6% 3.9% −2.5% −3.3% 4.9%Greenwich International Directional

Trading Group Index −1.1% −2.8% 4.4% −1.9% 0.4% −0.3% −3.0% −1.1%Greenwich International Futures Index 1.0% −2.2% 2.7% −1.3% −2.3% 1.3% −1.3% −1.4%Greenwich International Macro Index −3.6% −3.3% 5.2% −0.7% 1.8% −3.4% −9.2% −2.6%Greenwich International Market Timing

Index −2.7% −3.5% 6.7% −4.1% 3.9% −0.2% −0.6% 0.6%Greenwich International Specialty Strategies

Group Index −1.8% −5.6% 3.6% −1.3% 4.9% −4.5% −7.6% 4.2%Greenwich International Emerging Markets

Index −2.8% −7.5% 3.5% −1.7% 5.2% −5.2% −8.7% −4.9%Greenwich International Fixed Income

Index 1.9% 0.4% 2.3% −0.3% 2.6% −1.6% −1.2% −0.6%Greenwich International Multi-Strategy

Index2




Feb-00 Jan-00 Dec-99 Nov-99 Oct-99 Sep-99 Aug-99 Jul-99 Jun-99 May-99 Apr-99 Mar-99

6.3% 1.0% 8.2% 5.0% 1.6% 0.5% 0.1% −0.1% 5.4% 1.0% 6.8% 4.0%

2.0% 1.1% 2.9% 2.9% 0.9% 0.7% 0.0% 1.1% 1.8% 1.7% 3.0% 1.9%

1.9% 1.3% 4.4% 4.4% 0.8% 1.1% 0.8% 1.6% 1.6% 1.1% 2.2% 3.2%

2.4% 0.4% 1.5% 2.9% 0.6% 0.5% −0.2% 0.6% 2.3% 2.1% 4.2% 2.2%

1.8% 0.3% 0.8% 3.2% 0.1% −0.4% −0.2% 0.7% 1.4% 1.1% 2.8% 2.0%

2.7% 0.5% 1.8% 2.7% 0.8% 1.1% −0.2% 0.5% 2.7% 2.6% 5.1% 2.4%1.9% 1.3% 3.2% 2.4% 1.2% 0.7% −0.2% 1.1% 1.3% 1.7% 1.2% 1.0%

9.1% 1.0% 8.9% 6.1% 2.5% 1.1% 0.8% 1.0% 4.5% 1.4% 5.8% 1.7%15.2% 3.1% 17.3% 10.7% 5.7% 1.0% 1.9% 1.3% 7.7% 1.0% 8.5% 1.7%

13.3% −0.1% 10.9% 7.8% 1.7% 0.6% −1.0% 1.4% 3.0% 1.5% 3.3% 1.8%

−30.4% 2.0% −10.4% −9.1% −1.8% 5.2% 3.9% −1.1% −3.6% 2.2% −2.5% 0.3%9.0% 0.9% 8.3% 5.3% 2.2% 0.2% 0.4% 1.0% 5.4% 1.4% 7.6% 2.1%

5.5% 2.5% 5.3% 3.5% −1.4% −0.7% 0.1% −0.4% 5.2% −1.3% 5.0% 0.4%−0.2% 2.7% 1.9% 2.2% −3.4% −0.4% −0.5% −0.7% 3.1% −1.5% 3.8% −1.1%11.9% 0.3% 6.1% 0.4% 0.2% −0.9% −1.0% 0.5% 8.2% −1.6% 8.3% 1.6%

10.1% 3.9% 10.4% 7.0% 0.8% −0.9% 1.3% −0.6% 6.5% −0.6% 3.9% 2.1%

6.6% 0.1% 16.8% 6.8% 1.4% −0.3% −1.0% −2.6% 9.1% 0.4% 11.3% 9.5%

7.4% 0.2% 21.2% 9.2% 1.9% −0.4% −1.4% −3.4% 11.9% 0.8% 13.8% 11.5%

1.9% −1.9% 0.9% 0.7% 0.4% −0.2% 0.3% −1.3% 0.4% −2.1% 2.9% 2.0%

(continues)





Primary Strategy1 Feb-99 Jan-99 Dec-98 Nov-98 Oct-98 Sep-98

Greenwich International Hedge FundIndex3 −0.5% 0.0% 0.7% 4.0% 0.4% −0.1%

Greenwich International Market NeutralGroup Index −0.2% 1.5% 1.3% 3.2% −1.1% −2.0%

Greenwich International Equity MarketNeutral Index −0.4% 0.0% 0.9% 4.0% −1.1% −0.5%

Greenwich International Event-DrivenIndex −0.6% 1.5% 1.6% 2.9% 1.2% −2.0%

Greenwich International DistressedSecurities Index −1.0% 1.8% 1.3% 2.0% −0.3% −1.3%


Greenwich International Special SituationsIndex −0.4% 1.3% 1.8% 3.4% 2.1% −2.4%

Greenwich International Arbitrage Index 0.4% 2.6% 1.3% 3.0% −3.8% −3.0%Greenwich International Convertible




Group Index −1.5% 2.0% 1.4% 2.9% 0.2% 2.1%Greenwich International Growth Index −2.2% 5.3% 6.5% 8.0% 4.9% 8.2%Greenwich International Opportunistic

Index −0.8% 1.2% 0.4% 2.3% −3.5% 0.6%Greenwich International Short Selling

Index 5.5% −1.9% −6.6% −6.7% −13.1% −4.1%Greenwich International Value Index −3.4% 1.0% 1.3% 4.0% 3.8% 1.6%Greenwich International Directional

Trading Group Index −0.6% −0.3% 3.3% 1.6% −0.2% 2.9%Greenwich International Futures Index 1.6% −1.4% 2.5% −0.6% −1.3% 5.1%Greenwich International Macro Index −3.2% 0.9% 4.5% 2.6% −2.6% 0.8%Greenwich International Market Timing

Index −1.7% 0.4% 3.6% 4.9% 3.8% 0.9%Greenwich International Specialty Strategies

Group Index 0.6% −4.2% −2.8% 6.6% 2.0% −1.6%Greenwich International Emerging Markets

Index 0.6% −6.1% −3.9% 7.8% 2.1% −1.3%Greenwich International Fixed Income

Index 0.8% 0.7% 1.2% 3.0% 0.2% −4.0%Greenwich International Multi-Strategy

Index2




Aug-98 Jul-98 Jun-98 May-98 Apr-98 Mar-98 Feb-98 Jan-98

−9.9% 0.3% −2.2% −1.6% −0.7% 3.2% 6.4% −1.7%

−4.1% −0.3% 0.6% 0.0% 1.1% 2.6% 1.6% 0.6%

−0.9% −1.5% 2.7% −0.8% 0.3% 2.1% 2.3% −0.7%

−7.9% −0.4% −0.5% 0.1% 1.4% 2.9% 1.5% 1.5%

−6.6% 0.2% −0.2% 0.2% 1.5% 1.5% 1.8% 0.9%

−8.3% −0.7% −0.6% 0.0% 1.3% 4.0% 1.3% 1.8%−1.6% 0.4% 0.8% 0.1% 1.3% 2.5% 1.2% 0.3%

−8.4% −0.8% 0.7% −0.9% 0.6% 4.0% 5.5% −0.7%−13.5% −1.7% 3.4% −2.8% 0.7% 5.1% 9.7% −0.2%

−6.6% −0.9% 0.1% −1.1% −0.4% 2.9% 4.8% −0.3%

20.6% 3.5% 0.2% 7.9% −1.2% 0.0% −6.9% −2.7%−12.9% −1.1% −0.3% −1.0% 1.3% 4.9% 5.9% −0.9%

−3.1% −0.1% 0.4% 0.4% −1.8% 4.0% 2.4% 0.9%9.4% −1.0% 0.3% 2.5% −2.9% 2.8% 1.3% 2.3%

−3.8% 1.7% −0.4% −1.9% −0.9% 5.7% 3.5% −1.1%

−12.2% −0.6% 1.7% −0.7% −0.7% 4.0% 3.5% 1.0%

−17.3% 2.0% −7.7% −5.4% −3.0% 2.2% 11.3% −6.2%

−20.1% 2.6% −9.1% −7.5% −3.4% 2.3% 13.2% −7.9%

−7.3% 0.5% −2.5% −0.7% −0.1% 0.9% 1.4% 1.0%




TABLE C.11 Greenwich US YTD Hedge Fund Index3


Greenwich US Hedge FundIndex3 11.2% 11.9% 7.1% 8.4% 19.7% −0.4% 5.8% 11.4% 42.4% 12.6%

Greenwich US Market NeutralGroup Index 8.9% 11.8% 4.8% 8.5% 12.8% 5.5% 8.6% 15.3% 28.9% 7.4%

Greenwich US Equity MarketNeutral Index 9.0% 6.9% 5.6% 6.5% 6.2% 6.9% 11.8% 23.6% 28.8% 8.2%

Greenwich US Event-Driven Index 10.1% 13.6% 6.9% 14.2% 22.6% −1.6% 5.2% 13.6% 33.2% 5.9%Greenwich US Distressed Securities

Index 7.2% 14.6% 9.3% 19.9% 26.3% 1.9% 16.1% 2.1% 13.7% −1.0%Greenwich US Merger Arbitrage

Index 7.8% 13.8% 5.7% 3.3%Greenwich US Special Situations

Index 12.3% 12.8% 5.9% 12.1% 21.0% −3.9% 1.3% 18.2% 42.2% 8.9%Greenwich US Arbitrage Index 7.7% 12.0% 2.2% 4.6% 8.7% 8.5% 10.0% 11.5% 20.9% 9.1%

Greenwich US Convertible ArbitrageIndex −0.2% 13.3%−3.2% 1.7%

Greenwich US Fixed IncomeArbitrage Index 11.5% 9.0% 5.6% 5.8%

Greenwich US Statistical ArbitrageIndex 11.2% 13.4% 1.1% 2.5%

Greenwich US Long/Short EquityGroup Index 12.1% 13.6% 9.2% 8.6% 24.4% −4.1% 3.4% 10.2% 51.0% 18.2%

Greenwich US Growth Index 14.4% 13.9% 5.2% 7.5% 28.0%−13.3%−6.2%−0.1% 76.9% 35.2%Greenwich US Opportunistic Index 17.7% 10.9% 11.6% 7.5% 28.5% −1.8% 1.0% 14.9% 62.8% 18.4%Greenwich US Short Selling Index 10.0%−4.4% 5.0%−8.9%−22.6% 32.1% 8.2% 23.9%−23.7%−15.0%Greenwich US Value Index 9.6% 14.9% 9.4% 11.4% 25.2% −3.9% 12.7% 13.3% 44.3% 13.3%Greenwich US Directional Trading

Group Index 11.3% 4.7% 3.9% 7.6% 14.3% 6.8% 3.9% 14.5% 23.7% 25.1%Greenwich US Futures Index 7.8% 3.7% 2.6% 11.3% 13.2% 16.9% 4.3% 15.6% −2.3% 17.4%Greenwich US Macro Index 16.0% 7.3% 7.9% 1.5% 19.5% 6.3% 2.1% 2.6% 70.0% 4.1%Greenwich US Market Timing Index 9.4% 7.8%−0.1% 3.8% 11.3% −9.7% 3.7% 15.8% 43.4% 54.4%Greenwich US Specialty Strategies

Group Index 15.7% 14.4% 9.7% 10.5% 22.3% 1.4% 12.2% 8.7% 33.5% −9.1%Greenwich US Emerging Markets

Index 26.5% 18.6% 15.9% 19.0% 38.4% 11.2% 15.7%−3.2% 54.2%−38.1%Greenwich US Fixed Income Index 3.7% 10.0% 7.4% 10.3% 11.4% 6.2% 10.8% 15.6% 7.3% 6.8%Greenwich US Multi-Strategy

Index2 14.3% 13.0% 6.9% 4.9% 21.6%−13.8% 8.3% 11.6% 43.6% 8.5%




TABLE C.12 Greenwich Quarterly US Hedge Fund Index3


Greenwich US Hedge Fund Index3 2.10% 1.39% 4.69% 2.62% 4.88% 0.84% 0.50% 5.30%

Greenwich US Market NeutralGroup Index 1.32% 0.82% 3.00% 3.50% 3.75% 1.55% 1.68% 4.40%

Greenwich US Equity MarketNeutral Index 3.51% −0.06% 2.66% 2.61% 2.99% −0.08% 1.29% 2.60%

Greenwich US Event-Driven Index 0.79% 0.74% 3.63% 4.61% 5.14% 1.34% 1.29% 5.30%Greenwich US Distressed Securities

Index −0.19% −0.95% 3.75% 4.47% 5.22% 1.29% 2.51% 4.94%Greenwich US Merger Arbitrage

Index −1.18% 1.30% 3.49% 4.02% 4.19% 1.53% 1.88% 5.59%Greenwich US Special Situations

Index 1.63% 1.75% 3.57% 4.90% 5.17% 1.25% 0.29% 5.64%Greenwich US Arbitrage Index 0.87% 1.22% 2.49% 2.91% 2.87% 2.38% 2.22% 4.05%

Greenwich US Convertible ArbitrageIndex −2.83% −1.59% 0.88% 3.47% 2.40% 2.92% 2.37% 5.05%

Greenwich US Fixed Income ArbitrageIndex 2.52% 2.75% 2.92% 2.85% 2.50% 2.19% 1.76% 2.29%

Greenwich US Statistical ArbitrageIndex 2.05% 2.72% 3.36% 2.60% 3.68% 2.23% 2.17% 4.76%

Greenwich US Long/Short EquityGroup Index 1.67% 1.82% 5.09% 3.05% 5.80% 1.28% −0.75% 6.86%

Greenwich US Growth Index 1.93% 3.02% 5.84% 2.97% 6.41% 1.25% −2.24% 8.13%Greenwich US Opportunistic Index 3.33% 4.94% 5.07% 3.27% 6.10% −0.87% −1.89% 7.45%Greenwich US Short Selling Index 8.19% 3.40% −1.90% 0.20% −4.51% 0.20% 5.41% −5.21%Greenwich US Value Index 0.81% 0.31% 5.12% 3.13% 5.94% 1.85% −0.27% 6.79%Greenwich US Directional Trading

Group Index 5.05% 0.61% 6.79% −1.38% 4.00% −2.93% 1.46% 2.25%Greenwich US Futures Index 5.70% −2.93% 9.33% −3.87% 4.20% −3.81% 1.23% 2.18%Greenwich US Macro Index 4.57% 5.34% 3.20% 2.05% 3.59% −0.86% 1.92% 2.50%Greenwich US Market Timing Index 1.03% 3.98% 4.23% −0.05% 4.13% 0.21% 0.74% 2.59%Greenwich US Specialty Strategies

Group Index 2.77% 2.85% 5.75% 3.48% 5.84% 1.93% 0.52% 5.54%Greenwich US Emerging Markets Index 5.24% 7.21% 9.65% 2.25% 9.24% 0.86% −1.12% 8.90%Greenwich US Fixed Income Index 0.22% −1.54% 2.66% 2.37% 2.95% 2.63% 1.61% 2.44%Greenwich US Multi-Strategy Index2 2.66% 1.39% 4.24% 5.32% 5.18% 1.77% 0.94% 4.62%

© 2008 Greenwich Alternative Investments, LLC and/or its licensors.1 Please see Explanatory Notes.2 Until Jan. 2004, the “Multi-Strategy” category was named “Several Strategies.”3 Beginning with the final August 2004 Index, funds of funds are no longer included in the Greenwich USHedge Fund Index. Historical returns for the Index have been restated to exclude funds of funds.4 Index returns from January 1988 to December 2002 are based on quarterly index results, while returnsfrom January 2003 to present are based on monthly index results.

(continues)






Greenwich US Hedge Fund Index3 1.8% 4.3% 0.9% 0.1% 5.7% 0.6% −1.0% 3.0%

Greenwich US Market NeutralGroup Index 1.0% 3.2% −0.1% 0.6% 4.5% 1.0% 0.0% 2.8%

Greenwich US Equity MarketNeutral Index 1.0% 2.3% 0.8% 1.4% 3.1% 1.8% −1.0% 2.5%

Greenwich US Event-Driven Index 1.2% 3.8% 0.4% 1.4% 8.0% 0.6% 1.0% 4.1%Greenwich US Distressed Securities

Index 2.0% 4.8% 0.2% 2.1% 8.0% 1.5% 4.2% 4.9%Greenwich US Merger Arbitrage Index 1.2% 2.0% 0.8% 1.6% 2.8% −0.6% −0.1% 1.2%Greenwich US Special Situations Index 0.5% 3.8% 0.5% 1.1% 8.0% 0.3% −0.3% 3.8%

Greenwich US Arbitrage Index 0.9% 2.8% −1.2% −0.3% 1.9% 0.9% −0.4% 2.1%Greenwich US Convertible Arbitrage

Index 0.3% 3.9% −4.1% −3.2% 1.4% 1.1% −2.6% 1.8%Greenwich US Fixed Income Arbitrage

Index 1.5% 2.1% 0.7% 1.2% 0.7% 1.4% 1.2% 2.4%Greenwich US Statistical Arbitrage

Index 0.4% 1.2% −0.2% −0.3% 2.1% −1.6% 1.5% 0.5%Greenwich US Long/Short Equity

Group Index 1.9% 5.9% 1.7% −0.5% 6.7% 0.0% −1.3% 3.1%Greenwich US Growth Index 1.4% 5.7% 2.4% −4.0% 9.8% −1.6% −2.9% 2.5%Greenwich US Opportunistic Index 1.5% 8.4% 2.2% −0.7% 5.6% −0.2% −1.4% 3.4%Greenwich US Short Selling Index −1.5% 1.6% −0.4% 5.4% −11.5% 4.7% 1.3% −3.0%Greenwich US Value Index 2.2% 5.4% 1.3% 0.3% 7.3% 0.7% −0.8% 3.9%Greenwich US Directional Trading

Group Index 2.6% 2.0% 1.5% −2.2% 9.0% 0.7% −7.2% 5.7%Greenwich US Futures Index 3.3% 1.0% 1.6% −3.2% 12.0% 1.4% −9.7% 8.4%Greenwich US Macro Index 2.3% 4.8% 1.3% −0.6% 3.9% −0.8% −4.4% 3.0%Greenwich US Market Timing Index −0.9% 1.1% 1.0% −1.2% 3.4% 0.4% −1.5% 1.5%Greenwich US Specialty Strategies

Group Index 3.0% 4.1% 1.4% 0.9% 5.7% 3.3% −2.1% 3.3%Greenwich US Emerging Markets

Index 4.7% 6.9% 2.0% 1.5% 10.3% 6.7% −5.5% 7.1%Greenwich US Fixed Income Index 1.5% 2.0% 1.7% 2.0% 3.4% 3.7% 0.6% 2.2%Greenwich US Multi-Strategy Index2 2.5% 3.6% 0.8% −0.1% 3.5% 1.1% −1.3% 1.6%




4Q03 3Q03 2Q03 1Q03 4Q02 3Q02 2Q02 1Q02 4Q01 3Q01 2Q01 1Q01

6.1% 3.5% 8.3% 0.6% 3.7% −3.8% −1.5% 1.4% 6.3% −3.9% 4.9% −1.3%

3.8% 1.8% 4.3% 2.3% 3.5% −0.7% 0.9% 1.7% 2.1% 1.0% 2.3% 2.9%

2.0% 1.2% 2.5% 0.3% 0.6% 1.8% 3.7% 0.7% 2.5% 1.1% 3.8% 3.9%6.6% 4.2% 8.2% 2.0% 3.6% −5.1% −1.7% 1.8% 1.7% 0.2% 2.1% 1.1%

7.1% 5.0% 7.5% 4.6% 3.8% −4.4% 0.5% 2.2% 2.2% 1.2% 7.9% 4.0%

6.4% 3.9% 8.6% 0.7% 3.4% −5.5% −3.2% 1.6% 1.4% −0.3% 0.2% 0.0%2.5% 0.6% 2.2% 3.1% 4.3% 0.8% 1.1% 2.1% 2.2% 1.7% 1.8% 4.0%

7.5% 4.6% 11.4% −0.6% 3.9% −5.6% −3.3% 1.1% 9.1% −7.7% 6.1% −3.2%7.0% 5.2% 15.5% −1.5% 3.2% −5.3% −8.4% −3.1% 10.0% −10.7% 6.9% −10.7%8.5% 6.1% 11.9% −0.3% 3.0% −6.2% −1.4% 3.1% 6.0% −3.7% 3.0% −3.9%

−8.2% −5.5% −12.4% 1.9% −3.6% 15.8% 13.0% 4.7% −8.8% 17.4% −12.1% 15.0%8.3% 4.6% 10.7% −0.2% 5.5% −7.8% −3.1% 2.0% 12.7% −10.3% 9.7% 1.6%

5.9% 0.8% 3.9% 3.2% 1.5% 3.1% 4.0% −1.9% 2.4% −0.4% 1.3% 0.6%5.7% −0.8% 2.4% 5.5% −1.6% 11.8% 10.5% −3.8% −1.2% 2.5% −4.3% 7.6%7.1% 3.5% 5.8% 1.8% 11.7% −4.9% 2.2% −2.1% 8.0% −9.9% 4.9% 0.0%4.7% 1.9% 4.9% −0.5% −0.3% −6.0% −4.7% 1.1% 5.1% 1.0% 8.3% −9.8%

6.8% 3.7% 9.0% 1.2% 3.5% −5.0% −0.5% 3.6% 6.7% −0.1% 4.6% 0.6%

11.7% 8.9% 13.5% 0.2% 5.1% −2.5% −0.6% 9.2% 13.8% −5.2% 5.9% 1.3%4.0% 0.6% 4.2% 2.1% 1.6% 0.0% 2.6% 1.9% 0.6% 3.6% 3.7% 2.5%4.4% 3.6% 11.4% 0.9% 3.9% −12.7% −5.8% 0.9% 6.4% −0.6% 4.7% −2.2%

(continues)






Greenwich US Hedge Fund Index3 −2.7% 3.2% 0.4% 10.5% 21.1% 2.2% 10.4% 4.2%

Greenwich US Market NeutralGroup Index 1.4% 4.1% 2.3% 6.8% 10.9% 2.0% 9.8% 3.8%

Greenwich US Equity MarketNeutral Index 5.1% 4.8% 4.2% 7.7% 11.3% 5.0% 7.2% 2.8%

Greenwich US Event-Driven Index −0.9% 5.3% 1.4% 7.4% 13.3% −0.2% 12.6% 4.6%Greenwich US Distressed Securities

Index −3.9% 1.6% −0.2% 4.8% 3.4% −1.1% 7.8% 3.1%Greenwich US Merger Arbitrage IndexGreenwich US Special Situations Index 0.5% 6.5% 2.0% 8.3% 17.5% 0.3% 14.8% 5.1%

Greenwich US Arbitrage Index 1.3% 2.2% 2.2% 5.4% 6.9% 2.4% 6.7% 3.5%Greenwich US Convertible Arbitrage

IndexGreenwich US Fixed Income Arbitrage

IndexGreenwich US Statistical Arbitrage

IndexGreenwich US Long/Short Equity

Group Index −4.9% 3.5% −0.9% 13.0% 27.5% 3.0% 10.7% 3.9%Greenwich US Growth Index −11.6% 2.0% −3.0% 14.2% 38.8% 4.6% 14.3% 6.6%Greenwich US Opportunistic Index −3.1% 3.2% −3.7% 19.3% 34.5% 3.3% 12.0% 4.6%Greenwich US Short Selling Index 26.5% 4.4% 18.5% −20.8% −25.7% 9.1% −7.4% 1.6%Greenwich US Value Index −3.9% 4.6% −0.3% 13.1% 24.4% 1.4% 11.1% 3.0%Greenwich US Directional Trading

Group Index 7.2% −0.2% −0.8% 7.9% 12.4% 0.4% 7.4% 2.1%Greenwich US Futures Index 18.0% −0.7% −1.4% 0.1% −2.8% −0.7% 3.1% −1.8%Greenwich US Macro Index −6.8% −0.2% −4.0% 14.9% 34.8% 0.7% 20.1% 4.3%Greenwich US Market Timing Index −1.8% 0.5% 1.1% 16.1% 23.7% 2.1% 5.8% 7.3%Greenwich US Specialty Strategies

Group Index −0.7% 1.7% 0.9% 6.7% 15.8% −0.5% 10.1% 5.2%Greenwich US Emerging Markets

Index −3.6% −5.3% −3.0% 9.3% 30.4% −3.5% 16.5% 5.2%Greenwich US Fixed Income Index 4.0% 5.4% 4.2% 1.2% 3.8% −0.6% 1.6% 2.4%Greenwich US Multi-Strategy Index2 −2.2% 3.3% 1.9% 8.4% 19.7% 2.4% 9.0% 7.5%




4Q98 3Q98 2Q98 1Q98 4Q97 3Q97 2Q97 1Q97 4Q96 3Q96 2Q96 1Q96

10.2% −6.1% 1.0% 7.7% −0.1% 11.7% 7.8% 1.2% 4.5% 2.5% 6.4% 5.3%

4.7% −4.7% 1.5% 6.0% 3.1% 7.7% 6.0% 3.4% 4.3% 4.8% 6.2% 6.3%

5.2% −3.5% 1.5% 5.0% 3.2% 7.5% 4.9% 2.6% 3.6% 5.7% 7.3% 6.6%5.2% −7.0% 0.9% 7.3% 3.2% 8.6% 7.2% 2.9% 4.7% 4.3% 6.5% 7.1%

0.9% −7.7% 2.7% 3.5% 0.7% 7.3% 3.7% 2.4% 2.9% 3.1% 8.1% 5.3%

7.2% −6.7% 0.5% 8.3% 4.0% 9.1% 8.3% 3.0% 5.3% 4.8% 6.1% 7.7%3.6% −1.9% 2.6% 4.6% 2.7% 6.3% 5.1% 5.4% 4.2% 4.9% 4.7% 4.5%

13.7% −5.8% 1.9% 8.3% −1.3% 14.4% 9.0% −0.4% 4.5% 1.3% 6.3% 5.5%27.4% −7.2% 3.0% 11.0% −4.3% 17.0% 11.9% −7.1% 0.7% 1.3% 7.5% 5.0%10.3% −2.2% 2.4% 7.2% −1.5% 14.5% 8.2% 2.7% 6.3% 3.0% 5.4% 5.5%

−26.4% 19.5% 5.3% −8.2% 15.2% −5.0% −8.2% 14.4% 4.8% −4.6% −2.6% −3.4%14.6% −10.0% 0.8% 9.0% −1.5% 14.9% 9.9% 0.4% 5.6% 1.4% 6.9% 6.6%

7.6% 7.7% 1.0% 6.9% 3.1% 6.6% 1.9% 6.2% 9.6% 2.2% 4.1% −0.2%0.4% 14.4% −0.2% 2.4% 4.5% 3.4% −1.5% 8.9% 12.4% 1.8% 6.0% −1.3%

−3.7% −0.8% −2.8% 12.1% 5.4% 9.4% 2.4% 9.3% 7.5% 0.5% 4.0% −1.9%27.2% 2.8% 6.6% 10.8% 0.7% 10.0% 6.8% 0.7% 6.4% 4.6% 1.0% 2.9%

8.4% −16.8% −5.5% 6.6% −3.9% 8.9% 6.8% 2.7% 4.3% 1.3% 9.6% 3.9%

13.7% −36.7% −13.9% −0.1% −9.3% 9.2% 12.3% 7.2% 5.3% 1.9% 17.5% 4.2%3.5% −1.7% −1.8% 6.9% −1.9% 6.6% 4.8% 1.3% 2.6% 2.3% 2.7% 3.0%7.9% −9.9% −0.4% 12.1% −0.9% 9.8% 4.5% 0.1% 4.9% 0.2% 6.6% 4.2%

(continues)






Greenwich US Hedge Fund Index3 3.5% 8.2% 6.5% 3.8% −1.1% 3.9% −0.3% −0.6%

Greenwich US Market NeutralGroup Index 3.3% 5.4% 5.1% 4.7% −0.7% 2.9% 0.4% 0.8%

Greenwich US Equity MarketNeutral Index 2.9% 6.7% 5.0% 2.4% 0.7% 1.7% 1.6% 0.2%

Greenwich US Event-Driven Index 2.8% 6.2% 6.1% 5.1% −2.2% 4.7% −0.7% 0.7%Greenwich US Distressed Securities

Index 2.7% 4.4% 5.4% 4.8% −2.2% 3.5% −1.4% 2.9%Greenwich US Merger Arbitrage IndexGreenwich US Special Situations Index 2.9% 6.8% 6.5% 5.2% −2.1% 5.3% −0.3% −0.3%

Greenwich US Arbitrage Index 4.4% 2.4% 4.8% 3.5% 0.2% 1.5% 0.8% 1.3%Greenwich US Convertible Arbitrage




Group Index 3.9% 10.3% 8.6% 5.3% −0.7% 4.4% −0.2% −0.4%Greenwich US Growth Index 4.5% 12.4% 10.2% 4.7% 1.5% 6.4% −4.6% −2.5%Greenwich US Opportunistic Index 5.3% 9.5% 6.7% 4.3% −2.0% 3.7% 1.7% 0.3%Greenwich US Short Selling Index 6.4% −4.8% −10.3% 0.0% 3.8% −9.2% 15.2% 4.7%Greenwich US Value Index 2.5% 11.0% 7.7% 5.6% −2.3% 4.7% 0.4% 0.2%Greenwich US Directional Trading

Group Index 6.9% 3.3% 0.2% 6.7% −1.0% −2.4% 3.3% −3.1%Greenwich US Futures Index 7.5% −2.5% 3.4% 14.3% 1.6% −4.7% 8.9% −2.0%Greenwich US Macro Index 13.6% 12.5% −5.1% −2.2% −5.7% −0.6% −4.9% −6.3%Greenwich US Market Timing Index 0.1% 2.1% 3.0% 2.7% −0.4% 0.8% 2.1% 0.6%Greenwich US Specialty Strategies

Group Index 1.5% 4.8% 9.0% 0.7% −3.9% 7.4% −1.5% −3.6%Greenwich US Emerging Markets

Index −1.8% 2.5% 9.8% −8.4% −11.6% 18.0% −1.5% −10.9%Greenwich US Fixed Income Index 2.6% 4.9% 3.5% 1.3% 0.1% 2.8% −0.2% −3.5%Greenwich US Multi-Strategy Index2 3.0% 5.6% 7.0% 5.7% −1.3% 3.6% −2.0% 0.2%




4Q93 3Q93 2Q93 1Q93 4Q92 3Q92 2Q92 1Q92 4Q91 3Q91 2Q91 1Q91

5.3% 6.8% 5.6% 5.7% 7.9% 4.0% 0.4% 5.4% 6.0% 8.1% 2.4% 13.5%

5.3% 5.0% 5.8% 6.4% 4.6% 3.2% 1.5% 7.0% 5.3% 4.7% 3.9% 9.4%

5.0% 4.8% 6.5% 4.8% 4.4% 5.0% −0.6% 6.4% 5.7% 5.8% 0.9% 11.0%6.5% 5.8% 6.8% 8.3% 6.4% 2.2% 0.9% 9.4% 5.2% 6.0% 6.3% 10.9%

6.6% 3.8% 7.8% 10.1% 6.2% 2.4% 2.4% 13.9% 5.1% 9.0% 8.0% 11.8%

6.4% 6.8% 6.4% 7.4% 6.5% 2.1% 0.3% 7.6% 5.3% 4.5% 5.4% 10.5%3.9% 4.0% 3.8% 4.8% 1.8% 3.6% 3.8% 3.4% 5.0% 1.8% 2.3% 6.1%

4.1% 7.7% 5.1% 5.3% 10.1% 4.1% −0.6% 4.5% 6.2% 9.3% 1.7% 15.3%3.4% 8.2% 5.7% 3.2% 14.3% 4.4% −5.2% 4.3% 9.0% 10.9% 1.0% 21.1%6.3% 7.8% 6.8% 7.3% 10.2% 5.7% 2.1% 6.3% 8.6% 12.9% 2.0% 14.5%

−0.3% −3.7% −1.8% 0.6% −8.5% 3.0% 14.7% −1.9% −2.6% −0.3% 4.0% −18.7%3.9% 8.9% 4.5% 6.7% 9.3% 3.1% −0.6% 4.8% 4.2% 7.9% 1.5% 17.7%

30.3% 5.6% 8.8% 6.2% 2.0% 9.8% 5.4% −5.1% 15.8% 6.9% 0.3% 6.6%53.3% 3.3% 8.9% 6.9% 0.4% 10.7% 7.4% −10.7% 22.5% −2.3% −0.6% −1.4%10.1% 11.6% 10.1% 7.9% 2.8% 10.3% 5.1% −0.9% 11.8% 17.4% −1.8% 8.6%2.2% 2.4% 6.1% 2.6% 5.6% 4.5% −0.4% 3.5% 4.2% 13.1% 5.6% 23.9%

11.9% 7.3% 5.7% 6.0% 6.4% 2.2% 1.5% 8.1% 6.0% 6.5% 3.1% 15.1%

34.1% 8.0% 12.0% 8.3% 5.3% −0.1% 4.4% 16.2% 5.5% 5.4% 8.3% 19.1%4.6% 3.9% 4.8% 6.0% 0.5% 6.7% 2.8% 6.1% 7.8% 7.9% 5.0% 4.9%4.4% 8.6% 3.4% 5.3% 9.3% 1.5% −0.1% 6.3% 5.4% 6.4% 0.4% 17.6%

(continues)





Primary Strategy1 4Q90 3Q90 2Q90 1Q90 4Q89

Greenwich US Hedge Fund Index3 3.9% −4.4% 5.6% 2.3% 1.7%

Greenwich US Market NeutralGroup Index 2.9% 1.0% 4.0% 3.4% 1.6%

Greenwich US Equity MarketNeutral Index 3.6% 5.0% 4.9% 7.1% 1.2%

Greenwich US Event-Driven Index 3.2% −2.3% 5.1% 3.6% 0.0%Greenwich US Distressed Securities

Index −0.3% −1.6% 2.4% 6.1% 1.4%Greenwich US Merger Arbitrage IndexGreenwich US Special Situations Index 4.9% −2.7% 6.2% 2.7% −0.4%

Greenwich US Arbitrage Index 2.0% 4.6% 1.6% 1.2% 3.9%Greenwich US Convertible Arbitrage




Group Index 4.2% −7.7% 6.2% 1.4% 1.5%Greenwich US Growth Index 6.2% −13.0% 8.5% 2.6% 0.4%Greenwich US Opportunistic Index 3.4% −6.3% 5.2% 1.3% 0.0%Greenwich US Short Selling Index −3.9% 30.7% 1.7% 7.6% 16.3%Greenwich US Value Index 4.6% −10.6% 5.8% −0.3% 0.4%Greenwich US Directional Trading

Group Index 1.7% 17.6% 4.3% 12.4% 4.4%Greenwich US Futures Index −0.9% 35.9% 2.7% 21.9% 5.8%Greenwich US Macro Index 2.6% 0.7% 4.8% 3.8% 2.2%Greenwich US Market Timing Index 7.0% −2.5% 7.3% 6.8% 4.5%Greenwich US Specialty Strategies

Group Index 4.4% −3.0% 6.9% 3.1% 2.7%Greenwich US Emerging Markets

Index 10.9% −10.8% 14.1% 13.0% 5.7%Greenwich US Fixed Income Index 2.1% 1.1% 4.6% 2.1% 2.0%Greenwich US Multi-Strategy Index2 2.7% −1.5% 5.3% −0.4% 1.7%




3Q89 2Q89 1Q89 4Q88 3Q88 2Q88 1Q88

6.4% 7.1% 7.3% 3.7% 1.9% 7.8% 10.5%

4.0% 4.6% 5.9% 3.8% 3.0% 11.1% 13.5%

4.6% 3.8% 6.9% 4.8% 3.3% 5.6% 5.9%4.5% 5.0% 8.3% 4.1% 5.3% 6.4% 19.8%

5.4% 4.7% 9.9% 2.8% 7.6% 12.8% 29.7%

4.3% 5.1% 8.1% 4.3% 5.0% 5.6% 18.5%2.9% 4.5% 2.3% 2.7% 0.1% 19.9% 9.7%

7.1% 8.5% 7.7% 3.8% 1.2% 6.3% 9.0%10.5% 10.5% 8.4% 3.0% 0.5% 5.4% 10.3%

6.9% 9.6% 11.4% 2.8% 1.2% 8.6% 9.2%0.1% 8.8% −0.4% 7.9% 5.2% 2.4% −0.5%6.1% 6.6% 7.0% 4.0% 0.8% 6.5% 9.7%

−2.1% 10.8% 9.6% 4.1% 0.1% 14.6% −0.8%−12.4% 14.0% 9.1% 5.0% −5.1% 20.6% −10.8%

9.2% 8.1% 11.4% 2.7% 6.5% 8.7% 11.1%4.3% 9.0% 6.9% 4.4% 2.6% 8.1% 4.3%

10.7% 6.7% 8.6% 3.3% 1.1% 6.0% 11.2%

27.5% 13.4% 15.4% 7.1% −3.6% 10.0% 15.9%2.5% 4.4% 2.5% 2.4% 2.7% 2.4% 3.2%6.9% 4.5% 9.1% 1.7% 3.0% 6.4% 14.7%



212


gloss JWBK336-Strachman September 25, 2008 22:27 Printer: Yet to come

Glossary

Absolute-return fund A fund that tries to perform positively for investors regardlessof market conditions. The fund is not benchmarked against traditional long-onlyindices because it is able to go long and short to provide returns to investors.

Accredited investor Under the Securities Act of 1933, a company that offers orsells its securities must register the securities with the SEC or find an exemptionfrom the registration requirements. The Act provides companies with a numberof exemptions. For some of the exemptions, such as rules 505 and 506 ofRegulation D, a company may sell its securities to what are known as accreditedinvestors.The federal securities laws define the term accredited investor in Rule 501 ofRegulation D as:1. a bank, insurance company, registered investment company, business

development company, or small business investment company;2. an employee benefit plan, within the meaning of the Employee Retire-

ment Income Security Act, if a bank, insurance company, or registeredinvestment adviser makes the investment decisions, or if the plan hastotal assets in excess of $5 million;

3. a charitable organization, corporation, or partnership with assetsexceeding $5 million;

4. a director, executive officer, or general partner of the company sellingthe securities;

5. a business in which all the equity owners are accredited investors;6. a natural person who has individual net worth, or joint net worth

with the person’s spouse, that exceeds $1 million at the time of thepurchase;

7. a natural person with income exceeding $200,000 in each of the twomost recent years or joint income with a spouse exceeding $300,000for those years and a reasonable expectation of the same income levelin the current year; or

8. a trust with assets in excess of $5 million, not formed to acquire thesecurities offered, whose purchases a sophisticated person makes.1

213



214 GLOSSARY

Administrator A service provider hired by the hedge fund to calculate the overallperformance and net asset value for the fund, as well as to perform otherrecordkeeping functions.

Alpha The return as measured by the fund’s performance over the risk-free rateand/or other performance measurement tools, including, but not limited to,traditional and nontraditional indices.

Alternative assets Any investment vehicle that is not considered a traditional orlong-only fund. Alternative assets include hedge funds, private equity funds,and commodities pools that are not regulated under the Securities Act of 1940.

Annual rate of return The compounded gain or loss in a fund’s net asset valueduring a calendar year.

Arbitrage An investment strategy that attempts to take advantage of the mispricingof securities from one market to another.

Assets under management Includes all investments, leveraged and unleveraged,including cash, that are overseen by a fund manager.

Average annual return (annualized rate of return) Cumulative gains and lossesdivided by the number of years of a fund’s existence, that takes into accountcompounding.

Average monthly return Cumulative gains and losses divided by the number ofmonths of the investment’s life, with compounding taken into account.

Average rate of return The mean average of a fund’s returns over a given numberof periods. It is calculated by dividing the sum of the rates of return over thoseperiods by the number of periods.

Back-test Attempts to determine the effectiveness of an investment model by ap-plying the system to past periods and comparing those results with the actualperformance of other strategies.

Bear market Prolonged period of falling prices.*Bull market Prolonged period of rising prices.*Clearing The process of reconciling transactions between the manager and the

broker once a trade is entered and executed.Commodity trading advisor (CTA) A person or entity providing advice to others

on investments in commodity futures, options, and foreign-exchange contracts.Custodian A bank, trust company or other financial institution that holds and pro-

tects a fund’s assets and provides other services, including collecting money frominvestors, distributing redemption proceeds and maintaining margin accounts.

Derivative A financial instrument whose performance is linked to a specific security,index or financial instrument. Typically, derivatives are used to transfer risk ornegotiate the future sale or delivery of an investment.

Diversification The variety of investments in a fund’s portfolio. Risk-averse fundmanagers seek to combine investments that are unlikely to all move in the samedirection at the same time.

Drawdown The percentage loss that a fund incurs from its peak net asset value toits lowest value. The maximum drawdown over a significant period is sometimesemployed as a means of measuring the risk of a vehicle. Usually expressed as apercentage decline in net asset value.



Glossary 215

Due diligence Questions by investors to the manager regarding investment styleand strategy as well as the manger’s background and track record.*

Exposure The extent to which an investment has the potential to change based onchanges in market conditions. In the hedge fund world, exposure is measuredon a net basis. Net exposure takes into account the difference between the longpositions versus the short positions. For example, if a fund is 150 percent longand 65 percent short, its net exposure would be 85 percent.

Fair value The price at which a single unit of a security would trade between partiesthat don’t have interests in the issue.

Forward contract A private, over-the-counter derivative instrument that requiresone party to sell and another party to buy a specific security or commodity at apreset price on an agreed-upon date in the future.

Fund of funds A hedge fund that invests in other funds and does not directly makeinvestments in securities on behalf of its investors with its assets.

Futures contract An exchange-traded agreement to buy or sell a particular type andquantity of commodity or security for delivery at an agreed-on place and datein the future.

General partner The individual or firm that organizes and manages a limited part-nership, such as a hedge fund. The general partner assumes unlimited legalresponsibility for the liabilities of a partnership.

Haircut The amount by which a lender discounts the actual market value of col-lateral pledged by a borrower.

High-water mark A provision serving to ensure that a fund manager only col-lects incentive fees on the highest net asset value previously attained at theend of any prior fiscal year—or gains representing actual profits for eachinvestor.

Hurdle rate The minimum return necessary for a fund manager to start collectingincentive fees. The hurdle is usually tied to a benchmark rate such as Libor orthe one-year Treasury bill rate plus a spread. If, for example, the manager setsa hurdle rate equal to 5 percent, and the fund returns 15 percent, incentive feeswould only apply to the 10 percent above the hurdle rate.

Incentive fee (performance fee) The fee, usually 20 percent, that a fund manager ispaid on the profits made in the portfolio.

Inception date The day on which a fund starts trading.Limited liability company A legal structure that is the hedge fund investment

vehicle.*Limited partnership A legal structure that is used as a hedge fund vehicle.*Liquidity The ease with which an investment can be sold, without impacting its

price in the market.Lock-up The period of time—often one year—during which hedge-fund investors

are initially prohibited from redeeming their shares.Long position A transaction to purchase shares of stock resulting in a net positive

position.*Management fee The charge that a fund manager assesses to investors, often used

to cover operating expenses. The fee generally ranges from an annual 0.5 percent



216 GLOSSARY

to 2 percent of an investor’s entire holdings in the fund, and it is usually collectedon a quarterly basis.

Margin call Demand that an investor deposits enough money or securities to bringa margin account up to the minimum maintenance requirements.*

Margin of safety Common stock issues are considered either underpriced or over-priced in the market relative to the intrinsic value of their companies. Thisbrings error to truth for correction. To identify mispriced stocks, the value of acompany is compared to its stock market price.

Minimum investment The smallest amount that an investor is permitted contributeto a hedge fund as an initial investment. Minimum investment requirementscan range from $50,000 to $5 million, but most funds insist on $500,000 to$1 million.

Net asset value (NAV) The market value of a fund’s total assets, minus its liabilitiesand intangible assets, divided by the number of its shares outstanding.

Net-fee requirement An SEC rule stating that hedge fund managers and othertypes of investment advisors must deduct advisory fees they charge from anyperformance figures they present to prospective investors.

Netting The process of adjusting a gross amount, usually by subtracting. The termusually applies to the deduction of fees and taxes from an investment’s return.

Offshore fund An investment vehicle that is domiciled outside the United Statesand has no limit on the number of non-U.S. taxable investors it can take on.*

Onshore fund An investment vehicle that is set up in the United States that isavailable to U.S. citizens.*

Operational risk Measures the probability that investment losses will result fromfactors other than credit risk, market risk, or liquidity risk, such as employeefraud or misconduct, errors in cash-flow models, incorrect or incomplete docu-mentation of trades, or manmade disasters.

Option A contract that gives parties the right to buy, or sell, a specific asset orsecurity at a specified strike price by a preset date. It falls under the derivativescategory and comes in the form of calls (options to buy) and puts (options tosell). The cost of an option is generally a fraction of the cost of its underlyingsecurity.

Performance trigger The point at which a hedge fund’s losses cause specific con-tractual provisions designed to insulate investors from further losses.

Performance fee Fee paid to a manager based on how well the investment strategyperforms.*

Pooled investment vehicle Any limited partnership, trust, or company that operatesas an investment fund and is exempt from SEC registration under the InvestmentCompany Act of 1940.

Portfolio manager A company or individual that runs capital on behalf of an in-vestment fund.

Portfolio turnover rate The rate of trading activity in a hedge fund or mutual fund,expressed as a percentage of the portfolio’s size, that is bought or sold each year.Calculated by dividing the lesser of purchases or sales by average assets duringthat year.



Glossary 217

Poison pill Any number of legal defensive tactics written into a corporate charterto fend off the advances of an unwanted suitor.*

Prime broker A bank or securities firm that provides various execution, adminis-trative, back-office, and financing services to hedge funds and other professionalinvestors.

Private-equity fund Entities that buy illiquid stakes in privately held companies,sometimes by participating in leveraged buyouts.

Private placement Issues that are exempt from public-registration provisions insection 4-2 of the Securities Act of 1933. Hedge fund shares are generally offeredas private placements, which are typically offered to only a few investors, ratherthan the general public.

Quantitative analysis Security analysis that uses objective statistical information todetermine when to buy and sell securities.*

Rate of return The annual appreciation in the value of a fund or any other typeof investment, stated as a percentage of the total amount invested. Sometimesreferred to as simply the return.

Redemption fee A charge, intended to discourage withdrawals, that a hedge-fundmanager levies against investors when they cash in their shares in the fund beforea specified date.

Redemption notice period The amount of advance notice that an investor mustgive a hedge fund manager before cashing in shares of the fund. Notification isusually required in writing.

Redemption Liquidation of shares or interests in an investment fund.Regional investment strategy An approach in which the fund manager invests in

instruments that are issued by companies or governments in a specific geograph-ical region.

Regulation D A provision in the Securities Act of 1933 that allows privately placedtransactions to take place without SEC registration and prohibits hedge fundsfrom advertising themselves to the general public. It also outlines which partiesqualify as company insiders.2

Regulation T A Federal Reserve Board rule that dictates requirements for marginloans and differentiates “listed” and “unlisted” securities. Listed, or registered,securities are subject to more-stringent borrowing limits. Governs extensionof credit by securities brokers and dealers, including all members of nationalsecurities exchanges.3

Risk-free rate The theoretical return on a risk-free investment, usually a U.S. secu-rity.

Section 3(c)(1) A provision in the Investment Company Act of 1940 that allowscertain hedge funds to be established without registering as investment advisors,provided their shares are owned by 100 investors.4

Section 3(c)(7) A provision in the Investment Company Act of 1940 that allowshedge funds to have more then 100 investors, provided all investors are consid-ered to be qualified purchasers.5

Settlement Synonymous with a transaction’s closing, when, after clearing has takenplace, securities are delivered and payment is received.



218 GLOSSARY

Sharpe ratio The ratio of return above the minimum acceptable return dividendby the standard deviation. It provides information of the return per unit ofdispersion risk.*

Short position A transaction to sell shares of stock that the investor does not own.*Short sales The process of borrowing securities from a broker and “selling them

into the market” with the belief that the security can be bought back at a laterdate at a lower price.

Soft dollars Credits that can be used to pay for research and other services thatbrokerage firms provide to hedge funds and other investor clients in return fortheir business. Those credits are accumulated through soft-dollar brokers, whichchannel trades to multiple securities brokers.

Spread The difference in price or yield between two securities. Most often used todescribe the difference between the yield on a Treasury security and the yieldon another type of bond. It also refers to the return from a given investmentproduct, such as a hedge fund, versus the return of a benchmark such as theS&P 500 index.

Standard deviation A measure of the dispersion of a group of a numerical valuesfrom the mean. It is calculated by taking the difference between each numberin the group and the arithmetic average, squaring them to give the variance,summing them, and taking the square root.*

Traditional investments Products whose performances closely track the broaderstock and bond markets.

Volatility The likelihood that an instrument’s value will change over a given periodof time, usually measured as beta.

∗Strachman, Daniel A. Getting Started in Hedge Funds. Hoboken, N.J.: John Wiley & Sons,2005.


notes JWBK336-Strachman September 25, 2008 13:5 Printer: Yet to come

Notes

Chapter 1 Hedge Funds Past , Present , and Future1. There is no clear definition of the size of the industry because, unlike the mutual

fund industry, there is no central reporting agency. The number is what is quotedin many news reports throughout the last eight months. Its accuracy, however,cannot be verified.

2. Robin Sidel, Dennis K. Berman, and Kate Kelly, “J.P. Morgan Buys Bearin Fire Sale As Fed Widens Credit to Avert Crisis.” Wall Street Journal,March 17, 2008, p. A1, http://online.wsj.com/article/SB120569598608739825.html?mod=hps us whats news.

3. Elizabeth Hester, “Bear Stearns Shareholders Approve Sale” BloombergNews, May 30, 2008, from Washingtonpost.com: http://www.washingtonpost.com/wp-dyn/content/article/2008/05/29/AR2008052903247.html.

4. United States Department of Labor Bureau of Labor Statistics, “Employ-ment Situation Summary,” May 2, 2008, http://www.bls.gov/news.release/empsit.nr0.htm; Chris Isidore, “80,000 Jobs Lost, Unemployment Spikes: Em-ployers Slash Jobs for Third Straight Month While Unemployment Jumps to5.1%, a Nearly Three-Year High,” CNN (online: http://money.cnn.com/2008/04/04/news/economy/jobs march/), April 4, 2008.

Chapter 2 Hedge Funds Today1. Eleanor Laise, “The Hedge Fund Clones,” Wall Street Journal, July 21, 2007,

p. B1.2. Ibid.3. This number is estimated, because unlike in the mutual fund industry, there is

no central data source for hedge fund information.4. New York Stock Exchange Fact Book, www.nysedata.com/factbook.5. Investment Company Institute, “Trends In Mutual Fund Investing—June

2007,” July 30, 2007. http://www.ici.org/stats/mf/index.html#Trends%20in%20Mutual%20Fund%20Investing

6. FINRA, http://www.finra.org/RulesRegulation/PublicationsGuidance.

219



220 NOTES

7. Reuters, “U.S. Hedge Fund Oversight Needs Teeth, Say Critics,” April 15, 2008.8. This quote is from an interview with Hunt Taylor during research for my book

on Julian Robertson. Hunt died in 2006. He was a dear friend, and the reasonthat I know what I know about hedge funds and money management.

Chapter 3 The Men Who Made the Industry What I tIs Today

1. Fund complexes are money management firms composed of more than onehedge fund, mutual fund or investment vehicle.

2. Alan Rappeport, “A Short History of Hedge Funds.” CFO Magazine, March27, 2007. Barry Eichengreen and Donald Mathieson, “Hedge Funds: WhatDo We Really Know?” The International Monetary Fund, September 1999,http://www.imf.org/external/pubs/ft/issues/issues19/index.htm. Matthew Miller(ed.), “The 400 Richest Americans,” Forbes, September 7, 2007, http://www.forbes.com/lists/2007/54/richlist07 The-400-Richest-Americans NameProper14.html. Stanford Encyclopedia of Philosophy, http://plato.stanford.edu/entries/popper. The Wharton School, “125 Influential People and Ideas,”“Turned Risk into Wealth—Michael Steinhardt,” Wharton Alumni Magazine,October 27, 2007. Wyndham Robertson, “Hedge Fund Miseries,” Fortune,May 1971, 269. Stephanie Strom, “Top Manager to Close Shop on HedgeFunds,” New York Times, October 12, 1995, p. D1.

Chapter 4 Running Your Fund Transparent ly1. S&P 500 Index, http://moneycentral.msn.com/investor/charts/chartdl.aspx?

Symbol=%24INX&CP=0&PT=10.

Chapter 5 How Hedge Funds are Packaged1. The Inflation Calculator, http://www.westegg.com/inflation/infl.cgi.2. “UBS Tops Alpha Magazine’s Fund of Hedge Fund 50 Ranking for the

Third Time,” November 21, 2005. http://old.institutionalinvestor.com/pdf/pressRoom/pressrelease/alpha funds NOV.pdf

Chapter 8 Fraud, Col lapse, and the Kitchen Sink1. Edwards Evans, “Bear Stearns Joins Wall Street, Wrecks Drexel, LTCM” (Up-

date 1), Bloomberg, March 17, 2008.2. Deepak Gopinath, “Niederhoffer, Humbled by ’97 Blowup, Posts 56 Percent

Return,” Bloomberg, May 31, 2006.3. Randy Diamond, “KL Principal Pleads to Fraud” Palm Beach Post, April 18,

2008.4. Amanda Cantrell, “Hedge Fund Has-Beens,” CNN/Money, June 11, 2005.



Notes 221

5. Ibid.6. Matthew Leising, “Lake Shore Asset Management Accounts Frozen by U.S.,”

(Update 4), Bloomberg, June 28, 2007.7. Commodity Futures Trading Commission, “Case Status Report: Lake Shore

Asset Management,” Case Number 07 C 3598, April 28, 2008.8. Jenny Strasburg, “Zwirn Shuts Hedge Funds after Clients Pull $2 Billion,”

Bloomberg, February 22, 2008.9. Henry Sender, “Zwirn Winds Down Principal Funds,” The Financial Times,

February 22, 2008.10. Jeff St. Onge and Bill Rochelle, “Bear Stearns Caymans Filing May Hurt Funds’

Creditors,” Bloomberg, August 7, 2007.

Glossary1. Securities Lawyer’s Deskbook. The University of Cincinnati College of Law:

www.law.uc.edu/CCL/33ActRls/rule501.html.2. U.S. Securities and Exchange Commission. www.sec.gov/answers/regd/htm.3. The Free Dictionary. http://financial-dictionary.thefreedictionary.com/

Regulation+T+(Reg+T).4. Securities Lawyer’s Deskbook. The University of Cincinnati College of Law.

www.law.uc.edu/CCL/InvCoAct/sec3.html.5. Ibid.



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Index

AAccountants, 89–90

resource guide for, 133–35Accredited investor, defined, 16–17Administrators, resource guide for, 133–35.

See also Third-party administratorsAge of the Hedge Fund, 52Alpha, 53Alternative investments, 118Amaranth, hedge fund mismanagement and,

110–11Auditing, of hedge funds, 89–90AW Jones and Company, 5, 21

BBear Stearns Companies, 8–11, 106

hedge fund mismanagement and, 111–12Berger, Michael, 108, 109Bookbinder, Richard, 9Buffett, Warren, 37, 40Burch, Robert, 37Buyouts, fund of funds, 62–63

CCapital introduction services, 72–73Cioffi, Ralph, 111Commission, sharing, 22–23Commodity Futures Trading Commission

(CFTC), 109–10Communication

during crisis, 50–51open, 50

Cornfield, Bernie, 56Costs, of running fund of funds, 55–57Credit crisis, learning from, 43–46

fraud, 46–47information exchange, 47–51perception versus reality, 45–46

Criminal background checks, 114

DDB Zwirn & Company, 111Dialing for dollars, 69–70

Diversifying, portfolio, 65–66Dodd, David, 27Douglas, Doug, 63Druckenmiller, Stanley, 28Due diligence

investor, 113–14manager, 114–15questionnaire, 115, 121–32

EEconomics, funds of funds, 58–59Employee Retirement Income Security Act,

16Equity-based funds, 66European Monetary System, 28Exposures

net long, 24net short, 24

FFalsification, 32Family, raising money from, 69–72Federal Reserve, 8, 9, 10Fees

for hedge funds, 20–22management, 58

Fidelity Magellan Fund, 49Fortune 500 companies, 13Fraud, 46–47

existence of, 103–4in hedge fund industry, 104–5KL Financial and, 108Lake Shore fund complex and, 109–10Manhattan Investment Fund and, 108–9media and, 104–5reason for, in hedge fund industry, 107–10regulatory move to stop, 113

Friends, raising money from, 69–72Front-line investment analysis, 124–25Full NAV, 91Fund of funds, 55–57

buyouts, 62–63common problems, avoiding, 66–67

223



224 INDEX

Fund of funds (Continued)costs of running, 58–61economics of, 58–59functioning of, 57–58growth, 61–62growth in industry, 57

Fundsequity-based, 66hedge (See Hedge funds)mutual, 6–7offshore, 96–97onshore, 95–96

GGekko, Gordon, 104Goldman Sachs Group Inc., 14, 15, 41, 91Graham, Benjamin, 27Greenwich Investable Hedge Fund Index,

158–64Greenwich Investable US Hedge Fund Index,

178Greenwich Monthly Global Hedge Fund

Index, 165–77Greenwich Monthly International Hedge

Fund Index, 189–201Greenwich Monthly US Hedge Fund Index,

146–57Greenwich Quarterly Global Hedge Fund

Index, 184–87Greenwich Quarterly International Hedge

Fund Index, 180–83Greenwich Quarterly US Hedge Fund Index,

203–11Greenwich US YTD Hedge Fund Index, 202Greenwich YTD Global Hedge Fund Index,

188Greenwich Ytd International Hedge Fund

Index, 179

HHavens, Nancy, 28Headhunters, 98–99Hedge Fund Alert, 101Hedge fund clones, 14Hedge fund industry

evolution of, 118fraud, reason for, 107–10fraud in, 104–5future of, 53–54growth of, 1legends in, 28–40shaping of, 27–40

Hedge fund manager, job description for,70–71

Hedge fundsauditing, 89–90go bad, 42–43databases and services, 15development of, 3–5fees, 20–22historic performance of, 145–211history of, 3–5implosion of, 105–7Jones legacy, continuing, 23–25jumping on bandwagon, 51–54mismanagement of, 110–12mutual funds versus, 7in the news, 14–16packaging of, 55–67Presidential campaign and, 18reasons for investing in, 5–7regulation of, 16–18running transparently, 41–54size of, 93–94today, 13–25year of, 52–53

High-water mark, 21Hiring, third-party marketer,

75–77Historic performance, of hedge funds,

145–211Greenwich Investable Hedge Fund Index,

158–64Greenwich Investable US Hedge Fund

Index, 178Greenwich Monthly Global Hedge Fund

Index, 165–77Greenwich Monthly International Hedge

Fund Index, 189–201Greenwich Monthly US Hedge Fund

Index, 146–57Greenwich Quarterly Global Hedge Fund

Index, 184–87Greenwich Quarterly International Hedge

Fund Index, 180–83Greenwich Quarterly US Hedge Fund

Index, 203–11Greenwich US YTD Hedge Fund Index,

202Greenwich YTD Global Hedge Fund

Index, 188Greenwich Ytd International Hedge Fund

Index, 179Hurdle rates, 58



Index 225

IInformation exchange, 47–51

communicating during, 50–51investors, giving due to, 48–49open communication in, 50strategy, explaining, 49–50

Insurance companies, 97–98resource guide for, 133–35

Internal Revenue Service, offshore funds and,96

Investmentsalternative, 118in hedge funds, reason for, 5–7

Investor due diligence, 113–14Investors

accredited, 16–17finding right, 80giving due to, 48–49strategy, explaining to, 80–83vetting, 83

JJones, Alfred Winslow, 4, 17Jones legacy, continuing, 23–25J.P. Morgan Chase & Company, 8, 9, 10,

14, 15, 41, 42, 91, 94, 111

KKL Financial Group, LLC, fraud and, 108

LLake Shore fund complex, 109–10Lawyers, 88–89

experienced, choosing, 88–89questions for, 89resource guide for, 133–35

Legends, in hedge funds, 28–40Robertson, Julian, 36–39Soros, George, 30–32Steinhardt, Michael, 32–36

Light NAV, 91Lipper Small Cap Index, 6, 7Loan-to-value (LTV) ratio, 44Lock-ups, 16Long-Term Capital Management (LTCM),

10, 48–49

MManagement fee, 58Manager due diligence, 114–15Manager of managers (MOMs), 63–64

common problems with, avoiding, 66–67

Manhattan Investment Fund, 108–9Mariner Investor Group, 104Market. See Stock marketMarket fundamentalism, 32Marketing

successful, 84–85third-party, 73–77

Matching services, 99–100Merrill Lynch & Company, 14, 41, 44Michaelcheck, Bill, 104Mismanagement

Amaranth and, 110–11Bear Stearns and, 111–12DB Zwirn & Company and, 111in hedge fund industry, 107of hedge funds, 110–12regulatory move to stop, 113

Money, raising, 69–85capital introduction services, 72–73connections, making, 70–72dialing for dollars, 69–70road to wealth and, 77–79sources of, 69–72third-party marketing, 73–77

Money managementby Robertson, 37–39by Soros, 31–32by Steinhardt, 34–36

Mortgageloan-to-value (LTV) ratio and, 44market, sub-prime meltdown in, 41

Mukasey, Michael B., 8Munger, Charlie, 40Mutual funds, 6–7

hedge funds versus, 7regulation of, 17

NNASDAQ market, 92Neiderhoffer, Victor, 106Net asset values, calculating, 91–93

full NAV, 91NAV light, 91

Net long exposures, 24Net short exposures, 24Neuberger Berman, 22New York Stock Exchange, 92

OOffshore funds

Internal Revenue Service and, 96third-party administrator for, 96–97



226 INDEX

Onshore funds, third-party administratorfor, 95–96

Opportunity Partners L.P., 18

PPackaging, of hedge funds, 55–67

funds of funds, 55–57Parker, Virginia, 28Pitch book, preparing, 83–84

items included in, 84Ponzi, Charles, 107Popular press, fraud and, 104–5Portfolio, diversifying, 65–66Presidential campaign, hedge funds and, 18Prime brokers, 90–91

resource guide for, 133–35

QQuestionnaire, due diligence, 115, 121–32

RReferrals, raising money through, 69–72Regulation

of hedge funds, 16–18of mutual funds, 17

Regulatory moveto stop fraud, 113to stop mismanagement, 113

Resource guide, 133–43accountants, 140–42administrators, 138–40insurance companies, 142–43lawyers, 135–38prime brokers, 133–35

Risk management, 122–27Road to wealth, 77–79

cautionary tale about, 78–79reconnaissance, conducting, 77–78

Robertson, Julian, 15, 24, 25, 27, 28, 36–39money management by, 37–39

SSAC Capital, 23Saunders, David, 27, 36, 63Securities Act of 1933, 7Securities Act of 1940, 2, 17

calls for, 18–20Securities and Exchange Commission (SEC),

18, 28, 33, 113Service providers. See also Supporting staff

accountants, 89–90choosing, 87–88

headhunters, 98–99insurance companies, 97–98lawyers, 88–89matching services, 99–100prime brokers, 90–91third-party administrators, 91–97

Soros, George, 27, 28, 30–32, 105money management by, 31–32

S&P 500 Index, 6, 7, 46Steinhardt, Michael, 27, 28, 32–36

money management by, 34–36Stock market

understanding, 7–8volatility of, 7–8

Strangers, raising money from, 69–72Sub-prime meltdown in mortgage market, 41Successful marketing, essence of, 84–85Supporting staff, 87–102. See also Service

providersaccountants, 89–90headhunters, 98–99insurance companies, 97–98lawyers, 88–89matching services, 99–100prime brokers, 90–91third-party administrators, 91–97

TTannin, Matthew, 111Technology, taking advantage of, 101–2Third-party administrators, 91–97

finding, 94–95funds, size of, 93–94net asset values, calculating, 91–93for offshore funds, 96–97onshore funds, using for, 95–96

Third-party marketerchoosing, 73–75hiring, 75–77

Third-party marketing, 73–77Tiger Management, 25

downfall of, 38Transparency

measurement of, 48pros and cons of, 65

VVetting, investors, 83

WWarm call, 77Wealth, road to, 77–79

the long and short of hedge funds: a complete guide to hedge fund evaluation and investing

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