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SALT Conference – ALTs Nation: The Proliferation of Alternatives in the Modern Portfolio

Gregory Zuckerman (Moderator)

Special Writer, The Wall Street Journal

Hua Fan

Head of Fixed Income and Absolute Return Investment Department, China Investment Corporation (CIC)

Roxanne Martino

Partner, Chief Executive Officer & Investment Committee Chairperson, Aurora Investment Management

Colbert Narcisse

Managing Director & Head of Global Alternative Investments, Morgan Stanley

Leonard M. Tannenbaum

Chairman & Chief Executive Officer, Fifth Street Asset Management

Sarah Keohane Williamson

Partner & Director of Alternative Investments, Wellington Management Company

Notes from SALT Conference 2015 Panel II – ALTs Nation: The Proliferation Of Alternatives In The Modern Portfolio

Panel talking about why investors should invest in hedge funds….

Sarah Keohane Williamson – Not all investors are looking to beat an index,, and creating an alt portfolio can match an investors true investment goal

Leonard M. Tannenbaum – It is all about manager selection

Sarah Keohane Williamson – Looking for where alpha can be added with hedge funds and beta levels

Illiquidity premium

2.1 Trillion in dry powder — not allowing people to garner an illiquidity premium

Leonard M. Tannenbaum –  Corporate bond market spreads are very wide, a lot of illiquidity.  Hedge funds can be the market makers

Alternatives that dig in and do the analysis and can provide liquidity. Long only managers will stay away

Colbert Narcisse – Amount of capital HNW investors are investing in ALT’s is less than 5%, so still a long way to go bc they should be at 15-20%

Focus on manager selection and NET RETURNS

Way too much focus on fees

Faulty logic to assess funds vs the S&P

Solid managers should get more assets, bad managers

He would prefer to pay the full 2 and 20 for 20% returns than 80bps for 8% returns

Roxanne Martino – Hedge funds only own about 4% of the US equity market

She has heard the noise that their are too many hedge funds for the last 30 years

Hedge funds can make a huge impact and make a ton of money in the credit markets

We engage in heavy negotiations on fees – looking for cheaper fees

Taking an equity position, often times the managers are paying them to manage a big chunk of money

Hua Fan – Hedge funds provide a better risk adjusted return

2.9Trillion in hedge funds, but total assets out is like 300 Trillion

Sarah Keohane Williamson – Interesting oppty in energy, a lot of winners and losers in that space!

Roxanne Martino – Focused on event driven

Focused on long/short specialists (sector specialists)

A real opportunity to invest in some start up managers

Hua Fan – Adding china to the MSCI is just a matter of time

Amount of chinese with a brokerage account is SKY ROCKETING

What tips do you have to find managers who add alpha:

Sarah Keohane Williamson – Ask why they should make the return? Too many REALL smart people in this business, that does not cut it anymore

Most managers can’t answer that questions

Leonard M. Tannenbaum – Only speaking to private equity – invest in operators, stay in the top quartile of PE managers

Colbert Narcisse – Looking for infrastructure, well balanced team, rigorous investment debates internally and the ability for the manager to have at the firm

Roxanne Martino – Why does this manager have an edge? solid business and compliance

Need to have the edge in order to stay with the manager

CALPERS decision to fire all hedge funds is causing all allocators to take a step back and have a strong internal debate

Overall pension plans are increasing their allocation to hedge funds, not decreasing

Pensions are matching assets and liabilities

Public funds are so under funded they are looking for high returns

CALPERS decision is one off and circumstantial –every situation is different and lots of politics in pension plans