Michael Dubin, Silvercrest Asset Management

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  • 1. WAISC 2009 Shifting Sands: Evolving Hedge Fund Industry Michael Dubin CEO & CIO, SAM Alternative Solutions Silvercrest Asset Management September 2009
  • 2. Overview • Broken Hedge Fund Model: Needs Correction • Story of Misalignments  Investors  Hedge Funds  Investment Teams • How to Protect Yourself
  • 3. Where are we Headed? • Industry AUM: from $1 T to $2.5 T in 5 years • New hedge fund paradigm: Not an asset class • Evolving hedge fund classifications  Directional; Market Neutral; Illiquid • Evolving hedge fund models  Simple, Multi-Strategy, Blend with Traditional • Re-aligned hedge fund structure  Liquidity; Fees • Basic Value Proposition for Fund of Funds
  • 4. Changing Hedge Fund Paradigm • Past  Separate asset class  Absolute return – all Alpha, no Beta  Portable alpha  Flaw: more Beta than Alpha • New paradigm  Link to traditional asset classes  Liquid Alpha generators  Separation of Alpha and Beta
  • 5. Evolving to Three Basic Classifications • Directional  Liquid + High Beta  L/S Equity; L/S Fixed Income (loans/high yield bonds) • Market Neutral  Liquid + No Beta  Macro/ market neutral/ L/S equity/ stat arb/ relative value/CTAs • Illiquid  Hybrid, private-equity like  Longer investment horizon  Distressed/ event-driven/ special situations/ activist/ merger arb
  • 6. What About the Flawed Structure? • Timing Mismatch  Terms: Fixed calendar year  Not = investment horizon or portfolio liquidity • Incentives Asymmetry  Excessive risk taking  Suspended redemptions; business closures  Investor fears = Redemptions • Rigid terms • Management team disincentives  Cash bonuses to investment teams; Not aligned with investors
  • 7. Revised Structure: Liquidity • Objective  Align: portfolio, investor requirements & investment horizon  Separate investor groups: “liquidity hungry” vs.“low-liquidity” investors • Separate Portfolios by Liquidity  Liquidity buckets: different classes & fees  No gates/ calendar year locks • Rolling Lock-ups  No redemption surge = business stability • More Managed Accounts  Transparency & liquidity
  • 8. Revised Structure: Fees • Objective  Align investor interests with investment horizon • Management Fees  Scale to size of investment • Incentive Fees  Payout linked to investment horizon  Linked to liquidity  Incorporate a fee deferral • Hurdle Rates  Cash as hurdle rate; especially for high Beta
  • 9. Revised Structure: Compensation • Objective  Align management team compensation • Compensation  Primarily from incentive fees  Long-term payouts • Stake in Business  Upside from success of business  Reduce excessive risk taking
  • 10. Evolution to Transparent Hedge Funds • Objective  Transparency about strategies  Transparency about positions  Cleaner due diligence • Evolution Toward Simpler Models  Single Strategy  New Multi-Strategy  Blend with Traditional
  • 11. More Focus on Basic Value Proposition • Manager Sourcing • Manager Due Diligence  Reference checking + on-site due diligence  Manager research • Ongoing Monitoring • Appropriate Diversification  Portfolio construction  Asset allocation
  • 12. Packaging the Value Proposition • Past  Comingled vehicles  Diverse portfolios • Future  Customized solutions  Respond to investor perceptions  Growth of boutique approaches
  • 13. Conclusion • Demand for due diligence, transparency and liquidity • Hedge funds important in asset allocation • Alignment of interests is occurring • Simpler models are evolving • AUM growth will return • Diversified portfolios will dominate • Customized solutions will complement Fund-of-Funds