Pension Reserves Investment Management Board
84 State Street, Suite 250
                                                  ...
PENSION RESERVES INVESTMENT MANAGEMENT BOARD
     84 State Street, Suite 250, Boston, Massachusetts 02109

               ...
Table of Contents
     Hedge Fund of Funds _________.........................................................................
as participating and purchasing systems). The PRIT Fund's primary investment objective
is to accumulate assets through inv...
than 15 per cent of its revenues from the sale of tobacco products.” The legislation also
       required the PRIT fund to...
accordance with this RFP, are subject to these investment guidelines, as well as others
      whenever appropriate.

IV.  ...
B.     Required Attachments and Enclosures.

In addition to the responses to the RFP questions, the following information ...
(6) Confidentiality of certain records. Any documentary material or data made or
received by any person of the state inves...
RFP with any employee of PRIM’s custodian, other PRIM managers, consultants, or
        PRIM’s legal counsel or other advi...
A member of the Search Committee may make a due diligence site visit to the finalists'
       offices.  The Search Committ...
VIII. MINIMUM CRITERIA.

   A Proposer must meet the following minimum qualifications to be given further
   consideration...
B.   Basic Minimum Qualifications: Alpha Generating Hedge Fund Investment
     Management Services.

              All fir...
IX.    SELECTION CRITERIA.

       PRIM will apply the following criteria in the selection of an investment manager(s) for...
d.   Stability of the firm's professional base, as measured by personnel
                turnover since March 31, 2003.

 ...
U.S. EQUITY PORTABLE ALPHA
             INVESTMENT MANAGEMENT SERVICES


               PRODUCT NAME:


               PRO...
Please note that “subject product” refers to the specific U.S. Equity Beta Overlay product
that is being proposed.




   ...
A.   COMPANY BACKGROUND AND GENERAL DESCRIPTION

 1. Indicate your firm’s fiduciary classification:

                   Ba...
9. Describe the material developments in your organization (changes in ownership,
          personnel, business, etc.) ove...
7. Provide the client name, address, phone number, contact name, title, and account type
        (e.g. defined benefit, de...
Name             Responsibilities     Exp     Firm     Designations       Body/School



  4. What personnel or organizati...
D.   INVESTMENT PHILOSOPHY, POLICY AND PROCESS

       1. Describe your firm’s investment philosophy and process for beta ...
9. How do you minimize tracking error? What do you expect the tracking error to
   be? How much is due to costs of derivat...
18. What brokerage/counterparty requirements are required for this service? Which
              firms would be utilized an...
were/are their job responsibilities? For personnel who have left indicate job titles and
     years with the firm and who ...
1. How many compliance professionals support the subject product?              Please specify
        locations.

     2. ...
TAB 2-Quarterly and Monthly Performance) AND SUBMIT IT WITH YOUR
RESPONSE. PLEASE DO NOT CHANGE THE SPREADSHEET FORMAT.


...
TABLE#1

                                    Beta Overlay Management

                   2006 2005 2004 2003 2002 2001 200...
2006    2005    2004    2003   2002    2001    2000    1999
             Assets in Composite
             Number of Accts
...
SECTION II: ALPHA GENERATING HEDGE FUNDS (FUND OF FUNDS AND
MULTI-STRATEGY MANAGERS)

   Please fill out this section if y...
A.   COMPANY BACKGROUND AND GENERAL DESCRIPTION

1. Indicate your firm’s fiduciary classification:

                    Ba...
other pertinent activities, actions, or relationships not specifically outlined in this
        question. Also disclose an...
2001   2002   2003    2004    2005    2006
1.   (a) Total assets under management
         (all products) ($millions)

   ...
9. Describe the objectives of your firm with respect to future growth in the product,
        commenting on:
          • M...
4. Provide a list of the professionals involved in the subject product in the manner listed
       below:


PORTFOLIO MANA...
9. What is the dollar amount and percent of the fund that is invested by the General
       Partner? Discuss the total amo...
   Beta to S&P 500
              Beta to Lehman Aggregate
              Correlations with S&P 500
              Correl...
8. Describe your portfolio construction process. Include in your discussion the qualitative
   and quantitative processes ...
 Do you use cash as a method of risk control? Indicate how much cash is
         generally held in the portfolio.
       ...
19. Do you currently work with any beta overlay providers on a portable alpha mandate?
       Explain.

   20. Are you abl...
   Fill out the strategy allocations in the table below.

Strategy Allocations
                                 Portfolio...
   Have you encountered position limit problems? Explain.

6. Please provide a sample portfolio.

7. Discuss you buy/sell...
   Annual portfolio turnover

11. Discuss use of leverage:
      What is the rationale for use of leverage in the fund? ...
 Auditor’s fee to equity ratio

14. Comment on volatility:
      How volatile is the fund relative to its peers? If more...
provide the Custodian reports of net asset value by the fifth business day after month
           end and monthly performa...
6.     Discuss the causes and impact of any turnover (departures or hiring/promotions) of any
       operations profession...
Pension Reserves Investment Management Board
Pension Reserves Investment Management Board
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Pension Reserves Investment Management Board
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Pension Reserves Investment Management Board

  1. 1. Pension Reserves Investment Management Board 84 State Street, Suite 250 Timothy P. Cahill, Chair Boston, Massachusetts 02109 Michael Travaglini, Executive Director April 17, 2006 Dear Potential Provider: The Massachusetts Pension Reserves Investment Management Board (PRIM) is requesting proposals from qualified firms interested in providing U.S. equity portable alpha investment management services. In order for proposals to be considered by PRIM, each prospective provider must respond to the Request for Proposals by submitting an electronic copy of its proposal via e-mail by 3:00 p.m., EDT, Wednesday, May 17, 2006 to afinkelstein@mapension.com. In addition, an original and 1 copy of the proposal should be sent to: Amy Prehn Finkelstein Investment Officer Pension Reserves Investment Management Board 84 State Street, Suite 250 Boston, Massachusetts 02109 Further instructions for proposal submission, including information regarding the number of copies to be sent to Cliffwater LLC, are included in the Request for Proposals. Questions concerning the Request for Proposals must be submitted by 3:00 p.m., EDT, Friday, May 5, 2006. We appreciate the time and effort required to respond to this Request for Proposal. Each firm submitting a proposal to PRIM can be assured that the same time and effort will be expended in evaluating the proposals that are submitted for consideration. We look forward to your response. Sincerely, Michael Travaglini Executive Director 1
  2. 2. PENSION RESERVES INVESTMENT MANAGEMENT BOARD 84 State Street, Suite 250, Boston, Massachusetts 02109 Timothy P. Cahill, Chair Michael Travaglini, Executive Director REQUEST FOR PROPOSALS U.S. EQUITY PORTABLE ALPHA INVESTMENT MANAGEMENT SERVICES April 2006 2
  3. 3. Table of Contents Hedge Fund of Funds _________....................................................................................15 Multi-Strategy Hedge Fund _________............................................................................15 Pension Reserves Investment Management Board REQUEST FOR PROPOSALS U.S. EQUITY PORTABLE ALPHA INVESTMENT MANAGEMENT SERVICES I. INTRODUCTION. The Massachusetts Pension Reserves Investment Management (PRIM) Board is soliciting proposals from firms interested in providing U.S. Equity Portable Alpha Investment Management Services. The Board seeks to select firms to provide 1) beta overlay management services and 2) alpha generating hedge fund investment management services. More detailed descriptions of these services are set forth under the heading "SCOPE OF SERVICES". II. BACKGROUND INFORMATION. A. Legal Structure of PRIM. The Pension Reserves Investment Management (PRIM) Board is charged with the responsibility of investing and reinvesting the assets of the Pension Reserves Investment Trust (PRIT) Fund. The PRIT Fund is a pooled investment fund consisting of the assets of the State Employees' and Teachers' Retirement Systems as well as assets of other public employee retirement systems in the Commonwealth of Massachusetts (referred to 3
  4. 4. as participating and purchasing systems). The PRIT Fund's primary investment objective is to accumulate assets through investment earnings and other revenue sources to meet future pension liabilities. As of February 28, 2006, the PRIT Fund had assets of approximately $41.5 billion. PRIT funds are generally invested with a longer-term perspective and higher target returns than most retirement systems. The Fund was originally established to address the unfunded liability of the pension system. The Massachusetts State Teachers’ and Employees’ Retirement Systems Trust Fund (“MASTERS”) merged into the PRIT Fund as of December 31, 1996. The nine-member PRIM Board is chaired by the State Treasurer and Receiver-General of the Commonwealth, Timothy P. Cahill. The Governor or his designee is also a member of the Board. Other members include appointees of both the Governor and Treasurer, and four representatives of State employees and teachers. All members serve without compensation. The Board oversees the Fund under the terms of its Operating Trust dated July 15, 1988 and most recently amended on September 22, 1998. The members of the Board, in conjunction with the Executive Director, who serves at the pleasure of the Board, determine policies and make decisions concerning the administrative and investment operations of the Fund. The PRIM Board has established advisory committees, Investment, Administration/Audit and Real Estate/Timber, to provide a broader range of input to the Board on an informal basis. These committees are generally comprised of two or three Board members and private citizens with investment or business expertise. PRIM's investment managers deal primarily with the staff and Investment Committee. All policies and investments are ultimately approved by the Board. B. PRIM’s Advisors. Outside advisors are engaged for their particular expertise and retained to assist the Board and its staff in the areas of General Portfolio Strategy and Investments, Real Estate, and Private Markets. Cliffwater LLC is PRIM's general consultant as well as the hedge fund consultant, Pathway Capital is the alternative investment consultant, and The Townsend Group and Morris & Morse provide real estate consulting services. KPMG is the Fund’s auditor. In addition, Deloitte & Touche audits the Real Estate and Timber portfolios. Mellon Trust is the Fund's custodian and is responsible for providing record- keeping and analytic performance valuations for the Fund. C. General Description of PRIM’s Assets. Exhibit A includes a description of PRIM’s asset allocation as of February 28, 2006. D. Tobacco Divestiture On October 7, 1997, the Massachusetts legislature enacted legislation, H. 3905 that forbids the PRIT Fund from purchasing securities “of any company which derives more 4
  5. 5. than 15 per cent of its revenues from the sale of tobacco products.” The legislation also required the PRIT fund to divest itself of all such securities within three years; this divestment was largely completed before the end of 1997. PRIM provides investment managers with a quarterly listing of these restricted securities. III. SCOPE OF SERVICES. In February, 2006, the PRIM Board approved a 5% (approximately $2 billion) allocation to U.S. Equity Portable Alpha. The purpose of this Request for Proposal is to select one or more firms to provide 1) beta overlay management services and 2) alpha generating hedge fund investment management services. 1) Beta Overlay PRIM will achieve the beta, either S&P 500 or Dow Jones Wilshire 5000, through a notional investment in futures and/or swap contracts. PRIM staff anticipates that 20% of the approximately $2 billion portfolio may be reserved for cash margins. The beta overlay provider may be a traditional beta overlay manager or a hedge fund of fund of funds with beta overlay capabilities, and may submit a proposal to manage only the beta overlay management services or both the beta overlay management and the alpha generating hedge fund investment management services. PRIM is seeking one beta overlay manager for the full $2 billion program. 2) Alpha Source PRIM will achieve alpha by investing approximately $1.6 billion in a portfolio of hedge fund of funds and multi-strategy hedge fund managers. Over 60% of the alpha source will be deployed through hedge fund of funds managers, and up to 40% may be deployed through multi-strategy managers. The alpha generating hedge fund managers should produce alpha of LIBOR + 3%, net of fees, with volatility over the last five years less than 6% and a sharpe ratio greater than 1. PRIM’s goal via this search is to retain multiple alpha generating hedge fund of funds and multi-strategy managers and construct a well-diversified portfolio with conservative risk and return expectations that exhibit low correlations and low beta to the S&P 500. For the aggregate alpha component of the overall portable alpha program, expected returns are 6.85% , expected risk is 4.64%, and beta to the S&P 500 is less than .2. PRIM’s objective in launching a U.S. Equity Portable Alpha program is to complement other asset classes in the portfolio and minimize potential volatility of the fund while continuing to maximize returns. Proposals submitted for other strategies will NOT be accepted. PRIM may select investment advisers based on PRIM’s evaluation of the Proposals in accordance with the Selection Criteria contained in Section IX of this Request for Proposal. Investment advisers selected to perform these services will be required to perform the following additional services for PRIM: (1) submit monthly asset, transaction and performance statements within two weeks of each calendar month end; (2) attend semi-annual performance reviews in Boston, Massachusetts; and (3) participate in annual site visits. Currently, all funds of PRIM, including the funds to be managed in 5
  6. 6. accordance with this RFP, are subject to these investment guidelines, as well as others whenever appropriate. IV. MANAGEMENT AGREEMENT. PRIM will require that the manager or managers selected enter into its standard investment management agreement (the “Agreement”), including the appropriate investment guidelines and reporting requirements. A sample Beta Overlay Agreement and a Sample Hedge Fund Agreement are attached to this RFP as Exhibit B. Each firm responding to this RFP shall be required to state under the Representations and Warranties, set forth in Section XII hereof, that it will agree to and execute a contract containing the provisions set forth in Exhibit B. V. PROPOSAL SPECIFICATIONS. A. Proposal Deadline. The completed proposal, which must include all attachments, must be delivered electronically via e-mail to afinkelstein@mapension.com by 3:00 p.m. EDT on Wednesday, May 17, 2006 (the “Proposal Deadline”) to PRIM. Any Proposal delivered after the Proposal Deadline will not be considered. In addition, an original and one copy of the Proposal should be sent to PRIM as listed below: Amy Prehn Finkelstein Investment Officer Pension Reserves Investment Management Board 84 State Street, Suite 250 Boston, Massachusetts 02109 In addition, please send via e-mail your proposal to kbarchick@cliffwater.com and send one hard copy to the following representative of PRIM’s hedge fund consultant: Kathleen Barchick Managing Director Cliffwater LLC Marina Towers 4640 Admiralty Way, Suite 1101 Marina del Rey, CA 90292 The questions and/or requests made in this RFP should be duplicated in their entirety in the Proposal with each question and/or request repeated before the answer or response. Copies of this RFP can be obtained electronically through the PRIM Board website at www.mapension.com. 6
  7. 7. B. Required Attachments and Enclosures. In addition to the responses to the RFP questions, the following information will be attached to the firm’s response. 1. Cover Letter. The Proposal must be accompanied by an original and one (1) copy (one unbound) of a cover letter and one copy sent via e-mail, which will be considered an integral part of the Proposal, and which shall be signed by at least one individual who is authorized to bind the firm contractually. This cover letter must include: (a) the firm name, address and telephone/fax numbers; (b) the client contact; (c) the title or position which the signer of the cover letter holds in the firm; and (d) a statement to the effect that the Proposal is a firm and irrevocable offer of the firm. 2. Representations and Warranties. The Warranties contained in Section XII hereof, signed by an authorized officer of the firm, must be included as an attachment to the cover letter referenced in (1) above. YOUR SIGNATURE IS CONSIDERED BINDING, AND A SIGNED REPRESENTATIONS AND WARRANTIES MUST ACCOMPANY YOUR SUBMISSION OR IT MAY NOT BE PROCESSED. 3. Disclosure Statement. Attached to this RFP as Exhibit C are two Disclosure Statements, one for PRIM and one for PERAC. Each firm submitting a Proposal must complete the two disclosure forms and submit as an attachment to the cover letter referenced in (1) above. YOU MUST COMPLETE BOTH PRIM AND PERAC DISCLOSURE FORMS OR YOUR SUBMISSION MAY NOT BE PROCESSED. 4. Fee Proposal. The original and one copy of the fee proposals (one copy must be unbound and ready to photocopy) and one copy sent via e-mail of the proposing firm, on the forms contained in Section XI hereof (the “Fee Proposals”) must be placed in a separate, sealed envelope, clearly identified on the outside as “Fee Proposal submitted by (COMPANY NAME).” Also include one copy to Cliffwater LLC. 3. Any additional material must be submitted separate from the response. C. Public Record. In accordance with Chapter 66, Section 10 and Chapter 4 of the Massachusetts General Laws, upon the expiration of the Proposal Deadline, all Proposals shall be deemed a public record and shall be subject to requests for public disclosure. However, please note Section 23 of chapter 32 of the General Laws as most recently amended by Section 3 of chapter 502 of the Acts of 2002, was recently further amended by adding after subdivision (5), the following subdivision: 7
  8. 8. (6) Confidentiality of certain records. Any documentary material or data made or received by any person of the state investment (PRIM) board, which consists of trade secrets or commercial or financial information that relates to the investment of public trust or retirement funds, shall not be disclosed to the public if disclosure is likely to impair the government's ability to obtain such information in the future or is likely to cause substantial harm to the competitive position of the person or entity from whom the information was obtained. The provisions of the open meeting law shall not apply to the PRIM Board when it is discussing the information described in this paragraph. This subdivision shall apply to any request for information covered by this subdivision for which no disclosure has been made by the effective date of this subdivision. D. Withdrawal/Irrevocability of Responses. A proposer may withdraw and resubmit a Proposal prior to the Proposal Deadline. No withdrawals or re-submissions will be allowed after the Proposal Deadline. E. Waiver/Cure of Minor Informalities, Errors and Omissions. PRIM reserves the right to waive or permit cure of minor informalities, errors or omissions prior to the selection of finalists, and to conduct discussions with any qualified proposers and to take any other measures with respect to this RFP in any manner necessary to serve the best interest of PRIM and its beneficiaries. F. Communications with PRIM. PRIM’s Procurement Officer for this RFP is: Ms. Amy Prehn Finkelstein Investment Officer Pension Reserves Investment Management Board 84 State Street, Suite 250 Boston, Massachusetts 02109 Telephone: (617) 946-8454 Facsimile: (617) 946-8475 afinkelstein@mapension.com As of April 17, 2006, firms which intend to submit a Proposal should not contact any PRIM staff, members of the Investment Committee, members of the PRIM Board, or employees of the Massachusetts Treasury, other than the Procurement Officer. An exception to this rule applies to firms which currently do business with PRIM, such as PRIM’s current investment managers, but any contact made by such firms with persons other than the Procurement Officer must be limited to that business, and must not relate to this RFP. In addition, firms which intend to submit a Proposal should not discuss this 8
  9. 9. RFP with any employee of PRIM’s custodian, other PRIM managers, consultants, or PRIM’s legal counsel or other advisors. FAILURE TO OBSERVE THIS RULE IS GROUNDS FOR DISQUALIFICATION. G. Questions Relating to this RFP. All questions concerning this RFP must be received by the Procurement Officer by 3:00 p.m. EDT on Friday, May 5, 2006 (the "Question Deadline) via e-mail. Questions received in accordance with this section will be answered and circulated by e-mail to all firms who have proposed a question or who request in writing a copy of the questions and the responses. Questions submitted after the Question Deadline will not be considered. H. Incurring Costs. PRIM will not be liable for any costs incurred prior to entering into the Contract with the successful proposer or proposers. I. Rejection of Proposals. PRIM reserves the right to reject any non-qualifying Proposal, as well as the right to reject all Proposals submitted under this request for proposal. VI. SELECTION PROCESS. The Selection Process under this RFP will be as follows: A. Non-Qualifying Proposals. PRIM will evaluate each Proposal to determine if it was submitted in accordance with the requirements set forth in this RFP, including whether the proposing firm meets the minimum criteria. All non-qualifying Proposals not subject to the waiver/ cure of minor information will be rejected at this time and the proposing firm so notified. B. Selection of Finalists. The Proposals will be evaluated by a Search Committee to be formed by the PRIM Board. It is anticipated that the Search Committee shall include a member of the Investment Committee or its representative, as well as PRIM staff. Proposers may be invited to a due diligence interview with the Search Committee. Based on the Selection Criteria set forth in Section IX of this RFP (including the Fee Proposals), the Search Committee will select finalists to serve as investment manager to PRIM. C. Selection of Investment Managers. 9
  10. 10. A member of the Search Committee may make a due diligence site visit to the finalists' offices. The Search Committee shall then rank the finalists and make its recommendations for selecting an investment manager to the PRIM Investment Committee and the PRIM Board. The finalists selected by the Search Committee may be required to make an oral presentation to the Investment Committee, the PRIM Board, or both. The Investment Committee may accept the recommendations of the Search Committee or, based on the Selection Criteria set forth in Section IX of this RFP, may rank the firms differently from the Search Committee and recommend another firm or firms to provide investment management services to PRIM. The engagement will be awarded by the PRIM Board. VII. TENTATIVE TIME TABLE. The following is the tentative time schedule for PRIM’s search for firms to provide investment management services. All dates are subject to modification by PRIM with notice. Issuance of RFP: April 17, 2006 RFP Question Deadline: May 5, 2006 (Firm) 3:00 p.m. EDT RFP Response Deadline: May 17, 2006 (Firm) 3:00 p.m. EDT Notification of Finalists: Week of June 5, 2006 (Tentative) Search Committee June 14, 2006 and June 15, 2006 Interviews**: (Tentative) Investment Committee July 18, 2006 Interviews**: (Tentative) PRIM Board Meeting**: August 3, 2006 (Tentative) Projected September 1, 2006 Commencement Date: ** If selected, please plan to be in Boston for interviews by the Search Committee, Investment Committee, and the Board on these specific dates. 10
  11. 11. VIII. MINIMUM CRITERIA. A Proposer must meet the following minimum qualifications to be given further consideration in PRIM’s search for an investment manager(s). Failure of a firm to meet the minimum qualifications applicable to the investment management services for which it is submitting a Proposal will result in the Proposal’s immediate rejection. Section A is to be completed by firms submitting a response for the Beta Overlay Management Services. Section B is to be completed by firms submitting a response for the Alpha Generating Hedge Fund Investment Management Services. If firms are responding to both services, both sections should be completed. A. Basic Minimum Qualifications: Beta Overlay Management Services All firms must meet the minimum criteria below: 1. The investment professionals must have at least a two-year performance history in the beta overlay strategy being proposed as of March 31, 2006. 2. The investment professionals whose performance history is submitted must be the team responsible for the management of this account. 3. The candidate must be responsible for managing at least $500 million in the beta overlay strategy being proposed as of March 31, 2006. 4. The candidate must be willing to act as a fiduciary as defined by Chapter 32 of the Massachusetts General Laws. If the candidate is SEC registered, the firm must submit its full Form ADV (Parts I and II). 5. The candidate firm must have at least one tax-exempt institutional client invested in the beta overlay strategy being proposed, as of March 31, 2006. 6. The candidate must have been in operation as an investment management organization for at least six months as of March 31, 2006. 7. The candidate must be willing to include the attached representations and warranties in the contract if selected as the manager to the PRIM Board. 11
  12. 12. B. Basic Minimum Qualifications: Alpha Generating Hedge Fund Investment Management Services. All firms must meet the minimum criteria below: 1. The investment professionals must have at least a two-year performance history in the alpha strategy being proposed as of March 31, 2006. 2. The investment professionals whose performance history is submitted must be the team responsible for the management of this account. 3. The candidate must be responsible for managing at least $300 million in the alpha strategy being proposed as of March 31, 2006. 4. The candidate must be willing to act as a fiduciary as defined by Chapter 32 of the Massachusetts General Laws. If the candidate is SEC registered, the firm must submit its full Form ADV (Parts I and II). 5. The candidate firm must have at least one tax-exempt institutional client invested in the alpha strategy being proposed, as of March 31, 2006. 6. The candidate must have been in operation as an investment management organization for at least six months as of March 31, 2006. 7. The candidate must be willing to include the attached representations and warranties in the contract if selected as the manager to the PRIM Board. 12
  13. 13. IX. SELECTION CRITERIA. PRIM will apply the following criteria in the selection of an investment manager(s) for both the beta overlay management and alpha generating hedge fund investment management services. The Search Committee will assign a rating of either "Highly Advantageous", "Advantageous", "Acceptable", "Not Advantageous" or "Unacceptable" to all qualifying Proposals in each of the categories listed below. Any Proposal receiving a rating of "Unacceptable" in any applicable category will not be considered further. Using these ratings as a guide, the Search Committee will select finalists to move to the next stage of the Selection Process and recommend the retention of an investment manager to the Investment Committee. For a more detailed description of the Selection Process, see Section VI hereof. A. Basic Selection Criteria Applicable to all Proposing Firms 1. Stability and General Experience of the Firm. a. Stability of the firm, as measured by the quality of the organizational structure of the firm; the existence of, or potential for, significant developments in the firm; and the expected financial stability of the firm. b. Experience of the firm in providing investment management services to similar institutional investors, as measured by the firm's history of providing such services; and the similarity of a firm's clients to PRIM. c. Adverse organizational issues, such as the existence of litigation or other investigations; and the existence of financial problems. 2. Quality, Stability, Depth and Experience of Personnel. a. Experience of portfolio manager(s) in providing similar services to similar institutional investors, as measured by the length of time the portfolio manager(s) has served as a portfolio manager to such investors; demonstrated expertise in providing such services to other such investors; demonstrated organizational skills, and demonstrated ability to interact with both the staff and oversight body of pension funds. b. Experience of professionals in providing investment management services as measured by the length of time dedicated support staff have provided such services to similar institutional investors. c. Depth of personnel, as measured by the firm's account/portfolio manager and account/investment management personnel ratios; and back-up procedures for providing services to PRIM in the absence of the portfolio manager(s). 13
  14. 14. d. Stability of the firm's professional base, as measured by personnel turnover since March 31, 2003. 3. Client Relations and References a. Stability of the firm's client base, as measured by the number of accounts gained or lost since March 31, 2003. b. Quality of references from clients, as measured by responses relating to quality and responsiveness of investment management services; knowledge and accessibility of the portfolio manager(s); and the quality of client services. 4. Philosophy/Process a. Philosophy and portfolio characteristics that are consistent with the overall structural objectives of the asset class as measured by the investment characteristics of the portfolio, and that appropriately complement the existing PRIM portfolio. b. Defined philosophy and consistent process implementation, as measured by return consistency, distinct buy/sell disciplines, portfolio construction methodology, and the implementation of risk controls. 5. Performance and Fees a. The total cost of performing investment advisory services as measured by the Fee Proposal. b. The historical performance of the product as measured by its cumulative and annual performance compared to appropriate benchmarks as appropriate for a manager’s style over multiple time periods. c. Fit with PRIM’s objective to complement other asset classes in the portfolio and minimize potential volatility of the fund while maximizing returns. X. QUESTIONNAIRE 14
  15. 15. U.S. EQUITY PORTABLE ALPHA INVESTMENT MANAGEMENT SERVICES PRODUCT NAME: PRODUCT TYPE (please check all that apply) Beta Overlay Provider _________ Alpha Generating Hedge Fund Provider _________ Hedge Fund of Funds _________ Multi-Strategy Hedge Fund _________ FIRM NAME: ADDRESS: TELEPHONE #: FACSIMILE #: E-MAIL ADDRESS: CLIENT CONTACT: SIGNED: Name (print): Title: Date: SECTION I: BETA OVERLAY MANAGEMENT SERVICES Please fill out this section if you wish to submit a proposal for the beta overlay management services or if you are submitting a combined proposal for both services. 15
  16. 16. Please note that “subject product” refers to the specific U.S. Equity Beta Overlay product that is being proposed. 16
  17. 17. A. COMPANY BACKGROUND AND GENERAL DESCRIPTION 1. Indicate your firm’s fiduciary classification: Bank Insurance Company Registered Investment Advisor (Investment Advisors Act of 1940) Affiliate of Fiduciary (Name and Classification): Other: 2. Give a brief history of the firm including the month and year of SEC 1940 Act registration, the month and year the firm began managing U.S. equity beta overlay assets, and the month and year the firm began managing U.S. equity beta overlay assets for U.S. tax-exempt clients. 3. Describe the ownership of the firm, including but not limited to ownership structure and affiliated companies or joint ventures. If the firm is an affiliate, designate percent of parent firm’s total revenue generated by your organization, if a joint venture partner, identify the percentage of ownership and revenues recognized by each partner to the combined association. 4. Provide an organizational chart diagramming the relationships between the professional staff as well as the parent-subsidiary, affiliate, or joint venture entities. 5. Describe the levels (U.S. dollar amounts) of coverage for SEC-required (17g-1) fidelity bonds, errors and omissions coverage and any other fiduciary coverage, which your firm carries. List the insurance carriers supplying the coverage. 6. Over the past five years, has your organization or any of its affiliates or parent, or any officer or principal been involved in any business litigation, regulatory or legal proceedings? If so, provide a detailed explanation and indicate the current status. Also provide complete Form ADV (Parts I and II). 7. Describe in detail any potential conflicts of interest your firm may have in the management of this account. Include any activities of affiliated or parent organizations, brokerage activities, investment banking activities, or any past or current relationships with PRIM Board members and investment staff. Include any other pertinent activities, actions, or relationships not specifically outlined in this question. Also disclose any business relationship with Cliffwater LLC. 8. Describe all outside marketing/sales services (including product design and development) for which your firm has contracted over the last three years for the marketing of your investment services to the institutional, tax-exempt market. Specify any such arrangements as they relate to the product being proposed. Indicate whether the fees paid for such services are charged to client portfolio assets. 17
  18. 18. 9. Describe the material developments in your organization (changes in ownership, personnel, business, etc.) over the past three years in detail. 10. Do you have a plan and arrangements in place for an alternative worksite should your facilities become inoperative because of fire, earthquake, etc. Describe. 11. Describe your firm’s overall business strengths, weaknesses and uniqueness. B. NOTIONAL ASSETS UNDER MANAGEMENT 12/31 12/31 12/31 12/31 12/31 3/31 2001 2002 2003 2004 2005 2006 1(a) Total assets under management (all products) ($millions) (b) Total institutional (taxable & non-taxable) assets in beta overlay products ($ millions) (c) Total institutional (taxable & non-taxable) assets in U.S. Equity beta overlay ($ millions) (d) Total assets managed in U.S. Equity beta overlay for U.S. tax-exempt clients in separate accounts ($ millions) Number of Separate Accounts 2. Please list 5 largest U.S. tax-exempt U.S. Equity beta overlay accounts currently managed, including all public and ERISA fund clients, invested in the subject product. Include Name, Date of Inception, Market Value, Average Overlay Position, and Aggregate Underlying Portfolio Asset Value, as of 3/31/06. 3. List all clients and asset amounts gained in the subject product over the past three years as of March 31, 2006. 4. List all clients and asset amounts lost in the subject product over the past three years as of March 31, 2006. 5. What is the minimum account size you will accept on a separate account basis? 6. Identify three clients that have terminated accounts in the subject product over the past three years that can be contacted as references. Provide the firm name, contact person and title, phone number, product name, fund account value and reason for termination. 18
  19. 19. 7. Provide the client name, address, phone number, contact name, title, and account type (e.g. defined benefit, defined contribution, endowment) of three accounts, who are invested in the subject product that can be contacted as references. Also indicate the length of your relationship and assets under management for each reference. C. PEOPLE/ORGANIZATION 1. List the total number of persons in the subject product employed by discipline. Total Portfolio Managers Research Analysts Economists Marketing Trading Administration Client Service Other (Specify) Total 2. Please specify locations of portfolio managers and state the number of accounts each manages and include the dollar value of assets under management. Indicate those associated with U.S. tax-exempt accounts. 3. Provide a list of the professionals involved in the subject product in the manner listed below: PORTFOLIO MANAGEMENT Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School RESEARCH Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School TRADING Title/ Yrs Yrs @ Degrees/ Sponsoring 19
  20. 20. Name Responsibilities Exp Firm Designations Body/School 4. What personnel or organizational improvements are planned over the next years? 5. Provide biographies of no longer than one page on each of the persons listed in Question C.2. Please include prior employment history. 6. Provide a firm wide organizational chart. Also provide an organizational chart that diagrams the different functions (research, trading, etc.) dedicated to the product area. Professionals should be identified over their areas of responsibility. 7. Describe the compensation and incentive program for professionals directly involved in the product. How are they evaluated and rewarded? What incentives are provided to attract and retain superior individuals? • Identify the percentage of compensation which is:  Base salary  Performance bonus  Equity incentives  Other • Do you offer direct ownership, phantom stock, profit sharing, and/or performance bonus? • Who is eligible to participate? • On what basis are these incentives determined – is compensation tied to success factors such as asset growth, performance, or other factors? Please list and indicate the weight of each in determining total compensation. • How does your compensation structure/levels compare with other firms in the industry? 8. Discuss the causes and impact of any turnover (departures or hiring/promotions) of any professionals directly involved in the product you have experienced in the past five years. How long has the team been together? Indicate when and why any professional dedicated to the product left or joined the firm in the past three years. What were/are their job responsibilities? For personnel who have left indicate job titles and years with the firm and who replaced them. JOINED Date Name/Title Responsibilities DEPARTED Yrs @ Replaced by Date Name/Title Responsibilities Firm Reason for (name/title) leaving 20
  21. 21. D. INVESTMENT PHILOSOPHY, POLICY AND PROCESS 1. Describe your firm’s investment philosophy and process for beta overlay management. Why do you believe this philosophy will be successful in the future? Provide any evidence or research, which supports this belief. 2. Describe the history/evolution of your beta overlay services and discuss any changes in strategy, structure, etc. 3. Discuss the important factors to consider when evaluating beta overlay management and how your implementation improves fund performance and efficiency. 4. List the various strategies/benchmarks that you are capable of managing. 5. Explain your methodology for replication of U.S. Equity indices. Specifically, how do you gain exposure to the S&P 500 index? What are the allowable tolerance ranges? How do you gain exposure to the Dow Jones Wilshire 5000 index? What are the allowable tolerance ranges? What are the advantages/disadvantages of each approach? 6. Describe your proposed solution based on your understanding of PRIM’s program as outlined under Scope of Services. Do you recommend that PRIM gain index exposure through the S&P 500 or the Dow Jones Wilshire 5000? Do you recommend using futures and/or swaps to gain U.S. equity beta exposure? In what ratio? Why? What are the associated costs of each? Please include entry costs, annual holding costs, total cost of long position over 1 year, and expected annual tracking error. 7. If you recommend utilizing futures, please discuss how the use of such instruments is consistent with your approach, the advantages, potential risks, risk controls, and your expertise with these instruments. Please specifically address roll and basis risk due to tracking error. How do you mitigate these risks? How do you determine when to roll the contracts? How do you monitor that you are optimizing the roll? What are the capital requirements associated with this approach? What is the expected tracking error? 8. If you recommend utilizing swaps, please discuss how the use of such instruments is consistent with your approach, the advantages, potential risks, risk controls, and your expertise with these instruments. Please specifically address associated risks such as liquidity and counterparty risks as well as how you mitigate these risks. What type of settlement do you recommend (monthly, quarterly, annual)? Why? Do you recommend implementing intra-month triggers? 21
  22. 22. 9. How do you minimize tracking error? What do you expect the tracking error to be? How much is due to costs of derivatives and how much is due to benchmark mismatch? 10. What percentage of the program should be reserved for cash margins? Why? Is PRIM’s target of 20% reasonable? How would both initial and variation margin requirements be handled? Please describe in detail. 11. Please define your firm’s role in the broader context of the portable alpha program. How would your firm interact with PRIM’s alpha generating managers, consultant, custodian, and staff? What is your infrastructure to manage and monitor the exposure? What do you believe are the biggest challenges in facilitating this process? 12. Please describe how you would facilitate the rebalancing process. What type of transparency and information do you need from the alpha managers? Specifically, describe how you:  Provide ongoing beta exposure commensurate with total asset size of the portable alpha mandate  Adjust exposure based on performance of alpha managers relative to LIBOR  Monitor and neutralize undesired market exposure in the alpha program  Facilitate rebalancing between managers according to target ratios  Manage cash flows 13. Specify the approach you would use to measure and monitor the performance of the overlay program and impact on the overall portable alpha program. What type of return information and performance attribution will you provide on the total portable alpha portfolio? How would you expect to coordinate with the alpha generating hedge funds to ensure that overlay performance is properly reflected? 14. Describe your firm’s trading capabilities related to this product and specifically as it relates to futures and swaps. Provide a description of your trading platform, including systems (proprietary and off-the-shelf) for execution and processing. 15. Is your firm in a position where it may be on the other side of any given transaction? If so, what safeguards can you provide to ensure you are providing the best price to a client’s account? Please list any conflicts this activity creates and how your firm manages those conflicts. 16. How are you compensated for your activities in this area? How transparent is this compensation? Are commissions fully disclosed? Do you participate in the spread on any transactions? Do you have any arrangements with other funds or firms whereby you are compensated by trading with those firms? 17. Please list the various types and levels of costs associated (both implicit and explicit) with this type of trading. 22
  23. 23. 18. What brokerage/counterparty requirements are required for this service? Which firms would be utilized and how would they be selected? What is your role in preparing appropriate documentation such as ISDA Agreements? 19. If you have soft dollar relationships with broker-dealers/counterparties, please disclose the following: soft dollar policy and when last reviewed, percentage of trades executed tied to soft dollar relationships, and list of resources funded by soft dollars that would normally be funded with hard dollars. 20. Are you able to provide accurate, audited asset and transaction statements within 2-3 weeks of month's end? Explain. 21. What type of reporting do you provide around exposures and performance? 22. Describe the details of the process in establishing an overlay program, including a sample timeline. 23. What unique attributes does your firm or your product have that distinguish it from its competitors in the fulfillment of this assignment? What unique features of your investment approach do you feel add the most value over time? E. BACK-OFFICE/OPERATIONS/INTERNAL CONTROLS 1. How many back office operations professionals support the subject product? Please specify locations. 2. Provide a list of the professionals involved in the subject product in the manner listed below: BACK OFFICE OPERATIONS Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School 3. Provide biographies of no longer than one page on each of the persons listed in Question 2. Please include prior employment history. 4. Provide an organizational chart that diagrams the different operations functions dedicated to the product area. Professionals should be identified over their areas of responsibility. 5. Discuss the causes and impact of any turnover (departures or hiring/promotions) of any operations professionals directly involved in the product you have experienced in the past five years. How long has the team been together? Indicate when and why any operations professional dedicated to the product left or joined the firm in the past three years. What 23
  24. 24. were/are their job responsibilities? For personnel who have left indicate job titles and years with the firm and who replaced them. JOINED Date Name/Title Responsibilities DEPARTED Yrs @ Replaced by Date Name/Title Responsibilities Firm Reason for (name/title) leaving 4. Provide a detailed summary of your firm’s internal control structure. Does the firm conduct periodic risk assessment? Provide a copy of SAS 70 if available, or other internal control review documentation, preferably prepared by an independent third party. 5. Provide copies of the firm’s most recent audited financial statements and auditor’s management letter. 6. Describe the following back office and operational processes:  Are any back-office operations outsourced? If outsourced, what are the details of the agreement, including the economics of the relationship?  Does the firm have an existing relationship with PRIM’s custodian bank? How does PRIM’s custodian compare to others? How often are investment positions and cash reconciled with custodians?  Are trading policies and procedures for all investment strategies adequately documented? What type of trading system is utilized? Is the system proprietary or commercial?  How much price discretion do traders have? How are trades allocated among accounts? At what point are trades allocated? How are executed trades communicated to the portfolio accounting system? Is the information automatically transmitted? How do you ensure all trade information is captured? Describe internal controls in place designed to limit potentially harmful activities of your firm’s traders and other investment professionals.  Discuss how the securities in your portfolio are valued.  Is a Pricing Group employed that is separate and district from the investment management and operations functions? Are pricing policies and valuation procedures documented and current? F. COMPLIANCE/REGULATORY 24
  25. 25. 1. How many compliance professionals support the subject product? Please specify locations. 2. Provide a list of the professionals involved in the subject product in the manner listed below: COMPLIANCE Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School 3. Provide biographies of no longer than one page on each of the persons listed in Question 2. Please include prior employment history. 4. Provide a detailed summary of your firm’s compliance regime. Has the firm established written policies and procedures in accordance with SEC Rule 206(4)-7? Has the firm developed a process for evaluating the adequacy and effectiveness of these policies and procedures? How often are they reviewed for adequacy and effectiveness? How often are compliance policies and procedures updated? 5. Does your firm have a designated Chief Compliance Officer in accordance with SEC Rule 206 (4)-7? Describe the Chief Compliance Officer’s role in the firm. 6. Does your firm maintain a code of ethics? If so, please attach. 7. During the past five years, has the firm been subject to any governmental regulatory or law enforcement agency’s investigation, examination, or other proceeding directly involving the firm, its owners, or employees other than such examination or other proceedings as are routinely conducted in the ordinary course of the firm’s business? 8. During the past five years, has the firm been subject to any litigation alleging fraud, breach of fiduciary duty, or other willful misconduct? 9. Has your firm ever had any compliance violations or client guideline violations? If so, please describe how violations were dealt with and resolved. G. PERFORMANCE (Simulated results are not acceptable.) 1. a. Provide annual performance on a total return basis GROSS OF ALL FEES AND MANAGEMENT COSTS from inception for the subject product. Indicate if returns are net or gross of custody and swap costs. Use AIMR standards or, if different, indicate explicitly how they differ. Indicate whether the subject performance is the composite performance or that of the commingled account vehicle. Please complete the both tables below. YOU MUST COMPLETE THE 2 TABLES BELOW OR YOUR SUBMISSION MAY NOT BE PROCESSED. IN ADDITION, PLEASE ENTER THIS INFORMATION IN THE EXCEL SPREADSHEET (EXHIBIT E, TAB 1 and 25
  26. 26. TAB 2-Quarterly and Monthly Performance) AND SUBMIT IT WITH YOUR RESPONSE. PLEASE DO NOT CHANGE THE SPREADSHEET FORMAT. 26
  27. 27. TABLE#1 Beta Overlay Management 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Month 1 Month 2 Month 3 Month 4 N/A Month 5 N/A Month 6 N/A Month 7 N/A Month 8 N/A Month 9 N/A Month 10 N/A Month 11 N/A Month 12 N/A Total Return ___%___%___%___%___%___%___%___%___%___%___%___% S&P 500 Index or DJ Wilshire 5000 ___%___%___%___%___%___%___%___%___%___%___%___% Difference ___%___%___%___%___%___%___%___%___%___%___%___% TABLE #2 1 Year 3 Years 5 Years 10 Years Annualized Ended Ended Ended Ended Returns 3/31/06 3/31/06 3/31/06 3/31/06 Return _______% _______% _______% _______% S&P 500 Index or DJ Wilshire5000 _______% _______% _______% _______% Difference _______% _______% _______% _______% Provide underlying data for performance given in question F1(a), if applicable: 27
  28. 28. 2006 2005 2004 2003 2002 2001 2000 1999 Assets in Composite Number of Accts High Return Median Return Low Return 2. a. Describe causes for investment return deviation (both positive and negative) from the stated benchmark return by calendar year. In the attribution analysis identify contributions of stock and sector selection. H. CLIENT SERVICE 1. Which of your firm’s offices would service this account? What services would specifically be provided by which office? 2. Who will be the client service officer? How often could the person be available for client meetings? How often could the portfolio manager, chief investment officer and/or firm president be available for client meetings? I. SAMPLE DOCUMENTATION Please submit samples of appropriate documentation (eg. Investment agreement, guidelines, prospectus) required to implement the recommended structure. J. EXECUTIVE SUMMARY. Please submit an executive summary consisting of not more than 3 one-sided pages which summarizes the contents of the Proposal with the firm’s name identified on the top of the first page. If the firm is selected for a finalist interview, this summary will be provided to the Investment Committee in advance of any interview. Please be aware that all members of the Investment Committee may not have read your complete Proposal, which will be evaluated by the Search Committee. 28
  29. 29. SECTION II: ALPHA GENERATING HEDGE FUNDS (FUND OF FUNDS AND MULTI-STRATEGY MANAGERS) Please fill out this section if you wish to submit a proposal for the alpha generating hedge fund investment management services. 1) Please note that “hedge funds” refers to either fund of funds or multi-strategy funds, whichever is appropriate. “Subject product” refers to the specific alpha-generating fund of funds or multi-strategy product being proposed. 2) Based upon Section III, Scope of Services, below please provide a brief description of the hedge fund product you are proposing. Please explain if you are recommending a separate account or a commingled account. 3) Please answer all of the questions in the RFP as they relate to the specific portfolio that you are recommending. 4) Please include the following documents with your RFP submission: A. Subscription Documents B. Offering Memorandum C. Limited Partnership Agreements 29
  30. 30. A. COMPANY BACKGROUND AND GENERAL DESCRIPTION 1. Indicate your firm’s fiduciary classification: Bank Insurance Company Registered Investment Advisor/ (Investment Advisors Act of 1940) Affiliate of Fiduciary (Name and Classification): Other: 2. Give a brief history of the firm including dates and types of registration with any regulatory agencies (1940 Act Registration, IMRO, etc). 3. Provide background about the month and year the firm began managing hedge funds, and the month and year the firm began managing hedge funds for U.S. tax-exempt clients. 4. Provide background on proposed subject product including inception date (month and year), fund structure, legal entity, domicile, fund status for U.S. Investors, and fund status for Offshore Investors. 5. Describe the ownership of the firm, including but not limited to ownership structure and affiliated companies or joint ventures. If the firm is an affiliate, designate percent of parent firm’s total revenue generated by your organization, if a joint venture partner, identify the percentage of ownership and revenues recognized by each partner to the combined association. If your firm is employee-owned, discuss how the equity is distributed, and what, if any, plans your firm has to further distribute equity to your key professionals. 6. Provide an organizational chart diagramming the relationships between the professional staff as well as the parent-subsidiary, affiliate, or joint venture entities. 7. Describe the levels (U.S. dollar amounts) of coverage for SEC-required (17g-1) fidelity bonds, errors and omissions coverage and any other fiduciary coverage, which your firm carries. List the insurance carriers supplying the coverage. 8. Over the past five years, has your organization or any of its affiliates or parent, or any officer or principal been involved in any business litigation, regulatory or legal proceedings? If so, provide a detailed explanation and indicate the current status. Also provide complete Form ADV (Parts I and II). 9. Describe in detail any potential conflicts of interest your firm may have in the management of this account. Include any activities of affiliated or parent organizations with insurance, mutual funds, brokerage activities, investment banking activities, or current relationships with PRIM Board members and investment staff. Include any 30
  31. 31. other pertinent activities, actions, or relationships not specifically outlined in this question. Also disclose any business relationship with Cliffwater LLC. 10. Describe all outside marketing/sales services (including product design and development) for which your firm has contracted over the last three years for the marketing of your investment services to the institutional, tax-exempt market. Specify any such arrangements as they relate to the product being proposed. Indicate whether the fees paid for such services are charged to client portfolio assets. 11. Describe the material developments in your organization (changes in ownership, personnel, business, etc.) over the past three years in detail. 12. Will PRIM’s assets be treated as plan assets per the ERISA definition? If so, how is this monitored and how do you ensure compliance with current rules? If not, how is this managed? 13. Is the Fund permitted to generate unrelated business taxable income (“UBTI”) as described in Section 512 of the Internal Revenue Code of 1986, as amended? If so, indicate how much UBTI has been generated in each of the last five (5) fiscal years of the Fund. 14. Identify and describe the relationship and duration of the relationship with any of the following professionals used for your firm:  Prime Broker  Custodian  Administrator  Auditor  Accountant  Attorney  External Risk Manager 15. Please detail the proxy voting rights of clients, if any. 16. Do you have a plan and arrangements in place for an alternative worksite should your facilities become inoperative because of fire, earthquake, etc. Describe. 17. Describe your firm’s overall business strengths, weaknesses and uniqueness. B. ASSETS UNDER MANAGEMENT 12/31 12/31 12/31 12/31 12/31 3/31 31
  32. 32. 2001 2002 2003 2004 2005 2006 1. (a) Total assets under management (all products) ($millions) (b) Total institutional (taxable & non-taxable) assets in hedge fund products ($ millions) (c) Total institutional (taxable & non-taxable) assets in proposed subject product ($ millions) (d) Total assets managed in the proposed subject product for U.S. tax-exempt clients in separate accounts ($ millions) Number of Separate Accounts Number of Commingled Accounts 2. Please list 5 largest U.S. tax-exempt accounts currently managed in the subject product, including all public and ERISA fund clients, invested in the subject product. Include Name, Date of Inception, and Market Value as of 3/31/06. 3. List all clients and asset amounts gained in the subject product over the past three years as of March 31, 2006. 4. List all clients and asset amounts lost in the subject product over the past three years as of March 31, 2006. 5. What is the minimum account size you will accept on a separate account basis? 6. Describe your ability to provide customized portfolios to investors. Do you recommend that PRIM invest in a separate account or commingled account? Why? Include information on the commingled fund such as guidelines and operational parameters such as dates of openings, liquidity, etc. 7. Identify three clients that have terminated accounts in the subject product over the past three years that can be contacted as references. Provide the firm name, contact person and title, phone number, product name, fund account value and reason for termination. 8. Provide the client name, address, phone number, contact name, title, and account type (e.g. defined benefit, defined contribution, endowment) of three accounts, who are invested in the subject product that can be contacted as references. Also indicate the length of your relationship and assets under management for each reference. 32
  33. 33. 9. Describe the objectives of your firm with respect to future growth in the product, commenting on: • Maximum capacity, projected timeframe to reach capacity. How did you arrive at those asset limits? • Additional resources for portfolio management, research, trading, client service and tools/models to enhance the investment process or manage growth; and, • How will back office operations be affected in the event of a significant increase in assets under management? What actions will be taken? 10. What were the largest withdrawals in your fund since inception? Provide the date, percentage of equity, and reasons. 11. What is the optimum total asset size and number of client accounts for this investment product? Why? At what total asset size for the subject product do you intend to cease accepting more business? What advantages and disadvantages does your current size present to achieving superior performance results in the future. C. PEOPLE/ORGANIZATION 1. How many people are employed by the firm? List the total number of persons in the subject product employed by discipline. Total Portfolio Managers Research Analysts Economists Marketing Trading Administration Client Service Legal _______ Systems _______ Other (Specify) Total Investment Staff Total Non-Investment Staff Total Staff _______ 2. Please provide a list of all your investment offices, describing their functions. Identify where primary trading, research, and portfolio management activities take place. Where are accounts maintained? 3. Please specify locations of portfolio managers and state the number of accounts each manages and include the dollar value of assets under management. Indicate those associated with U.S. tax-exempt accounts. 33
  34. 34. 4. Provide a list of the professionals involved in the subject product in the manner listed below: PORTFOLIO MANAGEMENT Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School RESEARCH Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School TRADING Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School 5. What personnel or organizational improvements are planned over the next years? 6. Provide biographies of no longer than one page on each of the persons listed in Question C.2. Please include prior employment history. 7. Provide a firm wide organizational chart. Also provide an organizational chart that diagrams the different functions (research, trading, etc.) dedicated to the product area. Professionals should be identified over their areas of responsibility. 8. Describe the compensation and incentive program for professionals directly involved in the product. How are they evaluated and rewarded? What incentives are provided to attract and retain superior individuals? • Identify the percentage of compensation which is:  Base salary  Performance bonus  Equity incentives  Other • Do you offer direct ownership, phantom stock, profit sharing, and/or performance bonus? • Who is eligible to participate? • On what basis are these incentives determined – is compensation tied to success factors such as asset growth, performance, or other factors? Please list and indicate the weight of each in determining total compensation. • How does your compensation structure/levels compare with other firms in the industry? • Does your firm or key principles have a non-compete with any other firms? Explain. 34
  35. 35. 9. What is the dollar amount and percent of the fund that is invested by the General Partner? Discuss the total amount invested by the principles/management in the fund and other investment vehicles managed pari passu with the subject product. Has the management reduced its personal investment? If so, provide date, amount, and reasons. Please also disclose conditions of subscription/redemptions of team and owners’ assets. 10. What percentage of the General Partner’s time will be spent managing the fund’s investments? Describe any succession plan you have in the event that the General Partner is no longer capable of carrying out its responsibilities. Discuss any key man provisions. 11. Discuss the causes and impact of any turnover (departures or hiring/promotions) of any professionals directly involved in the product you have experienced in the past five years. How long has the team been together? Indicate when and why any professional dedicated to the product left or joined the firm in the past three years. What were/are their job responsibilities? For personnel who have left indicate job titles and years with the firm and who replaced them. JOINED Date Name/Title Responsibilities DEPARTED Yrs @ Replaced by Date Name/Title Responsibilities Firm Reason for (name/title) leaving D. FUND OF FUNDS INVESTMENT PHILOSOPHY, POLICY AND PROCESS (For Fund of Funds managers only. Multi-strategy managers should skip to section E). 1. Describe in detail the investment philosophy and process employed by your firm for this hedge fund strategy. How has this philosophy changed over time? 2. Provide the following performance information over the past 5 years:  What is the most appropriate benchmark? Would your firm be willing to adopt a benchmark dictated by PRIM?  Expected level of annualized outperformance relative to the index chosen.  The absolute and relative volatility targets  Standard deviation 35
  36. 36.  Beta to S&P 500  Beta to Lehman Aggregate  Correlations with S&P 500  Correlations with Lehman Aggregate 3. Discuss strategy allocation decisions and your approach to allocating assets between different types of strategy allocations.  What is the process whereby these strategy allocations change?  How frequently do they change?  Fill out the strategy allocations in the table below. Strategy Allocations Portfolio As Portfolio As Portfolio As Portfolio As of of of of 3/31/2006 12/31/2005 12/31/2004 12/31/2003 Equity Long/Short Equity Market Neutral Event Driven Global Macro/Tactical Other 4. Describe the manager identification process.  What is the fund universe from which you select underlying funds? How many hedge fund strategies are in your total universe?  Do you use an internal, proprietary database of hedge funds? Do you use external databases of hedge funds? Please describe.  How many hedge funds do you follow closely? How many are on your “short” recommended list? 5. Describe the manager evaluation process.  Describe your criteria for investing in managers.  Describe any minimum qualifications for investing in the underlying funds.  Describe the transparency you require from the hedge funds you invest in.  Describe the liquidity you require from the hedge funds you invest in. 6. Discuss the qualitative and quantitative research process.  What percentage of the research effort is conducted internally/externally?  How much of the process is top down vs. bottom up?  Discuss what makes your firm unique in being able to identify capable hedge fund strategies. 7. Describe the underlying manager due diligence process.  What is the process?  Who is involved?  Do you also perform operational due diligence? Explain. 36
  37. 37. 8. Describe your portfolio construction process. Include in your discussion the qualitative and quantitative processes utilized.  Discuss number of managers in the proposed portfolio. Has the average number of managers changed over time?  Describe how individual manager weightings are determined and how assets are allocated to individual funds in the portfolio.  What is the largest percentage of the portfolio that one single manager can represent (as percentage and dollar amount)? What is the largest manager allocation as of 3/31/06?  How do you invest new capital into the market? Have you added number of managers or increased allocations to existing managers?  How do you handle redemptions?  Please state the number of underlying funds “closed” to new capital in the current portfolio. What percent of your capital base do these funds constitute?  Discuss the depth of diversification.  Do you have maximum strategy allocations? What are they?  What is the geographical diversification? Please break down target and actual diversification by region.  Has the fund deviated from its initial strategy due to changes in asset levels and/or market conditions? Please describe. 9. Provide a list of managers that would be included in the proposed portfolio. 10. What is the ongoing monitoring process of the hedge funds you invest in?  How do you monitor the product’s adherence to its investment style and process? Specify who is responsible.  How has performance distributed across managers and time?  Please comment on the fund’s volatility, including both target and actual.  What is the average holding period for managers?  Provide data on the level of turnover of underlying fund managers and specific reasons why you may have changed managers.  List liquidated hedge funds that were part of the portfolio. State the percentage that shut down due to poor performance vs. voluntary retirement, etc.  Have you invested in any fund that has been the subject of any regulatory/legal action?  Have you ever invested in any fund that has lost more than 50% of the assets you invested?  What is the maximum monthly drawdown, as a percentage of fund assets, that you’ve experienced at the individual manager level?  Provide the 5 maximum drawdowns, in percent of equity for the portfolio, the recovery period, and explain reasons they have happened. 11. How is portfolio risk managed and monitored? Describe all risk management functions and software tools utilized.  What is your firm's definition of risk with respect to this product? If more than one, specify each with its percentage of importance.  How is your risk management analysis incorporated into the portfolio management process. 37
  38. 38.  Do you use cash as a method of risk control? Indicate how much cash is generally held in the portfolio.  Describe the risk exposure (VAR) and other risk analyses you are able to provide investors on an ongoing basis. Provide copies of any materials of this type that you offer clients. 12. Please explain:  Maximum leverage at the total portfolio level (% gross long)  Maximum leverage at the individual manager level (% gross long)  Highest amount of individual manager leverage used so far (% gross long)  Typical net market exposure for the total portfolio (% net long/short)  Minimum and Maximum net exposure 13. Provide the level of transparency you provide clients. Comment on the following types of transparency:  Organizational (assets, key professionals, ownership)  Process (investment process, research, portfolio construction)  Portfolio (risk exposure/VAR, country and sector exposure, leverage)  Security (individual positions and securities, both long and short)  Transaction (transaction history including brokers/commissions) 14. Describe how your firm addresses market timing, and describe how cash is invested. 15. Discuss in detail your firm’s approach to minimizing dispersion between separate accounts and commingled pools. Describe the procedures in place to ensure that portfolios are consistently managed. 16. If you have soft dollar relationships with broker-dealers, please disclose the following:  Soft dollar policy and when last reviewed.  Percentage of trades executed tied to soft dollar relationships.  List of resources funded by soft dollars that would normally be funded with hard dollars. 17. Discuss in detail your policy on subscriptions and redemptions for your fund. Specifically address timing of subscriptions, lock-up periods, notice periods, and redemption. Comment on any special provisions that exist (i.e. lock-ups, reserves, in- kind payments, exit fees, delayed payments, queues, etc.). 18. Describe the liquidity terms, including:  Minimum initial investment  Minimum subsequent investment  Subscription frequency and timeframes  Redemption frequency and timeframes  Redemption notice period  Redemption cash proceeds time period  Lock ups or liquidity constraints  Do you allow transfer of shares between nominees? 38
  39. 39. 19. Do you currently work with any beta overlay providers on a portable alpha mandate? Explain. 20. Are you able to provide accurate, audited asset and transaction statements within 2-3 weeks of month's end? Explain. PRIM currently requires investment managers to provide the Custodian reports of net asset value by the fifth business day after month end and monthly performance reports by the seventh business day after month end. 21. Describe what circumstances or market conditions would favor your product’s strategy? When can it be expected to be out of phase or be unrewarded? Comment on volatility, trends, liquidity, and correlation markets. 22. What unique attributes does your firm have that distinguishes it from its competitors in fulfilling this assignment. Describe any strengths and weaknesses that would impact the servicing of the PRIM account. 23. Describe how your product differentiates itself from those of PRIM’s hedge fund managers. What role would your portfolio play in PRIM’s portable alpha portfolio? 24. Given the asset allocation of PRIM’s current portfolio (see exhibit A) and the objectives of the portable alpha program, please detail a recommendation plan for how your firm would implement the mandate. E. MULTI-STRATEGY MANAGERS INVESTMENT PHILOSOPHY, POLICY AND PROCESS (Multi-Strategy managers only, Fund of Funds managers should skip to section F). 1. Describe in detail the investment philosophy and process employed by your firm for this hedge fund strategy. How has this philosophy changed over time? 2. Provide the following performance information over the past 5 years:  What is the most appropriate benchmark? Would your firm be willing to adopt a benchmark dictated by PRIM?  Expected level of annualized outperformance relative to the index chosen.  The absolute and relative volatility targets  Standard deviation  Beta to S&P 500  Beta to Lehman Aggregate  Correlations with S&P 500  Correlations with Lehman Aggregate 3. Discuss strategy allocation decisions and your approach to allocating assets between different types of strategy allocations.  What is the process whereby these strategy allocations change?  How frequently do they change?  Can strategy allocations go to zero? 39
  40. 40.  Fill out the strategy allocations in the table below. Strategy Allocations Portfolio As Portfolio As Portfolio As Portfolio As of of of of 3/31/2006 12/31/2005 12/31/2004 12/31/2003 Equity Long/Short Equity Market Neutral Event Driven Global Macro/Tactical Other 4. Describe your investment approach.  Universe from which securities are selected.  Investment criteria for new positions.  Types of instruments used (by percentage).  Discuss minimum, maximum, and average number of instruments.  Discuss the use, advantages, potential risks, risk controls, and experience with these instruments.  Maximum sector and security exposures.  Market capitalization ranges by sector and security.  What is the geographical diversification? Please break down target and actual allocations by region.  Discuss the depth of diversification in the portfolio.  What percentage of the research is conducted internally/externally?  How much of the process is top down vs. bottom up?  Has the fund deviated from its initial strategy due to changes in asset levels and/or market conditions? Please describe.  Discuss what makes your firm unique in being able to build a multi-strategy portfolio 5. Describe your portfolio construction process. Include in your discussion the qualitative and quantitative processes utilized.  How many investments are typically contained in a portfolio? Has the average number of investments changed over time?  How are position size and weightings determined, and how are assets allocated to individual securities in the portfolio.  What is the largest percentage of the portfolio that one single investment can represent. What is the largest position as of 3/31/06?  What are the most important industries in the portfolio and what are their weights?  What is the breakdown in terms of long and short positions? What is the role of short positions?  What were your longest and shortest held securities in the fund? Why?  How do you invest new capital into the market? Have you added positions or increased position size?  How do you handle redemptions? 40
  41. 41.  Have you encountered position limit problems? Explain. 6. Please provide a sample portfolio. 7. Discuss you buy/sell discipline.  Provide data on the level of turnover.  Discuss average holding period for all investments, profitable investments, and losing investments.  How has performance distributed across positions and time?  Have you had even profits in all issues or has there been a concentration that accounted for the majority of the gains of the fund at any one time? 8. How is portfolio risk managed and monitored? Describe all risk management functions and software tools utilized.  What is your firm's definition of risk with respect to this product? If more than one, specify each with its percentage of importance.  Describe any risk measurement models used and how this analysis is incorporated in the portfolio management process.  Describe the risk exposure (VAR) and other risk analyses you are able to provide investors on an ongoing basis. Provide copies of any materials of this type that you offer clients.  Discuss position and stop loss limits and their management. How frequently are these applied? When were their peaks observed?  How do you adjust your risk capital allocation when there is significant increase in equity due to trading profits?  Do you use cash as a method of risk control? Indicate how much cash is generally held in the portfolio.  Describe how you monitor and manage:  Liquidity risk, specifically commenting on how you would handle an "illiquidity event"  Common factor analysis  Value at risk (VAR)  What are the main sources of marginal risk in the portfolio?  Portfolio Duration - is it a residual to the portfolio construction process?  Risk controls as they pertain to credit quality, callability, interest rate volatility, default losses, etc. 10. Please explain the maximum, average range, and value of the following (as % of portfolio assets):  Portfolio gross long position  Portfolio gross short position.  Portfolio net position.  Portfolio beta.  Largest single position concentration.  Country concentration  Sector Net Exposure  Number of long positions in the portfolio  Number of short positions in the portfolio 41
  42. 42.  Annual portfolio turnover 11. Discuss use of leverage:  What is the rationale for use of leverage in the fund? What is your leverage exposure policy?  What is the maximum allowable leverage at the total portfolio level?  What is the average amount of leverage used?  What were the highest and lowest degrees of leverage used over the last 12 months?  Is the fund ever run without leverage?  How many banks/brokers extend leverage to the fund?  Has leverage ever been revoked to the fund for any reason? If so, why?  How does the fund hedge against interest rate exposure and currency risk? 12. Describe your firm’s trading capabilities related to this product. Provide a description of your trading platform, including systems (proprietary and off-the-shelf) for execution and processing.  Describe the allocation objectives and implementation procedures across all accounts. What is the process by which trades are allocated across separate accounts as opposed to commingled accounts? Please describe both the tactic of allocating the initial trade as well as the strategy of building positions across accounts.  Is trading segmented by investment product platform?  How many traders are there and what is their experience?  Describe the trading systems and strategies you use, and indicate any enhancements your firm is contemplating.  What steps have you taken to automate the trade flow process? What areas are still handled manually?  How do you leverage your infrastructure to ensure firm-wide collaboration in execution (broker/dealer relationships) and capital market conditions (liquidity)? How does your firm manage to and monitor market liquidity?  Describe how you measure trading costs (commissions and market impact).  Describe your firm’s policy regarding the use of soft dollars.  If your firm is affiliated with a broker/dealer, describe whether or not you trade through this affiliated brokerage.  Discuss your internal monitoring process for final price determination and trade order management. Do you have dedicated committees overseeing these functions? If so, please list the members.  What processes do you have in place for ensuring pre- and post-trade guideline compliance? What functions are automated? What process do you have in place for human verification? Who signs off on final trading?  Please describe the oversight procedures that would minimize the risk of traders acting outside of their given latitude in executing trades. 13. Provide your average annual commission costs as a percentage of total assets:  Brokerage to equity ratio  Administrator fee to equity ratio  Custodian fee to equity ratio 42
  43. 43.  Auditor’s fee to equity ratio 14. Comment on volatility:  How volatile is the fund relative to its peers? If more volatile, please validate the extra risk.  Over the past 12 months, how many daily drawdowns greater than 5% have occurred, and what was the length of recovery. 15. Describe how your firm addresses market timing, and describe how cash is invested. 16. Describe the level of transparency you provide clients. Comment on the following types of transparency:  Organizational (assets, key professionals, ownership)  Process (investment process, research, portfolio construction)  Portfolio (risk exposure/VAR, country and sector exposure, leverage)  Security (individual positions and securities, both long and short)  Transaction (transaction history including brokers/commissions) 17. Discuss in detail your firm’s approach to minimizing dispersion between separate accounts and commingled pools. Describe the procedures in place to ensure that portfolios are consistently managed. 18. If you have soft dollar relationships with broker-dealers, please disclose the following:  Soft dollar policy and when last reviewed.  Percentage of trades executed tied to soft dollar relationships.  List of resources funded by soft dollars that would normally be funded with hard dollars. 19. Discuss in detail your policy on subscriptions and redemptions for your fund. Specifically address timing of subscriptions, lock-up periods, notice periods, and redemption. Comment on any special provisions that exist (i.e. lock-ups, reserves, in- kind payments, exit fees, delayed payments, queues, etc.). 20. Describe the liquidity terms, including:  Minimum initial investment  Minimum subsequent investment  Subscription frequency and timeframes  Redemption frequency and timeframes  Redemption notice period  Redemption cash proceeds time period  Lock ups or liquidity constraints  Do you allow transfer of shares between nominees? 21. What is your firm’s policy on handling corporate actions that would impact portfolio holdings? 22. Are you able to provide accurate, audited asset and transaction statements within 2-3 weeks of month's end? Explain. PRIM currently requires investment managers to 43
  44. 44. provide the Custodian reports of net asset value by the fifth business day after month end and monthly performance reports by the seventh business day after month end. 23. Do you currently work with any beta overlay providers on a portable alpha mandate? Explain. 24. Describe what circumstances or market conditions would favor your product’s strategy? When can it be expected to be out of phase or be unrewarded? Comment on volatility, trends, liquidity, and correlation markets. 25. What unique attributes do your firm have that distinguishes it from its competitors in fulfilling this assignment. Describe any strengths and weaknesses that would impact the servicing of the PRIM account. 26. Describe how your product differentiates itself from those of PRIM’s hedge fund managers. What role would your portfolio play in PRIM’s portable alpha portfolio? 27. Given the asset allocation of PRIM’s current portfolio (see exhibit A) and the objectives of the portable alpha program, please detail a recommendation plan for how your firm would implement the mandate. F. OPERATIONS/BACK OFFICE/INTERNAL CONTROLS 1. How many back office operations professionals support the subject product? Please specify locations. 2. Provide a list of the professionals involved in the subject product in the manner listed below: BACK OFFICE OPERATIONS Title/ Yrs Yrs @ Degrees/ Sponsoring Name Responsibilities Exp Firm Designations Body/School 3. Do any individuals have veto power over investment decisions? 4. Provide biographies of no longer than one page on each of the persons listed in Question 2. Please include prior employment history. 5. Provide an organizational chart that diagrams the different operations functions dedicated to the product area. Professionals should be identified over their areas of responsibility. 44
  45. 45. 6. Discuss the causes and impact of any turnover (departures or hiring/promotions) of any operations professionals directly involved in the product you have experienced in the past five years. How long has the team been together? Indicate when and why any operations professional dedicated to the product left or joined the firm in the past three years. What were/are their job responsibilities? For personnel who have left indicate job titles and years with the firm and who replaced them. JOINED Date Name/Title Responsibilities DEPARTED Yrs @ Replaced by Date Name/Title Responsibilities Firm Reason for (name/title) leaving 7. Provide a detailed summary of your firm’s internal control structure. Does the firm conduct a periodic risk assessment? Provide a copy of SAS 70 if available, or other internal control review documentation, preferably by an independent third party. 8. Provide copies of the firm’s most recent audited financial statements and auditor’s management letter. 9. Comment on the role of the fund auditor:  Have there been any disciplinary or regulatory problems with any members of staff or the firm as a whole? Has the firm or any individuals been involved in any legal action?  Is the firm regulated? If so, by whom? What do the registrations allow the firm to do? If not regulated, what exemptions are relied upon?  What factors influenced your selection of the auditor?  Is fund performance audited?  Where previous audits performed by other firms?  Have there been any problems with previous audits?  How do the auditor track the fund’s assets during an audit?  Does any affiliate have a current or past relationship with the auditor?  How do the fees compare to those of other auditors? 10. Describe the following back office and operational processes (Fund of Funds Only)  Are any back-office operations outsourced? If outsourced, what are the details of the agreement, including the economics of the relationship? 45

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