Exploring New Opportunities and Diversification Strategies in Alternative Investments - Presentation delivered by Cynthia G. Koury, Partner and Senior Vice President, CM Wealth Advisors at the marcus evans Private Wealth Management Summit Fall 2014 in Las Vegas.

1. Exploring New Opportunities
and Diversification Strategies
in Alternative Investments
Cynthia G. Koury
Partner and Senior Vice President

2. Exploring New Opportunities and Diversification
Strategies in Alternative Investments
Alternatives – what are they?
• Investments that are less efficient, more complicated
and, often times, illiquid
• Private Equity
• Venture Capital
• Natural Resources
• Hedge Funds
2

3. 3
A Quick Review
Private Equity Past & Present
Why invest in Private Equity?
• Capital Scarcity
• Past:
• The industry was very small and the investor base was a small group
of high-net worth families and a few endowments
• Present:
• Industry and investor base has grown tremendously
• Annual capital raises are more than $100 billion
• Market size as a percentage of the market capitalization of the public
equity markets is approximately the same – less than 0.5%
• Market Opportunities
• Present: 86% of U.S. companies with 500 or more employees are privately
held

4. 4
• Value Drivers
• 1980’s leverage was the largest driver of value creation
• 1990’s multiple expansion was the driver of value creation
• 2000’s earning’s growth was the driver of value creation
• 2010’s operational improvements is the driver of value creation
• Diversification Benefits
• Past: losers were written down but winners were not written up until there was an event,
so private equity had a low correlation to public equities
• Present: with the new accounting rules that force private equity firms to market private
companies, both volatility and the correlation to public market have increased
• The Illiquidity Premium
• Past: investors expected a premium of 1000 basis points over public markets
• Present: investors expect a premium of 300 basis points
• Geographic Focus
• Past: U.S. Centric
• Present: Global
A Quick Review
Private Equity Past & Present

5. A Quick Review
Venture Capital Past & Present
Generation of “Innovation Alpha” – investing in disruptive
technologies that are not available in public markets
• Past: too much enthusiasm for venture led to belief it was a scalable
business
• Present: it is not a scalable business and a small number of venture
capital funds generate the majority of the returns
Investment Time Frame
• Past: take young companies public and allow significant value to
accrue to the public market investors
• Present: keep good companies private much longer and allow
significant value to accrue to the private holders
5

6. Diversification Benefits
• Innovation is not correlated to the public markets or economic
cycles
• Exit strategies, particularly IPO’s, are highly correlated to public
markets
Geographic Focus
• Past: Venture capital activity was predominantly located in the
U.S.
• Present: China and India have strong venture opportunities
A Quick Review
Venture Capital Past & Present
6

7. 7
A Quick Review
Hedge Funds Past & Present
Hedge Funds In General
• Past: Mysterious, exotic and elusive
• Present: Mature industry - highly diverse both among and within
strategies
Growth of the Industry
• Past: In 1990 – 610 hedge funds and fund-of-funds with $39 billion in
AUM
• Present: 9,700+ hedge funds and fund-of-funds with $2.82 trillion in
AUM

8. A Quick Review
Hedge Funds Past & Present
Value Proposition of Hedge Funds
• Early Days: Return enhancement a la George Soros and Julian Robertson
• 2000’s: Volatility reduction - downside protection for bear markets such
as 2000-2002 and 2008
• Present:
General/Media perception:
• “Hedge Funds are for Suckers” – (Businessweek, July 11, 2013)
• “Calpers Shows Masters of Hedge-Fund Universe Have No
Clothes” (The Wall Street Journal, September 16, 2014)
• “Slamming a Door on Hedge Funds” (The New York Times,
September 20, 2014)
Investor perception:
• Diversification, volatility reduction, alpha generation
8

9. Hedge Funds
Why the bad press?
• The tendency to compare hedge fund returns to equity market returns
• The “average” hedge fund charges more in fees than justified by the value
they create
Why the continuing growth in hedge funds?
• Hedge funds add value by being different than equities
• Hedge funds provide the ability to short assets and to invest in the
inefficient areas of the markets
9

10. • Yes
• They provide access to less efficient, more complicated and illiquid assets
that provide the opportunity to enhance returns or reduce volatility
• The caveats
• It is imperative to invest with top-tier managers
• Alternatives have to be categorized by the different roles and purposes they
provide in the portfolio
10
Hedge Funds
Do Alternatives Make Sense for the Future?

11. Diversification Strategies in Alternative
Investments
• The old way of lumping all alternatives together no longer
works
• Alternatives need to be classified by the purpose they serve in
the portfolio
• Growth
• Risk Reduction/Deflation hedge
• Inflation hedge
11

12. Risk
Assets/Growth
Risk Reduction Inflation Hedges
• Public Equities
• High Yield
• Cash
• U.S. Treasuries
• Investment Grade
Bonds
• Hedged Global
Bonds
• Core Real Estate
• Natural Resources/
Timber
• Infrastructure
LeastLiquidityMost
• Long/Short Equities
• Distressed Debt
• Venture Capital
• Private Equity
• Value-add and
Opportunistic Real
Estate
• Commodities
• Treasury Inflation-
Protected Securities
• Master Limited
Partnerships
• Commodity
Oriented
• Direct Lending
• Macro
• Arbitrage
• Relative Value
• Event Driven
PrivateProgramsHedgeFundsTraditional
12
Asset Types and Purposes in the Portfolio
Hypothetical Example

13. The Implications for Investing in Alternatives
Private Equity
• The illiquidity premium of public markets + 300 basis points remains attractive the
premium is too compressed to invest through large, generalized fund-of-funds.
Instead investors should:
• Commingle clients’ funds if possible
• Invest directly in private equity funds
• Invest in niche fund-of-funds
Venture Capital
• Access to the serial venture capitalist is imperative which will likely require
investing through a fund-of-funds
Hedge Funds
• The old general hedge fund-of-funds no longer work
• Define the purpose of each hedge fund in the portfolio
• Invest directly in hedge funds if possible or utilize customized or niche fund-of-
funds
• Liquid hedge funds are subject to regulatory constraints so not all hedge fund
strategies can be implemented in a mutual fund format
13