Hedge Fund White Paper FINAL Compliance approved Jan …clearbrookglobal.com/wp-content/uploads/2017/04/Hedge-Fund-White... · hedge funds and their managers has fueled the misperception

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This paper discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This paper is for informational purposes only and does not constitute, and is not to be construed as, an offer, solicitation, or recommendation to buy or sell any securities or related financial instruments. Opinions expressed in this paper reflect current opinions of Clearbrook as of the date appearing in this material only. This paper is based on information obtained from sources believed to be reliable, but no independent verification has been made and Clearbrook does not guarantee its accuracy or completeness. Clearbrook does not make any representations in this material regarding the suitability of any security for a particular investor or the tax exempt nature or taxability of payments made in respect to any security. Investments in hedge funds are risky and are not suitable for everyone. Prospective investors are urged to consult with their financial advisors before investing in hedge funds. The information in this paper may not be current and Clearbrook has no obligation to provide any updates or changes.

THEROLEOFHEDGEFUNDSININVESTORPORTFOLIOS DECEMBER22,2014 IDEASANDINSIGHTSSETUSAPART

SUMMARYDespiterecenthigh-profileexitsfromhedgefunds,publicpensionfundsareexpectedtobethemaindriverofgrowthinthealternativesspace.Thecombinationofmisinformationandcontroversyaroundhedgefundsandtheirmanagershasfueledthemisperceptionoftheroleofahedgefundallocationinan investor's portfolio. This paper will identify the benefits and drawbacks of individual hedge fundinvestmentsbystrategy,andclarifyhowhedge fundstrategies suchas long/shortequity,macroandrelative value behave in differentmarket environments.We seek to offer a balanced perspective onhowhedgefunds,ifusedcorrectly,canbeusedtofurtherinvestorobjectives,anddiscussexamplesofhowClearbrookappliesourresearchtoclientportfolios.INSTITUTIONALHEDGEFUNDINVESTINGLANDSCAPEThe $7.2 trillion alternatives space is expected to grow at an average annual pace of 5% in the nextdecade,comparedwith1-2%perannumfortheassetmanagementindustryasawhole,accordingtoarecentMcKinseystudyi.Thedatafromthisstudyshowsthatgrowthwillbedrivendisproportionatelyby large public pensions, sovereign wealth funds, high net worth and retail investors, with publicpensionfundsasthefastestgrowinggroup.AnadditionalstudybyPrequiniialsoshowsthatinstitutionsmakeupanestimated65%ofhedgefundinvestors.In the hedge fund space, Clearbrook has seen institutional investors self-identify into one of threecategories: institutions which have developed robust long-term hedge fund programs which aremeetingtheirobjectives;institutionswhichareplanningtoinvestmoreresourcesintoalternativesandwhose investment flowsareexpected togrowmorequickly than theaverage;and institutionswhichhave not found hedge funds to be paying off given their complexity and costs or their inadequateimplementationintotheirportfolio.HEDGEFUNDS:MYTHSANDREALITIESHedgefundsandtheirmanagers,duetotheircomplexityandhigher thanaverage fees, tendtobeapopular target for the mainstream media. Hedge fund managers may be either praised for theiroutsized returnsandprescient investment strategy,orvilified for theirextravagant fees.Additionally“HedgeFunds”are rarely identifiedby theirparticular strategyorcharacteristic,butareperceivedasonestrategyunilaterallydesignedtobeattheS&P500orotherlong-onlyequityindex.Forexample,inthedays followingCalPERS’decision toeliminatehedge funds fromtheportfolio,bloggers fromtheNew York Timesiii, Wall Street Journalivand Forbesvcited the 7% return of the CalPERS hedge fundallocationaslacklustercomparedtotheperformanceoftheS&P500orotherlong-onlyinvestmentsinthepastyear.

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THEROLEOFHEDGEFUNDSININVESTORPORTFOLIOS DECEMBER22,2014


Therealityisthateveryhedgefundstrategyistypicallymanagedagainstaspecificreturntarget,andanallocationtohedgefundsisusuallycomparedtoanabsolutereturnobjectiveorriskcharacteristic,andnotalways toa long-only indexbenchmark. Theobjectives,costs,complexityandriskprofileofeach fundvarieswidely. Additionally, thesizeofahedge fundallocationmatters inorder forhedgefundstohaveameaningfulimpactinreturns,whilecapacitytomanyhigh-performingfundsislimited-adding to thecomplexityandperceivedexclusivityof these investments. Allof theseconsiderationspointtotheneedforinstitutionalinvestorstoaddresourcesnotonlyintheformofflowsintoahedgefund program, but toward education and oversight from experienced advisors when deciding toestablishanallocationtoalternativeinvestments.ANALYZINGHEDGEFUNDRETURNSBYSTRATEGYThe growing dependence on hedge fund returns by institutional investors to provide alpha anddownside risk mitigation versus traditional long only assets makes it more important than ever toproperly identify,understandandemploytheproperhedgefundtomeetthespecificreturn,riskandliquidityobjectivesoftheinstitutionalinvestors.WeatClearbrookbelievethathedgefundshavebeenamisunderstood asset class due to investors and advisors alike grouping hedge funds into a singlemeltingpotandbelievinganyhedgefundshouldbeabletoaccomplishwhattheclientneeds.Ouraimistoclearupsomeofthesemisconceptionsabouthedgefunds,byfirst identifyingwhataresomeoftheprimaryfactorsaffectinghedgingrisksandreturns,andbyprovidingguidanceastothehedgefundstrategiesthatwouldbestmatchtheparticularinvestmentobjectivesfordifferentinvestors.

Over the years a number of excellent academic studies by Bussiere, Hoerova and Klaus (2012)viandKhandani and Lo (2007)viihave provided insights into the risk and return drivers for hedge funds. InthesestudiesthroughPrincipalComponentAnalysis,theauthorshaveidentifiedfactorssuchasequityexposure, volatility and liquidity asbeingprimarydeterminantsofhedge funds returns. Armedwiththis knowledge, wewould like to illustrate on a practical basis how hedge fund returns are actuallyaffectedbythesefactors.Toaccomplishthiswewillsimplybreakdownhowthetrendinequityprices,levelsofvolatilityandlevelofinterestratesaffectthetypicalLong/ShortEquityStrategy’sreturnovertime.Pleasenotethatingeneralotherhedgefundstrategieswillhaveriskandreturnfactorsthatmaybesimilarorinherentlydifferentovertime.

LONG/SHORTEQUITYVS.S&P500Long/ShortEquityisastrategywheretheinvestmentmanagertakesalongorshortpositioninequitysecurities that are deemed to be undervalued or overvalued. Managers depending upon theirrisk/returnobjectives can runportfolioswith various rangesofgrossandnetexposures, typicallynetlongbutintheoftoccasioncanbenetshortaswell.Thenetexposurestendtobeintherangeof+10to+40%net,whichexplainswhythesestrategiesdowellinascendingmarkets,albeitwithlowervolatility.

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FIG.1:EQUITYHEDGEFUNDSMONTHLYRETURNSWITHS&P500

Datasources:HFRIandS&P. Thechartaboveshowsthepositive relationshipof returnsbetweentheHFREquityHedge IndexandtheS&P500.TheHFRIEquityHedgetendstohavelowervolatilitythantheS&P500overtheJanuary1990-September2014timeperiod.EFFECTOFINTERESTRATESTOverall, interestrateshavebeendecreasingforthepastthirtyyears,buttheyareexpectedtoriseastheFedtapersitsquantitativeeasingprogram.InordertounderstandtherelationshipofinterestratesonLong/ShortEquityHedgeFundreturns,welookedattherollingperiodcorrelationofEquityHedgeFundMonthlyReturnswiththeUSTreasuryFedFundsRate(TFFR).Correlations are generally positive though inconsistent, particularly during periods where the TFFRexperiences sharp moves. For example, the correlation of equity hedge and TFFR was stronglynegative inAugust2011,with -0.6negativecorrelation,where theFedFundsRate rose sharply from0.11 (July 29) to 0.17 (August 1) and fell again to a low of 0.08 (August 5), while equity hedge fundreturnsweredown-4.9%. Also, inJanuary2004,thecorrelationwasapproximately-0.4,whentheTFFR declinedfrom1.01 to0.92and then rebounded to 1.03,whileequityhedge fundswereup+2.0% for themonth. InFebruary1995,correlationwas-0.4,astheTFFRrose16.0%from5.25to6.10,whileequityhedgefunds

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were up +1.68%.As a result,we believe that a rising interest rate environment should be helpful tolong/shortequityhedgefunds.

FIG.2:ROLLINGCORRELATIONOFEQUITYHEDGEFUNDSMONTHLYRETURNSWITHTHEUSTREASURYFED

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Source: Morningstar Encorr Analyzer. The chart shows rolling correlation of monthly returns HFRIEquityHedgeandtheUSFederalFundsRate,whichiscalculatedbasedona36-monthrollingperiod.Inadditiontothepositiverelationshipofinterestratestoequityhedgefundreturns,the“shortrebate”willalsobeapositivecontributoryfactortohedgefundreturnsinarisingrateenvironment.Long/shortequity managers establish a “short portfolio” of equities, whereby equities are sold creating a cashbalanceinthemanager’sportfolioaccount.Thecashthatisgeneratedearnsinterestintheformofa“shortrebate”whichispaidbythebrokeragefirmwherethemanager’accountisdomiciled.Thelevelofinterestpaidontheaccountistypicallytiedtoshortterminterestratesasdefinedbythebrokercallof Fed Funds rates. The effect on hedge fund returns can be substantial in an environment wheninterest rates are normalized from current 0.05% levels to the 3-4% levels seen before the 2008financialcrisis.Basedontheestimatedshortrebateattributionchartbelow,weexpecttheaveragelong/shortequitymanagertohaveincrementalreturnsof150to200basispointsperannuminanormalizedinterestrateenvironment.However,from2009-2013,the“shortrebate”hasnotcontributedtoreturns.

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Inadditiontothepositiverelationshipofinterestratestoequityhedgefundreturns,the“shortrebate”willalsobeapositivecontributoryfactortohedgefundreturnsinarisingrateenvironment.Long/shortequity managers establish a “short portfolio” of equities, whereby equities are sold creating a cashbalanceinthemanager’sportfolioaccount.Thecashthatisgeneratedearnsinterestintheformofa“shortrebate”whichispaidbythebrokeragefirmwherethemanager’accountisdomiciled.Thelevelofinterestpaidontheaccountistypicallytiedtoshortterminterestratesasdefinedbythebrokercallof Fed Funds rates. The effect on hedge fund returns can be substantial in an environment wheninterest rates are normalized from current 0.05% levels to the 3-4% levels seen before the 2008financialcrisis.Basedontheestimatedshortrebateattributionchartbelow,weexpecttheaveragelong/shortequitymanagertohaveincrementalreturnsof150to200basispointsperannuminanormalizedinterestrateenvironment.However,from2009-2013,the“shortrebate”hasnotcontributedtoreturns.

IMPLICATIONSOFMARKETVOLATILITYONLONG/SHORTEQUITYHEDGEFUNDS InthechartbelowwefindthereturnofLong/ShortEquityisalsoaffectedbylevelsofvolatility.Thesetypesofhedgefundstrategiesneedaconsistentlevelofrationalvolatilityinordertogeneratealpha,astheyprofitfromthepricedispersionbetweenstocksonaregional,sectorandintra-marketbasis.Thepricedispersioninordertobeadditivetoperformancemustbedrivenbyfundamentalfactors,thuswetermthesemarketstohaverational levelsofvolatilityasmeasuredbytheChicagoBoardofOptionsExchange (CBOE) Volatility Index (VIX) that is associated with the S&P 500 Index options, whichnormally range from the 15% to 25% level. These levels of VIX volatility attempt to predict thepotentialpricemovementoftheS&P500upordownbythepercentageleveloverthenext30days.

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Duringthemarketdebacleof2008whenthelevelsofVIXrosetoirrationallevels,equitypricestendtobedrivenbyglobaleconomicandmacrofactorsasopposedtofundamentals,thusthisirrationaltypeofvolatilitywilldetractfromtheperformanceofLong/ShortEquitystrategies.Similarly,otherperiodsof irrational volatility in 2001, 2002, 2010, 2011, which are highlighted in red on the chart below,coincidedwithsharpdipsintheperformanceofLong/ShortEquityStrategies.

FIG.3:EQUITYHEDGEFUNDSMONTHLYRETURNSWITHVIX

In summary, EquityHedge strategies tend to dowell in ascending equitymarkets, albeitwith lowervolatility,aswellasinrisinginterestrateenvironmentsandinrationalvolatilityenvironments.Ontheotherhand,macroandrelativevaluestrategiesarestrategiesthatwilltendtoperformwell inhighervolatilityenvironments.

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MACROVS.S&P500ANDMSCIACWIMacroisastrategywhichfocusesonfinancialinstrumentsthatarebroadinscopeandmovebasedonsystemicrisk.Systemicriskormarket risk isnotsecurityspecific. Ingeneral,portfoliomanagerswhotrade within the context of global macro strategies focus on currency strategies, interest ratesstrategies,andstockindexstrategies.Basedonthechartbelow,GlobalMacrohedgefundshavearelativelylowpositivecorrelation(ofbelow0.6) with the market indices, such as the Global Equity Index (MSCI ACWI NR) during most stablemarket periods. The only periods where we find exceptions are during the following time frames:August to September 1998, January to October 1999, February 2000, and January 2006 to January2008.

FIG.4:CorrelationofMacroHedgeFundsagainstGlobalEquityIndex

Thechart shows rollingcorrelationofmonthly returnsof theHFRIMacro (Total) Indexand theMSCIACWINR,whichiscalculatedbasedona36-monthrollingperiod.BasedonresearchbyGregoriouetal(2011)viii,volatilityhasanegativeimpactonhedgefundreturns.As we can see in the chart below, the performance returns of HFRI Global Macro Index is weaklynegatively correlatedwith the CBOEVIX index. Specifically, high and low volatility regimes have asignificantandgreaternegativeimpactonhedgefundreturnsthanmid-volatilityregimes.Hence,wecan say thatmacro strategies tend to do better inmid-volatilitymarkets than high or low-volatilityenvironments.

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FIG.5:RollingCorrelationofMacroHedgeFundsMonthlyReturns

ThechartshowsrollingcorrelationofmonthlyreturnsofHFRIMacro(Total)IndexandtheCBOEVIXIndex,whichiscalculatedbasedona36-monthrollingperiod.The chart below shows the positive relationship of returns between the HFRI Macro Index and theGlobalEquity Index(MSCIACWINRUSD). TheHFRIMacro Indextendstohave lowervolatilitythantheMSCIACWIovertheJanuary1990-September2014timeperiod.

FIG.6:RETURNSOFMACROHEDGEFUNDSANDTHEGLOBALEQUITYINDEX

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RELATIVEVALUEVS.VIXRelativevalueisastrategythatseekstotakeadvantageofpricedifferentialsbetweenrelatedfinancialinstruments,suchasstocksandbonds,bysimultaneouslybuyingandsellingthedifferentsecurities—therebyallowinginvestorstopotentiallyprofitfromthe“relativevalue”ofthetwosecurities.However,there is low correlation with the market indices and fixed income. The chart below shows therelationship of returns between the HFR Relative Value Index, equity markets volatility (VIX), fixedincome(BarclaysUSAggregate),andUSMarkets(S&P500).

FIG.7:CORRELATIONOFRELATIVEVALUEHEDGEFUNDSMONTHLYRETURNSWITHVIX

Relativevaluestrategieshaveaslightnegativecorrelationtovolatility,exceptintimesofmarketturmoil,whenthecorrelationbecomeshighlynegative.Forexample,thecorrelationdippedbelow-0.6duringthe1997Asianfinancialcrisis(August1997-September1997),theburstingoftheInternetbubble(March2001-May2001),andthe2007GlobalFinancialCrisis(September2008-November2008)anditsaftermath(May2009-August2011).Moreover, relative value strategies generally have a low negative correlation with volatility whichexplainswhythesestrategiesdowellinbetterinmoderatevolatilityenvironments.RELATIVEVALUEVS.S&P500Relativevaluestrategieshaveasmallpositivecorrelationwiththeequitymarket(S&P500),exceptintimesofmarket turmoil,whenthecorrelationbecomeshighlypositive. Forexample, thecorrelationrose above 0.6 during August 1998-June 1999, December 2007-October 2011, and January 2012-September2014.

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FIG.8:CORRELATIONOFRELATIVEVALUEHEDGEFUNDSMONTHLYRETURNSWITHS&P500

ThechartshowsrollingcorrelationofmonthlyreturnsHFRIRelativeValue (Total) IndexandtheS&P500TRUSD Index,which iscalculatedbasedona36-monthrollingperiodwithdatastartingJanuary1990.RELATIVEVALUEVS.BARCLAYSUSAGGREGATECorrelationsaregenerallypositivethoughinconsistent,particularlyduringperiodswheretheBarclaysUS Aggregate experiences sharp moves. These periods are highlighted in the chart below. Forexample, thecorrelationof relativevalueandBarclaysUSAggregatemovedfrom0.02to -0.25 fromMarch2007toMay2007,alsofrom-0.27to0.42 inAugust2008toOctober2008,andfrom0.22to-0.35fromAugust2011toOctober2011.

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FIG.9:CORRELATIONOFRELATIVEVALUEHEDGEFUNDSMONTHLYRETURNSWITHTHEBARCLAYSUSAGGREGATEINDEX

The chart shows rolling correlation of monthly returns HFRI Relative Value (Total) Index and theBarclaysUSAggregateIndex,whichiscalculatedbasedona36-monthrollingperiodwithdatastartingJanuary1990.IMPLICATIONSFORINVESTORSWithabetterunderstandingofsomeofthefactorsthataffecthedgefundstrategies,wecantrytoclearupsomeofthemisconceptionsinthemarketplaceofhedgefundperformance,expectationsinregardstorisk,returnandcorrelation,andhowtheyshouldbeemployedwithinaclient’sportfolio.As the institutional investor’s footprint inhedge fundshasgrowndramaticallyover thepast severalyears,manyoftheseinvestorsmayneedtoreassessandeducatethemselvesonhowhedgefundsasawhole fit intotheirportfolioversustheir investmentgoals. Webelievethedrive intohedgefundsbyinstitutionshasbeenpromptedbytheirdesirefordiversification,bondlikevolatilityandlowcorrelationto traditional long only assets. In the current time periodwhen amajority of institutions are eitherunderfunded or stretching to meet their annual spending needs, the ability to generate bond likeconsistent rates of return to meet their financial obligations would be optimal. To accomplish this,

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investorsshouldseekoutthosestrategiesthatemploymodestgrossandnetexposures,moderatetono leverage and have proper diversification in regards to percent of assets within a particular assetclass,industrygroup,andindividualpositions.HedgefundsthattypicallyhavethesecharacteristicsareLong/ShortMarketNeutralEquityandMulti-StrategyFunds.Institutionalinvestorsseekinghigherreturns,suchascompetingwithandoutperformingtheS&P500,should gravitate towards funds that can runwith high gross and net exposures,will take directionalpositions and canemploy various levels of leverage.Strategies fitting thismodel includeLong/ShortEquityHedge,Distressed/HighYieldDebtandMacro/CTA.Thedifferentrisk/returncharacteristicofhedgefundscanbeseeninthechartbelowwhichshowstheupsideanddownsidecaptureversustheS&P500indexfromJanuary1990toSeptember2014.FIG.10:HEDGEFUNDSTATISTICSVERSUSTHES&P500(JANUARY1990THROUGHSEPTEMBER2014)

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HFRI Fund Weighted Composite Index 1.8% -0.8% 50% 25% HFRI Equity Hedge (Total) Index 2.2% -1.1% 62% 36% HFRI Event-Driven (Total) Index 1.8% -0.6% 49% 21% HFRI Macro (Total) Index 1.4% 0.9% 39% 1% HFRI Relative Value (Total) Index 1.2% 0.2% 31% -5% HFRI EH: Short Bias Index -2.4% 4.4% -55% -183% HFRI Macro: Systematic Diversified Index 1.5% -0.4% 42% 15% HFRI ED: Distressed/Restructuring Index 1.6% -0.1% 43% 6% HFRI ED: Merger Arbitrage Index 1.0% 0.0% 28% 1% HFRI EH: Equity Market Neutral Index 0.7% 0.3% 18% -8%

S&P 500 3.3% -3.6% 100% 100%

CLARIFYYOURHEDGEFUNDPROGRAMGOALSANDDESIGN

Over timewehavefoundthat theadditionofhedgefundstoa traditional longonlyequityandfixedincomeportfoliocanreducethedownsidevariabilityofreturn,while increasingtheprobabilityoftheinstitutionmeetingitsannualreturnobjectivebyeffectivelyreducingthelefttailriskoftheportfolio.Clearbrookiscomfortableatrecommendingupwardsofa20%allocationtohedgefundstoachievethisgoal.Theabilityofhedgefundstoprovidedownsideriskprotectionandimproveconsistencyofreturnforatraditionalportfolio,isbyvirtueoftheirlowcorrelativenaturetolongonlyassets.Asseeninthechartbelow, we illustrate the cross-correlation between traditional and alternative assets. The statisticsshowthattheHFRIindexesandtraditionalassetshavevaryinglevelsofcorrelation.Dependingonthestrategy,ahedgefundcanhaveamoderate,lowornegativecorrelationtoequitiesorbonds.Another

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observation is thatall strategieshavea lowcorrelationwithanumberof traditionalassets. Assuch,hedgefundsprovidediversificationwithrespecttotraditionalassets.Thiscanprovideseveralbenefitsto portfolio allocations, including but not limited to, lower portfolio beta, lower return volatility,reductionoftailriskandimprovedconsistencyofreturn.

FIG.11:HFRIHEDGEFUNDCORRELATIONSTOTRADITIONALASSETS(FEB2000TOOCTOBER2014)

From Feb 2000 to October 2014

HFRI Fund Weighted

Composite Index

HFRI Equity Hedge Index

HFRI Event-Driven Index

HFRI Macro Index

HFRI Relative

Value Index

S&P 500 0.77 0.78 0.74 0.18 0.59 MSCI World 0.84 0.85 0.80 0.29 0.66 MSCI EM 0.87 0.86 0.80 0.43 0.68 Barclays US Agg Bond 0.01 -0.02 -0.04 0.16 0.13 Barclays Global Aggregate 0.24 0.21 0.18 0.38 0.23 Barclays High Yield 0.69 0.67 0.76 0.16 0.77 US Dollar -0.43 -0.43 -0.38 -0.41 -0.36 Gold Spot 0.28 0.25 0.19 0.44 0.21 Euro Currency 0.39 0.39 0.35 0.39 0.33 Source:Bloomberg,EncorrandHFR

In the currentmarket environmentwith equitymarkets trading at historical highs and fixed incomemarketsprovidinghistoricallylowyields,webelievetheproperselectionandallocationofhedgefundsto an institution’s portfolio canprovide themwith a better risk-adjusted return solution tomeet theliabilitiesofapublicpensionfund.ByemployingthedatafromHFRandhistoricaldataforequitiesandfixedincome,weshowthechangeoftheMarkowitzefficientfrontierviatheadditionofhedgefundstoa traditional equity/fixed incomeportfolio as seen in the chart below. The keyobservation is hedgefunds improve the risk/returnprofileof a traditional portfolio, or simply enhances theportfolio’s riskadjustedreturn.

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FIG.12:EFFICIENTFRONTIEROFTRADITIONALANDHEDGEFUNDALLOCATIONS(JAN2000TOSEPTEMBER2014)

Source:Lyxor

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CASESTUDY:CLEARBROOKCUSTOMHEDGEFUNDSOLUTIONAswehavesoughttodemonstrateintheprevioussections,theroleofaportfolioofhedgefundsisnotto outperform equity markets regardless of conditions. Rather, hedge fund investing requiresdedicatedresourcesappliedtomanagerselectionandportfolioconstruction,andaportfolioofhedgefunds will require ongoing monitoring and rebalancing. Clearbrook provides this oversight forinstitutionalclients.Asanexample,inAugustof2011,Clearbrookcreatedacustomizedhedgefundsolutionforaclientthatbehaves as a “fixed income surrogate.” This allocation provides stable, absolute rates of return in arange of approximately 400 basis points per annum over cash equivalent yields, by allocating to adiversifiedpoolofexperienced investmentmanagers. Clearbrookactivelymanages theallocation toeach individual hedge fund strategy, which have specific risk and return characteristics, see Fig. 13below.Since its inception in August 2011, the Clearbrook solution has outperformed its benchmark, theBarclaysAggregateIndex,by+5.74%.Disclaimer: The performance results displayed on this page represent actual returns of ClearbrookDiscretionary Investment Services LLC(“CDIS”)fortheperiodAugust2011throughthemonth-endindicatedintheheadingofthispaper.Thesereturnsarenetofexpensesandfees.Pastperformanceisnoguaranteeoffutureresultsandnorepresentationismadethataclientwillorislikelytoachieveresultssimilartothoseshown.Infact,futureresultsarelikelytodifferfrompastresultsbecausetheywilldependinpartonfuturemarketconditions,whichwillvaryfrom those of the past. There is no representation herein by CDIS that any other comparably structured portfolio will produce similarperformance to that of the results reflected herein. Underlying strategies in which CDIS Core Fund LLC invests may involve less liquidsecurities, as well as leverage. Investors should note that (a) the Fund is speculative and involves a high degree of risk; (b) the Fund’sperformancecanbevolatile;(c)aninvestorcouldloseallorasubstantialamountofhisorherinvestment;(d)thereisnosecondarymarketfortheinvestor'sinterestintheFundandnoneisexpectedtodevelop;and(e)therearerestrictionsontransferringinterestsintheFund.Duetothepotential volatilityofNetAssetValues,portfoliosmanagedbyCDISare intended for sophisticated investors. Youandyour advisor(s)should consider any legal, tax, and accounting matters relevant to any investments discussed herein. If you are subject to ERISA, thispresentationisbeingfurnishedtoyouontheconditionthatitwillnotformtheprimarybasisforanyinvestmentdecision.Thispaperisnottheofferof,northesolicitationofoffersfor,anysecurity,whichcanonlybemadebyprivateplacementmemorandumtobeobtainedfromCDIS.

FIG.13:CLEARBROOK’SAPPROACHTOCONSTRUCTINGHEDGEFUNDPORTFOLIOS

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CONCLUSIONInstitutional investorstodayareconfrontedwiththeneedtobothachieveconsistentpositiveratesofreturn and the need to mitigate downside risk. Pension funds in the current low interest rateenvironmentareseeingtheirunderfundingstatusworsen,andendowmentsareneedingtofindothermeanswithwhich tomeet their annual spending needs. Therefore it is important for institutions toferretoutandemploy investments thatcanmeet their targeted ratesof returnwithout takingonaninordinate amount of risk. The choice of an appropriate hedge fund investment to either providerisk/adjusted alpha versus equities or a moderate fixed income like return can help institutions toreduce their volatility andenhance returnsover time.Lower volatility and smallerpotential portfoliodraw-downs lead to a greater wealth effect and compounding of return for the institution. Theconsistentcompoundingofreturnswillpermitinstitutionstobettermeettheirliabilitiesandspendingneeds.Inordertonavigatethehedgefundspaceproperly,institutionswillneedprofessionalguidancetoimplementtherightstrategiesattherighttime. Notallhedgefundsarecreatedequal,andpublicfundsneedtoeducatetheirconstituentsabouthowtheassetclassisappropriatelyincorporatedaspartofaninvestmentportfolio.

i“TheTrillion-DollarConvergence:CapturingtheNextWaveofGrowthinAlternativeInvestments.”McKinsey&Co.,FinancialServicesPractice.August2014.ii“InvestinginHedgeFunds:AllAboutReturns?TheRealDriversforInstitutionalInvestorAllocation.”Preqin.June2014.AccessedonOctober6,2014fromhttps://www.preqin.com/docs/reports/Preqin_Special_Report_Investing_in_Hedge_Funds_June_14.pdf iiihttp://dealbook.nytimes.com/2014/09/15/nations-biggest-pension-fund-to-end-hedge-fund-investments/ivhttp://online.wsj.com/articles/calpers-shows-masters-of-hedge-fund-universe-have-no-clothes-heard-on-the-street-1410903036 vhttp://www.forbes.com/sites/stevedenning/2014/09/16/are-institutional-investors-waking-up-calpers-exits-hedge-funds/vi“CommonalityinHedgeFundReturns:DrivingFactorsandImplications.”BanquedeFranceWorkingPaperNo.373.Bussiere,M.,Hoerova,M.,andKlaus,B.March1,2012.AccessedonOctober6,2014fromhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2034894.vii“WhathappenedtothequantsinAugust2007?”JournalofInvestmentManagement5,5–54.Khandani,A.E.andLo,A.W.2007.AccessedonOctober6,2014fromhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1288988.viiiGregoriou,G.,etal(2011)“HedgeFunds:InsightsinPerformanceMeasurement,RiskAnalysis,andPortfolioAllocation.”PublishedbyJohnWiley&Sons.AccessedonNovember28fromhttp://books.google.com/books?id=vgFbxoVVMUgC&pg=PT408&lpg=PT408&dq=vix+volatility+and+global+macro+hedge+fund&source=bl&ots=u66VSYhgfy&sig=Vmmcz8htQHXu94kajLw5O6GodoE&hl=en&sa=X&ei=R_14VObXMZbasASekIDAAg&ved=0CEwQ6AEwBw#v=onepage&q=vix%20volatility%20and%20global%20macro%20hedge%20fund&f=false

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