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marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Page 1: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

marcus evans

2007 Private WealthManagement Summit

The “Stay Rich”Hedge Fund Portfolio

Page 2: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Enron

Pan Am

W. R. Grace

Polaroid

WorldCom

50 mortgage companies (so far)

Prominent companies sometimes go belly-up

Dead Public Companiesmarcus evans

Page 3: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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LTCM

Bayou

Amaranth

Sowood

Bear Stearns

Bear Stearns

Prominent hedge funds sometimes go belly-up

Dead Hedge Fundsmarcus evans

Page 4: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Anecdotally, the failure rate of large public companies and prominent hedge funds is quite similar

You can’t tell the belly-ups without a program…

So What’s My Point?marcus evans

Page 5: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Since the risk of failure is similar, the risk-control strategy ought to be similar

Why re-invent this wheel?

So What’s My Point?marcus evans

Page 6: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Owning 5 or 6 stocks is a “Get-Rich-or-Get-Poor Strategy”

We might get rich (Microsoft, Google) – or we might go broke (Enron, mortgage companies)

This is MPT 101

Single Stock Riskmarcus evans

Page 7: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Owning 5 or 6 hedge funds is also a “Get-Rich-or-Get-Poor Strategy”

We might get rich (Soros, Farallon) – or we might go broke (LTCM, Sowood)

This is Hedge Fund 101

Single Hedge Fund Riskmarcus evans

Page 8: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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To avoid going broke owning stocks: instead of holding a handful of stocks, we need to hold (roughly) 20 well-diversified stocks

This is MPT 101

Diversifying Away Single Stock Riskmarcus evans

Page 9: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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“Well-diversified” means not in the same industry sector or not otherwise correlated (don’t own 20 mortgage lenders)

This is MPT 101

Diversifying Away Single Stock Riskmarcus evans

Page 10: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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To avoid going broke owning hedge funds: instead of holding a handful of hedge funds, we need to hold (roughly) 20 well-diversified funds

This is Hedge Fund 101

Diversifying Single Hedge Fund Riskmarcus evans

Page 11: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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“Well-diversified” means not in the same sector or engaging in the same strategy (i.e., they are not all long subprime credit)

This is Hedge Fund 101

Diversifying Single Hedge Fund Riskmarcus evans

Page 12: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Yet, most private investors’ hedge fund portfolios consist only of a small handful of individual hedge funds

What gives?

So What’s My Point?marcus evans

Page 13: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Implication #1:

To invest in individual hedge funds, we need to have a LOT of capital allocated to hedge

How big is big?

The Implications of Hedge Fund 101marcus evans

Page 14: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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If the best hedge funds have $5 million minimums, we need to be investing $100 million in hedge

($5mm X 20 funds)

It’s sooo big!

The Implications of Hedge Fund 101marcus evans

Page 15: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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If we can negotiate average minimums of $1 million – very unlikely - we need to be investing $20 million in hedge

($1mm X 20 funds)

It’s sorta big…

The Implications of Hedge Fund 101marcus evans

Page 16: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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The reality is probably that $25 million allocated to hedge is the absolute minimum if you wish to invest in individual hedge funds

It’s big!

The Implications of Hedge Fund 101marcus evans

Page 17: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Implication #2:

Multistrategy funds are not a way around this rule – they don’t offer institutional diversification

A fund is a fund is a fund.

The Implications of Hedge Fund 101marcus evans

Page 18: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Investing in 3 multistrats means that 1/3 of our capital is exposed to one institution – is it Farallon or Amaranth?

A fund is a fund is a fund.

The Implications of Hedge Fund 101marcus evans

Page 19: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Multistrats don’t always provide strategy diversification: at the peak, 95% of Amaranth’s capital was in one strategy

A fund is a fund is a fund.

The Implications of Hedge Fund 101marcus evans

Page 20: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Multistrats don’t always provide strategy diversification: most multistrats are herd animals

A fund is a fund is a fund.

The Implications of Hedge Fund 101marcus evans

Page 21: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Implication #3:

Like it or not, funds of funds will be an important element in the hedge fund portfolios of most private investors

Everyone loves to hate FOFs

The Implications of Hedge Fund 101marcus evans

Page 22: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Of the 1,200 hedge FOFs in existence, about 50 are worthy of consideration

A few funds earn their extra layer of fees

The Implications of Hedge Fund 101marcus evans

Page 23: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Someone must do what a good FOF does:

Offer access to closed funds

Perform up-front diligence

Perform ongoing diligence

Make sensible tactical adjustments

Offer built-in diversification

These services aren’t cheap, but they have to be done

The Implications of Hedge Fund 101marcus evans

Page 24: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Hedge fund terror levels: The Red Zone – Investing

less than $25 million in hedge

The Orange Zone – Investing $25 - $75 million in hedge

The Green Zone – Investing more than $75 million in hedge

Don’t confuse us with TSA…

What Zone Are You In?marcus evans

Page 25: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Why all the terror? The Red Zone – Investors in

individual hedge funds may destroy capital

The Orange Zone – Investors in individual funds may destroy returns

The Green Zone – Investors in individual funds are probably ok

Don’t confuse us with TSA…

What Zone Are You In?marcus evans

Page 26: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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In return for less-than-long-equity returns, do we want to risk getting poor?

Duh…

What Are We Getting for Taking Risk?marcus evans

Page 27: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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For < $25 million investors: Stick with the best FOFs

If you invest in individual funds, don’t commit more than 5% of your hedge exposure to any one

It may not be fun, but it’s smart

Red Zone Strategiesmarcus evans

Page 28: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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For $25 to $75 million investors:

Core position in a high quality, diversified FOFs (minimum 50% allocation)

Individual funds as satellite strategies (max. 5% in any fund)

There really are FOFs that are worth the extra layer of fees! Honest!

Orange Zone Strategiesmarcus evans

Page 29: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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For > $75 million investors: Use individual hedge funds

– 15 to 20 funds minimum

Use targeted FOFs for unusual strategies (real assets, etc.)

Consider engaging a hedge fund consultant (Albourne, etc.)

Only the largest families will fall into the Green Zone

Green Zone Strategiesmarcus evans

Page 30: Marcus evans 2007 Private Wealth Management Summit The “Stay Rich” Hedge Fund Portfolio

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Gregory Curtis

Chairman

Greycourt & Co., Inc.

(412) 361-0100

Fax 412-361-0300

[email protected]

www.greycourt.com

Contact InformationMarcus Evans

September 2007