Fund Classification Guide

Fund Classification Guide

Primary Strategy

Direct Hedge Fund – Direct Hedge Funds are open-ended investment vehicles investing in a wide range of assets using a variety of strategies. These funds are directly invested in assets that fall into the strategy’s theme. Investors are heavily relying on the manager’s expertise in a particular area to provide them with an alternative solution to traditional long-only investments.

Replication Hedge Funds – Replication Hedge Funds aim to replicate hedge fund returns by isolating specific hedge fund strategies and attempting to mimic what the manager is doing. The expectation is to generate similar beta to that of the particular hedge fund.

Hedge Fund-of-Funds – Hedge Fund-of-Funds hold a portfolio of other hedge funds rather than investing directly in shares, bonds or other securities. This type of strategy provides the investor with an opportunity to achieve a broad level of diversification in a variety of fund categories that are wrapped up into one fund. Fund-of-Fund managers will often conduct extensive due diligence on the managers in which they invest. Once invested, the fund manager will actively monitor the firms and funds in the portfolio. These strategies tend to have higher expense ratios as they are often comprised of multiple funds.

Hedge Funds

Credit Long/Short – Credit Long/Short strategies use leverage, derivatives, and short positions with exposure to credit-sensitive securities in an attempt to maximize total returns using analysis of issuers and current credit market views. Long/Short strategies such as this typically have a more concentrated portfolio and longer duration than long only products.

Event-Driven – Event-Driven funds are a broader form of distressed and merger arbitrage products. Event-Driven strategies include mergers and acquisitions, spin-offs, tracking stocks, accounting write-offs, reorganizations, bankruptcies, share buy-backs, special dividends, and any other significant market events. Returns are expected to have little correlation to the stock market since the returns are generated from company specific events.

Equity Long/Short – Equity Long/Short managers build a portfolio by buying long positions in undervalued stocks and shorting positions in overvalued stocks through investments in equities and equity-linked securities. The manager will use the short positions to offset risk, resulting in a more risk-neutral position with respect to exposure. Net exposure for these strategies tends to be long market exposure.

Macro – Macro funds allocate to the global equity, fixed income, and currency markets in hopes of generating returns as a result of significant shifts in market factors such as global interest rates and macroeconomic policy. Macro strategies will often use derivatives and leverage to greater accentuate the impact of market movements on the portfolio. These trades are typically based on overall economic and political views (macroeconomic principles).

Insurance - Insurance strategies take long and short positions in insurance related assets such as reinsurance securities and catastrophe bonds. These are event driven strategies in which the manager is looking to speculate on a catalyst which will significantly impact the market in which the securities have exposure. Insurance funds may diversify among various types of insurance or may limit exposure to a specific category such as weather, life insurance, or catastrophe bonds. The returns are typically uncorrelated to the market because they are the product of an isolated event.

Multi-Strategy - Multi-Strategy funds typically employ several strategies under a common organizational goal. Typically, multistrategy funds can diversify market risk and are characterized by their ability to allocate capital among various strategies. Multi-Strategy managers normally have the freedom to operate within predefined risk limits and can leverage the entire portfolio or apply various levels of leverage for each strategy or transaction. Most liquid positions in Multi-Strategy funds may have to be redeemed first which can result in higher concentrations of illiquid strategies.

Niche - Niche strategies aim to achieve further portfolio diversification by adding exposure to market catalysts that are otherwise difficult to directly access. This exposure is typically gained through a manager’s ability to time entry and exit of investments or through specific expertise in an investment. These strategies can be specific to an industry, region, or sector depending on the manager’s
expertise.

Real Estate - Real Estate strategies employ an investment philosophy predicated upon realization of a valuation differential between related instruments in which one or more components of the spread contains exposure to investment in real estate directly (commercial or residential) or indirectly through Real Estate Investment Trusts (REITS). Strategies are typically utilize a fundamental approach to measure the existing relationship between instruments and identify positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager.

Volatility - Volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies. These funds can also include long, short, neutral, or variable exposures to the direction of implied volatility. Volatility strategies can also employ the use of both listed and unlisted instruments to enhance returns.

Commodities – Commodity strategies invest in derivative securities to speculate on specific commodity market prices. These strategies often seek disparity between spot and futures prices. The manager typically uses leverage in the form of commodity futures contracts. The fund may focus specifically on agriculture, energy, metals, or natural resources.

Alternatives

Absolute Return – Absolute Return managers are not bound to a specific stock or bond index, thus enabling them to pursue value-added strategies without regard for size, benchmark restrictions, or market direction. The manager is targeting risk-adjusted returns in excess of the investment objective (i.e. LIBOR + 2%). Absolute Return funds may focus specifically on fixed income or equity, or may employ a multi-asset class approach to achieving target alpha.

Corporate Venturing – Corporate Venturing funds are typically closed to outside investors and are formed with capital supplied by the parent company. These funds invest in startup and growth companies, often with the intention to supplement research and development budgets for the parent company. The investments are also made with the intention that the startup will increase in value and leave the parent company with a sizeable stake.

Currency – Currency strategies typically speculate on the direction in which a currency or portfolio of currencies will move by taking an unhedged long or short position. The manager will typically use long and short currency forward contracts or futures contracts to gain exposure to currencies. The fund may focus on a specific group of currencies (i.e. G4) or take a broader approach to the currency market. Currency managers employ either an active or passive management strategy, depending on investment objective.

Distressed Debt – Distressed Debt strategies invest in the debt of financially troubled companies, most of which have defaulted or are on the verge of default, undergoing restructuring, reorganization, liquidations, or bankruptcy proceedings. Exposure is primarily gained through long and short positions in significantly discounted corporate debt or debt-related securities. The securities are expected to appreciate substantially as a result of the debt restructuring or other action. The manager will typically assume an active role in the management of the company through the creditors’ committee.

Infrastructure – Infrastructure strategies invest in securities of companies involved in the development of infrastructure such as roads, railroads, waste facilities, water filtration plants, grid, etc. These investments are usually long-term. The theme of the fund can be driver by a particular class of infrastructure such as water, telecommunication, ports, or energy.

Mezzanine Debt – Mezzanine Debt funds invest in a hybrid debt/equity security of small and middle market companies, commonly constructed as an intermediate term bond with contractual obligations to repay. These securities often have the option to convert to an equity interest in the company which issued the debt. The investments are typically structured as subordinated or unsecured notes but can also come in the form of convertible debt, common stock, or preferred stock.

Portable Alpha – Portable Alpha strategies invest with the intent to achieve return distributions that are not correlated to stocks or bonds. The managers will often allocate globally across multiple asset classes with an absolute total return objective. The rate of return equals that of a cash rate of return plus a premium (portable alpha). The portable alpha is representative of the manager’s ability to select value-maximizing investments, as the strategy is seeking returns independent of market movements.

Private Equity – Private equity strategies are long-term, illiquid investments in which private stock or equity-linked securities of a nonpublic company are purchased with the intent that the company goes public, or capital is provided to public companies that wish to go private. The investment goal will vary depending on the manager. However, common objectives are expansion/development (Venture Capital), ownership (Buyout), or restructuring of firm operations/management (Mezzanine).

Real Estate Financing – Real Estate Financing strategies typically use a form of mezzanine financing to close the gap between the equity contributed by the owner of a real estate investment and the financing provided by the lender. This type of strategy often seeks investments in projects such as warehouse expansion, office park construction, and other real estate opportunities where additional outside capital is required. This is a long-term, illiquid investment.

Secondary Markets – Secondary Market managers serve as market-makers for stakeholders in relatively illiquid asset looking to close their positions. These managers provide a secondary market for investors holding long-term investments that have declined in value. The assets may sell for a small fraction of the seller’s investment and are sometimes ‘auctioned’ off to the highest bidder. An example would be a venture capital firm that is looking to sell off its stake in a company it initially funded. The venture capital firm would go to the secondary market to realize its losses or gains.

Special Situations – Also referred to as Distressed Investing or Vulture Investing, Special Situation strategies seek direct and indirect investments in equity and debt securities of companies that are in financial distress, engaged in a corporate transaction, issuing or repurchasing stock, or involved in another type of special situation. The intent is to invest capital into a company that is distressed financially but operationally sound, and restructure/reorganize the company to improve profitability. An ideal target has a relatively high income level, tangible assets, and requires capital restructuring. The manager may lead or actively participate in the restructuring process.

Venture Capital – Venture Capital strategies invest private capital in startup or early-stage companies with long-term growth potential and without access to capital markets. The manager carefully reviews business plans and other success indicators to determine in which companies to invest capital. Once invested, the managers will often take an active role in monitoring the firm’s progress, establishing goals for the firm, and ensuring the success and growth of the firm. These investments are long term, illiquid, and very risky.

Sub-Strategy

Hedge Funds

Credit Long/Short – Credit Long/Short strategies use leverage, derivatives, and short positions with exposure to credit-sensitive securities in an attempt to maximize total returns using analysis of issuers and current credit market views. Long/Short strategies such as this typically have a more concentrated portfolio and longer duration than long only products.

Event-Driven – Event-Driven funds are a broader form of distressed and merger arbitrage products. Event-Driven strategies include mergers and acquisitions, spin-offs, tracking stocks, accounting write-offs, reorganizations, bankruptcies, share buy-backs, special dividends, and any other significant market events. Returns are expected to have little correlation to the stock market since the returns are generated from company specific events.

Equity Long/Short – Equity Long/Short managers build a portfolio by buying long positions in undervalued stocks and shorting positions in overvalued stocks through investments in equities and equity-linked securities. The manager will use the short positions to offset risk, resulting in a more risk-neutral position with respect to exposure. Net exposure for these strategies tends to be long market
exposure.

Macro – Macro funds allocate to the global equity, fixed income, and currency markets in hopes of generating returns as a result of significant shifts in market factors such as global interest rates and macroeconomic policy. Macro strategies will often use derivatives and leverage to greater accentuate the impact of market movements on the portfolio. These trades are typically based on overall economic and political views (macroeconomic principles).

Insurance - Insurance strategies take long and short positions in insurance related assets such as reinsurance securities and catastrophe bonds. These are event driven strategies in which the manager is looking to speculate on a catalyst which will significantly impact the market in which the securities have exposure. Insurance funds may diversify among various types of insurance or may limit exposure to a specific category such as weather, life insurance, or catastrophe bonds. The returns are typically uncorrelated to the market because they are the product of an isolated event.

Multi-Strategy - Multi-Strategy funds typically employ several strategies under a common organizational goal. Typically, multistrategy funds can diversify market risk and are characterized by their ability to allocate capital among various strategies. Multi-Strategy managers normally have the freedom to operate within predefined risk limits and can leverage the entire portfolio or apply various
levels of leverage for each strategy or transaction. Most liquid positions in Multi-Strategy funds may have to be redeemed first which can result in higher concentrations of illiquid strategies.

Niche - Niche strategies aim to achieve further portfolio diversification by adding exposure to market catalysts that are otherwise difficult to directly access. This exposure is typically gained through a manager’s ability to time entry and exit of investments or through specific expertise in an investment. These strategies can be specific to an industry, region, or sector depending on the manager’s expertise.

Real Estate - Real Estate strategies employ an investment philosophy predicated upon realization of a valuation differential between related instruments in which one or more components of the spread contains exposure to investment in real estate directly (commercial or residential) or indirectly through Real Estate Investment Trusts (REITS). Strategies are typically utilize a fundamental approach to measure the existing relationship between instruments and identify positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager.

Volatility - Volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies. These funds can also include long, short, neutral, or variable exposures to the direction of implied volatility. Volatility strategies can also employ the use of both listed and unlisted instruments to enhance returns.

Commodities – Commodity strategies invest in derivative securities to speculate on specific commodity market prices. These strategies often seek disparity between spot and futures prices. The manager typically uses leverage in the form of commodity futures contracts. The fund may focus specifically on agriculture, energy, metals, or natural resources.

Alternatives

Absolute Return – Absolute Return managers are not bound to a specific stock or bond index, thus enabling them to pursue value-added strategies without regard for size, benchmark restrictions, or market direction. The manager is targeting risk-adjusted returns in excess of the investment objective (i.e. LIBOR + 2%). Absolute Return funds may focus specifically on fixed income or equity, or may employ a multi-asset class approach to achieving target alpha.

Corporate Venturing – Corporate Venturing funds are typically closed to outside investors and are formed with capital supplied by the parent company. These funds invest in startup and growth companies, often with the intention to supplement research and development budgets for the parent company. The investments are also made with the intention that the startup will increase in value and leave the parent company with a sizeable stake.

Currency – Currency strategies typically speculate on the direction in which a currency or portfolio of currencies will move by taking an unhedged long or short position. The manager will typically use long and short currency forward contracts or futures contracts to gain exposure to currencies. The fund may focus on a specific group of currencies (i.e. G4) or take a broader approach to the currency market. Currency managers employ either an active or passive management strategy, depending on investment objective.

Distressed Debt – Distressed Debt strategies invest in the debt of financially troubled companies, most of which have defaulted or are on the verge of default, undergoing restructuring, reorganization, liquidations, or bankruptcy proceedings. Exposure is primarily gained through long and short positions in significantly discounted corporate debt or debt-related securities. The securities are expected to appreciate substantially as a result of the debt restructuring or other action. The manager will typically assume an active role in the management of the company through the creditors’ committee.

Infrastructure – Infrastructure strategies invest in securities of companies involved in the development of infrastructure such as roads, railroads, waste facilities, water filtration plants, grid, etc. These investments are usually long-term. The theme of the fund can be driver by a particular class of infrastructure such as water, telecommunication, ports, or energy.

Mezzanine Debt – Mezzanine Debt funds invest in a hybrid debt/equity security of small and middle market companies, commonly constructed as an intermediate term bond with contractual obligations to repay. These securities often have the option to convert to an equity interest in the company which issued the debt. The investments are typically structured as subordinated or unsecured notes but can also come in the form of convertible debt, common stock, or preferred stock.

Portable Alpha – Portable Alpha strategies invest with the intent to achieve return distributions that are not correlated to stocks or bonds. The managers will often allocate globally across multiple asset classes with an absolute total return objective. The rate of return equals that of a cash rate of return plus a premium (portable alpha). The portable alpha is representative of the manager’s ability to select value-maximizing investments, as the strategy is seeking returns independent of market movements.

Private Equity – Private equity strategies are long-term, illiquid investments in which private stock or equity-linked securities of a non-public company are purchased with the intent that the company goes public, or capital is provided to public companies that wish to go private. The investment goal will vary depending on the manager. However, common objectives are expansion/development (Venture Capital), ownership (Buyout), or restructuring of firm operations/management (Mezzanine).

Real Estate Financing – Real Estate Financing strategies typically use a form of mezzanine financing to close the gap between the equity contributed by the owner of a real estate investment and the financing provided by the lender. This type of strategy often seeks investments in projects such as warehouse expansion, office park construction, and other real estate opportunities where additional outside capital is required. This is a long-term, illiquid investment.

Secondary Markets – Secondary Market managers serve as market-makers for stakeholders in relatively illiquid asset looking to close their positions. These managers provide a secondary market for investors holding long-term investments that have declined in value. The assets may sell for a small fraction of the seller’s investment and are sometimes ‘auctioned’ off to the highest bidder. An example would be a venture capital firm that is looking to sell off its stake in a company it initially funded. The venture capital firm would go to the secondary market to realize its losses or gains.

Special Situations – Also referred to as Distressed Investing or Vulture Investing, Special Situation strategies seek direct and indirect investments in equity and debt securities of companies that are in financial distress, engaged in a corporate transaction, issuing or repurchasing stock, or involved in another type of special situation. The intent is to invest capital into a company that is distressed financially but operationally sound, and restructure/reorganize the company to improve profitability. An ideal target has a relatively high income level, tangible assets, and requires capital restructuring. The manager may lead or actively participate in the restructuring process.

Venture Capital – Venture Capital strategies invest private capital in startup or early-stage companies with long-term growth potential and without access to capital markets. The manager carefully reviews business plans and other success indicators to determine in which companies to invest capital. Once invested, the managers will often take an active role in monitoring the firm’s progress, establishing goals for the firm, and ensuring the success and growth of the firm. These investments are long term, illiquid, and very risky.

Sub-Strategy

Hedge Funds

100% Net Long Exposure – 100% Net Long Exposure strategies utilize both long and short positions but maintain a net market exposure of 100%. Gross exposure, however, varies with investment focus through use of derivatives and short positions.

Activist – Activist managers examine public companies that are mismanaged. These strategies are effective in changing the composition of a company’s board of directors and generally convince existing management to adopt their recommended changes to the firm’s corporate structure. Activist managers are expected to produce returns well above other hedge fund products.

Capital Structure Arbitrage – Capital Structure Arbitrage strategies invest in the multiple asset classes available within the capital structure of a company. Returns are generated by capitalizing on pricing inefficiencies within the company’s debt structure. The manager takes a long position on the undervalued security, while taking a short position on the overvalued security with the expectation that the prices will converge to the market price.

Credit Long/Short: Multi-Strategy – Multi-Strategy fund managers maintain long and short positions mostly in fixed income and fixed income-linked securities. The manager will pool investment capital and allocate it to multiple strategies by employing various investment processes to analyze and determine security selection. These strategies can be narrowly focused or broadly diversified in leverage, net exposure, holding period, and market concentration.

Credit Long/Short: Multi-Strategy (Market Neutral) – These strategies employ Multi-Strategy methodology to construct a portfolio with little or no net market exposure by taking offsetting positions in derivatives and other securities, attempting to neutralize market risk. Multi-Strategy (Market Neutral) managers typically follow the rule of one alpha. Managers in this space create a portfolio designed to produce only one source of alpha; distinct from long/short managers who have both a long portfolio and short portfolio – each generating sources of alpha. This strategy eliminates beta risk and relies solely on security selection.

Equity Long/Short: Multi-Strategy - Multi-Strategy fund managers maintain long and short positions mostly in equity and equity-linked securities. The manager will pool investment capital and allocate it to multiple strategies by employing various investment processes to analyze and determine security selection. These strategies can be narrowly focused or broadly diversified in leverage, net exposure, holding period, and market concentration.

Distressed Credit – Distressed Credit funds take positions in the debt of companies that are experiencing financial distress, in bankruptcy, or corporations in a major reorganization. Most distressed credit funds use a combination of short selling, capital structure arbitrage (see definition), and becoming involved in the bankruptcy process to find extremely undervalued securities.

Discretionary Macro – Discretionary Macro strategies rely on fundamental market data to employ a macroeconomic, top-down investment approach. The manager will often actively trade in developed and emerging markets with a focus on absolute and relative levels on equity markets, interest rates, currencies, and commodities. Spread trades are used when there are opportunities to isolate an investment whose price is inconsistent with expected value.

Merger Arbitrage – Merger Arbitrage strategies focus on identifying equity and equity-linked securities of companies that are currently involved in a corporate transaction. The manager will buy the stock of the firm that is to be acquired and sell the stock of the firm that is the acquirer. This strategy attempts to capture the price spread between the current market prices of the merging firms and the expected value of those companies upon the completion of the merger.

Event Driven: Multi-Strategy - Multi-Strategy fund managers maintain long and short positions in various asset classes, depending on the theme of the fund. The manager will pool investment capital and allocate it to multiple strategies by employing various investment processes to analyze and determine security selection. These strategies can be narrowly focused or broadly diversified in leverage, net exposure, holding period, and market concentration.

Private Placements/Reg. D – Regulation D allows hedge funds to issue private offerings to sophisticated or institutional investors as a non-public offering, which exempts the issue from being registered under the Securities Act of 1933. The security can be sold to an unlimited number of accredited investors, but there can be no more than 35 non-accredited purchasers of the security from the issuer in one offering. Rule 501(a) sets the terms for defining an accredited investor. Essentially, an accredited investor is defined as an institutional investor or organization that has total assets in excess of $5,000,000, or a person whose individual or joint net worth exceeds $1,000,000 at the time of purchase or had an individual income greater than $200,000 in each of the two most recent years or joint income with that persons spouse exceeding $300,000.

Special Situations – Special Situation strategies primarily invest in securities of companies or securities with exposure to companies which are engaged in, or with soon be engaged in, any particular circumstance involving a security that managers find potentially profitable based on a special situation, rather than fundamental analysis. These investments are typically not long-term and include opportunities such as company spin-offs, tender offers, mergers and acquisitions, and bankruptcy proceedings.

Short Selling/Short Bias – Short Bias strategies utilize analytical tactics in which the manager assesses the value of companies in order to identify those that are overvalued. The manager will typically use a fundamental or technical approach, and will maintain a short position once the company has been identified. These products make money when the stock market declines and are used to protect portfolios during market corrections and other drawdowns.

Systematic Macro – Systematic Macro managers use mathematical and technical models to identify opportunities in markets showing trends or momentum across asset classes or individual securities. These strategies employ a quantitative approach with a focus on statistical or technical patterns in returns of an asset in a liquid market. These strategies benefit by discerning consistent trending patterns in individual securities and typically purchase more liquid securities to allow for shorter duration holding periods.

Equity Hedge (Sector Focused) – Sector focused equity hedge strategies, also known as sector focused long/short strategies, attempt to generate returns by investing primarily in a specific industry, sector, or market segment. Examples of sector focused products include energy, consumer staples, and transportation.

CTA Managed Futures – Commodity Trading Advisors (CTA ) employ strategies in which the fund invests in options, futures, or swaps in commodity markets. CTA strategies invest in a variety of commodities through various derivative securities, taking both long and short positions. These can be specifically focused in any of the following areas: Agriculture Focus, Discretionary Focus, Energy Focus,
Metals Focus, Synthetic Focus, or Systematic Focus.

Global Tactical Asset Allocation – GTAA strategies combine aspects of Global Macro strategies with tactical allocation methodology. GTAA funds generate returns by taking long and short positions in multiple asset classes such as global equity, debt, and currency markets. These positions implement risk controls and are well-diversified. Asset classes are over weighted or underweighted in the portfolio, based on the manager’s short-term forecast of expected performance.

Long Only – Long Only strategies hold only long positions on securities in the portfolio. Managers of this strategy hope to generate returns based off of both technical and fundamental analysis of individual securities in attempt to locate undervalued investments. Derivative contracts and other alternative securities can be purchased in this type of portfolio, as long as the positions are long.

Long-Short Trading – Long-Short strategies take long positions in undervalued securities and short positions in overvalued securities. The manager will use the positions to offset risk, resulting in a more risk-neutral position with respect to exposure. These strategies tend to be net long and use the shorting capability is a hedge on downside risk.

Convertible Arbitrage – Convertible Arbitrage strategies identify disparities in pricing among similar securities, in which there is a convertible fixed income feature that is a component of the mispricing. The manager will typically invest in a convertible and a nonconvertible security of the same issuer.

Statistical Arbitrage – Statistical Arbitrage strategies use a quantitative-based investment approach to identify individual securities or groups of securities (asset class, sector, industry, etc.) trading outside of their historical price ranges. These funds make bets that two similar securities with dissimilar prices will converge to the same value over the investment holding period. These anomalies typically occur only for a short period of time. Thus, statistical arbitrage have very high turnover since the securities are held for very short-term time periods in a day.

Structured Credit – Structured Credit strategies construct portfolios of credit instruments including synthetic CDO, cash CDOs, and nth-to-default baskets in separate tranches that meet specific needs for a client that cannot be met from the standardized financial instruments available in the markets.
Structured Credit (Market Neutral) – These are Structured Credit strategies that use hedging instruments and other securities to offset net long or short positions to reduce market risk, resulting in a portfolio with little or no systematic market exposure.

Variable Net Exposure – Variable Net Exposure strategies are Long/Short equity strategies where the manager has the ability to adjust long and short position weightings without regard to a target weighting, but rather, adjusting the weightings to mitigate or gain risk exposure in the portfolio based on current and forecasted market conditions.

Market Neutral – These strategies construct portfolios with little or no net market exposure by taking offsetting positions in derivatives and other securities, attempting to neutralize market risk. Market Neutral managers typically follow the rule of one alpha. Managers in this space create a portfolio designed to produce only one source of alpha; distinct from long/short managers who have both a long portfolio and short portfolio – each generating sources of alpha. This strategy eliminates beta risk and relies solely on security selection.

Fixed Income Relative Value (FI-RV) – Fixed Income Relative Value (FI-RV) products search for interest-rate anomalies in the market. Managers purchase one fixed income security and simultaneously sells a similar with the expectation that over the investment holding period, the two security interest rates, and ultimately prices, will converge. The investments traded in this space include government bonds, interest rate swaps and futures contracts.

Foreign Exchange (FX) – FX strategies trade one currency for another on the global market where currencies are traded virtually twenty-four hours a day. Increasing globalization has led to a substantial increase in the number of foreign exchange transactions and, thus, is the largest financial market, with average daily volumes in the trillions of dollars.

Multi-Strategy: Broad – Multi-Strategy Broad funds employ several strategies under a common organizational goal. While Multi-Strategy funds may have a specific them (geographic, industry, sector, etc.) depending on the manager’s expertise, Broad funds are not confined to an asset class, geographic region, methodology, or investment focus. Rather, they have greater latitude to employ various
methodologies to generate alpha. The manager will typically use a bottom up approach to determine value-maximizing investments.

Multi-Strategy: Market Neutral – Market Neutral Multi-Strategy funds employ several strategies to maintain an integrated portfolio designed to neutralize market risk. This market risk is not limited to the general stock market, but also to sector risk as well. These portfolios are typically designed to produce only one source of alpha and to eliminate beta risk. The integrated construction of these portfolios all managers to focus primarily on security selection with respect to either the stock market or to any industry. Generally, these funds have equal long and short positions to remain neutral. Because returns to net positions can be small, managers may use leverage to enhance returns.

Multi-Strategy: Concentrated – Concentrated Multi-Strategy funds maintain the ability to allocate capital amongst several strategies and diversify idiosyncratic risk. However, concentrated strategies target a small group of securities with common characteristics (i.e., undervalued/distressed companies). These funds are typically more volatile in nature because there is a greater amount of exposure to each holding.

Real Estate: Mezzanine Debt – Mezzanine funds provide bridge financing to real estate investments with the intent to fulfill a gap in financial capital. An example of mezzanine financing is a manager that invests in the construction of a warehouse, where the owner is able to cover 20% of the cost and the bank lends 60% of the cost, leaving the manager to fill the 20% gap. Financing is provided through privately-issued securities which will often have both debt and equity components. The mezzanine securities may be convertible debt, senior or subordinated debt, common stock, preferred stock, or warrants.

Real Estate: Real Estate Arbitrage – Real estate arbitrage strategies invest in potentially mispriced derivative securities and other financial instruments with direct or indirect (REITs) exposure to real estate. The focus of the fund may be commercial, residential, or a combination of the two. The primary goal of the manager is to capitalize on price inefficiencies in the real estate market.

Insurance: Broad – Broad insurance strategies take long and short positions in insurance related assets across multiple insurance sectors. Unlike other insurance strategies, these funds are not confined to one particular insurance sector or geographic region, but rather, can diversify across a variety of insurance assets to seek returns. The returns of these funds are typically uncorrelated to the market because they are the product of an isolated event.

Insurance: Catastrophe Bonds – Insurance Catastrophe Bond strategies invest in bonds issued by insurers. The returns of the investments are tied to the probability of a specified natural disaster occurring within a certain time period, typically a few years. Exposures can be gained by investing in the bonds directly or in derivatives (options or futures contracts).

Insurance: Life Insurance – Life Insurance strategies take long and or short positions in life insurance related assets. These are event-driven strategies in which the manager speculates on when life insurance policies will begin making payouts to their beneficiaries. The returns of a life insurance fund are typically uncorrelated to the market because these portfolios are predicated upon a specific event.

Insurance: Industry Loss Warranty – Insurance Industry Loss Warrant (ILW) strategies invest in reinsurance or derivative contracts through which an investor purchases protection from total loss in an industry as a result of an event. The industry loss must occur for the purchaser of the contract to receive the specified payout.

Insurance: Weather – Insurance Weather funds construct portfolios of weather derivative securities. Weather derivatives are exchange-traded contracts that allow the purchaser to gain if the underlying weather index moves in a specified direction. These funds will also invest in weather related insurance contracts to protect against events such as floods, hurricanes, blizzards, etc. with the expectation that a weather related catalyst will result in a payout.

Volatility: Long Volatility – Long volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies. These funds specifically employ long exposures to the direction of implied volatility. Long volatility strategies can also employ the use of both listed and unlisted instruments to enhance returns.

Volatility: Short Volatility – Short volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies. These funds specifically employ short exposures to the direction of implied volatility. Short volatility strategies can also employ the use of both listed and unlisted instruments to enhance returns.

Volatility: Tail Risk Hedging – Tail risked hedged volatility strategies generally seek exposure to and profit from significant increases or decreases in volatility under market conditions that are deemed to be highly improbable or several standard deviations from the mean. An example of tail risk hedging is purchasing out of the money call and put options on a security to hedge against extremely volatile markets.

Volatility: Volatility Arbitrage – Volatility Arbitrage strategies are typically based upon available empirical evidence suggesting that average implied volatilities of both fixed income and equity derivatives tend to overestimate realized volatilities. These funds generally take long positions in fixed income derivatives and delta hedge the market risk of the position. If the implied volatility is higher than the realized volatility, the arbitrageur will benefit from this position.

Commodities Agriculture Focus – Agriculture focus strategies are reliant on the evaluation of market data, relationships and influences as they pertain primarily to Soft Commodity markets focusing primarily on positions in grains (wheat, soybeans, corn, etc.) or livestock markets. Agriculture funds can have a fundamental, systematic, or technical investment process and can have allocations in both Developed and Emerging markets.

Commodities Energy Focus – Energy focused strategies rely heavily upon the evaluation of market data, relationships and influences as they pertain primarily to Energy commodity markets. Portfolio positions primarily employ Crude Oil, Natural Gas and other Petroleum based products. Energy focused funds can have a fundamental, systematic, or technical investment process and can have allocations in both Developed and Emerging markets.

Commodities Metals Focus – Metal focused commodity strategies rely heavily upon the evaluation of market data, relationships and influences as they pertain to Hard Commodity markets. Portfolio positions can range from precious metals such as gold, silver, and platinum to utilitarian materials like steel. Metal focused funds can have a fundamental, systematic, or technical investment process and can have allocations in both Developed and Emerging markets.

Commodities Synthetic Strategy – Synthetic strategy commodities funds generally seek exposure to the commodities markets without being directly invested in the underlying commodity. This exposure can be gained through derivatives such as futures contracts. For example, a manager can create a synthetic agriculture commodities fund by trading in grain, wheat, and corn futures contracts. These funds can have a fundamental, systematic, or technical investment process and have allocations in both Developed and Emerging markets.

Commodities Broad Sector Focus – Broad commodity funds invest in derivative securities to speculate on specific commodity market prices. While broad commodity funds may have a specific them (geographic, industry, sector, etc.) depending on the manager’s expertise, these funds are not confined to an asset class, geographic region, methodology, or investment focus. Rather, they have greater latitude to employ various methodologies to generate alpha. The manager will typically use a bottom up approach to determine value-maximizing investments.

Commodities Natural Resources – Natural Resources focused strategies rely heavily upon the evaluation of market data, relationships and influences as they pertain primarily to Natural Resource commodity markets. Portfolio positions primarily employ natural gas, metals, and agricultural products. Natural Resource focused funds can have a fundamental, systematic, or technical investment process and can have allocations in both Developed and Emerging markets.

Niche Seeding/Emerging Managers – Niche seeding fund strategies seek out talented emerging hedge fund managers with a promising investment strategy that lack the assets and/or sufficient track record to attract capital from more traditional investors. The manager of the seed fund will construct the portfolio by reviewing small emerging hedge fund managers and allocating capital among them, hoping to generate returns from the performance of the emerging managers. Possible factors for manager selection may include simulated returns or industry experience.

Niche Direct Lending – Direct lending niche strategies involve issuing new loans at par value rather than purchasing loans or debt in the secondary corporate debt or loan market at a discount. These funds typically offer shorter lock-up periods than a typical equity vehicle, offer higher levels of liquidity and downside protection associated with a secured loan.

Niche Other – Niche strategies aim to achieve further portfolio diversification by adding exposure to market catalysts that are otherwise difficult to directly access. This exposure is typically gained through a manager’s ability to time entry and exit of investments or through specific expertise in an investment. Niche funds that have a classification of “other” employ a strategy that is not represented in the list of choices.

Alternatives

Asset Class – Asset Class currency strategies invest directly or indirectly in global currencies. The manager seeks returns by capitalizing on inefficiencies in the foreign exchange market or speculating on global foreign exchange and interest rate movements. Macroeconomic factors often play a key role in portfolio construction. The manager gains exposure through use of long and short positions in futures and forward currency contracts, currency swaps, or currency options.

Overlay Strategy – Currency Overlay strategies aim to manage asset volatility created by currency exposure. The manager mitigates risk by taking strategic positions in global currencies to hedge exposure to macroeconomic factors such as global interest rates, while seeking capital appreciation through exposure to undervalued currencies. Hedging is typically achieved through use of futures and
forward currency contracts, currency swaps, or currency options.

Communications Infrastructure – Communications Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in communication infrastructure projects and companies. An example of such project is the construction or updating of a data and voice network. The manager is generally not limited by geographic region or asset class.

Diversified Infrastructure – Diversified Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in various infrastructure projects and companies. The manager is generally not limited by geographic region, asset class, or the type of infrastructure.

Energy Infrastructure – Energy Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in energy infrastructure projects and companies. Examples include construction in nuclear energy, solar energy, power grids, renewable energy, and oil & gas exploration. The manager is generally not limited by geographic region or asset class. Municipal/Social Infrastructure – Municipal/Social Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in communication infrastructure projects and companies. An example of a Municipal/Social Infrastructure target investment could include municipal fixed income used to fund university, hospital, or government buildings.

Ports Infrastructure – Ports Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in port infrastructure projects and companies. This sector of infrastructure is more prevalent in regions with increasing import/export activity and new/reconstructed ports are required to manage the traffic. The manager is generally not limited by geographic region or asset class.

Transportation Infrastructure – Transportation Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in transportation infrastructure projects and companies. Examples include construction of roads, tunnels, bridges, and highways. The manager is generally not limited by geographic region or asset class.

Water Infrastructure – Water Infrastructure strategies invest directly or indirectly, through investment in traditional or derivative securities, in water infrastructure projects and companies. Examples include construction of dams, aqueducts, water treatment plants and supply systems, and levies. The manager is generally not limited by geographic region or asset class.

Buyout – Buyout strategies invest private capital in public and privately-owned companies. In the case of publicly traded companies, the goal may be to turn control of the company over to the company’s current management or to take the company private. Buyout strategies involved in private company transactions may intend to restructure the business. Buyouts are a form of M&A activity; referred to as a Leveraged Buyout (LBO) when a significant portion of the purchase is financed.

Fund-of-Funds – Private Equity Fund-of-Fund strategies are diversified multi-manager portfolios of other private equity funds. The manager may allocate to buyout funds, venture capital funds, or mezzanine funds. The fund may focus on managers with regional, sector, or industry expertise. There is often an extensive due diligence process involved in manager selection. Once a manager has been selected, the manager will often ensure oversight of the investment through involvement in manager advisory committees, valuation committees, and continuous monitoring of the managers.

Large Market Buyout – Large Market Buyout strategies target large companies (enterprise value >$500 million) for Buyout opportunities. These companies typically have a history of steady profit margins, strong free cash flow, low debt, a weak stock price, and a strong balance sheet. The fund may target a specific industry or region in which the manager has experience.

Mezzanine – Mezzanine funds provide bridge financing; they invest with the intent to fulfill a gap in financial capital. An example of mezzanine financing is a manager that invests in the expansion of an office building, where the owner is able to cover 20% of the cost and the bank lends 60% of the cost, leaving the manager to fill the 20% gap. Financing is provided through privately-issued securities which will often have both debt and equity components. The mezzanine securities may be convertible debt, senior or subordinated debt, common stock, preferred stock, or warrants.

Middle Market Buyout – Middle Market Buyout strategies target mid-sized companies (enterprise value between $100 million and $500 million) for Leveraged Buyout opportunities. These companies typically have a history of steady profit margins, strong free cash flow, low debt, a weak stock price, and a strong balance sheet. The fund may target a specific industry or region in which the manager has experience.

Venture Capital – Venture Capital strategies seek start-up and early-stage companies that are unable to attract capital from traditional sources, for which they can provide equity financing. The manager carefully reviews business plans and other success indicators to determine in which companies to invest capital. Once invested, the managers will often take an active role in monitoring the firm’s progress, establishing goals for the firm, and ensuring the success and growth of the firm. These are long-term, illiquid private equity investments.

Acquisitions Buyout Stage – Acquisition Buyout strategies invest in companies in the later stages of development. The product/brand has already been established and profitability may be diminishing. There is a need for capital in order to achieve growth. These investments are typically followed by an IPO or partner acquisition.

Early Stage – Early Stage Venture Capital strategies invest during the beginning stages of the start-up company’s development, usually after product testing has been completed and the focus is now on building out commercial sales, establishing a viable work environment, and creating a marketing campaign. The manager carefully reviews business plans and other success indicators to determine in which companies to invest capital. Once invested, the managers will often take an active role in monitoring the firm’s progress, establishing goals for the firm, and ensuring the success and growth of the firm. These are long-term, illiquid private equity investments.

Expansion Stage – Expansion Stage Venture Capital strategies invest in start-up companies once commercial viability has been achieved. This can come in the form of a profitable quarter, steady growth, or a strong product interest. Expansion Stage investors seek to provide capital to sustain the company’s growth by expanding, often because the company’s cash flow alone is not sufficient to do so.

Style

Consumer Discretionary Sector – A sector that consists of businesses that sell nonessential goods and services. This includes retailers, media companies, services, consumer durables and apparel companies, and automobile companies. This sector performs best when the economy is doing well and is the opposite of consumer stables, which consist of businesses that sell necessities like food and drugs.

Consumer Staples Sector – The sector that consists of businesses that sell essential goods and services. This includes food and beverages, tobacco, prescription drugs, and household products. This sector tends to perform well in almost all market conditions since these products are a necessity. Consumers must still purchase these products even in the worst market conditions.

Energy Sector – The energy sector consists of stocks that relate to producing or supplying energy. This includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, or integrated power firms. This sector is mainly driven by the supply and demand for worldwide energy and, thus, energy producers will do very well during times of high oil and gas prices, but will return less when demand is reduced.

Financials Sector – Stocks that provide financial services to commercial and retail customers. This sector includes banks, investment funds, insurance companies and real estate. A large portion of this sector generates revenue from mortgages and loans, and therefore perform best in low interest rate environments.

Healthcare Sector – A category relating to medical and healthcare goods or services. This sector includes hospitals, health maintenance organizations (HMOs), biotechnology and a variety of medical products. Since these services are essential as people will still require medical aid during economic downturns, this sector is less sensitive to business cycle fluctuations and is typically considered defensive in nature.

Industrials Sector – The industrials sector is a category of stocks that relate to construction and manufacturing. Returns are mainly driven by supply and demand for building construction as well as demand for manufactured products.

Information Technology Sector – A category of stocks relating to the research, development and/or distribution of information technologically based goods and services. This sector contains products and services for both consumers and businesses that focus on technology to treat information. This includes computer software, information systems, computer hardware, and programming.

Multi-Sector – A strategy which combines stocks from various sectors to create a portfolio. Managers in this space have the ability to invest based on current market conditions and analysis by buying or selling stocks in the various equity market sectors (i.e. Technology, Industrials, Financials, etc.).

Technology Sector – A category of stocks relating to the research, development and/or distribution of technologically based goods and services. This sector contains products and services for both consumers and businesses that focus on the manufacturing of electronics, creation of software, computers or products and services relating to information technology.

Telecom Services Sector – A category of public companies that relate to producing telephone and internet products, services and technologies. This includes telecommunications service providers, network operators, regulators, manufacturers, subscribers and users.

Utilities Sector – A category of stocks for utilities such as gas, water and power. Because utilities require significant infrastructure, these firms often carry large amounts of debt. Therefore, utilities companies are sensitive to changes in the interest rate and as these rates rise or drop, the debt payments will increase or decrease. The utilities sector performs best when interest rates are falling or remain low.