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PARADIGM Global Advisors, LLC Fund of Hedge Funds Table of Contents I.
Firm Overview
II.
Our Differentiating Philosophy
III. Investment Process IV. Biographies 1
I. Firm Overview ¾
Paradigm Global Advisors was founded in 1989 by Dr. James Park.
¾
Independent Firm with 28 Employees (14 of which are Dedicated to Due Diligence and Asset Allocation Teams)
¾
SEC Registered Investment Advisor Since 1996 with Fourteen Year Track Record.
¾
Exclusively Focused on Managing Hedge Funds
¾
Unique Investment Process – Information Processors
¾
- One of the Most Robust Hedge Fund Databases
¾
Institutional and High Net Worth Focus
¾
Global Presence, Reach and Capabilities
¾
Consistent, Solid Risk Adjusted Performance and Alpha
¾
Low Correlation to Traditional Asset Classes
¾
Well Diversified Portfolios Across Strategies and Managers (Over 80 Managers in Master Fund) 2
WHY IS PARADIGM THE BEST ALTERNATIVE? ¾
14 YEAR TRACK RECORD •
Founded in 1989 and an SEC Registered Investment Advisor, PARADIGM has $1.6 billion in assets under management and advisory.
¾
TRULY GLOBAL PRESENCE AND INVESTMENTS
¾
CAPACITY
• •
•
•
Headquarters in New York City and representative offices in Los Angeles, Monte Carlo and Tokyo Invested with over 90 hedge funds globally.
Asset allocation methodology and unique ability to identify smaller and/or younger highly skilled managers ensures capacity for its investors Capacity with over 30 closed managers and capacity agreements with 24 managers with whom they invested early .
¾
PASS: PARADIGM’S PROPRIETARY QUANTITATIVE RANKING SYSTEM
¾
PERFORMANCE
• •
•
Unique, proprietary technology developed by Dr. James Park, PARADIGM Chairman and CEO. Contains track records for over 15,500 managers and is used to generate proprietary indices and ranking and selection tools.
Ranked as the number one performer for eight and nine year investment periods in 2004 and ranked sixth for 2004 returns.
3
I. Firm Overview – Paradigm’s Global Presence
Headquarters: New York Representative Offices : Los Angeles, Monte Carlo, Tokyo Distribution Agreements Worldwide: Banks, Insurance Companies, Broker Dealers 4
James Park, JD, PhD Chairman & CEO
Stephane Farouze Partner
Markus Karr Partner
Research/ Asset Allocation
Information Technology
Marketing & Client Services
Business Administration
Nikolay Fedorovskiy, PhD Director of Research
Shinichi Onoda Director
Alla Babikova Director
Jim Hirchak, CPA Director of Risk Mgt/Compliance
Denis Bychkov Research Analyst
Kevin Yoon Computer Graphics
Jeffrey Schneider Senior Vice President
Stephen Covello Senior Vice President - Operations
Jean-Michel Savre Senior Vice President
Seth Moskowitz Associate – Client Services
John Page Senior Vice President
Katherine Han Associate- Client Services
Louis J. Hanna Senior Vice President
Angela McConico Administrative Assistant
Nick M. Markola Senior Vice President
Travis Cameron Administrative Assistant
Victor Popov Research Analyst - Consultant Gordon Kelly Hedge Fund Analyst Shirley Xian Hedge Fund Analyst
Philippe Alter Senior Analyst Joint Venture with Cyril Finance in France
Robin Liu Hedge Fund Analyst Matteo Solbiati Head of European Branch
Gerald Toledano Vice President –Structuring
14 people are involved in the investment process
Rafael Castellanos Vice President
Average experience in the Alt. Inv. Industry : 9 years
Laurent Benzaquine Vice President
Average experience with PARADIGM : 6.25 years
Jonathan Guerbato Associate
28 (+1) employees 5
I. Firm Overview - Paradigm’s Range of Products Domestic Funds of Funds Products • Core Program (2) • Leveraged Program (2) • Sector Funds (1) Off-shore Funds of Funds Products • Core Program (4) • Leveraged Programs (1) • Sector funds (4)
Regulated Products • US Futures Fund • UK Structured Note • Italian Structured Note • Chilean Products • French Alternative Fund
• White Label Products (4) • Structured Products (2) JP Morgan provides custodial services and leverage for PARADIGM’s Offshore Funds
PARADIGM has passed due diligence and has been approved for leverage & guaranteed products by:
6
I. Firm Overview Paradigm Global Advisors Does NOT: ¾ Make Directional Market Bets ¾ Take Outsized Risks to Achieve Higher Returns ¾ Neglect to Analyze and Compare Manager Skill versus the Market ¾ Invest with managers who are directional risk takers ¾ Allocate to trend followers ¾ Invest with Mangers with excessive lock-up provisions (exceeding 2 years) ¾ Allocate to fixed Beta managers ¾ Allocate to managers with multitude of strategies ¾ Invest in Mortgage-Backed Securities, Dedicated Emerging Market Managers or Currencies
7
II. Our Differentiating Philosophy ¾ Treat Hedge funds as information processors rather than financial companies. ¾ View the Fund of Funds as a conglomerate of superb information processors. ¾ Bottom up (manager centric) investment approach. ¾ Employ unique theoretical and statistical methodology which is based on Dr. Park’s PdD thesis that applies Modern Portfolio Theory to hedge funds – Park Ratio. ¾ Paradigm owns proprietary patent-pending algorithms designed to identify exceptional hedge fund manager skill and predict probability of future performance. ¾ Over the past 16 years, Paradigm has built proprietary , one of the most comprehensive and robust hedge fund databases globally. System Pass contains in excess of 15,000 track records, is fully customizable and models for numerous biases. ¾
models for the following hedge fund biases: survivorship, self-selection, selfreporting, liquidation, Bull Market/Bear Market.
¾ Utilize Park RatioTM (proprietary technique) which facilitates aggregate hedge fund analysis, style analysis, cluster analysis, and portfolio attribution analysis. 8
II. Our Differentiating Philosophy ¾ Construct well diversified portfolios across strategies and managers (over 80 managers in master fund). Low average allocation per manager ¾ Rank hedge fund managers by skill not by return. ¾ Paradigm constructs hedge fund indices and sub indices in order to rank managers relative to their peers and to identify best in class managers. ¾ Paradigm has the expertise and the technology to identify smaller and younger highly skilled managers and managers deploying novel, niche or unique strategies. ¾ MAR/Hedge consistently ranks Paradigm’s multi-manager funds among the world’s top ten funds of hedge funds on a return and risk-adjusted return basis. ¾ Paradigm’s approach generates consistent, solid risk adjusted returns, Alpha and a low correlation to traditional asset classes. ¾ Volatility centric allocations, not dollar centric. ¾ Investment team with significant experience in the identification, selection, due diligence and monitoring of hedge funds and strategies. ¾ Access to top tier hedge funds as the firm is able to at times allocate to small, nimble and periodically closed hedge funds. ¾ Alignment of interests – no conflict of interest.
9
III. INVESTMENT PROCESS Paradigm Global Advisors LLC., employees a unique approach to fund of hedge funds investing by treating underlying hedge funds as information processors not just as financial companies and ranking them by skill not returns. The firm employs proprietary and theoretical and statistical methodology based on it’s founders research and doctoral studies. The four pinnacles of Paradigm’s investment philosophy which take into account changing hedge fund and market conditions are: a) Manager Selection, b) Quantitative Analysis, c) Due Diligence and d) Portfolio Allocation and Risk Management
Quantitative Analysis
Manager Selection
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
10
Quantitative Analysis
III. Investment Process – Manager Selection Manager Selection
Paradigm Global Advisors LLC., sources hedge fund managers from:
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Proprietary Sources
Public Sources
Proprietary
Prime Brokers
Strategic Investors
Industry Conferences
Institutional Allocators
Direct Submissions
Hedge Fund Managers
Third Party Databases
Consultants
Lawyers
Industry Contacts (developed over past 16 years)
Accountants
Academics
Administrators Prime Broker Symposiums
Other Sources Competitors/ Other Fund of Fund Managers Publications MAR/Hedge Absolute Return Asia Hedge Barron’s Hedge Fund Alert Albourne Village
11
Quantitative Analysis
III. Investment Process – Manager Selection Manager Selection
Database of 8,700 active managers Quantitative Filtering Ranking by Skill
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
400 managers Qualitative Analysis Interview Process Due-Diligence Process
100 managers Approved List
Inv. Committee Approval Allocation Process 12
Quantitative Analysis
III. Investment Process – Quantitative Analysis ¾
Statistical ranking using Paradigm's proprietary theoretical modeling filter, and identifying best of breed managers
Manager Selection
PARADIGM Global Advisors
Portfolio Allocation and Risk Management
¾
Paradigm purchases monthly manager data from 8 different hedge fund data providers and such data is subsequently entered into system PASS.
¾
PASS contains track records for over 15,500 managers (8,700 active managers and 6,800 inactive managers) and ranks them by skill (not returns)
¾
Utilize System PASS to measure Hedge Fund AlphaTM , Hedge Fund BetaTM and Park RatioTM (aggregate analysis, style analysis, cluster analysis, portfolio contribution analysis)
¾
In addition, the system conducts mean-variance and other standard statistical analysis.
R
HF
= α + β (PARADIGM Hedge Fund Index) + ε
14%
= 0 + 1.4 (+10%)
9%
= 2 + 0.7 (+10%)
Alpha Measures Skill
Due Diligence
Beta Measures Risk
13
Quantitative Analysis
III. Investment Process – Quantitative Cluster Analysis ¾
Developed by Paradigm using patent-pending technology, Cluster Analysis groups hedge funds into certain discrete style categories.
¾
Strategy correlations are unstable over time and could possibly diminish portfolio diversification. In order to display more stable correlation structures, Paradigm performs Cluster Analysis.
¾
Discrete style categories used in Cluster Analysis could be perceived as equivalents of asset classes.
¾
Discrete style categories have well defined but differentiated correlation, risk and return characteristics.
¾
The Cluster Analysis process allows Paradigm to evaluate managers whose performance distinguishes them from peers in their cluster.
¾
Outliers often require additional research and investigation, as they may indicate the presence of exceptionally skilled managers, fraudulent managers, or managers deviating from their stated styles.
Manager Selection
Y
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Z
X
14
Quantitative Analysis
III. Investment Process – Quantitative Analysis Manager Selection
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
15
Quantitative Analysis
III. Investment Process – Due Diligence Due Diligence - Qualitative Analysis ¾
Initial interview with asset allocation team members
¾
Interview with senior asset allocation team members
¾
Determine manager’s level of skill/expertise
¾
Information processing vs. market timing
¾
Establish value added by potentially engaging the manger
Manager Selection
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Due Diligence - Manager Evaluation Process ¾
Background check, confirm educational and employment history including personal and professional references
¾
Manager developments and organizational changes
¾
Confirm AUM with a prime broker and conduct fundamental portfolio analysis
¾
Gather prospectus and audited financial statements
¾
Check for violations/customer complaints with SEC
¾
Manager office visit
¾
PARADIGM proprietary manager questionnaire
¾
Operational checklist including infrastructure, risk controls, trade execution and service providers
¾
Leave no stone unturned – conduct comprehensive evaluation
16
Approved Manager Characteristics
Quantitative Analysis
III. Investment Process – Due Diligence Manager Selection
Due Diligence - Manager Approval Process ¾
Set manager specific and style specific reward/risk parameters
¾
Bottom up investment manager approach
¾
Institute minimum test account
¾
Analyze return stream against expectations
¾
Monitor for discrepancies between past and actual performance
¾
Conduct strategy and value added analysis
¾
Cluster analyze historical manager performance
¾
Commitment to being invested with only top tier information processors
¾
Report to investment committee
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Due Diligence – Approved Manager Characteristics ¾
No fixed beta managers
¾
Average size: $50 to $150 million
¾
Very little emerging market
¾
Average track record: Three years
¾
No long term systematic trend followers
¾
Single strategy focus (signals expertise)
¾
No directional risk takers
¾
Has a clearly defined investment process
¾
Marked to market securities
¾
Wealthy and invested in own fund
17
III. Investment Process – Portfolio Allocation and Risk Management Portfolio Construction ¾
Strategic and tactical approach
¾
Maximization of Reward/Risk ratio
¾
Bottom up (manager) versus top down (sector) approach
¾
Equal Allocation by volatility and not by $
¾
Sector Optimization
¾
Portfolio liquidity
¾
Credit Exposure
¾
Leverage
¾
Correlation analysis and economic driver analysis
¾
Monthly portfolio rebalancing at the manager level and sector level
Quantitative Analysis PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
¾ Broad diversification: 50 to 100 managers ¾ Diversification benefit ¾ Manager and strategy concentration ¾ 5% maximum allocation to a single manager
18
III. Investment Process – Portfolio Allocation and Risk Management Risk Management ¾
¾
Ongoing quantitative analysis using actual returns
Cross correlation analysis
Manager returns reviewed on a daily, weekly, monthly basis
Manager returns reviewed in context of other managers of similar style
Peer comparison and peer group rankings
Rolling returns and standard deviation trends
Quantitative Analysis PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Continuous monitoring for red flags
Style drift and strategy changes
Unusual drawdowns or profits
Returns inconsistent with strategy
Rapid asset growth, capital inflows and outflows
Regulatory concerns
Negative industry reputation
Loss of focus, personal life issues
Employee turnover
Unwillingness to share information
Manager diversifies personal assets away from the fund/partnership
19
VI. Biographies James Park, J.D., Ph.D., Chairman and Chief Investment Officer Dr. Park is responsible for directing the overall management and investment activities of PARADIGM Global Advisors, LLC. He has 13 years of direct hedge fund investment experience. Between 1991 and 1998, Dr. Park was a professor of finance at Long Island University, where he founded the Center for Financial Markets Research. Dr. Park completed his Ph.D. in financial economics in 1995 at the Columbia Business School, where he also taught. His dissertation on hedge funds is the first of its kind. He is a recognized author of pioneering research on the behavior of hedge funds. Prior to launching his academic and financial careers, Dr. Park was an Assistant District Attorney in Massachusetts. From 2001 to 2003, he served as an elected member of the Nominating Committee for the National Futures Association. Dr. Park earned a B.S. in economics from the Wharton School of Finance, University of Pennsylvania, and a J.D. from Harvard and Columbia Law Schools. Stephane Farouze, Managing Director Structured Products and Institutional Marketing Mr. Farouze joined PARADIGM in early 2003 as Managing Director of Structured Products and Institutional Marketing. He has 11 years of experience in alternative investments and derivative products. Prior to joining PARADIGM, Mr. Farouze was the Global Head of Sales and Structuring at Societe Generale Asset Management’s Alternative Investments Group, where he grew assets under management from $3.4 billion to over $15 billion in less than three years. He has launched in excess of 100 capital-guaranteed products in Italy, Spain, France, Germany, Hong Kong, Singapore and Japan. Before joining SocGen, Mr. Farouze headed the foreign exchange derivatives desk for the Italian markets at BNP Paribas, Commerz Bank, and Smith Barney. He has a B.A. in finance and economics from San Diego State University. 20
Markus Karr, Managing Director Asset Allocation
VI. Biographies
Mr. Karr is Managing Director of Asset Allocation at PARADIGM, where he and his team assist Dr. Park in implementing the company’s research in the areas of manager selection and portfolio allocation. He joined the firm in 1994 and has more than ten years of hedge fund investment experience. Mr. Karr earned a B.S. in computer science and engineering from the Massachusetts Institute of Technology, where he concentrated his studies on modeling and simulation design. He was a registered Commodity Trading Advisor from 1995 to 2002 and is currently a member of the National Futures Association. P. James Hirchak, CPA, Director Compliance and Risk Management Mr. Hirchak is responsible for compliance and risk management at PARADIGM. Before joining the firm in 2002, he was Treasurer and Senior Vice President of Gardner Capital Management, where he was part of an investment team focused on financial, administrative and due diligence issues. Prior to joining Gardner, Mr. Hirchak was Treasurer and Chief Operating Officer of Moran Group, LP, an investment partnership managing U.S. and foreign investments in excess of several hundred million dollars. Between 1990 and 1992, Mr. Hirchak was Treasurer and Chief Operating Officer of Structured Asset Management, a quantitative money manager and wholly owned subsidiary of Templeton International. Prior to 1990, he held various financial and administrative positions on the trading floors of Drexel Burnham Lambert and Kidder Peabody & Co. in New York. Mr. Hirchak holds a B.S. in accounting and a M.B.A. in finance from Utah State University. Nikolay Fedorovskiy, Ph.D., Director Research Mr. Fedorovskiy joined PARADIGM in 2000 as Director of Research responsible for designing and securing the online statistical reporting system used by PARADIGM’s asset allocation team. He also leads the research and development of various statistical algorithms used in PARADIGM’s quantitative analysis of hedge funds. He gained extensive experience in computer programming and engineering while working for Russia’s Institute of Electric Power, where he created a programming language for semantic networks. Mr. Fedorovskiy received his Ph.D. in mathematics from Moscow State University, where he majored in high algebra and computer modeling. 21
VI. Biographies Alla Babikova, Director Marketing and Client Services Ms. Babikova joined PARADIGM in 2001 as the Director of Marketing and Client Services. She has more than seven years of experience in sales and marketing for the financial and hedge fund industries. Prior to joining PARADIGM, she was the Head of Marketing and Client Services for Waterford Partners, LLC, a global hedge fund manager. From 1996 to 1998, Ms. Babikova covered private and institutional domestic clients as an equity sales professional at Renaissance Capital, LLC, a major Russian investment bank. In 1995, she worked at Credit Suisse First Boston in Moscow. Prior to joining CSFB, she spent two years as an interpreter for a joint venture between Gulf Canada and British Gas. Ms. Babikova holds a B.A. in French and English from Novgorod University of Foreign Languages. Matteo Solbiati, Director Head of European Branch Mr. Solbiati joined PARADIGM in March 2003. From 1995 to 2003, he worked for Fineco Sim (Bipop Group), a leading Italian broker, where he expanded the derivatives desk and eventually became the Head of Trading and Structured Products, managing a team of 35 people. He developed innovative structured products on various underlying commodities for insurance, retail and institutional clients, as well as for fund managers. Mr. Solbiati graduated from Bocconi University in Milan with a Master’s degree in applied statistics.
22
Firm Overview
II.
Our Differentiating Philosophy
III. Investment Process IV. Biographies 1
I. Firm Overview ¾
Paradigm Global Advisors was founded in 1989 by Dr. James Park.
¾
Independent Firm with 28 Employees (14 of which are Dedicated to Due Diligence and Asset Allocation Teams)
¾
SEC Registered Investment Advisor Since 1996 with Fourteen Year Track Record.
¾
Exclusively Focused on Managing Hedge Funds
¾
Unique Investment Process – Information Processors
¾
- One of the Most Robust Hedge Fund Databases
¾
Institutional and High Net Worth Focus
¾
Global Presence, Reach and Capabilities
¾
Consistent, Solid Risk Adjusted Performance and Alpha
¾
Low Correlation to Traditional Asset Classes
¾
Well Diversified Portfolios Across Strategies and Managers (Over 80 Managers in Master Fund) 2
WHY IS PARADIGM THE BEST ALTERNATIVE? ¾
14 YEAR TRACK RECORD •
Founded in 1989 and an SEC Registered Investment Advisor, PARADIGM has $1.6 billion in assets under management and advisory.
¾
TRULY GLOBAL PRESENCE AND INVESTMENTS
¾
CAPACITY
• •
•
•
Headquarters in New York City and representative offices in Los Angeles, Monte Carlo and Tokyo Invested with over 90 hedge funds globally.
Asset allocation methodology and unique ability to identify smaller and/or younger highly skilled managers ensures capacity for its investors Capacity with over 30 closed managers and capacity agreements with 24 managers with whom they invested early .
¾
PASS: PARADIGM’S PROPRIETARY QUANTITATIVE RANKING SYSTEM
¾
PERFORMANCE
• •
•
Unique, proprietary technology developed by Dr. James Park, PARADIGM Chairman and CEO. Contains track records for over 15,500 managers and is used to generate proprietary indices and ranking and selection tools.
Ranked as the number one performer for eight and nine year investment periods in 2004 and ranked sixth for 2004 returns.
3
I. Firm Overview – Paradigm’s Global Presence
Headquarters: New York Representative Offices : Los Angeles, Monte Carlo, Tokyo Distribution Agreements Worldwide: Banks, Insurance Companies, Broker Dealers 4
James Park, JD, PhD Chairman & CEO
Stephane Farouze Partner
Markus Karr Partner
Research/ Asset Allocation
Information Technology
Marketing & Client Services
Business Administration
Nikolay Fedorovskiy, PhD Director of Research
Shinichi Onoda Director
Alla Babikova Director
Jim Hirchak, CPA Director of Risk Mgt/Compliance
Denis Bychkov Research Analyst
Kevin Yoon Computer Graphics
Jeffrey Schneider Senior Vice President
Stephen Covello Senior Vice President - Operations
Jean-Michel Savre Senior Vice President
Seth Moskowitz Associate – Client Services
John Page Senior Vice President
Katherine Han Associate- Client Services
Louis J. Hanna Senior Vice President
Angela McConico Administrative Assistant
Nick M. Markola Senior Vice President
Travis Cameron Administrative Assistant
Victor Popov Research Analyst - Consultant Gordon Kelly Hedge Fund Analyst Shirley Xian Hedge Fund Analyst
Philippe Alter Senior Analyst Joint Venture with Cyril Finance in France
Robin Liu Hedge Fund Analyst Matteo Solbiati Head of European Branch
Gerald Toledano Vice President –Structuring
14 people are involved in the investment process
Rafael Castellanos Vice President
Average experience in the Alt. Inv. Industry : 9 years
Laurent Benzaquine Vice President
Average experience with PARADIGM : 6.25 years
Jonathan Guerbato Associate
28 (+1) employees 5
I. Firm Overview - Paradigm’s Range of Products Domestic Funds of Funds Products • Core Program (2) • Leveraged Program (2) • Sector Funds (1) Off-shore Funds of Funds Products • Core Program (4) • Leveraged Programs (1) • Sector funds (4)
Regulated Products • US Futures Fund • UK Structured Note • Italian Structured Note • Chilean Products • French Alternative Fund
• White Label Products (4) • Structured Products (2) JP Morgan provides custodial services and leverage for PARADIGM’s Offshore Funds
PARADIGM has passed due diligence and has been approved for leverage & guaranteed products by:
6
I. Firm Overview Paradigm Global Advisors Does NOT: ¾ Make Directional Market Bets ¾ Take Outsized Risks to Achieve Higher Returns ¾ Neglect to Analyze and Compare Manager Skill versus the Market ¾ Invest with managers who are directional risk takers ¾ Allocate to trend followers ¾ Invest with Mangers with excessive lock-up provisions (exceeding 2 years) ¾ Allocate to fixed Beta managers ¾ Allocate to managers with multitude of strategies ¾ Invest in Mortgage-Backed Securities, Dedicated Emerging Market Managers or Currencies
7
II. Our Differentiating Philosophy ¾ Treat Hedge funds as information processors rather than financial companies. ¾ View the Fund of Funds as a conglomerate of superb information processors. ¾ Bottom up (manager centric) investment approach. ¾ Employ unique theoretical and statistical methodology which is based on Dr. Park’s PdD thesis that applies Modern Portfolio Theory to hedge funds – Park Ratio. ¾ Paradigm owns proprietary patent-pending algorithms designed to identify exceptional hedge fund manager skill and predict probability of future performance. ¾ Over the past 16 years, Paradigm has built proprietary , one of the most comprehensive and robust hedge fund databases globally. System Pass contains in excess of 15,000 track records, is fully customizable and models for numerous biases. ¾
models for the following hedge fund biases: survivorship, self-selection, selfreporting, liquidation, Bull Market/Bear Market.
¾ Utilize Park RatioTM (proprietary technique) which facilitates aggregate hedge fund analysis, style analysis, cluster analysis, and portfolio attribution analysis. 8
II. Our Differentiating Philosophy ¾ Construct well diversified portfolios across strategies and managers (over 80 managers in master fund). Low average allocation per manager ¾ Rank hedge fund managers by skill not by return. ¾ Paradigm constructs hedge fund indices and sub indices in order to rank managers relative to their peers and to identify best in class managers. ¾ Paradigm has the expertise and the technology to identify smaller and younger highly skilled managers and managers deploying novel, niche or unique strategies. ¾ MAR/Hedge consistently ranks Paradigm’s multi-manager funds among the world’s top ten funds of hedge funds on a return and risk-adjusted return basis. ¾ Paradigm’s approach generates consistent, solid risk adjusted returns, Alpha and a low correlation to traditional asset classes. ¾ Volatility centric allocations, not dollar centric. ¾ Investment team with significant experience in the identification, selection, due diligence and monitoring of hedge funds and strategies. ¾ Access to top tier hedge funds as the firm is able to at times allocate to small, nimble and periodically closed hedge funds. ¾ Alignment of interests – no conflict of interest.
9
III. INVESTMENT PROCESS Paradigm Global Advisors LLC., employees a unique approach to fund of hedge funds investing by treating underlying hedge funds as information processors not just as financial companies and ranking them by skill not returns. The firm employs proprietary and theoretical and statistical methodology based on it’s founders research and doctoral studies. The four pinnacles of Paradigm’s investment philosophy which take into account changing hedge fund and market conditions are: a) Manager Selection, b) Quantitative Analysis, c) Due Diligence and d) Portfolio Allocation and Risk Management
Quantitative Analysis
Manager Selection
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
10
Quantitative Analysis
III. Investment Process – Manager Selection Manager Selection
Paradigm Global Advisors LLC., sources hedge fund managers from:
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Proprietary Sources
Public Sources
Proprietary
Prime Brokers
Strategic Investors
Industry Conferences
Institutional Allocators
Direct Submissions
Hedge Fund Managers
Third Party Databases
Consultants
Lawyers
Industry Contacts (developed over past 16 years)
Accountants
Academics
Administrators Prime Broker Symposiums
Other Sources Competitors/ Other Fund of Fund Managers Publications MAR/Hedge Absolute Return Asia Hedge Barron’s Hedge Fund Alert Albourne Village
11
Quantitative Analysis
III. Investment Process – Manager Selection Manager Selection
Database of 8,700 active managers Quantitative Filtering Ranking by Skill
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
400 managers Qualitative Analysis Interview Process Due-Diligence Process
100 managers Approved List
Inv. Committee Approval Allocation Process 12
Quantitative Analysis
III. Investment Process – Quantitative Analysis ¾
Statistical ranking using Paradigm's proprietary theoretical modeling filter, and identifying best of breed managers
Manager Selection
PARADIGM Global Advisors
Portfolio Allocation and Risk Management
¾
Paradigm purchases monthly manager data from 8 different hedge fund data providers and such data is subsequently entered into system PASS.
¾
PASS contains track records for over 15,500 managers (8,700 active managers and 6,800 inactive managers) and ranks them by skill (not returns)
¾
Utilize System PASS to measure Hedge Fund AlphaTM , Hedge Fund BetaTM and Park RatioTM (aggregate analysis, style analysis, cluster analysis, portfolio contribution analysis)
¾
In addition, the system conducts mean-variance and other standard statistical analysis.
R
HF
= α + β (PARADIGM Hedge Fund Index) + ε
14%
= 0 + 1.4 (+10%)
9%
= 2 + 0.7 (+10%)
Alpha Measures Skill
Due Diligence
Beta Measures Risk
13
Quantitative Analysis
III. Investment Process – Quantitative Cluster Analysis ¾
Developed by Paradigm using patent-pending technology, Cluster Analysis groups hedge funds into certain discrete style categories.
¾
Strategy correlations are unstable over time and could possibly diminish portfolio diversification. In order to display more stable correlation structures, Paradigm performs Cluster Analysis.
¾
Discrete style categories used in Cluster Analysis could be perceived as equivalents of asset classes.
¾
Discrete style categories have well defined but differentiated correlation, risk and return characteristics.
¾
The Cluster Analysis process allows Paradigm to evaluate managers whose performance distinguishes them from peers in their cluster.
¾
Outliers often require additional research and investigation, as they may indicate the presence of exceptionally skilled managers, fraudulent managers, or managers deviating from their stated styles.
Manager Selection
Y
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Z
X
14
Quantitative Analysis
III. Investment Process – Quantitative Analysis Manager Selection
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
15
Quantitative Analysis
III. Investment Process – Due Diligence Due Diligence - Qualitative Analysis ¾
Initial interview with asset allocation team members
¾
Interview with senior asset allocation team members
¾
Determine manager’s level of skill/expertise
¾
Information processing vs. market timing
¾
Establish value added by potentially engaging the manger
Manager Selection
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Due Diligence - Manager Evaluation Process ¾
Background check, confirm educational and employment history including personal and professional references
¾
Manager developments and organizational changes
¾
Confirm AUM with a prime broker and conduct fundamental portfolio analysis
¾
Gather prospectus and audited financial statements
¾
Check for violations/customer complaints with SEC
¾
Manager office visit
¾
PARADIGM proprietary manager questionnaire
¾
Operational checklist including infrastructure, risk controls, trade execution and service providers
¾
Leave no stone unturned – conduct comprehensive evaluation
16
Approved Manager Characteristics
Quantitative Analysis
III. Investment Process – Due Diligence Manager Selection
Due Diligence - Manager Approval Process ¾
Set manager specific and style specific reward/risk parameters
¾
Bottom up investment manager approach
¾
Institute minimum test account
¾
Analyze return stream against expectations
¾
Monitor for discrepancies between past and actual performance
¾
Conduct strategy and value added analysis
¾
Cluster analyze historical manager performance
¾
Commitment to being invested with only top tier information processors
¾
Report to investment committee
PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Due Diligence – Approved Manager Characteristics ¾
No fixed beta managers
¾
Average size: $50 to $150 million
¾
Very little emerging market
¾
Average track record: Three years
¾
No long term systematic trend followers
¾
Single strategy focus (signals expertise)
¾
No directional risk takers
¾
Has a clearly defined investment process
¾
Marked to market securities
¾
Wealthy and invested in own fund
17
III. Investment Process – Portfolio Allocation and Risk Management Portfolio Construction ¾
Strategic and tactical approach
¾
Maximization of Reward/Risk ratio
¾
Bottom up (manager) versus top down (sector) approach
¾
Equal Allocation by volatility and not by $
¾
Sector Optimization
¾
Portfolio liquidity
¾
Credit Exposure
¾
Leverage
¾
Correlation analysis and economic driver analysis
¾
Monthly portfolio rebalancing at the manager level and sector level
Quantitative Analysis PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
¾ Broad diversification: 50 to 100 managers ¾ Diversification benefit ¾ Manager and strategy concentration ¾ 5% maximum allocation to a single manager
18
III. Investment Process – Portfolio Allocation and Risk Management Risk Management ¾
¾
Ongoing quantitative analysis using actual returns
Cross correlation analysis
Manager returns reviewed on a daily, weekly, monthly basis
Manager returns reviewed in context of other managers of similar style
Peer comparison and peer group rankings
Rolling returns and standard deviation trends
Quantitative Analysis PARADIGM Global Advisors
Due Diligence
Portfolio Allocation and Risk Management
Continuous monitoring for red flags
Style drift and strategy changes
Unusual drawdowns or profits
Returns inconsistent with strategy
Rapid asset growth, capital inflows and outflows
Regulatory concerns
Negative industry reputation
Loss of focus, personal life issues
Employee turnover
Unwillingness to share information
Manager diversifies personal assets away from the fund/partnership
19
VI. Biographies James Park, J.D., Ph.D., Chairman and Chief Investment Officer Dr. Park is responsible for directing the overall management and investment activities of PARADIGM Global Advisors, LLC. He has 13 years of direct hedge fund investment experience. Between 1991 and 1998, Dr. Park was a professor of finance at Long Island University, where he founded the Center for Financial Markets Research. Dr. Park completed his Ph.D. in financial economics in 1995 at the Columbia Business School, where he also taught. His dissertation on hedge funds is the first of its kind. He is a recognized author of pioneering research on the behavior of hedge funds. Prior to launching his academic and financial careers, Dr. Park was an Assistant District Attorney in Massachusetts. From 2001 to 2003, he served as an elected member of the Nominating Committee for the National Futures Association. Dr. Park earned a B.S. in economics from the Wharton School of Finance, University of Pennsylvania, and a J.D. from Harvard and Columbia Law Schools. Stephane Farouze, Managing Director Structured Products and Institutional Marketing Mr. Farouze joined PARADIGM in early 2003 as Managing Director of Structured Products and Institutional Marketing. He has 11 years of experience in alternative investments and derivative products. Prior to joining PARADIGM, Mr. Farouze was the Global Head of Sales and Structuring at Societe Generale Asset Management’s Alternative Investments Group, where he grew assets under management from $3.4 billion to over $15 billion in less than three years. He has launched in excess of 100 capital-guaranteed products in Italy, Spain, France, Germany, Hong Kong, Singapore and Japan. Before joining SocGen, Mr. Farouze headed the foreign exchange derivatives desk for the Italian markets at BNP Paribas, Commerz Bank, and Smith Barney. He has a B.A. in finance and economics from San Diego State University. 20
Markus Karr, Managing Director Asset Allocation
VI. Biographies
Mr. Karr is Managing Director of Asset Allocation at PARADIGM, where he and his team assist Dr. Park in implementing the company’s research in the areas of manager selection and portfolio allocation. He joined the firm in 1994 and has more than ten years of hedge fund investment experience. Mr. Karr earned a B.S. in computer science and engineering from the Massachusetts Institute of Technology, where he concentrated his studies on modeling and simulation design. He was a registered Commodity Trading Advisor from 1995 to 2002 and is currently a member of the National Futures Association. P. James Hirchak, CPA, Director Compliance and Risk Management Mr. Hirchak is responsible for compliance and risk management at PARADIGM. Before joining the firm in 2002, he was Treasurer and Senior Vice President of Gardner Capital Management, where he was part of an investment team focused on financial, administrative and due diligence issues. Prior to joining Gardner, Mr. Hirchak was Treasurer and Chief Operating Officer of Moran Group, LP, an investment partnership managing U.S. and foreign investments in excess of several hundred million dollars. Between 1990 and 1992, Mr. Hirchak was Treasurer and Chief Operating Officer of Structured Asset Management, a quantitative money manager and wholly owned subsidiary of Templeton International. Prior to 1990, he held various financial and administrative positions on the trading floors of Drexel Burnham Lambert and Kidder Peabody & Co. in New York. Mr. Hirchak holds a B.S. in accounting and a M.B.A. in finance from Utah State University. Nikolay Fedorovskiy, Ph.D., Director Research Mr. Fedorovskiy joined PARADIGM in 2000 as Director of Research responsible for designing and securing the online statistical reporting system used by PARADIGM’s asset allocation team. He also leads the research and development of various statistical algorithms used in PARADIGM’s quantitative analysis of hedge funds. He gained extensive experience in computer programming and engineering while working for Russia’s Institute of Electric Power, where he created a programming language for semantic networks. Mr. Fedorovskiy received his Ph.D. in mathematics from Moscow State University, where he majored in high algebra and computer modeling. 21
VI. Biographies Alla Babikova, Director Marketing and Client Services Ms. Babikova joined PARADIGM in 2001 as the Director of Marketing and Client Services. She has more than seven years of experience in sales and marketing for the financial and hedge fund industries. Prior to joining PARADIGM, she was the Head of Marketing and Client Services for Waterford Partners, LLC, a global hedge fund manager. From 1996 to 1998, Ms. Babikova covered private and institutional domestic clients as an equity sales professional at Renaissance Capital, LLC, a major Russian investment bank. In 1995, she worked at Credit Suisse First Boston in Moscow. Prior to joining CSFB, she spent two years as an interpreter for a joint venture between Gulf Canada and British Gas. Ms. Babikova holds a B.A. in French and English from Novgorod University of Foreign Languages. Matteo Solbiati, Director Head of European Branch Mr. Solbiati joined PARADIGM in March 2003. From 1995 to 2003, he worked for Fineco Sim (Bipop Group), a leading Italian broker, where he expanded the derivatives desk and eventually became the Head of Trading and Structured Products, managing a team of 35 people. He developed innovative structured products on various underlying commodities for insurance, retail and institutional clients, as well as for fund managers. Mr. Solbiati graduated from Bocconi University in Milan with a Master’s degree in applied statistics.
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