HATTERAS Alternative Mutual Funds Fund of funds in a mutual fund |
Table of Contents Hatteras Alternative Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Investment Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Table of Contents | 1
Hatteras Alternative Mutual Funds � Alternative investment manager � Established in 2002 � Offers fund of funds in a mutual fund � Assets* � Firm: $1.98 billion � Mutual Funds: $357 million Hatteras Alternative Mutual Funds | 2 * As of March 31, 2011
Liquid Hedge Fund Strategies LONG/ SHORT M ARKET NEUTRAL RELATIVE VALUE – EVENT EQUITY EQUITY LONG/ SHORT DEBT DRIVEN � Generalist � Generalist � M ulti-Strategy � M erger Arbitrage � Sector Focus � Sector Focus � Long/ Short Fixed � Activist Income � International � International � Distressed / � Credit Arbitrage Restructuring � Variable Bias � Quantitative � Hedged High Yield � Event Equity/ Debt Hatteras Alternative Mutual Funds | 3
Fund Structure Open-End M utual Fund � Daily liquidity � No investor qualifications Hatteras Alpha � Complete position level transparency Hedged Strategies Fund � Investment team can implement allocations daily Underlying Funds � Strategy-specific Relative Long/ M arket Event Value – Short Neutral � Scalability for more managers/ strategies Driven Long/ Short Equity Equity Debt � Proprietary mutual funds Sub-Advisors � M anagers are given trading authority of 6 4 4 5 managed trading accounts Hedge Fund Hedge Fund Hedge Fund Hedge Fund � Primebroker: JP M organ & Jeffries M anagers M anagers M anagers M anagers � Custodians: JP M organ/ CTC & US Bank � Administrator: US Bancorp Fund Services Hatteras Alternative Mutual Funds | 4 Number of hedge fund managers is as of March 31, 2011
Fund Structure Single Strategy � Open-end mutual funds Hatteras Hatteras Hatteras Alpha � Inception: M ay 2011 Long/ Short Equity Long/ Short Debt Hedged Strategies Fund Fund Fund Strategy Assets Under M anagement as of 3/ 31/ 11 Relative Long/ M arket � Long/ Short Equity: $112,862,275 Event Value – Short Neutral Driven Long/ Short Equity Equity � Relative Value – Long/ Short Debt: $95,363,133 Debt 6 4 4 5 M ulti-M anager Hedge Fund Hedge Fund Hedge Fund Hedge Fund M anagers M anagers M anagers M anagers Hatteras Alternative Mutual Funds | 5 Number of hedge fund managers is as of March 31, 2011
Hatteras Alternative Mutual Funds – Fund Offerings � Hatteras Alpha Hedged Strategies Fund – fund inception September 2002 � ALPHX (no load) � APHAX (A-share) � APHCX (C-share) � Hatteras Long/Short Equity Fund – fund inception May 2011 � HLSAX (A-share) � HLSIX ( I -share) � Hatteras Long/Short Debt Fund – fund inception May 2011 � HFIAX (A-share) � HFINX ( I -share) Hatteras Alternative Mutual Funds | 6
Hatteras Alpha Hedged Strategies Fund � Core allocation to fund of funds BENCHMARK � Multiple hedge fund strategies HFRI Fund of Funds Composite Index � Multiple hedge fund managers � Target: Returns of the HFRI Fund of Funds Composite Index with a correlation of 0.9 TARGET STRATEGY ALLOCATION SUB-STRATEGIES ALLOCATION RANGE* 4 Event Driven 1 Generalist, Sector Focus, 25% - 45% International, Variable Bias 1 2 Generalist, Sector Focus, Long/ Short Equity 15% - 35% International, Quantitative 3 Multi-Strategy, Relative Value – 3 Long/Short Fixed Income, Long/ Short Debt 15% - 35% Credit Arbitrage, Hedged High Yield Merger Arbitrage, Activist, 2 4 Distressed/Restructuring, 5% - 25% M arket Neutral Equity Event Equity/Debt Hatteras Alternative Mutual Funds | 7 * Ranges provided are as a percent of total investments and are provided as a guideline
Hatteras Long/Short Equity Fund � Single hedge fund strategy: Long/Short Equity � Multiple hedge fund managers � Target: Long-term equity returns with 50%-60% volatility of the S&P 500 Index TARGET STRATEGY ALLOCATION SUB-STRATEGIES 4 1 Generalist, Sector Focus, International, Variable Bias 1 Long/ Short Equity 3 BENCHMARK HFRX Equity Hedge Index 2 Hatteras Alternative Mutual Funds | 8
Hatteras Long/Short Debt Fund � Single hedge fund strategy: Long/Short Debt � Multiple hedge fund managers � Target: T-Bills + 5% over a full market cycle with low correlation to the Barclays Capital U.S. Aggregate Bond Index � Long/Short debt strategies have historically performed well in rising interest rate environments TARGET STRATEGY ALLOCATION SUB-STRATEGIES 4 Multi-Strategy, Long/Short Fixed Income, 3 Credit Arbitrage, Hedged High Yield 1 3 Relative Value – Long/ Short Debt BENCHMARK HFRX Fixed Income – Corporate Index 2 Hatteras Alternative Mutual Funds | 9
Institutionalized Investment Process Repeatable process � Define investment mandates � Determine strategic allocation at Fund level � Manager sourcing: search, due diligence, and selection � Portfolio construction � Risk management and manager monitoring Investment Process | 10
Fund Investment Mandates � Hatteras Alpha Hedged Strategies Fund � Broad-based exposure across hedge fund strategies � Target: Returns of the HFRI Fund of Funds Composite Index with a correlation of 0.9 � Hatteras Long/Short Equity Fund � Target: Long-term equity returns with 50%-60% volatility of the S&P 500 Index � Hatteras Long/Short Debt Fund � Target: T-Bills + 5% over a full market cycle with low correlation to the Barclays Capital U.S. Aggregate Bond Index Investment Process | 11
Manager Search, Due Diligence, and Selection � Sourcing � Industry contacts from experienced portfolio team � Prime brokers, capital introduction firms � Industry-oriented databases � Seek liquid strategies that limit use of leverage � Initial screening � Quantitative, including peer review � Initial meetings � Experience in managing hedged portfolios � Ability to generate alpha through security selection (long and short) � Initial Investment Committee review Investment Process | 12
Manager Search, Due Diligence, and Selection (continued) � Individual manager additional due diligence � Assess commitment to research and portfolio management � Risk systems analysis � Portfolio fit analysis � Assess manager effect on overall portfolio � Operational due diligence � Background and reference checks � Legal/Regulatory review � Final Investment Committee review and approval � Board of Trustees approval � Custodial review and approval Investment Process | 13
Portfolio Construction � Tactical allocations based on � Bottom-up view: opportunities from discussions with hedge fund managers � Top-down view: market environment and opportunities � Bi-monthly Investment Committee meetings � Allocation to new managers starts at underweighted position Investment Process | 14
Risk Management and Manager Monitoring � Advantages of managed trading accounts � 100% position-level transparency on a daily basis � Mitigates operational and business risk associated with investing in hedge fund manager LPs � Ability to defund managers daily � Eliminates gating and sidepocket risk � Assets are fully segregated from hedge fund managers � Assets are custodied/deposited with top-tier financial institutions � Maintenance of each trading account pursuant to a specific Investment Management Agreement and Investment Mandate HEDGE FUND MANAGER Hatteras Mutual Fund Manager Hedge Fund Managed Trading Account TRADING $500 million of AUM $450 million of AUM $50 million of AUM AUTHORIZATION Prime Broker: JP Morgan Prime Broker: PB ‘ABC’ FULL Jeffries PB ‘XYZ’ SEGREGATION Administrator: “X” Administrator: US Bancorp Investment Process | 15
Risk Management and Manager Monitoring (continued) � Improved understanding of risk exposures by security, sector, etc. � Daily portfolio transparency � Daily cash flow reports � Risk exposure reports and exceptions � Monthly calls with managers to review positions, trends, performance, and outlook Investment Process | 16
Portfolio Managers MICHAEL P. HENNEN, CFA A decade of alternative investment experience focused on single manager � and fund of funds research, as well as manager search and selection � Graystone Research Group, Morgan Stanley � Morningstar ROBERT J. MURPHY, CFA, FRM, CAIA Two decades of investment industry experience including manager research, � product development, and risk management with two established multi-billion dollar fund of hedge fund organizations � Ivy Asset Management, a division of BNY Mellon Asset Management � Meridian Capital Partners � A.G. Edwards, Cowen & Company, Donaldson, Lufkin & Jenrette, Bear Stearns Investment Process | 17
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