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Utah
 
Retirement
 
Systems
 
Investments
 
Group
 
Summary
 
of 
 
Preferred
 
Hedge
 
Fund
 
Terms
 
Overview:
 
The
 
purpose
 
of 
 
this
 
document
 
is
 
to
 
crystallize
 
a
 
general
 
view
 
on
 
the
 
share
 
class
 
terms
 
that
 
institutional
 
investors
 
should
 
prefer
 
when
 
investing
 
in
 
hedge
 
fund
 
partnerships.
 
The
 
information
 
contained
 
herein
 
is
 
drawn
 
from
 
a
 
variety
 
of 
 
discussions
 
with
 
institutional
 
investors,
 
asset
 
management
 
firms,
 
and
 
the
 
investment
 
industry
 
at
 
large.
 
With
 
the
 
multitude
 
of 
 
strategies,
 
investor
 
types,
 
and
 
heterogeneity
 
across
 
the
 
hedge
 
fund
 
industry,
 
there
 
is
 
no
 
panacea
 
for
 
optimal
 
contract
 
terms
 
in
 
hedge
 
fund
 
investing.
 
However,
 
the
 
hedge
 
fund
 
industry
 
is
 
at
 
a
 
crossroads
 
where
 
a
 
decade
‐
long
 
sellers’
 
market
 
for
 
funds,
 
buoyed
 
by
 
excess
 
demand
 
from
 
all
 
investor
 
types,
 
is
 
grinding
 
to
 
a
 
halt
 
due
 
to
 
large
 
performance
 
related
 
losses,
 
structural
 
changes
 
to
 
the
 
investment
 
banking
 
model
 
upon
 
which
 
many
 
firms
 
were
 
created,
 
and
 
the
 
exposure
 
of 
 
an
 
asset
‐
liability
 
mismatch
 
(i.e.
 
strategy
 
illiquidity
 
meets
 
investor
 
demand
 
for
 
liquidity)
 
that
 
has
 
created
 
a
 
spiral
 
of 
 
redemption
 
pressure
 
and
 
forced
 
selling.
 
The
 
response
 
of 
 
the
 
institutional
 
investor
 
community
 
to
 
an
 
industry
 
reeling
 
from
 
the
 
issues
 
highlighted
 
above
 
will
 
shape
 
the
 
future
 
of 
 
the
 
hedge
 
fund
 
business.
 
Managers
 
are
 
under
 
a
 
tremendous
 
amount
 
of 
 
stress,
 
from
 
boutique
 
arbitrageurs
 
to
 
“Blue
 
chip”
 
hedge
 
funds,
 
and
 
are
 
offering
 
to
 
cooperate
 
with
 
their
 
stable
 
investor
 
base
 
in
 
restructuring
 
the
 
hedge
 
fund
 
business
 
model.
 
The
 
changes
 
taking
 
place
 
will
 
help
 
secure
 
the
 
solvency
 
of 
 
the
 
hedge
 
fund
 
industry
 
while
 
stabilizing
 
the
 
prospect
 
of 
 
long
 
term
 
active
 
returns
 
available
 
to
 
investors.
 
This
 
document
 
ends
 
with
 
a
 
concrete
 
representation
 
of 
 
the
 
share
 
class
 
terms
 
that
 
URS
 
believes
 
to
 
be
 
appropriate
 
for
 
institutional
 
investors
 
in
 
hedge
 
funds.
 
Again,
 
while
 
there
 
is
 
no
 
single
 
“best”
 
contract
 
structure,
 
we
 
feel
 
that
 
these
 
terms
 
are
 
a
 
minimum
 
standard
 
to
 
best
 
align
 
interests
 
and
 
ensure
 
a
 
mutually
 
beneficial
 
relationship
 
over
 
a
 
long
‐
term
 
investment
 
horizon.
 
Qualitative
 
Assessment
 
of 
 
Hedge
 
Fund
 
Terms:
 
Management
 
Fees
 
Management
 
fees
 
should
 
be
 
used
 
to
 
cover
 
operating
 
expenses
 
only,
 
and
 
are
 
not
 
appropriate
 
funding
 
sources
 
for
 
staff 
 
bonuses,
 
business
 
reinvestment,
 
strategy
 
expansion,
 
or
 
wealth
 
accumulation
 
by
 
partners.
 
Managers
 
should
 
consider
 
implementing
 
a
 
tiered
 
management
 
fee
 
structure,
 
as
 
in
 
the
 
traditional
 
asset
 
management
 
industry,
 
so
 
that
 
large
 
investors
 
do
 
not
 
subsidize
 
an
 
unduly
 
large
 
share
 
of 
 
operational
 
costs.
 
An
 
example
 
is
 
included
 
in
 
the
 
appendix.
 
Asset
 
managers’
 
incentive
 
to
 
run
 
“asset
 
gathering”
 
businesses
 
instead
 
of 
 
“asset
 
management“
 
businesses
 
have
 
been
 
overstretched
 
because
 
of 
 
the
 
profitability
 
derived
 
from
 
the
 
industry
 
standard
 
2%
 
management
 
fee.
 
Assuming
 
economies
 
of 
 
scale,
 
costs
 
should
 
fall
 
as
 
managers
 
grow
 
their
 
assets
 
under
 
management.
 
Investors
 
should
 
consider
 
management
 
fee
 
schedules
 
that
 
ratchet
 
down
 
as
 
the
 
firm
 
or
 
strategy
 
AUM
 
increase
 
to
 
certain
 
hurdle
 
rates.
 
For
 
example,
 
management
 
fees
 
of 
 
a
 
single
 
strategy
 
 
manager
 
might
 
be
 
cut
 
by
 
25
 
bps
 
from
 
1.50%
 
to
 
1.25%
 
as
 
the
 
Fund
 
grows
 
from
 
$1.0
 
billion
 
to
 
$3.0
 
billion.
 
Performance
 
Fees
 
Performance
 
fees
 
should
 
create
 
alignment
 
of 
 
incentives
 
through
 
timing
 
mechanisms
 
(e.g.
 
deferments,
 
holdbacks,
 
and/or
 
claw
 
backs),
 
appropriate
 
hurdle
 
rates,
 
and
 
egalitarian
 
terms
 
for
 
all
 
investors.
 
One
 
of 
 
the
 
greatest
 
strengths
 
of 
 
the
 
hedge
 
fund
 
industry
 
is
 
the
 
alignment
 
of 
 
interest
 
that
 
is
 
created
 
with
 
“pay
 
for
 
performance”
 
carry
 
fee
 
structure.
 
Performance
 
fee
 
terms
 
should
 
be
 
amended
 
to
 
include
 
payment
 
that
 
matches
 
the
 
duration
 
of 
 
an
 
investment
 
horizon.
 
Two
 
examples:
 
1)
 
performance
 
fees
 
ought
 
to
 
be
 
paid
 
at
 
the
 
end
 
of 
 
a
 
lock
‐
up
 
period
 
or
 
2)
 
a
 
deferred
 
payment
 
schedule
 
where
 
a
 
portion
 
of 
 
the
 
performance
 
fee
 
(50%)
 
is
 
paid
 
in
 
year
 
one
 
and
 
the
 
remainder
 
(50%)
 
is
 
paid
 
in
 
the
 
following
 
year.
 
Lastly,
 
managers
 
should
 
not
 
be
 
paid
 
carry
 
for
 
cash
 
returns
 
and
 
investors
 
should
 
recoup
 
at
 
least
 
a
 
portion
 
of 
 
management
 
fees
 
paid.
 
All
 
performances
 
fee
 
should
 
be
 
accrued
 
above
 
an
 
appropriate
 
hurdle
 
of 
 
T
‐
Bills
 
plus
 
Management
 
Fees.
 
Liquidity
 
Risk
 
Subsidy
 
The
 
current
 
environment
 
highlights
 
a
 
critical
 
concern
 
regarding
 
hedge
 
fund
 
managers’
 
liquidity
 
management
 
practices.
 
The
 
root
 
of 
 
the
 
problem
 
lies
 
in
 
the
 
varying
 
demand
 
for
 
liquidity
 
across
 
investors
 
in
 
comingled
 
hedge
 
fund
 
vehicles.
 
In
 
a
 
simplified
 
case
 
the
 
demand
 
for
 
liquidity
 
is
 
primarily
 
a
 
function
 
of 
 
the
 
investor’s
 
expected
 
investment
‐
horizon
 
(e.g.
 
1
 
yr,
 
3,
 
yrs,
 
10
 
yrs),
 
premeditated
 
reallocations,
 
and
 
exogenous
 
liquidity
 
pressures
 
unrelated
 
to
 
tactical
 
or
 
strategic
 
investment
 
goals.
 
Institutional
 
investors
 
have
 
long
‐
term
 
investment
 
horizons
 
that
 
match
 
the
 
duration
 
of 
 
their
 
long
‐
term
 
expected
 
liabilities;
 
for
 
example,
 
a
 
public
 
pension
 
fund
 
expects
 
its
 
benefit
 
payouts
 
to
 
continue
 
in
 
perpetuity.
 
On
 
the
 
other
 
end
 
of 
 
the
 
spectrum
 
lie
 
non
‐
institutional
 
investors
 
such
 
as
 
Fund
 
of 
 
Funds
 
or
 
high
‐
net
‐
worth
 
individuals
 
whose
 
investment
 
horizon
 
is
 
shorter
 
primarily
 
because
 
of 
 
their
 
sensitivity
 
to
 
unexpected,
 
immediate
 
liquidity
 
needs.
 
This
 
is
 
best
 
characterized
 
in
 
recent
 
months
 
by
 
Fund
 
of 
 
Funds’
 
urgent
 
demand
 
for
 
liquidity
 
to
 
meet
 
the
 
needs
 
of 
 
their
 
own
 
redeeming
 
investors,
 
a
 
consequence
 
of 
 
poor
 
structuring
 
of 
 
their
 
own
 
liquidity
 
management
 
provisions.
 
When
 
heterogeneous
 
investment
 
horizons
 
are
 
pooled
 
in
 
the
 
same
 
fund
 
structure,
 
long
 
horizon
 
investors
 
effectively
 
subsidize
 
the
 
availability
 
of 
 
liquidity
 
to
 
short
‐
horizon
 
investors.
 
The
 
costs
 
of 
 
this
 
subsidy
 
have
 
been
 
largely
 
dismissed
 
until
 
recently.
 
First,
 
if 
 
managers
 
receive
 
large
 
requests
 
for
 
redemptions,
 
they
 
become
 
forced
 
sellers
 
of 
 
assets
 
and
 
the
 
downward
 
pressure
 
on
 
prices
 
is
 
magnified
 
in
 
dislocated
 
markets.
 
While
 
managers
 
can
 
fulfill
 
redemptions
 
with
 
existing
 
cash
 
on
 
hand,
 
paying
 
down
 
cash
 
balances
 
reduces
 
their
 
ability
 
to
 
deploy
 
capital
 
as
 
new
 
opportunities
 
come
 
through
 
the
 
pipeline
 
 –
 
a
 
missed
 
opportunity
 
cost
 
to
 
remaining
 
investors.
 
Further,
 
paying
 
down
 
cash
 
and
 
selling
 
quality
 
assets
 
to
 
meet
 
the
 
redemptions
 
of 
 
short
‐
term
 
investors
 
leaves
 
long
‐
term
 
investors
 
holding
 
an
 
illiquid
 
pool
 
of 
 
assets
 
that
 
is
 
not
 
representative
 
of 
 
the
 
mandate
 
to
 
which
 
they
 
subscribed.
 
Institutional
 
investors
 
should
 
no
 
longer
 
bear
 
the
 
costs
 
of 
 
taking
 
undue
 
liquidity
 
risk.
 
Instead,
 
hedge
 
fund
 
managers
 
must
 
structure
 
share
 
class
 
terms
 
that
 
transfer
 
liquidity
 
risk
 
evenly
 
among
 
commingled
 
investors.
 
Liquidity
 
Terms
 
While
 
investors
 
should
 
not
 
be
 
unduly
 
deprived
 
of 
 
their
 
access
 
to
 
liquidity,
 
managers
 
should
 
smooth
 
maximum
 
allowable
 
redemption
 
pressure
 
over
 
a
 
long
 
period
 
of 
 
time
 
to
 
ensure
 
that
 
the
 
liquidity
 
risk
 
premium
 
is
 
not
 
subsidized
 
by
 
long
‐
term
 
investors.
 
Fund
‐
level
 
gates,
 
investor
‐
level
 
gates,
 
lock
‐
ups
 
(hard
 
and
 
soft),
 
and
 
rolling
 
redemption
 
periods
 
are
 
essential
 
tools
 
for
 
resolving
 
this
 
problem.
 
Fund
‐
level
 
gates
 
may
 
be
 
implemented
 
at
 
a
 
manager’s
 
discretion,
 
while
 
investor
‐
level
 
gates
 
provide
 
an
 
automatic
 
 
redemption
‐
smoothing
 
mechanism.
 
Managers
 
should
 
penalize
 
any
 
rescinded
 
redemption
 
requests
 
by
 
resetting
 
the
 
investor’s
 
high
 
water
 
mark
 
and
 
charging
 
a
 
reasonable
 
level
 
of 
 
administrative
 
fees
 
to
 
be
 
paid
 
to
 
the
 
fund.
 
Managers
 
may
 
also
 
resolve
 
the
 
problem
 
of 
 
liquidity
 
subsidies
 
by
 
creating
 
a
 
separate
 
and
 
distinct
 
commingled
 
fund
 
for
 
long
‐
term
 
institutional
 
investors.
 
In
 
general,
 
investors
 
and
 
managers
 
must
 
agree
 
on
 
proper
 
compensation
 
for
 
liquidity
 
risk,
 
be
 
more
 
attentive
 
to
 
matching
 
asset
 
and
 
liability
 
time
 
horizons,
 
and
 
structure
 
terms
 
to
 
allow
 
funds
 
to
 
weather
 
market
 
dislocations.
 
As
 
the
 
current
 
situation
 
demonstrates,
 
failure
 
to
 
do
 
so
 
results
 
in
 
a
 
negative
 
feedback
 
loop
 
of 
 
redemptions,
 
forced
 
sales
 
and
 
protracted
 
losses,
 
which
 
is
 
costly
 
to
 
investors
 
and
 
hedge
 
fund
 
managers
 
alike.
 
Leverage
 
and
 
Lack
 
of 
 
Transparency
 
Leverage
 
has
 
been
 
misused,
 
mistimed
 
and
 
mismanaged
 
in
 
ways
 
that
 
have
 
exacerbated
 
problems
 
for
 
hedge
 
funds.
 
Further,
 
a
 
lack
 
of 
 
transparency
 
has
 
prevented
 
investors
 
from
 
accurately
 
gauging
 
portfolio
 
risk.
 
Managers
 
should
 
meet
 
or
 
exceed
 
transparency
 
needs
 
of 
 
all
 
investors.
 
In
 
exchange,
 
investors
 
should
 
be
 
unwavering
 
in
 
their
 
commitment
 
to
 
protecting
 
the
 
confidentiality
 
of 
 
that
 
transparency.
 
The
 
use
 
of 
 
leverage
 
is
 
an
 
important
 
investment
 
tool
 
but
 
its
 
use
 
should
 
be
 
prudent
 
in
 
application
 
and
 
appropriately
 
disclosed.
 
At
 
a
 
minimum
 
transparency
 
should
 
include
 
the
 
following:
 
 Annual:
 
•
 
Audited
 
Financial
 
Statements
 
Quarterly:
 
•
 
Fee
 
disclosure
 
•
 
Schedule
 
of 
 
operational
 
costs
 
•
 
Soft
 
dollar
 
or
 
commission
 
recapture
 
trades
 
•
 
Disclosure
 
of 
 
investor
 
base
 
by
 
institution
 
type,
 
concentration,
 
geography,
 
etc.
 
Monthly:
 
•
 
Investor
 
and
 
aggregate
 
fund
 
NAV
 
report
 
(capital
 
account
 
summary)
 
•
 
Disclosure
 
of 
 
portfolio
 
percentage
 
in
 
Tier
 
3
 
securities
 
•
 
Return
 
attribution
 
and
 
long/short
 
exposure
 
by
 
strategy,
 
geography,
 
or
 
sector
 
•
 
Largest
 
long
 
and
 
short
 
positions
 
by
 
name
 
•
 
Qualitative
 
strategy
 
commentary
 
that
 
addresses
 
return
 
drivers
 
by
 
name
 
•
 
Leverage
 
(Gross/NAV)
 
at
 
the
 
fund
 
and
 
strategy
 
level
 
•
 
Participation
 
in
 
Third
 
Party
 
Risk
 
Aggregators
 
•
 
Estimates
 
of 
 
fund,
 
strategy,
 
and
 
firm
 
AUM
 
Weekly/Daily:
 
•
 
MTD
 
return
 
estimates
 
•
 
Return
 
attribution
 
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