The Spectrum of Hedge Fund Investors Effective Marketing

The Spectrum of Hedge Fund Investors: Effective Marketing and Best Practices Required to Attract and Retain Capital September 14, 2010

93% of new investments in hedge funds are going to firms with over $5 billion AUM Q 2, 2010 Hedge Fund Research Report To the other 7% How are you growing your business?

The Spectrum of Hedge Fund Investors Effective Marketing and Best Practices Required to Attract and Retain Capital Contents 1. Overview 2. The Investor Spectrum 3. The 4 Stages of Hedge Fund Development 4. Big 12 Hedge Fund Best Practices 5. The Necessary 9 for Raising and Retaining Capital

Overview • A little about Merlin • Over the past 36 months, Merlin has spoken to hundreds of hedge fund managers preparing to launch new funds and as well as more established hedge funds looking to expand their asset base. • Merlin realized was that there was no clear and concise guide to help managers set themselves up for success or get managers beyond their current plateau. • Merlin started to identify the strategies and business models that our most prepared hedge funds had in place, and noticed that there was a very consistent story that set these managers apart from the rest. • Merlin developed a framework around this including several action items to improve a hedge fund’s ability to attract and retain capital.

Big 12 Hedge Fund Best Practices 1. Written compliance and employee trading policies with periodic review 2. Multiple levels of authority on cash movements with a minimum of 2 people controlling input, release and approvals 3. Written and consistent valuation policy by asset class 4. Sound technology and infrastructure with reliable back-up, disaster recovery and business continuity plan 5. Open architecture to handle multiple Prime Brokers, multiple custodians and managed accounts. Understand why you use these firms and the alpha they generate 6. Clear risk management methodology 7. Ability to prove best execution 8. High quality audit, tax and legal representation 9. Sustainable third party administration 10. Dedicated operations manager, COO, CFO and CCO 11. Significant principal’s money in the fund 12. Daily position and cash reconciliation 13. Those managers who meet these Best Practices and generate Alpha can seize the growth opportunities in the marketplace.

The Necessary 9 How to Raise & Retain Institutional Capital 1. Convey how your process is repeatable and truly unique 2. Contributors to your portfolio’s performance; showcase all the following quantitative measurements: • • 3. 4. 5. 6. 7. 8. 9. Risk- including delta and beta adjusted with implied volatilities Daily exposure detail over time sinception Alpha over custom blended benchmarks on your long and short positions Asset allocation vs. stock selection criteria Concentration, liquidity and leverage statistics Volatility Attribution, both absolute and relative Everyone on your team must similarly articulate your fund’s compelling edge You need to be able to operate in a multi prime/custodian environment Operationally equipped to handle managed accounts Institutional quality infrastructure; operational, technology and compliance Show sustainability with limited reliance on the founder or any single person Understand your shortcomings Know your competition