7772 N. Palm Ave. Fresno, CA 93711 (559) 457-0681 p. (559) 457-0318 f. FresnoCountyRetirement.org

DATE: October 2, 2019

TO: Board of Retirement

FROM: Donald C. Kendig, CPA, Retirement Administrator

Staff Contact: Doug Kidd, Investment Officer

SUBJECT: Consideration of the Termination of Grosvenor Institutional Partners LP, Canyon Balanced Fund, Double Black Diamond Ltd., Farallon Capital Offshore Investors, Inc., and HBK Multi-Strategy Offshore Fund Ltd. – APPROPRIATE ACTION

Recommended Actions Based on Board Action If your Board moves to terminate one or all of its fund managers: 1. Direct staff to work with Grosvenor, Verus, and Investment Counsel, as necessary, to coordinate the termination process.

If your Board takes no action to terminate manager(s): 2. Receive and file this report.

Fiscal and Financial Impacts If the Board takes no action, there will be no change to the hedge fund program. If the Board moves to terminate one or all of its hedge fund relationships, a series of termination notices will be generated by staff, with the assistance of Grosvenor and/or Investment counsel. A plan is presented below and a timeline attached. Costs are unknown at this time. Grosvenor’s assistance would normally be included in its management fees. Investment Counsel is hourly.

Background and Discussion The consultant has indicated, “While as a firm Verus still believes that hedge funds have merit in institutional portfolios, we think it's important that our clients, as fiduciaries, have complete confidence in the manner their portfolios are structured…”. There is the potential for a change to how the program is constructed. If the Board decides to deconstruct the current program and rebuild, staff wants the Board to be fully aware of what is involved in deconstruction and has put together a disposition analysis.

Excellence ● Professionalism ● Teamwork ● Integrity ● Accountability ● Innovation “The County of Fresno is an Equal Employment Opportunity Employer.”

Consideration of the Termination of Grosvenor Institutional Partners LP, Canyon Balanced Fund, Double Black Diamond Ltd., Farallon Capital Offshore Investors, Inc., and HBK Multi-Strategy Offshore Fund Ltd. Page 2

In Summary There are two custodial accounts under the of Grosvenor. The first is Grosvenor’s flagship fund-of-funds Grosvenor Institutional Partners, L.P. fund. The Second is FCERA’s GCM Better Futures Fund, LLC fund-of-one containing five direct hedge fund investments. (There is a separate LLC for the Better Futures Fund.)

Three phases could exist: Phase I  Fir Tree International Value II, Ltd (approx. $30.8MM) – Subject to closed session provisions. Phase II – October2019 (with the cooperative assistance of Grosvenor)  Canyon Balanced Fund L.P. (approx. $32.5MM) – Provide notice prior to September 30, 2019 of a full redemption and receive 25% on December 31, 2019, 33.1/3% on March 31, 2020, 50% June 30, 2020, and 100% September 30, 2020. There is a possible 5% retention related to audited numbers. No specific redemption request form provided or asked for. (Initial analysis date expired. Move back one quarter.)  Double Black Diamond Ltd (approx. $30.6MM) – 25% may be redeemed after the first 12 months (Investor Gate may apply) upon a 60 day notice. It is unclear, but appears that successive 25% redemption requests may be given every 60 days. The fund has an anniversary of September 30 of each year and a full redemption request may be made within 60 days of that date, in this case September 30, 2020, or well before August 1, 2020 to be safe. Specific redemption request form provided and mandated (Annex E).  Farallon Capital Offshore Investors, Inc (approx. $38.4MM) – Provide 60 day notice prior to June 30, 2020 and will be received within 30 days thereafter, subject to a 5% retention related to audited numbers. Specific redemption request form provided and asked for (Exhibit C).  HBK Multi-Strategy Offshore Fund Ltd (approx. $34.0MM) – Provide notice at least 90 days and not more than 120 days prior to the end of a calendar quarter, or prior to September 30, 2019 for 25%, and generally may redeem all of its interest over four consecutive redemption dates (subject to certain limitations) or December 31, 2019 for 33.1/3%, March 31, 2020 for another 50%, and June 30, 2020 for the last 100% to be paid out within 30 days after a quarter’s end after the redemption request, subject to a 5% retention. No specific redemption request form provided or asked for.  Grosvenor Institutional Partners, L.P (approx. $169MM) – Provide notice 70 days prior to December 31, 2019 for the liquidation of all assets. At least 90% will be provided within 60 days of the withdrawal date of March 31, 2020. There are provisions related to underlying funds which could cause delay in receiving the remaining 10%.

Phase III – February 2021 approx.  GCM Better Futures Fund, LLC – Close Custodial Account via a letter of direction to Northern Trust, once last direct fund distributes and balance is $0.00. Terminate LLC. Consideration of the Termination of Grosvenor Institutional Partners LP, Canyon Balanced Fund, Double Black Diamond Ltd., Farallon Capital Offshore Investors, Inc., and HBK Multi-Strategy Offshore Fund Ltd. Page 3

If the Board approves terminations, there will be funds available for reinvestment in other areas of FCERA’s asset allocation. Hedge Funds are considered an alternative asset class reported in the same grouping with and Private Credit as outlined in FCERA’s Investment Policy Statement. Staff believes that hedge funds are less liquid and were intended to be a lower volatility diversifier to FCERA’s Equity exposure.

It is the Board’s prerogative where to invest the proceeds with the investment consultant and that can be discussed at the Board’s offsite and at future meetings. Deciding whether to keep or sell its hedge funds is only a first step in deciding what to do with the allocation.

Staff believes the extended redemption period will allow time to consider other options for the portfolio, and real assets would be a natural alternative, with lower volatility than equities and having likely higher returns than most fixed income alternatives. Staff can cooperate with Verus to consider those alternatives in light of the active risk budgeting exercise, as well as whether to add to existing investments or to augment allocations to the real assets segment by investigating in new strategies. Listed real assets alternatives are available in the event that hedge fund redemptions occur more quickly than Staff and Verus can evaluate private real estate options, or any other combination of investments which the Board determines to be appropriate. Any new combination would need to be run through the models by Verus and considered by the Board as it would adjust the portfolio’s risk return profile.

Attachments 1. Hedge Fund Transition Timeline (as currently understood by Staff)

(On File with the Clerk of the Board) 2. Fir Tree International Value Fund II, Ltd. Cover Page 3. Canyon balanced Fund L.P. Redemption Terms Excerpts 4. Double Black Diamond LTD. Redemption Terms Excerpts 5. Farallon Capital Offshore Investors, Inc. Redemption Terms Excerpts 6. HBK Multi-Strategy Offshore Fund Ltd Redemption Terms Excerpts 7. Grosvenor Capital Management Redemption Terms Excerpts

FCERA Hedge Fund Redemptions 2019/2020 Approx Sep Jan Jan Fund/Account Amount 2019 Oct Nov Dec 2020 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2021 Feb Fir Tree 30.8 (subject to closed session provisions) - Canyon notify redeem redeem redeem redeem 32.5 10.8 20.1 1.6 - Double Black notify redeem 30.6 30.6 Farallon notify redeem redeem 38.4 36.5 1.9 HBK notify redeem redeem 34.0 8.5 8.5 8.5 8.5 Grosvenor Fund notify redeem redeem 169.0 152.1 16.9 Totals (up) 335.3

Totals (across) 304.5 ------152.1 19.3 - - 65.0 - - 40.7 - 16.9 8.5 1.9

Difference 30.8 (Fir Tree) Fir Tree International Value Fund II, Ltd. Canyon Balanced Fund L.P. Canyon Balanced Fund L.P. Canyon Balanced Fund L.P. Canyon Balanced Fund L.P. Canyon Balanced Fund L.P. Canyon Balanced Fund L.P. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Double Black Damond Ltd. Farallon Capital Offshore Investors, Inc. Farallon Capital Offshore Investors, Inc. Farallon Capital Offshore Investors, Inc. Farallon Capital Offshore Investors, Inc. Farallon Capital Offshore Investors, Inc. Farallon Capital Offshore Investors, Inc. Farallon Capital Offshore Investors, Inc. HBK Multi-Strategy Offshore Fund Ltd HBK Multi-Strategy Offshore Fund Ltd HBK Multi-Strategy Offshore Fund Ltd HBK Multi-Strategy Offshore Fund Ltd HBK Multi-Strategy Offshore Fund Ltd HBK Multi-Strategy Offshore Fund Ltd Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM Grosvenor Capital Management GCM