34724_GrRoundtable.qxp 5/30/07 11:04 AM Page 1 The Education Committee of The GreenwichKnowledge,R Veracity,oundtable Fellowship The Greenwich Roundtable Presents Spring 2007 In This Issue About the Greenwich Roundtable Best Practices in Hedge Fund Investing: DUE DILIGENCE FOR FIXED INCOME Research Council AND CREDIT STRATEGIES Introduction Table of Contents 34724_GrRoundtable.qxp 5/30/07 11:04 AM Page 2 NOTICE G Greenwich Roundtable, Inc. is a not- for-profit corporation with a mission to promote education in alternative investments. To that end, Greenwich R Roundtable, Inc. has facilitated the compilation, printing, and distribu- tion of this publication, but cannot warrant that the content is complete, accurate, or based on reasonable assumptions, and hereby expressly disclaims responsibility and liability to any person for any loss or damage arising out of the use of or any About the Greenwich Roundtable reliance on this publication. Before making any decision utilizing content referenced in this publica- The Greenwich Roundtable, Inc. is a not-for- The Greenwich Roundtable hosts monthly, tion, you are to conduct and rely profit research and educational organization mediated symposiums at the Bruce Museum in upon your own due diligence includ- located in Greenwich, Connecticut, for investors Greenwich, Connecticut. Attendance in these ing the advice you receive from your who allocate capital to alternative investments. It forums is limited to members and their invited professional advisors. is operated in the spirit of an intellectual cooper- guests. Selected invited speakers define com- In consideration for the use of this ative for the alternative investment community. plex issues, analyze risks, reveal opportunities, publication, and by continuing to Mostly, its 200 members are institutional and and share their outlook on the future. For the read beyond this notice, you release, private investors. past 11 years, the Greenwich Roundtable has and forever discharge Greenwich hosted some of the leading managers, scien- Roundtable, Inc., its current, former, The purpose of the Greenwich Roundtable is tists, and policy makers of our day. and future members, trustees, direc- to discuss and provide current, cutting-edge The Board of Trustees, whose membership tors, officers, agents, employees, and information on alternative investing. Our mis- reflects a cross section of the alternative successors (collectively, “Releasees”) sion is to reveal the essence of both trusted investment community, sets the direction of of and from any and all actions, causes of action, suits, claims, or and new investing styles and to create a code the Greenwich Roundtable. demands whatsoever, of any kind or of best practices for the alternative investment description, in law or in equity, industry. whether or not well founded in law or in fact, which you have, had, or may ever have against any of the Releasees arising out of any reliance made by you on this publication including, without limitation, partial or complete losses of the value of any investment, penalty or punitive dam- © Greenwich Roundtable 2007 ages, all legal and court costs, and attorney fees. SPRING 2007 G BEST PRACTICES IN HEDGE FUND INVESTING:DUE DILIGENCE 2 R 34724_GrRoundtable.qxp 5/30/07 11:04 AM Page 3 Research Council RESEARCH COUNCIL OF 2007 Anonymous Four years ago we began to tap into the group small to limit our funding from the sell- Bank of America knowledge of our members under the auspices side and thus maintain our independence. The of the Education Committee. Investing in alter- trustees also restricted the number of hedge BlackRock Inc. natives is not well documented. We wanted to fund managers, and opened nominations to a Bridgewater Associates conduct original research apart from our sym- few high integrity industry suppliers. Nominees were selected because their business activities posiums and so we began the task of assembling D.E. Shaw & Co., L.P. best practices from the investors’ point of view. serve as an example to all of their sincere desire However this assignment would require addi- to educate investors and of their belief in our Halcyon Asset Management tional funding and our ability to raise funds was mission. Once again the response was gratify- limited. Our regular membership is closed. ing. And so we are pleased to announce the III Associates Associate memberships do not generate much members of the Research Council of the PricewaterhouseCoopers revenue. Still we got phone calls from hedge Greenwich Roundtable for 2007. funds, from private equity funds and from Schulte Roth & Zabel LLP industry vendors asking how they can help. Greenwich, Connecticut has a long tradition of Some of these general partners began making community involvement and philanthropy. We Strategic Value Partners contributions. They simply wished to support began with the hope that the same spirit would us with no strings attached and, in some cases, extend into the alternative investment commu- anonymously. nity. We were not disappointed. Today the “The Research Council enables the Research Council serves as a small group of sus- Greenwich Roundtable to host the In this spirit, the Research Council was born. taining sponsors of our research at the broadest range of investigation that Our Education Committee has been working as Greenwich Roundtable. Our purpose is to fos- serves the interests of the limited partners and investors. ” a group of altruistic investors (curiously some ter research and publishing in the field of non- investors declined to assist us because they did traditional investing to educate sophisticated not wish to reveal their due diligence techniques investors. Dedicated to the development of best in credit and fixed income strategies) who con- practices, members of the Research Council not tributed their time and worked to raise profes- only provide no-strings funding but they have sional standards. Then the Research Council also assisted the members of our Education emerged as a group of altruistic sell-siders who Committee by rolling up their sleeves in the dis- wish to help investors document the allocation covery and editing phases. The Research process. The final result is intended to demysti- Council enables the Greenwich Roundtable to fy alternative investing and to bring about pursue the broadest range of investigation that greater understanding. serves the interests of investors. They also share our belief that education is one of the greatest In 2005, our Board of Trustees named a small needs in the marketplace. The Research Council group of high integrity institutions for Research has generously underwritten the entire Best Council appointments. These wonderful man- Practices in Hedge Fund Investing series. They agers launched us into a new orbit. Best are providing it to you with their compliments. Practices in Due Diligence for Equity Strategies For that, we are all sincerely grateful. was released in that summer to the approval of investors and the industry at large. Stephen McMenamin Chair and Executive Director, The Greenwich In January 2007, our Board again nominated Roundtable candidates to the Research Council. We kept the FOR FIXED INCOME AND CREDIT STRATEGIES G SPRING 2007 R 3 34724_GrRoundtable.qxp 5/30/07 11:04 AM Page 4 G R Introduction: Letter from the Chair Best Practices in Hedge Fund Investing: Due mal notice in respected publications, such as the Diligence for Fixed Income and Credit Financial Times and Barron's, and we continue Strategies represents the third installment in a to be humbled by formal inquiries from institu- series and completes our survey of hedge fund tional investors as far away as Japan, the Gulf due diligence. The Education Committee of the and Scandinavia. Greenwich Roundtable began our investigation of due diligence almost four years ago and was That said, what we could not have anticipated motivated by an elegantly simple thesis: the was the level of interest generated by our publi- topic had not been explored in a comprehen- cation in the policymaking and regulatory com- sive, informed way from the perspective of the munities in Washington and beyond. It is here hedge fund investor as opposed to the hedge that the relationship between the GR's fund manager. We believed the topic of due dili- Education Committee (research and writing of gence deserved a more searching and substan- publications) and the External Affairs tive written review and set out to rectify this. Committee (articulating this educational mes- sage) warrants further explanation. The We had several goals. In broad terms, we hoped extraordinary members of the External Affairs to educate investors, policymakers, journalists Committee have played a vital role in sustain- and students of investing about the qualitative ing proper attention to Best Practices by art of hedge fund due diligence. By doing so, we explaining it to policymakers, journalists and a hoped, as we underscored in our last edition of disparate range of constituencies in the invest- Best Practices, to demystify a process that had ment community at large. The members of the been given an almost unrecognizably ominous External Affairs Committee are the GR's portrayal in the mainstream press. We also unabashed "grey-hairs" who explain our work hoped to promote an elevated standard of con- to investor groups, policy-makers, legislators duct for the community of dedicated hedge and, occasionally, the media. They have been fund investors and the alternative investment commendably dedicated to this work, having industry as a whole. Our work commanded for- traveled to Washington D.C., Hartford, Albany, SPRING 2007 G BEST PRACTICES IN HEDGE FUND INVESTING:DUE DILIGENCE 4 R 34724_GrRoundtable.qxp 5/30/07 11:04 AM Page 5 Best Practices Subcommittee Members Introduction: Ben Alimansky Letter from the Chair (cont.) Brooklyn NY Holdings Spencer Boggess U.S. Trust Company Colorado, West Virginia, London, Geneva and strategies, in addition to investment bankers, Chairman, Education Committee Singapore in the past year to spread this mes- credit officers, and analysts.