Joint Board and IAC Meeting 8/19/2020

AGENDA ITEM DETAILS

Subject: *Hedge Fund Market Update and Program Overview

BACKGROUND:

During the August 19, 2008 Joint Meeting of the Board of Trustees (Board) and the Investment Advisory Committee (IAC), the Board adopted an asset allocation plan that included investing 5% of the Trust’s assets in hedge funds via an Absolute Return Portfolio (Portfolio). Initial allocations to the Absolute Return Portfolio were made in August 2012.

During the May 24, 2011 Joint Meeting of the Board and the IAC, Albourne America LLC (Albourne) was selected as the hedge fund consultant for ERS. This contract was subsequently renewed as of August 2019.

During the February 26, 2013 Joint Meeting of the Board and the IAC, the Board adopted an asset allocation plan that provided for the use of hedge funds across asset classes.

The objectives of ERS’ Hedge Fund Program are as follows: to emphasize capital preservation, to provide for an attractive risk-adjusted return, to deliver additive diversification benefits to the Trust, and to reduce the Trust’s overall volatility.

As of May 31, 2020; the Absolute Return Portfolio was approximately 4.41% of Trust assets. The targeted allocation for the Absolute Return Portfolio remains at 5%, but has further flexibility given an allowable strategy band of 0-10%.

The ERS Hedge Fund team includes Anthony Curtiss (Director of Hedge Funds), Panayiotis Lambropoulos (Portfolio Manager), Nicholas Maffeo (Portfolio Manager), and Courtney Dunn (Analyst). ERS has extended a contingent offer to a new Analyst; if accepted, they will begin work before the end of the calendar year.

INDUSTRY OVERVIEW Significant market sell-offs in March caused an increase in levels of volatility akin to market responses to the Global Financial Crisis and 9/11. The conservatively positioned Absolute Return Portfolio was designed to weather such periods of heightened volatility and take advantage of trading opportunities that emerge as a result of these events.

March saw a sharp downturn across markets as the world responded to the COVID-19 outbreak. Equities suffered, particularly following the World Health Organization’s (WHO) declaration of COVID-19 as a pandemic on March 11. As the worldwide number of cases continued to increase, governments and central banks around the world announced unprecedented stimulus packages. In efforts to stabilize markets, the U.S. Federal Reserve (The Fed) lowered short-term rates, opened swap lines to help U.S. dollar-funding demands, and initiated several actions, to stabilize money market, commercial paper, and primary and secondary corporate credit markets. The Fed also restarted an asset purchase program, including U.S. Treasury and agency mortgage-backed securities. Non-agency residential mortgage- backed securities and commercial mortgage-backed securities were not direct beneficiaries of the Fed’s support, which negatively impacted mortgage arbitrage managers and reduced the effectiveness of their hedging strategies.

The following table illustrates the challenging period for hedge funds on a year-to-date (YTD) basis. This is primarily due to the speed with which markets moved and its impact on liquidity. Hedge funds are able to protect capital during volatile times, but need markets to regain liquidity and resume a normal course of trading to take advantage of more attractive trading opportunities. All index strategy returns except CTA, also known as Commodity Trading Advisors, have generated negative returns so far in 2020. CTAs primarily take directional positions (i.e. momentum) in index level or macro instruments, such as futures or FX contracts, in a systematic fashion. Coming into the year, CTAs were positioned for risk-on moves with high exposures to long equities and more moderate exposure to long fixed income. Given the speed of the market reaction to COVID-19, positions across the portfolios were reduced initially based on volatility, but there has also been a slower repositioning of CTA books due to volatile market prices to produce more risk-off portfolios. CTAs are currently more defensively positioned with long bond positions and muted equity positions.

Index 2020 YTD 2019 2018 2017 2016 3 Year 5 Year 10 Year HFRI All Equity Hedge -5.62% 13.61% -7.12% 13.28% 5.47% 6.13% 4.54% 4.67% HFRI EH: Equity MN -1.74% 2.33% -0.97% 4.87% 2.23% 2.05% 2.52% 2.57% HFRI All Event Driven -8.69% 7.52% -2.16% 7.59% 10.57% 4.21% 3.83% 4.92% HFRI ED: Distressed/Restructuring -7.75% 3.16% -1.90% 6.24% 15.15% 2.45% 2.62% 4.50% HFRI ED: Merger Arbitrage -7.42% 6.81% 3.29% 4.32% 3.63% 4.79% 4.26% 3.65% HFRI All Macro -0.73% 6.46% -4.05% 2.21% 1.03% 1.45% 0.82% 1.26% Barclay CTA 1.16% 5.14% -3.14% 0.79% -1.22% 0.87% -0.03% 0.78% HFRI All Relative Value -5.08% 7.44% -0.47% 5.15% 7.67% 3.99% 3.84% 5.19% HFRI RV: Fixed Income - Corporate -5.22% 9.29% -1.14% 6.63% 11.52% 4.84% 4.77% 5.38% HFRI RV: Multi Strategy -1.77% 5.21% -0.17% 4.10% 6.36% 3.02% 3.20% 4.54% Bloomberg Ticker Index HFRIEHI Index HFRI All Equity Hedge HFRIEMNI Index HFRI EH: Equity MN HFRIEDI Index HFRI All Event Driven HFRIDSI Index HFRI ED: Distressed/Restructuring HFRIMAI Index HFRI ED: Merger Arbitrage HFRIMI Index HFRI All Macro BARCCTA Index Barclay CTA HFRIRVA Index HFRI All Relative Value HFRIFIHY Index HFRI RV: Fixed Income - Corporate HFRIFI Index HFRI RV: Multi Strategy Source: Albourne – Data as of May 2020

The Global Macro strategy posted respectable returns in 2019, with nearly two-thirds of the strategy’s returns generated by rates trading, followed by equities, commodities, credit, and lastly foreign exchange (FX). In recent years, the strategy has been plagued by unremarkable performance amid low volatility in rates and FX markets, and in several cases outdated risk taker structures which were not optimal for the prevailing market environment. Interest rate exposures have been the primary driver of returns in 2020, while outlier performance was primarily driven by large equity positions. Fortunately, very few Global Macro funds were caught in the cash/futures basis trade which led to losses in several Fixed Income Relative Value funds. Most funds have materially reduced risk, moved towards tactical risk taking, all while working to balance defensive portfolio management and modest opportunistic risk taking. The future for the global macro strategy is encouraging. Global central banks have opened their crisis-playbooks and have rolled out nearly every accommodative program and form of quantitative easing ever created, while stimulative fiscal policy is also being introduced at an unprecedented pace. The market disruptions which began this episode, COVID-19 and discord in the energy markets, have created a significant set of market opportunities, with the subsequent policy actions creating an additional set of opportunities. Global Macro funds should be uniquely well suited for the market environment in the coming quarters.

Event Driven strategies recorded a positive year of performance in 2019, with exposure to U.S. merger arbitrage (this includes managers who claim to have a European bias) helping drive returns for the year, as that strategy benefitted from an unusually low deal failure rate in 2019. Most managers benefitted from upwards moving equity markets in the U.S. and Europe in 2019. Today, deal spreads remain at a much wider average level than where they stood prior to the drawdown in March 2020. The investable universe has contracted. Many previously announced deals closed in the first half of the year. Given the current environment, there has been virtually no new deal flow to provide new investable opportunities. Certain deals that were struck prior to February 2020 have not yet closed.

Distressed investing, which is a sub-strategy within Event Driven, recorded lackluster returns in an environment that saw a strong rally in high yield bonds and leveraged loans (up +14.0% and +8.0%, respectively). Part of the strategy’s underperformance in 2019 related to the generic underperformance of distressed “asset classes,” relative to their “regular way” counterparts. To illustrate, the lowest rated tiers of performing high yield bonds and leveraged loans returned +9.0% and +2.0%, respectively, lagging the broader high yield and loan markets. Meanwhile defaulted bonds returned -14.0%, massively lagging performing high yield. Finally, levered and reorg equities returned +9.0%, massively lagging large cap stocks. Another factor contributing to the strategy’s performance in 2019 included funds’ exposure to the underperforming energy sector. While oil recovered a portion of its late 2018 swoon, gas prices reached new lows, and energy-related securities—as proxied by E&P and oilfield services ETFs—were down over -10.0% during the year. The broader distressed opportunity remains enormous. Despite fiscal and monetary measures taken by governments, the sudden and prolonged decline in economic activity will inevitably lead to distress across a multi-trillion dollar market globally. Default rates are now well above the long-term average and the pace of restructurings is expected to grow further, which is anticipated to create actionable distressed opportunities.

Equity Long/Short strategies performed well during 2019, as managers effectively navigated the factor volatility and macro headlines. Despite periods where macro headlines overwhelmed the underlying bottom-up fundamentals (especially in May when global trade fears escalated), managers were able to drive performance from underlying company fundamentals. Managers that have fared best through the crisis to date are those that were low net, net short and/or bearish on the U.S. economy coming into the crisis. Macro led environments tend to be challenging for the long/short strategy.

The chart above shows the dispersion of returns across the hedge fund industry classified by strategy. The line within each respective rectangle represents the median return. Top and bottom decile returns are represented at the end points on each respective line. The chart illustrates that dispersion of returns amongst managers is high.

For the 12-month period ending May 31, 2020, index returns, as measured by the HFRI Fund of Fund Conservative Index (Bloomberg: HFRIFOFC Index) and the HFRI Fund of Funds Diversified Index (Bloomberg: HFRIFOFD Index), were -1.41% and +0.76%, respectively, and the HFRX Global Hedge Fund Index (Bloomberg: HFRXGL) increased +2.95%. The ERS Absolute Return Portfolio was up +4.04% during the same period. The Absolute Return Portfolio has met its objectives as a diversifier to the Trust while providing attractive risk adjusted returns.

PERFORMANCE REVIEW

Absolute Return Portfolio As of May 31, 2020; the annualized inception-to-date return (ITD) for the Absolute Return Portfolio is +5.02%. This return exceeds the portfolio’s target return of 90-day T-bills + 350 basis points (Bloomberg: G0O1 Index (floating component)), which has seen annualized returns of +4.76% over the same time period. It should be noted, this is a blended benchmark return. The benchmark’s spread component was reduced from 400 to 350 basis points at the May 2019 ERS Board meeting. Similarly, the Absolute Return Portfolio has outperformed the HFRI Fund of Fund Conservative Index +2.73%, HFRI Fund of Funds Diversified Index +3.04%, and the HFRX Global Index +1.37% over the same time period. The graph below illustrates the performance of investing $1,000 in the Absolute Return Portfolio (at inception).

The annualized standard deviation of the Absolute Return Portfolio has not reached its target range of 4%-8%. Inception to date, the Portfolio has achieved an annualized standard deviation of +2.89%. This results in a very high annualized Sharpe ratio of 1.47. The Sharpe ratio is a measure of excess risk adjusted returns. Within a risk-reducing portfolio, a high Sharpe ratio is preferred as it indicates higher relative returns per unit of risk. In comparison, the HFRI Fund of Fund Diversified and the HFRX Global Hedge Fund Indices have delivered Sharpe ratios of 0.53 and 0.17, respectively over the same time period. This information is summarized in the chart below. The Sortino ratio is a variation of the Sharpe ratio, but does not focus solely on standard deviation/volatility. The Sortino ratio focuses on downside volatility. This helps from an analysis standpoint, since standard deviation by itself penalizes a manager for upside volatility (large positive moves).

Annualized Annualized Sharpe Sortino Largest ERS Portfolio & Benchmark Standard Return Ratio Ratio Drawdown Deviation Absolute Return Portfolio 5.02% 2.89% 1.47 2.41 -4.01% 90 Day T-Bills + 3.50% (blended) 4.76% 0.25% 35.45 N/A N/A HFRI FOF: Diversified Index 3.04% 4.40% 0.53 0.71 -8.19% HFRI FOF: Conservative Index 2.73% 3.43% 0.59 0.73 -7.69% HFRX Global Hedge Fund Index 1.37% 4.34% 0.17 0.21 -8.95% Stated Policy Benchmark Bloomberg Ticker 90 Day T-Bills + 3.50% (blended) G0O1 INDEX (floating component) Industry Benchmarks Bloomberg Ticker HFRI FOF: Diversified Index HFRIFOFD INDEX HFRI FOF: Conservative Index HFRIFOFC INDEX HFRX Global Hedge Fund Index HFRXGL INDEX Historically, the Absolute Return Portfolio has delivered both a low correlation and a low beta compared to the Trust. The correlation between the two since the inception of the Absolute Return Portfolio is 0.73. This is up on a year over year basis given recent market volatility, but it is expected to decline as the economic environment stabilizes. This also speaks to the fact that the ERS Hedge Fund portfolio is primarily comprised of liquid instruments. A less liquid portfolio would most likely have seen its correlation either stay the same or decline. Beta measures the level of systematic risk, where a low beta indicates a diversifying exposure to the Trust. The beta since inception between the Absolute Return Portfolio and the Trust is 0.34. This is below the targeted cap of 0.40.

The Absolute Return Portfolio remains diversified by strategy and within the targeted allowable strategy bands. A detailed look at both current and historical strategy exposures is shown below. Exposures are as of May 31, 2020.

Strategy correlation remains relatively low, as displayed in the following table. Correlations across Event Driven, Global Macro, and Equity Long/Short increased given the recent market volatility. Correlations to Relative Value declined relative to all other strategies. This is primarily from adjustments made over the last year to the underlying strategies. The correlation between Relative Value and Event Driven remains elevated, but is expected given the overlap of multi-strategy exposure between the two strategies. Expectations are for this to subside over time as new Relative Value strategies are added to the portfolio. The strategy correlations displayed below are from inception to May 31, 2020.

Strategy Relative Event Global Equity Opportunistic Correlation Value Driven Macro Long/Short Relative Value Event Driven 0.60 Global Macro 0.17 0.42 Equity Long/Short 0.22 0.43 0.41 Opportunistic 0.07 0.37 0.41 0.16 Below are two charts providing annualized returns over various timeframes for the Absolute Return Portfolio. The figures are through May 31, 2020. The first chart compares the Absolute Return Portfolio to various benchmarks. The second chart displays strategy performance relative to each strategy’s respective HFRX benchmark. HFRX indices are investable and carry both positive and negative benchmark attributes.

YTD 1 Yr. Annualized 3 Yr. Annualized 5 Yr. Annualized ITD Absolute Return Portfolio 1.60% 4.03% 4.13% 3.85% 5.02%

T-Bills + 3.50% (blended) 2.18% 5.77% 5.75% 5.16% 4.76% HFRI FOF: Diversified Index -2.57% 0.75% 2.01% 1.06% 3.04% HFRI FOF: Conservative Index -3.65% -1.42% 1.29% 1.01% 2.73% HFRX Global Hedge Fund Index -2.79% 2.95% 0.67% 0.11% 1.37% Investment Strategy Current Allocation MTD QTD YTD 3 Yr 5 Yr ITD Relative Value $332,282,351 1.72% 4.35% 8.51% 7.40% 5.52% 5.83% HFRX Relative Value Arbitrage Index 2.00% 5.06% -0.65% 2.28% 0.68% 0.93% Event Driven $414,759,544 1.62% 4.14% 1.87% 3.79% 3.62% 5.23% HFRX Event Driven Index 1.96% 4.74% -1.03% -0.73% 0.65% 2.20% Equity Long/Short $92,315,761 1.29% 5.82% 1.00% 3.78% 3.05% 5.50% HFRX Equity Hedge Index 1.22% 5.77% -8.33% -0.57% -0.87% 0.34% Global Macro $258,851,342 2.30% 6.22% -0.65% 3.30% 3.50% 3.36% HFRX Macro Index 0.26% 0.76% -0.43% 1.28% -0.56% 0.15% Opportunistic $99,115,732 0.11% -0.58% -9.09% 3.07% 6.99% 6.72% The Absolute Return Portfolio has been able to deliver attractive returns on both an absolute and risk adjusted return basis. From a relative performance standpoint, the Absolute Return Portfolio has underperformed its strategic long-term benchmark recently, but has outperformed the benchmark since inception. The underperformance relative to the Portfolio’s strategic benchmark was due to the challenge of keeping pace when interest rates were rising along with the lack of equity exposure and an emphasis on credit based strategies. The strategic benchmark is an absolute benchmark that is both uninvestable and never experiences monthly negative performance. As the Covid-19 pandemic unfolded, the Portfolio’s managers remained diligent in preserving capital; and the ERS Hedge Fund team has been actively allocating into several existing and new strategies. These new allocations will be beneficial as an economic recovery takes place.

In comparison to peer benchmarks (i.e. fund of funds), the Absolute Return Portfolio has continually outperformed across almost all time periods. This speaks to the portfolio construction of the Absolute Return Portfolio as well as the strength of the ERS Hedge Fund team’s ability to select managers. The time periods presented above are annualized with the exception of YTD performance.

The Absolute Return Portfolio remains extremely liquid. Approximately 75% of its assets could be withdrawn over the next 12 months, subject to the option to exit early by paying a redemption fee. The remaining 25% is primarily spread across five managers. With regards to one of the five managers, ERS has submitted a full redemption. The full redemption is due to a mix of performance concerns along with a desire to raise the liquidity of the portfolio. This is a multi-year process where ERS is allowed semi-annual liquidity. The full exit date for this manager is June of 2021. A second less-liquid investment resides in the Opportunistic sleeve and has a rolling multi-year lock. This investment is focused on regulatory capital and specialty finance trades. There are also three investments that have investor level gates. A common investor-level gate limits redemptions to a specific percentage of an investor's money over a suggested period time. In contrast, fund-level gates are based on redemptions representing a certain percentage of the overall net asset value of hedge funds. Two of the three investments have more generous underlying liquidity rights associated with fund level gates. However, for reporting purposes, they are tracked as investor level gates to keep a conservative liquidity profile. When adjusting for the two managers with fund level gates then the liquidity profile increases to around 85%.

In addition to monitoring contractual liquidity, the ERS Hedge Fund team actively monitors the underlying liquidity of the portfolio based on ASC 820 accounting rules. These are defined across three levels and percentages to these levels are provided by the manager’s administrator. These are provided on a lagged quarterly basis. As of March 31, 2020; the Absolute Return Portfolio has 75% of its underlying assets classified as either Level I or II. This remains relatively unchanged on a year over year basis.

Directional Growth Portfolio The Directional Growth Portfolio has been a positive contributor to the Trust. While not all underlying managers have outperformed their respective benchmarks, in aggregate the portfolio has provided a net benefit to the Trust. The Directional Growth Portfolio is a collection of strategies evaluated on a standalone basis. These managers are paid an incentive fee on relative outperformance to a specified equity market index. The Directional Growth Portfolio is comprised of two Equity Long/Short allocations. The Algert Japan 150/50 Fund L.P. will be liquidated in July 2020. The capital will be recycled back into the Trust to fund a new Japan focused internal portfolio. These allocations are within policy guidelines and strategy diversification expectations. The following table provides portfolio performance over various time periods, as of May 31, 2020. Returns are annualized over the specified time period.

Fund Name YTD 1 YR 3 YR 5 YR ITD Algert Japan 150/50 Fund L.P. -10.49% 1.33% N/A N/A -5.01% MSCI Japan -7.11% 6.98% 3.34% 3.09% -2.25%

MW TOPS World Equities (US) Fund -5.36% 6.20% 7.63% 9.23% 11.38% MSCI AC World Daily Net Local -8.87% 5.81% 5.65% 5.69% 7.19%

Benchmark Bloomberg Ticker MSCI JAPAN M1JP INDEX MSCI AC World Daily Net Local NDLEACWF INDEX The largest allocation within the Directional Growth Portfolio remains to the MW TOPS World Equities (US) Fund. It is the largest allocation given it’s benchmarked to a broad market index. Historically, other allocations haven been benchmarked to more specified indices. Below is a chart highlighting the current allocations as of May 31, 2020.

Fund Current Allocation Inception Date Allocation Algert Japan 150/50 Fund L.P. $134,784,873 05/01/18 27% MW TOPS World Equities (US) Fund L.P. $371,886,680 04/01/14 73% Total Value $506,671,553 100% The MW TOPS World Equities (U.S.) Fund continues to produce attractive risk adjusted returns. Historically, this manager has been profitable 70% of the time and has both an attractive Sharpe ratio (0.78) and Sortino ratio (1.19). It has achieved attractive risk adjusted returns while maintaining a high historical correlation (.98) and beta (1.0) to its respective benchmark.

Annualized Annualized Sharpe Sortino Largest Fund Name & Benchmarks Return Standard Ratio Ratio Drawdown Deviation Algert Japan 150/50 Fund L.P. -5.01% 15.39% -0.33 -0.46 -18.80% MSCI JAPAN -2.25% 14.97% -0.08 -0.25 -16.79%

MW TOPS World Equities (US) Fund 11.38% 13.43% 0.78 1.19 -20.81% MSCI AC World Daily Net Local 7.19% 12.95% 0.48 0.74 -21.39%

Directional Growth Portfolio 9.35% 13.04% 0.64 0.98 -20.05%

The liquidity of the underlying strategies within the Directional Growth Portfolio is high given the emphasis on equities. The majority of assets are available for redemption on a monthly basis, with varying notice periods. Approximately 100% of the underlying assets could be redeemed in a given month. None of the investments within the Directional Growth Portfolio is under a lock. A lock-up period is a window of time when investors are not allowed to redeem money from the fund. These can vary by strategy and are common within the hedge fund industry.

Other Hedge Fund Allocations

The ERS Hedge Fund team continues to source and evaluate less-liquid opportunistic credit strategies for the Opportunistic Credit Portfolio. In March 2020, the ERS Board of Trustees approved an updated tactical plan. Expectations are for the ERS Hedge Fund team to make 0-3 allocations over the next 12 months. The ERS Hedge Fund team continues to work with a third party partner, PAAMCO Prisma, to source and allocate to emerging hedge fund managers. The ERS Launchpad (Launchpad) initiative will act as an enhancement to the existing Hedge Fund program, which already allocates to emerging hedge fund managers. A key and differentiating aspect for Launchpad is that ERS seeks a revenue share from all investments in exchange for a longer lock and early-stage investment. These are seeding transactions and capital allocations to these emerging hedge fund managers will not be used for working capital purposes. An investment used for working capital purposes would be used to input capital into a business where you would be considered a part owner. This entails holding direct business risk where the invested capital would only be recouped through either a sale or liquidation. The investment by ERS Launchpad is only invested in publically traded securities and not physical business. The first investment was made in September 2019 to Cinctive Capital Management.

ERS Hedge Fund Holdings

The ERS Hedge Fund program has been structured and implemented with a focus on scalability in order to manage and support multiple hedge fund portfolios and asset classes. The table below shows a summary of current hedge fund investments. Each manager underwent due diligence by the ERS Hedge Fund team and was approved by the Asset Class Investment Committee. Allocations cannot be made without approval by the Asset Class Investment Committee.

Absolute Return Portfolio Holding Name Asset Type Initial Allocation Current Value Hudson Bay Fund L.P. HF - Multi-Strategy Relative Value 10/1/2019 $134,887,949 (PAX) Pacific Alliance Asia Opp Fund L.P. HF - Multi-Strategy Event Driven 1/1/2017 $127,943,910 Laurion Capital L.P. HF - Multi-Strategy Relative Value 1/1/2020 $114,107,777 Apollo Credit Strategies Fund L.P. HF - Long/Short Credit 4/1/2020 $106,302,296 Garda Fixed Income Relative Value Opportunity Fund HF - Fixed Income Arbitrage 11/1/2018 $100,060,624 Graham Absolute Return Trading Ltd. HF - Discretionary Developed Markets Macro 2/1/2018 $94,548,696 MW European TOPS (US) Fund HF - Equity Long/Short 3/1/2013 $92,315,762 Complus Asia Macro Fund Ltd. HF - Discretionary Global Macro Asia 10/1/2016 $84,150,431 Iguazu Partners LP HF - Global Macro 12/1/2013 $80,152,216 Glazer Enhanced L.P. HF - Merger Arbitrage 1/1/2016 $79,487,229 Taiga Special Opportunities Fund HF - Opportunistic 7/1/2017 $75,622,746 Magnetar Structured Credit Fund LP HF - Structured Credit 1/1/2014 $50,669,976 Southpaw Credit Opportunity Partners L.P. HF - Distressed / Stressed 8/1/2012 $33,582,134 PAG - Project Wine - (Side Pocket) HF - Opportunistic 6/30/2019 $16,114,280 SP - Side Pockets (#14) HF - Opportunistic various $7,378,707 Directional Growth Portfolio MW TOPS World Equities (US) Fund HF - Equity Long/Short 4/1/2014 $371,886,680 Algert Japan 150/50 Fund L.P. HF - Equity Long/Short 5/1/2018 $134,784,873 PAAMCO PRISMA Launchpad Cinctive Capital Management HF - Multi-Manager Equity Long/Short 9/1/2019 $126,342,686

Total Hedge Fund Assets $1,830,338,972 *ERS is accredited by the State Pension Review Board (PRB) as a Minimum Educational Training (MET) sponsor for Texas public retirement systems. This accreditation does not constitute an endorsement by the PRB as to the quality of our MET program. This agenda item may be considered in-house training provided by ERS to board trustees and the system administrator for purposes of fulfilling the MET program requirements. ERS is an accredited sponsor of MET for its system administrator and trustees for continuing education.

STAFF RECOMMENDATION: The agenda item is presented for information and discussion purposes only. No action is required.

APPENDIX:

CTA: Commodity Trading Advisers take primarily directional positions in index level or macro instruments, such as futures or FX (foreign exchange) contracts, in a systematic fashion.

GLOBAL MACRO: Global Macro Managers take risk across geographies and products, while employing a wide range of trading styles. Investment decisions are often based on a manager's top-down views of the world; this can include analysis of economic conditions, interest rates, inflation, government policy and geopolitical factors.

EVENT DRIVEN: Event Driven Managers, over the course of a full market cycle, invest the majority of capital across the following sub-strategies: Risk Arbitrage, Distressed/High-Yield Credit, and Equity Long/Short. The most common type of risk arbitrage involves taking positions in the securities of a company being acquired in a merger or an acquisition. Distressed/High-Yield Credit investments typically are in securities in companies that are experiencing financial distress. Equity Long/Short involves investing in the stocks of US companies both on the long and on the short side.

DISTRESSED: Distressed Managers invest in non-investment grade corporate (and sometimes sovereign) debt securities, frequently stressed (e.g., performing but at significant discounts to par) or defaulted (e.g., where a balance sheet restructuring will occur).

ATTACHMENT:

1. Exhibit A – Hedge Fund Appendix .