Montreal Exchange Conference

SELECTION PROCESS AND THE LIFE CYCLE OF HEDGE FUND MANAGERS

Mario Therrien Caisse de dépôt et placement du Québec August 19th 2005

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1 General Overview of CDP Hedge Fund Program

Selection Process and Life Cycle of Hedge Fund Managers

Agenda

3 Other flags to look for

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General Overview of CDP Hedge Fund Program

Part of the Absolute Return Group

Objective : Create and build diversified portfolios of international Hedge Funds

In-house process : 17 full time professionals

AuM : 3G $C (approx. 3% of CDP Total Assets)

80 + funds invested in 12 different strategies worldwide

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Selection Process and Life Cycle of Hedge Fund Managers

"Hedge fund managers can be tough to like, but it is difficult not to admire the great confidence and faith that they have in themselves,demonstrated the willingness to risk their future on their skills".

William Crerend (1998)

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Selection Process and Life Cycle of Hedge Fund Managers

5 phases in the life cycle of a hedge fund manager5 phases in the life cycle of a hedge fund manager

1. Entrepreneurial Phase Lasts approximately 18 months Usually a manager that left another organization (other hedge fund,

"Long only", etc.) Critical issue : whether the entrepreneurial firm has sufficient capital

to survive regardless of the market environment. The source of capital is also important (institutional, "hot money", etc.)

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Selection Process and Life Cycle of Hedge Fund Managers

5 phases in the life cycle of a hedge fund manager 5 phases in the life cycle of a hedge fund manager (continued)(continued)

2. Wealth Creation Alignment of the return objectives between the Manager and the

Investor Usually, Year 1 to Year 5 is the best period to invest Other observations :

Emerging funds usually outperform older, more mature funds "Younger" decile funds are beating older funds by 970 bps. (source :

Cross Boarder Capital) Investors should invest in the first three years of a fund

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Selection Process and Life Cycle of Hedge Fund Managers

Value of a Traditional "Long Only" CompanyValue of a Traditional "Long Only" CompanyP

erfo

rman

ce

Assets under management

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Selection Process and Life Cycle of Hedge Fund Managers

Value of a Hedge Fund CompanyValue of a Hedge Fund CompanyP

erfo

rman

ce

Assets under management

Capacity Constrained Limits

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Selection Process and Life Cycle of Hedge Fund Managers

5 phases in the life cycle of a hedge fund manager 5 phases in the life cycle of a hedge fund manager (continued)(continued)

3. Wealth Enjoyment After 4-5 years of managing a successful hedge fund, the manager

accumulates enough wealth that his lifestyle can change significantly. On the other hand, certain managers are more ascetic or philanthropic. Critical issue : in both cases, is the focus of the manager still dedicated

to money management.

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Selection Process and Life Cycle of Hedge Fund Managers

5 phases in the life cycle of a hedge fund manager 5 phases in the life cycle of a hedge fund manager (continued)(continued)

4. Wealth Preservation The Manager, given is shift in his focus, hires young talent to transfer

the informational "DNA" of his edge.

5. Wealth succession and/or distribution The Manager (Principal) recognizes the importance to create a

succession plan. Transferring part of the equity to the core of the management team.

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Selection Process and Life Cycle of Hedge Fund Managers

High probability of survival

Intellectual property

Adaptability vs Intellectual PropertyAdaptability vs Intellectual Property

High Low

High

Low

Ad

apta

bili

ty

Low probability of survivalValue of franchise

High Low

Fle

xib

ilit

y t

o r

es

po

nd

to

ch

an

gin

g

ma

rke

t e

nv

iro

nm

en

t

High

Low

Source : UBS

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Other flags to look for

5 "Yellow flags" in investing in Hedge (Louis Moore Bacon – 5 "Yellow flags" in investing in Hedge (Louis Moore Bacon – Moore Capital)Moore Capital)

Size of the Fund Financial Leverage Transparency Funding Hubris

3 types of Hedge Fund Managers1. "There are those who know they are in the game"2. "There are those who don't know they are in the game"3. "There are those who don't know they are in the game and have

become in the game"

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Profile of a Future Hedge Fund ManagerProfile of a Future Hedge Fund Manager