Water and Power Employees’ Retirement Plan …...2012/12/31 · Water and Power Employees’ Retirement Plan (WPERP) Real Return Investment Portfolio Quarterly Report Executive

Pension Consulting Alliance, Inc. December 2012

Water and Power Employees’ Retirement Plan (WPERP) Real Return Investment Portfolio

Quarterly Report Executive Summary

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Pension Consulting Alliance, Inc. Nothing herein is intended to serve as investment advice, a recommendation of any particular investment or type of investment, a suggestion of the merits of purchasing or selling securities, or an invitation or inducement to engage in investment activity.

Quarterly Report Q4-12

2

REAL RETURN PORTFOLIO SUMMARY As of December 31, 2012, WPERP’s total exposure to the Real Return investment class was $453.4 million in both the Retirement and Health Plans with $381.4 million in the Retirement portfolio. The Retirement and Health Plan’s GILS portfolio had an aggregate value of $407.3 million, with $63.8 million in the Health Plan. WPERP’s Retirement and Health Plan Hedge Fund of Funds Portfolios had an aggregate value of $37.9 million and $8.2 million, respectively. Recent Investment Performance Trends During the most recent quarter, the WPERP Real Return portfolio outperformed its policy benchmark by 1.1%, net of fees. Over the latest 1-year period, the portfolio outperformed its Tbills + 3% benchmark by 2.4%, net of fees. The portfolio outperformed is benchmark over the last 3-year annualized period by 3.2%. Outperformance by the portfolios Hedge Fund of Funds manager benefited returns. Portfolio performance trailed over the latest 5-year period with a 2.7% annualized return and since inception with a 3.9% annualized return.

WPERP Retirement Investment Performance, Net of Fees Real Return Performance vs. Benchmark

Month Quarter YTD 1 Year 3 Year 5 Year Since Inc.**

WPERP Real Return Total 0.1 1.9 5.4 5.4 6.3 2.7 3.9 Benchmark* 0.3 0.8 3.0 3.0 3.1 3.4 4.1 Excess Return -0.2 1.1 2.4 2.4 3.2 -0.7 -0.2

*Tbills + 3% **Inception 2/2007


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GLOBAL INFLATION LINKED SECURITIES (GILS) PORTFOLIO SUMMARY The WPERP GILS Portfolio outperformed its policy benchmark by 0.1%, net of fees, over the latest quarter. Over the latest 1-year period, the portfolio underperformed its BC Global Inflation Linked Bond benchmark by (0.4%), net of fees. The Portfolio underperformed its policy benchmark over the latest 2-year time period by (0.4%) and since inception time period by (0.7%), net of fees. The GILS portfolio underperformed against the Median Fund over the latest quarter, while producing a 2.0% return, gross of fees. Over the latest 1-year period, the portfolio underperformed the median fund by (1.0%), gross of fees. The WPERP portfolio also trailed the Median Fund over the 2-year and since inception periods underperforming by (1.0%) and (1.5%) respectively, gross of fees.

WPERP Retirement Investment Performance, Net of Fees

Global Inflation Linked Portfolio Performance vs. Benchmark

Month Quarter YTD 1 Year 2 Year Since Inc.***

WPERP GILS 0.1 1.9 5.2 5.2 7.9 6.6 Benchmark* 0.0 1.8 5.6 5.6 8.3 7.3 Excess Return 0.1 0.1 -0.4 -0.4 -0.4 -0.7

Global Inflation Linked Portfolio Performance vs. Median Fund, Gross of Fees

Month Quarter YTD 1 Year 2 Year Since Inc.***

WPERP GILS 0.1 2.0 5.4 5.4 8.1 6.8 Median Fund** 0.4 2.2 6.4 6.4 9.1 8.3 Excess Return Median Fund -0.3 -0.2 -1.0 -1.0 -1.0 -1.5

*BC Global Inflation Linked Bond Index **eVestment Alliance Global Tips ***Inception 5/2010


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HEDGE FUND OF FUNDS PORTFOLIO SUMMARY The WPERP Hedge Fund of Funds Portfolio outperformed its policy benchmark by 0.5%, net of fees, over the latest quarter. Over the latest 1-year period, the portfolio outperformed its Tbills + 3% benchmark by 4.4%, net of fees. The 1-year outperformance can be attributed to favorable equity markets that began in the second quarter of 2012. The Portfolio outperformed its policy benchmark over the latest 3-year time period by 0.8%, net of fees. Long term annualized relative portfolio underperformance is a direct result of severe market corrections in 2008; however, since inception portfolio performance has been positive, resulting in no principal loss. The total Hedge Fund of Funds Portfolio trailed the Median Fund over the most recent quarter by (0.2%), net of fees, while outperforming over the 1 year period by 3.2%, net of fees. The WPERP portfolio added significant value over the Median Fund over the 5-year period, outperforming by 2.7%, net of fees, and since inception by 2.9%, net of fees.

WPERP Retirement Investment Performance, Net of Fees Hedge Fund of Funds Performance vs. Benchmark

Month Quarter YTD 1 Year 3 Year 5 Year Since Inc.***

WPERP Hedge Fund of Funds 0.7 1.3 7.4 7.4 3.9 1.2 2.7 Benchmark* 0.3 0.8 3.0 3.0 3.1 3.4 4.1 Excess Return 0.4 0.5 4.4 4.4 0.8 -2.2 -1.4

Hedge Fund of Fund Performance vs. Median Fund, Net of Fees

Month Quarter YTD 1 Year 3 Year 5 Year Since Inc.***

WPERP Hedge Fund of Funds 0.7 1.3 7.4 7.4 3.9 1.2 2.7 Median Fund** 1.0 1.6 4.2 4.2 1.8 -1.5 -0.2 Excess Return Median Fund -0.3 -0.2 3.2 3.2 2.1 2.7 2.9

*Tbills + 3% **HFRI Conservative Index ***Inception 2/2007


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WPERP Real Return Risk/Return Analysis Period ending December 31, 2012

WPERP Hedge FoF

Tbills + 3%*

WPERP GILS

BC Global Inflation Linked Bond

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Ann

ualiz

ed R

etur

n

Standard Deviation

Annualized Risk/Return 2 years ending 12/31/12

WPERP Real Return Total

*Tbills+3% is currently the benchmark for both WPERP Real Return and WPERP Hedge Fund of Funds. The Total Real Return benchmark will be changing to CPI+3% upon continued funding of the class.


6

WPERP Real Return Risk/Return Analysis Period ending December 31, 2012

WPERP Hedge FoF Aggregate

Tbills + 3%**

BC Universal

Russell 3000

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0.0% 5.0% 10.0% 15.0% 20.0%

Ann

ualiz

ed R

etur

n

Standard Deviation

Annualized Risk/Return Since Inception*

*Inception 2/2007

WPERP Real Return Total

**Tbills+3% is currently the benchmark for both WPERP Real Return and WPERP Hedge Fund of Funds. The Total Real Return benchmark will be changing to CPI+3% upon continued funding of the class.


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10%

90%

Hedge Fund of Funds

GILS

WPERP Real Return Performance Charts WPERP Real Return Total

Period ending December 31, 2012

Growth of $100

Added Value versus Tbills +3% Net of Fees

Portfolio Allocation

Quarterly Returns Net of Fees

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Tot

al R

etur

n, %

Mar-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

WPERP Real Return

Total

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Exce

ss R

etur

n, %

Feb-07Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

WPERP Real Return

Excess

50

60

70

80

90

100

110

120

130

Gro

wth

of $

100

Jan-07Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

WPERP Real ReturnRussell 3000 IndexTbills + 3%


8

44.3%

20.7%

3.0%

3.8%

2.4%

21.0%

2.8%‐0.9% 1.2%

Strategy Country Allocation

United States

United Kingdon

Australia

Sweden

Japan

Euro

Canada

Forward Foreign Exchange

Cash

WPERP Real Return Performance Charts

WPERP GILS* Period ending December 31, 2012

Growth of $100 Quarterly Returns

Net of Fees

Added Value versus BC WGILB Net of Fees

*Currently managed solely by Wamco.

100

102

104

106

108

110

112

114

116

118

120

122

Gro

wth

of $

100

Apr-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

WPERP Wamco NetBC WGILB

-2

-1

0

1

2

Tot

al R

etur

n, %

Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

WPERP Wamco Net

Total

-1

0

1

Exc

ess

Ret

urn,

%

May-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

WPERP Wamco Net

Excess


9

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12

Russell 3000

BC Universal

MSCI ACWI ex US

ML Global Bond

WPERP Hedge Fund of Funds Performance Charts

WPERP Hedge Fund Total Period ending December 31, 2012

Growth of $100

12-Month Rolling Beta Added Value versus Tbills +3% Net of Fees

Quarterly Returns Net of Fees

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Tot

al R

etur

n, %

Mar-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

WPERP Hedge Fund Total

Total

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Exc

ess

Ret

urn,

%

Feb-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

WPERP Hedge Fund Total

Excess

Dec-12

50

60

70

80

90

100

110

120

130

Gro

wth

of $

100


WPERP Hedge Fund TotalRussell 3000 IndexTbills + 3%


10

Actual Asset Allocation Comparison* – Hedge Fund of Funds Portfolio, December 31, 2012

8.0%

20.0%

2.0%

26.0%2.0%

12.0%

0.0%

26.0%

4.0%

WPERP Hedge Fund of Funds Total

Quantitative

Distressed

Short‐Biased

Equity Hedged

Directional Equity

Fixed Income Arbitrage

Convertible Arbitrage

Event Driven

Long/Short Credit

8.0%

20.0%

2.0%

26.0%2.0%

12.0%

0.0%

26.0%

4.0%

Aetos

Quantitative

Distressed

Short‐Biased

Equity Hedged

Directional Equity


Convertible Arbitrage

Event Driven

Long/Short Credit

*Please refer to the Glossary section for a list of strategy definitions.


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-1.5

-1

-0.5

0

0.5

1

1.5

Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12

Russell 3000

BC Universal

MSCI ACWI ex US

ML Global Bond

WPERP Hedge Fund of Funds Performance Charts

Aetos Period ending December 31, 2012

Growth of $100

12-Month Rolling Beta

Monthly Returns versus Tbills +3% Net of Fees

Dec-12

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Exc

ess

Ret

urn,

%Feb-07 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

Aetos WPERP

Excess

50

60

70

80

90

100

110

120

130

Gro

wth

of $

100


Aetos WPERPRussell 3000 IndexTbills + 3%


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Manager Allocation and Turnover Period ending December 31, 2012 Aetos Manager Allocations Turnover

Equity Hedged Status Convertible Arbitrage Status Strategy Allocation New Terms/TransBrookside Capital Partners CNH Convertible Arbirtrage Term. 3Q12 Equity Hedged 1 1Cadian Fund, LP Fund % Subtotal 0.00% Event Driven Arbitrage 1 0Conatus Capital Partners, LP Fixed Income Arbitrage 0 0Joho Partners, LP Quantitative Status Convertible Arbitrage 0 1Marshall Wace European TOPS Fund Absolute Return Capital Partners New 2Q12 Quatitative 2 1Moon Capital Global Equity AQR RT Fund Term. 3Q12 Short-Biased Equity 1 1North River Partners, LP Capstone Vol (US) New 2Q12 Distressed 0 0Route One Fund, LP GMO Reversion to Mean Fund Directional Equity 0 1Samlyn Onshore Fund, LP Term. 2Q12 Fund % Subtotal 8.00% Long/Short Credit 1 0The Elkhorn Fund YTD Turnover 6 5Tiger Consumer Partners Short-Biased Equity StatusTuriya Fund LP New 1Q12 GMO U.S. Tactical OpportunitiesViking Global Equities LP Kriticos International Limited New 1Q12Fund % Subtotal 25.00% Ursus Partners Transferred 1Q12

Fund % Subtotal 3.00%Event Driven Arbitrage StatusCornwall Domestic New 1Q12 Distressed StatusDavidson Kempner Partners, LP AG Mortgage ValueFarallon Capital Offshore Investors, Inc. Anchorage Capital Partners, LPLuxor Capital Partners, LP Aurelius Capital Partners, LPOceanwood Global Opportunities Fund Centerbridge CreditFund % Subtotal 26.00% Davidson Kemper Distressed

King Street Capital, LPFixed Income Arbitrage Status Watershed Capital Partners, LPBracebridge FFIP, LP Fund % Subtotal 20.00%Parsec Trading CorporationFund % Subtotal 12.00% Directional Equity Status

CamCap Energy Term. 3Q12Long/Short Credit Status Egerton Capital PartnersBrevan Howard Credit Catalysts Fund New 2Q12 Fund % Subtotal 2.00%Fund % Subtotal 4.00%


13

Latest Quarter During the fourth quarter for the WPERP Hedge Fund of Funds Portfolio, Aetos hired no new managers and terminated no managers.


14

Hedge Fund and Hedge Fund of Funds Industry Overview During the fourth quarter of 2012 hedge funds exhibited continued growth. As of December 31, 2012, the number of projected hedge fund managers is over 9,800. Before leverage, hedge funds are estimated to be over $2.2 trillion in capital. The pace of commitments to hedge funds continues to grow but is stabilizing.

Source: HFR

0

500

1000

1500

2000

2500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

$ Bi

llion

s

CAPITAL ALLOCATED TO HEDGE FUNDS (as of 12/31/2012)


15

Relative Value27%

Event Driven25%

Opportunistic48%

BREAKOUT OF HEDGE FUND INDUSTRY by Major Strategy Type (by AUM)

(as of 12/31/2012) BREAKOUT OF HEDGE FUND INDUSTRY

Performance by Sector(as of 12/31/2012)

Performance in the fourth quarter of 2012 improved across the various hedge fund sectors, with all sectors producing positive returns over the latest quarter. The 1-year period returns also produced positive returns across the various hedge fund sectors. Positive performance over the last 12-months was a direct result of stronger financial markets across the globe, particularly U.S. equities. All of the major hedge fund styles added value in the long-term time periods.

Source: HFR

Quarter 1 Year 3 Years 5 Years 10 YearsHFN Event Driven 3.58 8.88 5.36 3.93 8.09HFN Macro 0.83 3.23 2.76 3.29 6.85HFN Relative Value 1.55 7.08 4.84 3.68 6.01HFN Equity Hedge 2.72 9.17 3.98 1.61 7.35


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Glossary

Alpha The premium an investment earns above a set standard. This is usually measured in terms of a common index (i.e., how the stock performs independent of the market). An Alpha is usually generated by regressing a security’s excess return on the S&P 500 excess return. Annualized Performance The annual rate of return that when compounded t times generates the same t-period holding return as actually occurred from period 1 to period t. Beta The measure of an asset’s risk in relation to the Market (for example, the S&P 500) or to an alternative benchmark or factors. Roughly speaking, a security with a Beta of 1.5, will have moved, on average, 1.5 times the market return. Bottom-up A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks. Convertible Arbitrage Hedge Funds Convertible arbitrage is the trading of related securities whose future relationship can be reasonably predicted. Convertible securities are usually either convertible bonds or convertible preferred shares, which are most often exchangeable into the common stock of the company issuing the convertible security. The managers in this category attempt to buy undervalued instruments that are convertible into equity and then hedge out the market risks. Fair value is based on the optionality in the convertible bond and the manager’s assumption of the input variables, namely the future volatility of the stock. Correlation Correlation expresses the degree to which fluctuations in one variable are related to fluctuations in another variable. It ranges from -1 to +1. Drawdown Drawdown measures a period of negative performance. It is generally expressed as a percentage of the net asset value.


17

Distressed Securities Hedge Funds Distressed securities funds invest in the debt or equity of companies experiencing financial or operational difficulties or trade claims of companies that are in financial distress, typically in bankruptcy. These securities generally trade at substantial discounts to par value. Hedge fund managers can invest in a range of instruments from secured debt to common stock. The strategy exploits the fact that many investors are unable to hold below investment grade securities. Emerging Markets Hedge Funds Emerging market hedge funds focus on equity or fixed income investing in emerging markets as opposed to developed markets. This style is usually more volatile not only because emerging markets are more volatile than developed markets, but because most emerging markets allow for only limited short selling and do not offer a viable futures contract to control risk. The lack of opportunities to control risk suggests that hedge funds in emerging markets have a strong long bias. Equity Market-Neutral Hedge Funds Equity market-neutral is designed to produce consistent returns with very low volatility and correlation in a variety of market environments. The investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency-neutral or both. Equity market-neutral is best defined as either statistical arbitrage or equity long/short with zero exposure to the market. Event Driven Hedge Funds This investment strategy class focuses on identifying and analyzing securities that can benefit from the occurrence of extraordinary transactions. Event-driven strategies concentrate on companies that are, or may be, subject to restructuring, takeovers, mergers, liquidations, bankruptcies, or other special situations. The securities prices of the companies involved in these events are typically influenced more by the dynamics of the particular event than by the general appreciation or depreciation of the debt and equity markets. For example, the result and timing of factors such as legal decisions, negotiating dynamics, collateralization requirements, or indexing issues play a key element in the success of any event-driven strategy. Fixed Income Arbitrage Hedge Funds Fixed income arbitrage managers seek to exploit pricing anomalies within and across global fixed income markets and their derivatives, using leverage to enhance returns. In most cases, fixed income arbitrageurs take offsetting long and short positions in similar fixed income securities that are mathematically, fundamentally or historically interrelated. The relationship can be temporarily distorted by market events, investor preferences, exogenous shocks to supply or demand, or structural features of the fixed income market.


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Global Macro Hedge Funds Macro hedge funds pursue a base strategy such as equity long/short or futures trend following to which large scale and highly leveraged directional bets in other markets are added a few times each year. They move from opportunity to opportunity, from trend to trend, from strategy to strategy. Hedge Fund A fund (generally not regulated) that typically engages in non-conventional investment techniques and strategies, using derivatives, short positions and borrowing, thereby achieving a leveraged effect. Long/Short Equity Hedge Funds Long/short strategies combine both long as well as short equity positions. The short positions have three purposes, which can vary over time or by manager. First, the short positions are intended to generate alpha. This is one of the main differences when compared with traditional long-only managers. Stock selection skill can result in doubling the alpha. A long/short equity manager can add value by buying winners as well as selling losers. Second, the short positions can serve the purpose of hedging market risk. Third, the manager earns interest on the short as he collects the short rebate.

Merger Arbitrage Hedge Funds Merger arbitrage (also known as risk arbitrage) specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. In stock swap mergers, risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. In the case of a cash tender offer, the risk arbitrageur is seeking to capture the difference between the tender price and the price at which the target company’s stock is trading.

Relative Value Strategy Hedge Funds This class of investment strategy seeks to profit by capitalizing on the mis-pricings of related securities or financial instruments. Generally, relative-value and market neutral strategies avoid taking a directional bias with regards to the price movement of a specific stock or market. This makes this style most appealing for investors who are looking for high and stable returns accompanied by low correlation to the equity market. R-Squared Square of the correlation coefficient. The proportion of the variability in one series that can be explained by the variability of one or more other series a regression model. A measure of the quality of fit. 100% R-square means perfect predictability.


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Sharpe Ratio This ratio is a risk-adjusted measure of a fund’s performance. It is calculated as follows [(annualized rate of return)-(annualized risk-free interest rate)] / annualized standard deviation. For example, a fund with a Sharpe Ratio greater than 1.0 is achieving more than one unit of excess return per unit of risk undertaken. Short Selling Hedge Funds The short selling discipline has an equity as well as fixed income component. Short sellers seek to profit from a decline in the value of stocks. In addition, the short seller earns interest on the cash proceeds from the short sale of stock. Standard Deviation The square root of the variance. A measure of dispersion of a set of data from its mean. Top-down Investment style that begins with an assessment of the overall economic environment and makes a general asset allocation decision regarding various sectors of the financial markets and various industries.


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Hedge Funds Characteristics and Terms

Strategies Definition Relative Value

Convertible Arbitrage Invests in the convertible securities of a company. A typical investment is to be long the convertible bond and short the common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of the stock, while protecting the principal from market moves.


Fixed income arbitrage managers seek to exploit pricing anomalies within and across global fixed income markets and their derivatives, using leverage to enhance returns. In most cases, fixed income arbitrageurs take offsetting long and short positions in similar fixed income securities that are mathematically, fundamentally or historically interrelated. The relationship can be temporarily distorted by market events, investor preferences, exogenous shocks to supply or demand, or structural features of the fixed income market.

Equity Market Neutral

Equity market-neutral is designed to produce consistent returns with very low volatility and correlation in a variety of market environments. The investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency-neutral or both. Equity market-neutral is best defined as either statistical arbitrage or equity long/short with zero exposure to the market.

Event Driven

Risk Arbitrage

Risk arbitrage (also known as merger arbitrage) specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. In stock swap mergers, risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. In the case of a cash tender offer, the risk arbitrageur is seeking to capture the difference between the tender price and the price at which the target company’s stock is trading.

Distressed Securities

Distressed securities funds invest in the debt or equity of companies experiencing financial or operational difficulties or trade claims of companies that are in financial distress, typically in bankruptcy. These securities generally trade at substantial discounts to par value. Hedge fund managers can invest in a range of instruments from secured debt to common stock. The strategy exploits the fact that many investors are unable to hold below investment grade securities.

Opportunistic

Macro Macro hedge funds pursue a base strategy such as equity long/short or futures trend following to which large scale and highly leveraged directional bets in other markets are added a few times each year. They move from opportunity to opportunity, from trend to trend, from strategy to strategy.

Short Sellers The short selling discipline has an equity as well as a fixed income component. Short sellers seek to profit from a decline in the value of stocks. In addition, the short seller earns interest on the cash proceeds from the short sale of stock.

Long Region, Industry, or Style

Traditional equity fund structured like a hedge fund; i.e., uses leverage and permits managers to collect an incentive fee. Focus of the fund could be a specific geographic region (i.e., Japan) , industry (i.e., technology) or style (i.e., growth)

Emerging Markets

Emerging market hedge funds focus on equity or fixed income investing in emerging markets as opposed to developed markets. This style is usually more volatile not only because emerging markets are more volatile than developed markets, but because most emerging markets allow for only limited short selling and do not offer a viable futures contract to control risk. The lack of opportunities to control risk suggests that hedge funds in emerging markets have a strong long bias.

Long/Short Equity

Long/short strategies combine both long as well as short equity positions. The short positions have three purposes, which can vary over time or by manager. First, the short positions are intended to generate alpha. This is one of the main differences when compared with traditional long-only managers. Stock selection skill can result in doubling the alpha. A long/short equity manager can add value by buying winners as well as selling losers. Second, the short positions can serve the purpose of hedging market risk. Third, the manager earns interest on the short as he collects the short rebate.


21

Supplemental Performance/Risk Statistics

Hedge Fund of Funds

1 year ending 12/31/2012 Net of Fees, versus the S&P 500

Since inception ending 12/31/2012 Net of Fees, versus the S&P 500

Alpha, % Beta R-Squared, %Sharpe Ratio

Treynor Ratio

Sortino Ratio

Information Ratio

Batting Average* Total Excess* Total Excess*

WPERP Hedge Fund Total 4.4 0.2 75.6 3.4 0.4 NA 3.6 0.830 7.4 4.4 2.1 2.1Aetos WPERP 4.4 0.2 75.0 3.4 0.4 NA 3.6 0.830 7.3 4.2 2.0 2.0BC Universal 5.8 0.0 3.2 2.9 -1.7 NA 3.0 0.580 5.5 2.5 1.9 1.9Tbills + 3 2.9 0.0 2.9 NA NA 0.0 NA 0.000 3.0 0.0 0.0 0.0HFRI FOF: Diversif ied Index 2.2 0.2 48.0 1.8 0.3 21.0 1.8 0.580 5.4 2.3 2.9 2.9HFRI FOF: Conservative Index 1.1 0.2 60.7 1.6 0.2 16.4 1.7 0.750 3.9 0.9 2.3 2.3Merrill Lynch 3-month T-Bill 0.0 0.0 0.0 NA NA NA 5.8 0.000 0.1 -2.9 0.0 0.0Russell 3000 0.0 1.0 100.0 1.5 0.2 10.8 1.5 0.750 16.4 13.4 10.7 10.7*Tbills + 3%

MPT Statistics Annualized Return, % Annualized StdDev, %

Alpha, % Beta R-Squared, %Sharpe Ratio

Treynor Ratio

Sortino Ratio

Information Ratio

Batting Average* Total Excess* Total Excess*

WPERP Hedge Fund Total 1.0 0.2 43.9 0.3 0.1 1.0 0.5 0.620 2.7 -1.4 5.9 6.0Aetos WPERP 0.7 0.2 48.8 0.2 0.1 1.0 0.5 0.580 2.3 -1.8 5.1 5.2BC Universal 4.9 0.1 9.1 1.4 0.9 NA 1.8 0.590 6.3 2.3 3.5 3.6Tbills + 3 2.8 0.0 2.8 NA NA 0.0 NA 0.000 4.1 0.0 0.5 0.0HFRI FOF: Diversif ied Index -1.5 0.2 46.9 -0.1 -0.1 0.0 0.0 0.510 0.2 -3.9 6.0 6.1HFRI FOF: Conservative Index -1.9 0.2 43.8 -0.3 -0.1 -0.1 -0.1 0.540 -0.3 -4.3 5.2 5.3Merrill Lynch 3-month T-Bill 0.0 0.0 0.0 NA NA NA 2.2 0.000 1.2 -2.9 0.5 0.2Russell 3000 0.0 1.0 100.0 0.2 0.0 0.2 0.1 0.590 2.3 -1.8 18.6 18.6*Tbills + 3%

**Inception 2/2007

Annualized Return, % Annualized StdDev, %MPT Statistics

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Water and Power Employees’ Retirement Plan …...2012/12/31 · Water and Power Employees’ Retirement Plan (WPERP) Real Return Investment Portfolio Quarterly Report Executive