Alternatives Advisor to Investors - County of Fresno liquidity, manager organizational ... ‐ Develops portfolio structure and hedge fund ... equities and investment grade fixed income

The Alternatives Advisor to Institutional InvestorsLos Angeles • New York

The Alternatives Advisor to Institutional Investors

Fresno County Employees’ Retirement Association (FCERA)Presentation on Cliffwater Hedge Fund Advisory Services

February 3, 2016

2

Contents

Organization Review• Organization history and structure• FCERA relationship• FCERA administrative support• Fee proposal

Why Hedge Funds?

Cliffwater Investment Approach• Investment process• Investment due diligence• Operational and legal due diligence• Composite performance

Portfolio Construction• Portfolio structure and optimization• Transition management

Monitoring and Reporting

Questions & Answers

3

Cliffwater LLC

Founded in 2004

100% employee owned, 7 partners

SEC registered, accept fiduciary responsibility

Offices in Los Angeles and New York

Experienced professional staff– 53 employees

Institutional client base– 38 total clients, 32 hedge fund clients

Assets under advisement*– $76 billion in total assets under advisement – $56 billion in alternative assets– $36 billion in hedge funds– $12 billion in private equity– $8 billion in real assets

*Assets as of September 30, 2015 (Private assets valuation generally lags by a quarter)

4

The Cliffwater Hedge Fund Team

Portfolio Advisory Senior Professionals Hedge Fund Senior Investment Professionals

Daniel Stern Senior Managing Director Head of Hedge Fund Research

20 years of hedge fund experience

Additional Hedge Fund Team Members

Investment ResearchRory Doyle, Managing Director Steve Masarik, Director Kevin Ryan, Vice President Ryan Cummins, Vice President Eric Kurtz, Sr. Associate

Eli Sokolov, CFA Managing Director


Kevin Lenaghan, CFA Managing Director


Chris Solarz, CFA Managing Director


Stephen NesbittCEO, CIO


Kathleen Barchick, CFA, Senior Managing Director


Thomas Lynch, CFA, Senior Managing Director


James FeidlerSenior Managing Director


Pete Keliuotis, CFA Senior Managing Director


Mark Johnson Managing Director


Andrew Rudolph Managing Director


Aaron Dalrymple, CFA Managing Director


Operations Due Diligence Lance Johnson, COOJonathan Tabak, Managing Director Kevin McCann, Director

Legal Due Diligence Jonathan Rogal, General Counsel Stanley Liu, Director Linda Baker, Vice President

Monitoring & ReportingDavid Wippel, Managing Director Steve Thomas, DirectorJoshua Belvedere, Sr. Associate Tom Christensen, Associate Tori Irons, Associate D’Ann Patterson, AnalystThomas Brown, Chief Technology Officer

5

Cliffwater Organization

Stephen NesbittCEO/ CIO

Kathleen BarchickSr. Managing

Director

James FeidlerSr. Managing

Director

Thomas Lynch Sr. Managing

Director

Pete KeliuotisSr. Managing

Director

Mark JohnsonManaging Director

Gabrielle ZadraSr. Managing

Director

Daniel SternSr. Managing

Director

Lance JohnsonChief Operations

Officer

Jonathan Rogal General Counsel

Thomas BrownChief Technology

Officer

Eric AbelsonManaging Director

Mark Williams Managing Director

Chris Rice‐ShepherdManaging Director

Joon ChoiManaging Director

Erik Ogren Vice President

Mario Monroy Senior Associate

Jeffrey ToporAssociate

Sean CastilloAssociate

Kyle BarberAnalyst

William DornbrookAnalyst

Natalie SajalIntern

Jonathan TabakManaging Director

Kevin McCannDirector

Emily MullinsVice President

David Wippel Managing Director

Eli SokolovManaging Director

Aaron DalrympleManaging Director

Andrew RudolphManaging Director

Kevin Lenaghan Managing Director

Chris SolarzManaging Director

Rory DoyleManaging Director

Steve MasarikDirector

Kevin Ryan Vice President

Ryan CumminsVice President

Eric KurtzSenior Associate

Susanne WeiSenior Associate

Stanley LiuDirector

Linda BakerVice President

Karen ShangAccounting Manager

Emily HagermanAnalyst

Fiona RosesAdmin Assistant

Sopi Welch Admin Assistant

PortfolioAdvisory Private Assets Hedge Funds Operations Due

DiligenceLegal &

Compliance Monitoring & Reporting Corporate

Carol KomesuTreasurer/Controller

Technology

Reboot Networks

Backstop Solutions

Payoda

Jennifer BermudezDirector

Steve Thomas Vice President

Paulo Jeronymo Vice President

Joshua BelvedereSenior Associate

Christina NolanAssociate

Tom ChristensenAssociate

Tori IronsAssociate

Thidar MawAssociate

D’Ann PattersonAnalyst

6

Cliffwater’s Clients

Our size, reputation, and experience attracts top tier managers on a global basis . . .

Yet we are small enough to help our clients access the top quality opportunities.

Representative List of Cliffwater Clients

Endowment/FoundationAmerican UniversityDenison UniversityOberlin College Reed CollegeThe College BoardThe Principia CorporationUndisclosed Private College*Undisclosed Public University*University of Nebraska FoundationUniversity of OttawaVMI Investment Holdings, LLC

Corporate/PrivateDuke (Progress) EnergyGreater Miami Jewish Federation, Inc.Principal Financial Group Undisclosed Corporate Pension Fund*

Healthcare Mercy HealthMedStar Health Undisclosed Healthcare Endowment*

State PensionMaine PERSNew Mexico PERA Ohio STRS Rhode Island ERSState of New JerseyState of Wisconsin (SWIB)Undisclosed Public Pension Fund*

City/County PensionCity of PhiladelphiaDistrict of Columbia Retirement BoardHouston MunicipalSacramento CountyTexas County & District Retirement

*Cliffwater is not allowed to disclose certain names and information of some of its clients. This is a representative list of clients. Inclusion in the list does not represent an endorsement or approval of Cliffwater or the advisory services provided.

7

Cliffwater Alternatives Coverage and Assets under Advisement*

Long/ShortGlobalEuropeAsiaSector

Market NeutralRelative value

Equity market neutral

EventMerger arbitrage

ActivistMulti‐strategy

Macro/TradingDiscretionarySystematic

CTAsCommodities

Emerging markets

CreditLong/ShortDistressed

Structured Credit

Hedge Funds Private Equity Real Assets Real Estate

Leveraged BuyoutsGlobalUS

EuropeAsia PacificSector

LBO CapitalizationLargeMidSmall

Regional

VentureEarly

GrowthLate

Diversified

Growth U.S. Global

Private Debt

Distressed

Bank Loans

Mezzanine

Direct Lending

EnergyUpstreamMidstreamDownstream

Natural ResourcesTimber

AgricultureMining/minerals

Water

InfrastructureCore

Opportunistic

CommoditiesIndices

Enhanced IndicesHedge FundsLong‐only

Public Real Assets

Core

Value Add

Opportunistic

Regional

Sector Funds

REITS

$36 billion AUA $8 billion AUA$12 billion AUA

* As of date 09/30/2015 (Private assets valuation generally lags by a quarter). Assets include approximately $925 million in discretionary portfolios. Cliffwater oversees approximately $5 billion in Opportunistic investments, a subset of alternativesectors listed above.

8

Demonstrated Thought Leadership – Recent Research Reports

9

Scope of Hedge Fund Advisory Services

Hedge Funds and Asset Allocation– Assist with assumptions and policies

Investment Due Diligence– Broad coverage

Operations Due DiligenceLegal ReviewFund RecommendationsWeb Access to Reports, AnalyticsPortfolio Construction– Fund and strategy weights– Tactical weights– Rebalancing

Monitoring and Risk Management– Monthly performance reporting– Monthly fund and market commentary– Monthly portfolio characteristics, risk

analytics, liquidity, manager organizational changes

Monitoring and Risk Management (continued)– Fund amendment recommendations– Watch List and redemption recommendations– Annual re‐underwriting of due diligence

(investment and operational)

Client Service– Senior investment professionals comprise client

service team– Also offer direct access to research teams and

reporting teams– Attendance at client meetings as requested– Board education/presentations– Facilitate knowledge transfer– Access to all Cliffwater research– Onsite visits to Cliffwater offices– Joint participation in manager meetings

10

How Cliffwater Anticipates Working with FCERA

Task Frequency Cliffwater GC*FCERA Staff

FCERA Board Description Cliffwater Professionals

Administration Daily X X

Oversight of cash flows for subscriptions, redemptions and amendments alongside FCERA and custodian

Operations, Monitoring/ Reporting and Legal due diligence teams

Initial Portfolio Structure One‐Time X X X

Initial portfolio structure for direct fund investments; done in conjunction with Grosvenor portfolio

Portfolio Advisory (Keliuotis/Feidler/Nesbitt) and Investment Research team

Investment Due Diligence Ongoing XSource managers and conduct investment due diligence

Investment Research team

Operations Due Diligence Ongoing XConduct operations due diligence

Operations Due Diligence team

Legal Due Diligence Ongoing XLegal review of business terms and conditions

Legal Due DIligence team

Manager Recommendations Ongoing X X XMake recommendations for implementing strategy

Portfolio Advisory (Keliuotis/Feidler) and Investment, Operations, and Legal Due Diligence

Parties Involved

* GC = General Consultant

11

How Cliffwater Anticipates Working with FCERA (cont’d)

Task Frequency Cliffwater GC*FCERA Staff

FCERA Board Description Cliffwater Professionals

Manager MonitoringWeekly, Monthly, Annual

XMonitor investment managers used to implement strategy

Investment, Operations, and Legal Due Diligence teams; Monitoring/Reporting team

Performance and Risk Review Monthly X X XReview performance, risk, exposures and report exceptions to FCERA and GC

Monitoring/Reporting team and Portfolio Advisory

Prepare Board Materials Monthly X X

Attend FCERA board meetings; collaborate with FCERA staff on presentations

Portfolio Advisory (Keliuotis/Feidler)

Portfolio Structure Review Annual X X X XReview portfolio structure with and without Grosvenor portfolio

Portfolio Advisory (Keliuotis/Feidler/Nesbitt)

Investment Policy Statement Review

Annual X X X X

Work with GC and FCERA staff to review IPS, including guidelines and performance and risk benchmarks

Portfolio Advisory (Keliuotis/Feidler)

Asset Allocation Annual X X X XAssist GC and FCERA with asset allocation and role of HF portfolio

Portfolio Advisory (Keliuotis/Feidler/Nesbitt)

Parties Involved

* GC = General Consultant

12

Cliffwater Administrative Support for FCERA

Cliffwater will assist FCERA with enhanced administrative support including the following:Cliffwater Support Services for FCERA

Trade ExecutionMonitor and reconcile appropriate account(s) on a monthly basis to ensure trades are executed as expected

Legal DocumentsNegotiate business legal terms in side letters with investment managers, when applicableWork with FCERA counsel on legal, regulatory, and other FCERA‐specific issuesCoordinate the collection of all supporting documentation required by the investment managers upon initial close/subscriptionRecommend action on limited partnership amendments and consents

Subscriptions/RedemptionsMonitor all subscription and redemption activity and collect all related notices

Cash ManagementMaintain an ongoing cash forecast to ensure cash needs are being met

Accounting/ReportingMaintain an independent record of valuations and cash flows for all investments on a monthly basisReconcile cash flows, income, and investment returns to custodian bank recordsTax documentation assistance for onshore/offshore accountsShare class allocation accountingGenerate and distribute total portfolio and asset class specific reporting packagesAssist in the annual audit as needed

13

FCERA Program Structure with Specialist Consultant

HF

Man

ager

Con

trol

Cliffwater:‐ Develops portfolio structure and hedge fund

program IPS‐ Sources and recommends managers‐ Monitors managers and portfolio‐ Operations/administrative support‐ Collaborates with FCERA staff (non‐discretionary)‐ Works with general consultant as appropriate

Benefits vs. fund‐of‐funds:• Lower fees (15‐30 bps vs. 60‐100+ bps)• Control over manager selection/allocation• Broad selection of managers• Direct manager relationships• Customized liquidity profile

FCE

RA

Con

trol

14

Cliffwater Fee Proposal

Non‐DiscretionaryServices

DiscretionaryServices

$ 100 million

$ 150 million

$ 200 million

$ 250 million

$ 300 million

$ 350 million

$ 400 million

$ 425,000 $ 425,000 $ 425,000 $ 425,000 $ 425,000 $ 425,000 $ 425,000

42.5 28.3 21.3 17.0 14.2 12.1 10.6

$ 100 million

$ 150 million

$ 200 million

$ 250 million

$ 300 million

$ 350 million

$ 400 million

$ 375,000 $ 500,000 $ 625,000 $ 675,000 $ 725,000 $ 775,000 $ 825,000

37.5 33.3 31.3 27.0 24.2 22.1 20.6

NOTE: these fees are not additive. The total fee for a combination of discretionary and non‐discretionary services would be between $425,000 and $875,000, depending on desired mix of discretionary and non‐discretionary services.

Fees include administrative services as described on page 12.

15

Cliffwater Hedge Fund Advisory Philosophy

1. Benchmarking and Accountability

2. Resources and Infrastructure

3. Collective Decision‐Making

4. Frequent Communication

5. Clients First

6. Senior Professionals

1. Benchmarking and Accountability

2. Resources and Infrastructure


4. Frequent Communication

5. Clients First

6. Senior Professionals

How We Execute…

1. Performance Driven

2. Full Service

3. Customized Approach

4. Intensive Communications

5. Open Platform

6. Value Added Service

1. Performance Driven

2. Full Service

3. Customized Approach

4. Intensive Communications

5. Open Platform

6. Value Added Service

How We Think…


16|

Why Hedge Funds?

17

Strong Historical Performance

Since 1990, Hedge Funds have had better annualized returns with significantly lower volatility than global equities and investment grade fixed income.

* Hedge Funds = HFRI Fund Weighted Composite Index; Global Equities = MSCI ACWI Index; IG Fixed Income = Barclays Aggregate Index

Global Equities Inv. Grade Fixed Income70% Equities, 30% Inv.

Grade Fixed Inc. Hedge Funds*Cumulative Return 363.8% 384.9% 401.2% 1129.9%Annualized Return 6.1% 6.3% 6.4% 10.1%Annualized Volatility 15.1% 3.7% 10.7% 6.7%

Volatility (% / mo) 1.3% 0.3% 0.9% 0.6%Sharpe (rfr = 1%) 0.34 1.44 0.50 1.35% Positive Months 59.9% 69.2% 60.9% 69.6%Maximum Drawdown ‐54.0% ‐5.2% 94.8% ‐21.4%

18

Hedge Fund Downside Protection

A benefit of hedge funds is that they outperform during periods of market stress

Scenario Name Drawdown Peak TroughMonths

Between Peaks Drawdown Peak TroughMonths

Between PeaksThe Financial Crisis ‐ 2008 ‐54.03% Oct‐07 Feb‐09 69 ‐21.42% Oct‐07 Feb‐09 36

‐4.75% Mar‐00 May‐00 5‐6.39% Aug‐00 Nov‐00 17

Russian Debt Crisis ‐ 1998 ‐13.50% Jun‐98 Aug‐98 5 ‐11.42% Apr‐98 Aug‐98 11

MSCI World ‐ Net USD HFRI Fund Weighted Composite Index

Technology Meltdown ‐ 2000 ‐46.80% Mar‐00 Sep‐02 70

* Hedge Funds = HFRI Fund Weighted Composite Index; Global Equities = MSCI ACWI Index

19

Hedge Funds Provide Diversifying Alpha

S&P 500Inv. Grade Bonds High Yield

HFRI Fund Weighted

HFRI Equity Hedge

HFRI Macro Systematic

HFRI Relative Value HFRI Macro

HFRI Multi‐Strat.

HFRI Conv. Arb. HFRI Event HFRI FI Corp.

S&P 500 1.00

Inv. Grade Bonds 0.11 1.00

High Yield 0.60 0.23 1.00

HFRI Fund Weighted 0.74 0.08 0.64 1.00 > 0.7

HFRI Equity Hedge 0.73 0.06 0.57 0.95 1.00 0.3 ‐ 0.7

HFRI Macro Systematic 0.39 0.12 0.13 0.55 0.49 1.00 < 0.3

HFRI Relative Value 0.50 0.10 0.66 0.73 0.68 0.16 1.00

HFRI Macro 0.32 0.31 0.28 0.64 0.55 0.61 0.34 1.00

HFRI Multi‐Strat. 0.53 0.16 0.74 0.75 0.68 0.20 0.80 0.43 1.00

HFRI Conv. Arb. 0.47 0.17 0.69 0.62 0.60 0.07 0.80 0.25 0.78 1.00

HFRI Event 0.70 0.05 0.70 0.90 0.84 0.37 0.76 0.50 0.76 0.66 1.00

HFRI FI Corp. 0.53 0.12 0.82 0.69 0.59 0.17 0.71 0.38 0.81 0.67 0.77 1.00

Data is from January 1990 ‐ June 2015

Correlations

Asset Class Correlations 1990 ‐ 2015

20

Hedge Fund Alpha Generation – Cliffwater Model Portfolio*

3.07%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

Rolling

12 Mon

th Alpha

Returns

Cliffwater Model Hedge Fund Portfolio AlphaRolling 12 Month AlphasThrough Sept 30, 2015

CW Model Portfolio

HFRI Fund Weighted Index

HFRI Fund‐of‐Funds Index

‐20%

‐10%

0%

10%

20%

30%

40%

Rolling

12 Mon

th Alpha

Returns

1. Cliffwater All Hedge Fund StrategiesRolling 12 Month Alphas

CW Model PortfolioCW Model Market NeutralCW Model Credit/DistressedCW Model Event DrivenCW Model Equity LSCW Model Macro DiscretionaryCW Macro Model CTACW Model Multi‐Strategy

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

Cumulative Re

turn (G

rowth of $

1.00)

Cumulative Model Hedge Fund PortfolioTotal Return and its Alpha and Beta Components

Through Sept 30, 2015

Cumulative Total Return

Cumulative Alpha Return

Cumulative Beta Return

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

Cumulative Alph

a (Growth of $

1.00)

1.3 Cumulative Alpha Returns for Strategy Groups

CW Model PortfolioCW Model Market NeutralCW Model Credit/DistressedCW Model Event DrivenCW Model Equity LSCW Model Macro DiscretionaryCW Macro Model CTACW Model Multi‐Strategy

*The Cliffwater model portfolio performance results presented are unaudited and have been prepared for informational purposes only. The performance results reflect thehypothetical, back‐tested results of a model portfolio of Cliffwater approved hedge funds that are weighted to the target strategy weights of the model determined byCliffwater over time. The performance results of the model portfolio do not represent actual trading. The returns are net of all underlying fund or account expenses,management fees, and performance‐based fees, but gross of any Cliffwater's fees. Past performance does not guarantee future performance.

21

Hedge Funds Improve Risk‐Adjusted Expected Return

– A 20% hedge fund allocation improves expected return while reducing expected risk– The portfolio risk/return ratio improves from 0.50 to 0.62 with the addition of hedge funds

Based on Cliffwater Capital Market Assumptions as of January 1, 2016


22|

Cliffwater Investment Approach

23

Cliffwater Investment Process

•Investment •Operational•Legal

• Customized• Diversification bystrategy, industry, cycle, and geography

• Global Sourcing• Broadest Universe of Funds

• Proactive Calling

• Monthly/Quarterly Calls• Annual Meetings• ManagerDevelopmentMemos

Monitoring

ManagerSourcing &Access

DueDiligence*

PortfolioConstruction

1. Client Focused

2. Uniform Process


4. Fully Documented

5. Transparent

How We Execute…

• Collaborative

*Generally, only Investment Due Diligence is conducted on Long Only strategies.

24

Cliffwater Internal Investment Approval Process

AnalystPreliminary

Due Diligence & Rating

(A, B, or C)

InvestmentDue Diligence

Operations, LegalDue Diligence

Research Group

Approval

InvestmentCommitteeApproval

Partnership,ManagerSourcing

A‐RatedFunds

ClientRecommendation,

Investment

“Focus List”comprised of A, B‐rated,

archive C‐rated

Client AccessibleDocumentation

found on Cliffwater CRM Platform

IC MinutesDue diligence

Preliminary Rating

25

Hedge Fund Selection Process – By The Numbers

2,000 Unique

Managers**

UniverseFocusList

*CliffwaterApproved

List

Investment, Operational,

LegalDue Diligence

Approval by Research Group

Approval by Cliffwater Investment Committee

Sourcing and Initial Due Diligence by Cliffwater Research Group

A and B‐rated managers are moved to the Focus list for further due diligence

8,000HedgeFunds

131

Market Neutral

Credit/ Distressed

Event Driven

624Equity L/S

Macro Discretionary

Macro CTA

Multistrategy

*As of 12/31/2015** Source: HFRI

26

Investment Due Diligence Components

Our investment research analysts rate over 1,400 hedge fund managers across four major criteria…

…approximately 425 managers are rated “B” and 200 are rated “A”

Business Stability

Personnel

Strategy

Portfolio

Risk ManagementTransparency

Fund Liquidity

Fees &Expenses

Alphavs Beta

Peers

Risks

Organization

Investment Process

Governance

Performance

27

Alpha/Beta Separation is Essential

Fund 1

Fund 2

Fund 3

Fund 4

Fund 5

Fund 6

Fund 7

Fund 8Fund 9

Fund 10

Fund 11

Fund 12

Fund 13

Fund 14

Fund 15

Fund 16

Fund 17

Fund 18

Fund 19

Fund 20

Fund 21

Fund 22

Fund 23

Fund 24

Fund 25

Fund 26

Fund 27

Fund 28Fund 29

Fund 30

Fund 31

Fund 32

Fund 33

Fund 34

Fund 35

Fund 36Fund 37

Fund 38

Fund 39

Fund 40

Fund 41

Fund 42

Fund 43

Fund 44

Fund 45

Fund 46Fund 47

Fund 48

Fund 49

Fund 50

Fund 51

Fund 52

Fund 53

Fund 54

Fund 55

Fund 56

Fund 57

Fund 58Fund 59

Fund 60

Fund 61

Fund 62Fund 63

Fund 64

Fund 65

Fund 66

Fund 67

Fund 68

Fund 69

Fund 70

Fund 71

Fund 72

Fund 73

Fund 74

Fund 75

Fund 76

Fund 77

Fund 78

Fund 79

Fund 80

Fund 81

Fund 82

Fund 83

Fund 84

Fund 85

Fund 86

Fund 87

Fund 88

Fund 89

Fund 90

Fund 91

Fund 92

Fund 94

Fund 95

Fund 96

Fund 97

Fund 98

Fund 99

Fund 100

Fund 101

Fund 102

Fund 103Fund 104

Fund 105

Fund 106Fund 107

Fund 108

Fund 109

Fund 110

Fund 111

Fund 112

Fund 113

Fund 114

Fund 115

Fund 116

Fund 117

Fund 118Fund 119

Fund 120

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

-0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

Info

rmat

ion

Rat

io

Beta

Risk‐AdjustedAlpha

(information ratio)

Beta

Cliffwater RecommendedHedge Funds

28

Operational and Legal Due Diligence Components

Our operations team grades each performance component against best industry practices

Each hedge fund must pass operational review before the manager is approved

Legal & Regulatory

Compliance

Business Risk Mgmt

Personnel

Segregation of Duties

Service Providers

Technology & Systems

Trade Execution

Trade Reconciliation

Financing

CounterpartyRisk

Valuation Procedures

Il l iquid Pricing

Pricing Sources

Accounting

Governance

Operations InfrastructureProcesses

Valuation

29

Analyst Reports

Profile Report– Cliffwater analysts prepare a 3 to 4 page qualitative assessment on every hedge fund and assign an A to C rating

Performance Report– A monthly quantitative analysis of return, risk, attribution, and universe comparison for every hedge fund

“Select” Due Diligence Report– A comprehensive write up on hedge funds chosen for full due diligence and recommendation to clients– Select reports are re‐underwritten at least annually

Meeting/Call Notes– Analysts provide a write up summarizing all meetings and calls with hedge funds, covering discussion points and

findingsFund Development Report– As part of a comprehensive monitoring process, analysts prepare and send reports to clients alerting them of any

material manager events (i.e. departures) with a conclusion and recommendation (if required)Watch List Report– Analysts prepare a Watch List Report, followed by regular updates, for hedge funds where significant concerns

exist (performance, organization, or other)Redemption Recommendation Report– Analysts prepare a Redemption Recommendation Report in instances where a hedge fund no longer meets

investment expectationsAnalyst reports and meeting notes are accessible by clients through

Cliffwater’s client website

Analyst reports and meeting notes are accessible by clients through

Cliffwater’s client website

30

Cliffwater Hedge Fund Composite*(Periods ending November 30, 2015)

5.68%

4.60%

7.86%

4.54%

2.65%

3.76%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

3 Years 5 Years 7 Years

Cliffwater Hedge Fund Composite HFRI Fund‐of‐Funds Composite

* The Cliffwater Hedge Fund Composite is comprised of diversified hedge fund portfolios of Cliffwater's clients, both discretionary and non‐discretionary, with absolute returnobjectives that are typically benchmarked to the HFRI Fund of Funds Composite Index. The composite returns are asset weighted based on the returns of the portfolios in thecomposite. Portfolios included in the composite must consist primarily of Cliffwater recommended funds or accounts. The returns are net of underlying fund expenses andmanager fees, but gross of Cliffwater fees. Past performance does not guarantee future performance. Please see disclosures on page 43.

Cliffwater Composite Hedge Fund Performance


31|

Portfolio Construction

32

Cliffwater Hedge Fund Return and Risk Architecture

MarketBetas

Equity

Credit

RealRates

Inflation

StrategyBetas

Market Neutral

Credit/Distressed

Event Driven

Equity Long/Short

Macro

Macro CTA

Multistrategy

Manager Alpha

Selection

Timing

Return significant,persistent

smaller,inconsistent

zero sum,persistent

Risklarge,symmetric,systematic

variable,non‐symmetricsystematic

alpha risk,symmetric,diversifiable

Risk‐adjusted SharpeRatio return/risk information

ratio

Hedge Fund Total Return

* Strategy betas are also referred to as “alternative” betas

=

We both (1) measure each source of hedge fund

return historically and (2) forecast each source of

return, including individual manager alphas

We both (1) measure each source of hedge fund

return historically and (2) forecast each source of

return, including individual manager alphas

33

Five Steps to Hedge Fund Portfolio Construction

1) Pick an objective

2) Set target strategy weights

3) Number of hedge funds

4) Hedge fund selection

5) Optimize portfolio weights

Asset Weighting

Retu

rn o

r R

etu

rn E

quiv

ale

nt

OptimalAsset

Weight

Implied Return (Marginal Cost)

Marginal Return

Cliffwater combines proprietary models with forward looking assessments to customize hedge fundportfolios to meet clients’ varying needs

34

The Optimal Number of Hedge Funds

Fund of Funds have historically over‐diversified their portfolios

Cliffwater research shows the optimal number of hedge funds ranges between 15 and 30, depending upon selection skill

Average Cliffwater client invests in 20 hedge funds

FCERA may choose to keep the existing Grosvenor fund‐of‐funds with complimentary direct allocations; in this case Cliffwater would structure a complementary portfolio

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1 6 11 16 21 26 31 36 41 46

Ris

k A

dju

sted

Retu

rn (

Info

rma

tion R

atio

)

Number of Hedge Funds in the Portfolio

X = Optimal Number of Hedge Funds

Perfect Foreknowledge

Excellent Skill

Good Skill

No Skill

Selection Skill and the Optimal NumberOf Hedge Funds

35

1 2 3 4 5 6 7 8 9 10 11

Model Weights Libor

Equity Beta*

Credit Beta**

Beta Return Beta Risk

Alpha Return

Alpha Risk

Info Ratio

Total Return Total Risk

Market Neutral 5% 1.45% ‐0.05 0.00 ‐0.28% 1.10% 2.66% 3.29% 0.81 3.83% 3.47%Credit/Distressed 20% 1.45% 0.00 0.35 1.68% 2.80% 2.40% 3.58% 0.67 5.53% 4.54%Event Driven 20% 1.45% 0.20 0.15 1.84% 5.00% 3.50% 4.47% 0.78 6.79% 6.71%Equity Long/Short 25% 1.45% 0.40 0.10 2.72% 9.15% 4.20% 4.65% 0.90 8.37% 10.26%Macro‐Discretionary 15% 1.45% 0.10 0.00 0.56% 2.20% 4.90% 5.72% 0.86 6.91% 6.12%Macro‐Systematic 5% 1.45% ‐0.10 0.00 ‐0.56% 2.20% 5.00% 9.35% 0.53 5.89% 9.61%Multistrategy 10% 1.45% 0.15 0.20 1.80% 4.20% 3.00% 4.61% 0.65 6.25% 6.24%

Hedge Fund Portfolio 100% 1.45% 0.16 0.22 1.61% 4.57% 3.65% 3.42% 1.07 6.70% 5.73%* MSCI World Equity Index** S&P/LSTA Leveraged Loan Index

Expected Sources of Hedge Fund Return and Risk ‐‐ October 1, 2015

Beta Alpha Libor+Beta+Alpha

Strategy

1 2 3

StrategyMarket Neutral

Credit/Distressed

Event Driven

Macro‐Discretionary

Macro‐Systemat

icMultistrategy

Market Neutral 2 3.80 0.50 1.00Credit/Distressed 3 4.00 0.70 0.35 1.00Event Driven 3 5.00 0.70 0.35 0.55 1.00Equity Long/Short 5 6.00 0.50 0.35 0.55 0.55Macro‐Discretionary 3 7.00 0.50 0.35 0.45 0.45 1.00Macro‐Systematic 2 10.00 0.75 0.15 0.15 0.15 0.15 1.00Multistrategy 2 5.00 0.70 0.35 0.55 0.55 0.55 0.15 1.00

20

Expected Hedge Fund Alpha Calculations5

# of Hedge Funds

Avg Fund Alpha Risk

Intra‐ Strategy Correl

Inter‐Strategy Correlations

Baseline Model Portfolio Construction

36

Full Portfolio Construction Example

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Return RiskSharpe Ratio Rank Beta

Beta Return

Alpha Return

Alpha Risk

Info Ratio Rank

Portf Wghts

Contribution to Portf Risk Diff

Implied Return

Exp Info

RatioExp

Return

Expect minus Implied Return* Rank

Mkt Neutral 1 12.12% 5.81% 1.55 3 0.00 0.00% 9.01% 5.41% 1.67 4 7% 2% -5% 2.26% 0.80 6.83% 4.57% 2Mkt Neutral 2 9.88% 5.64% 1.20 7 0.00 0.00% 6.77% 5.07% 1.33 7 7% 2% -5% 2.31% 0.75 6.32% 4.00% 3Credit/Distressed 1 11.90% 3.95% 2.16 1 -0.01 -0.01% 8.54% 3.96% 2.15 1 7% 1% -5% 1.71% 0.80 5.62% 3.91% 4Credit/Distressed 2 6.92% 10.73% 0.45 15 0.33 0.16% 3.60% 8.60% 0.42 17 7% 10% 3% 11.88% 0.60 9.34% -2.54% 12Credit/Distressed 3 12.23% 4.77% 1.83 2 0.07 0.04% 8.66% 4.20% 2.06 2 7% 5% -2% 5.97% 0.65 5.61% -0.36% 6Event Driven 1 8.41% 5.24% 1.01 10 0.19 0.09% 4.90% 3.68% 1.33 8 7% 6% -1% 7.09% 0.80 6.40% -0.70% 7Event Driven 2 9.47% 10.32% 0.64 12 0.40 0.20% 5.71% 6.11% 0.93 11 7% 13% 6% 15.21% 0.65 8.56% -6.65% 16Equity LS 1 7.80% 13.07% 0.45 16 0.60 0.30% 4.01% 5.26% 0.76 13 7% 16% 9% 18.84% 0.55 8.46% -10.39% 17Equity LS 2 7.99% 4.80% 1.05 9 0.15 0.07% 4.58% 3.49% 1.31 9 7% 5% -1% 6.65% 0.70 5.71% -0.94% 8Equity LS 3 15.35% 9.02% 1.39 5 0.17 -0.50% 12.63% 7.43% 1.70 3 7% 8% 1% 9.86% 0.70 8.59% -1.27% 10Equity LS 4 13.66% 8.35% 1.23 6 0.21 0.10% 9.82% 6.70% 1.47 6 7% 9% 2% 11.12% 0.70 8.26% -2.86% 13Macro-Discr 1 14.92% 7.90% 1.48 4 -0.07 -0.04% 11.61% 6.97% 1.67 5 7% 3% -3% 3.95% 0.75 7.35% 3.41% 5Macro-Systematic 1 19.48% 14.69% 1.09 8 0.01 0.00% 16.10% 12.58% 1.28 10 7% 6% -1% 7.16% 0.75 11.97% 4.81% 1Multistrat 1 6.69% 7.34% 0.57 13 0.15 0.07% 3.52% 6.49% 0.54 16 7% 8% 1% 9.41% 0.80 8.44% -0.97% 9Multistrat 2 6.84% 5.89% 0.65 11 0.21 0.10% 3.42% 4.15% 0.82 12 7% 7% 0% 8.07% 0.70 6.47% -1.61% 11DJ/CS Hedge Fund Index 6.41% 7.26% 0.49 14 0.30 0.15% 2.86% 4.05% 0.71 15 11.34% 1.00 8.09% -3.25% 14HFRI Fund Weighted Index 5.88% 7.57% 0.40 17 0.34 0.17% 2.27% 3.17% 0.72 14 11.21% 1.00 7.43% -3.77% 15

Portfolio 11.15% 4.73% 1.75 0.16 0.04% 7.52% 3.48% 2.16 100% 100% 0% 8.10% 1.23 7.59% 3.29%Group Average 10.35% 7.78% 1.04 0.18 0.06% 6.94% 5.72% 1.23 8.47% 0.75 7.61%

Market Neutral 13% * Portfolio value equals the average of the absolute values in the columnCredit/Distressed 20%Event 13%Equity Hedge 27%Global Macro 13%Multi Strategy 13%

100%

Historical Return and Volatility Other Historical Risk and Return Measures Capital vs Risk Budget Expected Return & Optimal Weights

Hedge Fund Portfolio Construction Example

37

Cliffwater Experience with Portfolio Completions and Transitions

FCERA is considering various options to increase its hedge fund exposure from 4% to 8%– Specialist consultant (Cliffwater) to build out direct portfolio– Another fund‐of‐funds alongside legacy account (Grosvenor)– Single fund‐of‐one

Cliffwater has extensive experience working alongside legacy Funds‐of‐Funds:– Direct fund portfolio structure takes into account fund‐of‐funds exposures– Can also facilitate portfolio transition to move to 100% direct model if desired

Client Example 1• Cliffwater oversees $300 million in hedge fund exposure• 2 legacy funds‐of‐funds (one terminated on Day 1; the other fund‐of‐one used as transition manager)• Final direct portfolio initially targeted at 22 (still in development)

Client Example 2• Cliffwater oversees $10 billion in aggregate hedge fund exposure, including funds‐of‐funds• 6 legacy funds‐of‐funds (mix of commingled and funds‐of‐one)• Built direct portfolio of 40 funds with over 100 funds through fund‐of‐funds managers

Client Example 3• Cliffwater oversees $350 million in hedge fund exposure• 1 legacy fund‐of‐funds (fund‐of‐one)• Final direct portfolio, including new funds, totaled 24, including 4 legacy funds

38

Hedge Fund Portfolio Transition Experience

1) Evaluate the FOF portfolios

2) Identify desirable managers

3) Liquidation / in‐kind transfer

4) Build aggregate portfolio

Funds to be Transferred:

Fund HFoF Manager NAV Manager Liquidity Lockup Period

Next Liquidity Date Notice Period Side Pockets

Portfolio A Manager 1 14,025,978 Quarterly None XXXXX 90 2%Portfolio B Manager 2 16,187,704 Quarterly 1 year XXXXX 45 0%Portfolio C Manager 2 24,904,213 Quarterly 1 year XXXXX 90 0%Portfolio D Manager 3 21,280,898 Monthly 1 year XXXXX 30 0%Portfolio E Manager 1 15,845,314 Quarterly 2 year XXXXX 60 0%Portfolio F Manager 3 21,301,011 Monthly None XXXXX 60 6%Portfolio G Manager 2 43,893,183 Quarterly None XXXXX 60 0%Total 157,438,301


39|

Monitoring & Reporting

40

What we do after an investment is made… Cliffwater analysts conducted 1,100

meetings and 2,200 calls over the last

year

Cliffwater analysts conducted over 500 monthly monitoring calls in the last year

All Cliffwater hedge fund personnel participate in a

Monday morning meeting to review the week’s events and

manager review

All analyst meetings, calls, and write‐ups are

documented and placed on Cliffwater’s proprietary web platform for client access

Our Hedge Fund Reporting Group

provides returns within 6‐10 business days of

month end and portfolio analytics within 5 weeks.

* Chart segments scaled to approximate commitment of analyst time

Hedge Fund Monitoring*

41

Web‐based Research Library and Client Site to Access Research & Reports

42

Client Portfolio Reporting – Sample Hedge Fund Portfolio Snapshot

43

Cliffwater Disclosures

This presentation has been provided to you for the purpose of discussing an investment advisory relationship. The material contained herein is confidential and is intended for one‐on‐one or small groupmeetings with qualified, sophisticated investors. It may not be copied, transmitted, given, or disclosed to any third party. This presentation is not an advertisement and is not intended for public use fordistribution or for the investing public. This material is not meant to be, nor shall it be construed as, an offer or solicitation of an offer for the purchase or sale of any security.

This presentation was prepared exclusively for information and discussion purposes, and is not meant to be, nor shall it be construed as, an attempt to define all information that may be material to you.All information including opinions or facts expressed herein are current as of the date appearing in this presentation and is subject to change without notice. All third party information has been obtainedfrom sources believed to be reliable. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in thispresentation. The information and opinions in this presentation do not constitute investment advice.

This presentation may include sample or pro forma performance. Such information is presented for illustrative purposes only and is based on various assumptions, not all of which are described herein.Such assumptions, data, or projections may have a material impact on the returns shown. Nothing contained in this presentation is, or shall be relied upon as, a representation as to past or futureperformance, and no assurance, promise, or representation can be made as to actual returns. Past performance does not guarantee future performance.

References to market or composite indices (such as the S&P 500), benchmarks or other measures of relative market performance over a specified period of time (each, an “index”) are provided forinformation only. Reference to an index does not imply that a portfolio will achieve returns, volatility or other results similar to the index. The composition of an index may not reflect the manner in whicha portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject tochange over time.

– Hedge Fund Research, Inc. (“HFR”) is the source and owner of the HFR data contained or reflected in this report and all trademarks related thereto.

– Frank Russell Company (“FRC”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The Russell Index datamay contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.

– Thomson Financial Inc. is the owner and/or licensor of the Cambridge Associates LLC data contained or reflected in this material.

The Cliffwater Hedge Fund Composite is comprised of diversified hedge fund portfolios of Cliffwater's clients, both discretionary and non‐discretionary, with absolute return objectives that are typicallybenchmarked to the HFRI Fund of Funds Composite Index. The composite returns are asset weighted based on the returns of the portfolios in the composite. Portfolios included in the composite mustconsist primarily of Cliffwater recommended funds or accounts. For these purposes, a portfolio that consists of at least 90% of Cliffwater recommended funds or accounts will be deemed to be a portfoliothat consists primarily of Cliffwater recommended funds or accounts. A portfolio will be removed from the composite when (i) the portfolio no longer consists of at least 90% of Cliffwater recommendedfunds or accounts, or (ii) Cliffwater no longer provides consulting services with respect to the portfolio. The historical performance for portfolios removed from the composite are kept in the historicalperformance of the composite. The composite returns are based on the valuations reported by the sponsor and/or administrator of the fund or account. The returns are not audited nor are theycompliant with the provisions of Global Investment Performance Standards (GIPS) which require, among other things, full composites for all asset categories and returns calculated net of all fees includingadvisory fees and discretionary responsibilities. Past performance does not guarantee future performance. Amounts may not sum due to rounding. The returns rely upon the accuracy and completenessof financial information provided to Cliffwater by such sponsors and/or administrators and the custodian banks of Cliffwater’s clients and, therefore, Cliffwater has not conducted an independentverification of this information. Returns are typically adjusted for cash flows based on the timing reflected in the valuations reported by the sponsor and/or administrator of the fund or account. All cashflows and values used to calculate the returns are in, or have been converted to, U.S. dollars. The returns are net of all underlying fund or account expenses, management fees, and performance‐basedfees, but gross of Cliffwater's fees. Unlike the composite return, the index return does not reflect any underlying fund or account expenses, management fees, or performance‐based fees. Unlike theunderlying funds and accounts included in the portfolios within the composite, an index is unmanaged and fully invested. There is no correlation between the performance of the index and the composite.