DORCHESTER CAPITAL ADVISORS, LLC Presentation to NCPERS 2009 ...

DORCHESTER CAPITAL ADVISORS, LLC

Presentation to NCPERS 2009 Public Safety Employees Pension & Benefits Conference

© Dorchester Capital Advisors, LLC 2CONFIDENTIAL

Table of Contents

The Hedge Fund Industry

3

Fund Of Hedge Funds

15

New Hedge Fund Era

20

The Hedge Fund Industry


History of Hedge Funds

• Contrary to popular belief, hedge fund investing has been around for decades

• Alfred Winslow has been credited by many with starting the first hedge fund in 1949, introducing the concepts of shorting, leverage, performance fees, and investing firm capital alongside partners

• Other than a few small peaks and valleys, the industry inched along in relative obscurity until the 1990’s, when the popular press picked up on the uncorrelated returns achieved by hedge fund managers that had become household names

• Between increased media awareness of the hedge fund industry and the explosion of derivative instruments previously unavailable, the hedge fund industry grew rapidly with hedge funds numbering in the thousands managing hundreds of billions of dollars

• Contrary to media reports in Q4 2008, the hedge fund industry is still vibrant with an estimated $1.4 trillion in assets under management


Hedge Fund Industry Growth - AUM

$58,370$95,720

$456,430

$625,554

$820,009

$972,608

$1,105,385

$1,464,526

$46,545

$126,474

$194,515

($42,824)

$38,910

$1,430,603

$1,331,695

$490,580$539,060

$374,770

$167,360

$185,750$167,790

$367,560

$1,407,095

$1,868,419

$256,720

($154,447)

($103,291)

$36,918$8,463 $27,861

($1,141)

$57,407

$91,431

$14,698 $4,406

$55,340

$23,336

$99,436

$70,635 $46,907

$73,585

($500,000)

($250,000)

$0

$250,000

$500,000

$750,000

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q12009

Q22009

Ass

ets

($M

M)

Estimated Assets Net Asset Flow

Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009


Hedge Funds and Mutual Funds

Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009 and Investment Company Institute

Assets: Hedge Funds vs Mutual Funds(Billions of $ as of 6/30/09)

$1,431 , 12%

$4,031 , 35%

$527 , 5%

$1,822 , 16%

$3,653 , 32% Hedge Funds

Stock Funds

Hybrid Funds

Bond Funds

Money MarketFunds


Hedge Fund Industry Growth - # of Firms

1,105

1,514

1,945

8,9239,0569,284

10,096

9,462

8,661

610

3,617

5,379

4,454

3,873

821

2,9902,781

3,325

2,383

6,297

7,436

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q12009

Q22009

# F

un

ds

Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009


A Consolidated Industry

8.16%

75.69%

0.65%1.08%

0.19%2.17%

3.79%

8.27%

< $10 Million $10 to $25 Million $25 to $50 Million

$50 to $100 Million $100 to $200 Million $200 to $500 Million

$500M to $1 Billion > $1 Billion

• About 300 hedge fund firms manage over $1 billion and collectively these firms represent approximately 75% of all hedge fund assets

• About 90 hedge fund firms manage over $5 billion and collectively these firms represent roughly 60% of all hedge fund assets

Distribution of Hedge Fund Industry Assets by Fund AUM Tier

June 30th 2009

Source: HFR Global Hedge Fund Industry Report – Q2 2009, InvestHedge

According to the “HFR Global Hedge Fund Industry Report – Q2 2009 and InvestHedge:


Characteristics Of Hedge Funds

Benefits

• Flexible Mandate: less constrained regarding benchmarks, use of short selling, leverage, and permitted securities; therefore, can focus on absolute returns

• Incentive Structure: fee structure attracts highly talented money managers who personally invest in their funds; therefore, interests are aligned with investors

• Diversification: hedge funds are typically uncorrelated with traditional asset classes


Characteristics Of Hedge Funds

Drawbacks

• Transparency: hedge funds can seem opaque to new or nervous investors because disclosure standards are not universal across strategies or managers

• Manager Risk: so much of a fund’s performance may be the result of a few key people

• Liquidity: hedge fund investing involves lock ups


Hedge Fund Strategies

Same

Some overlap

Distinctly different

• While many of these strategies sound exotic, they play in the same sandbox as your traditional long-only managers

• The only major difference is that they do so in a less-constrained fashion

Strategy Name Markets

Convertible Arbitrage Convertible bonds, stocks, options

Emerging Markets Stocks in developing countries

Global Macro Fixed income, equity indexes, commodities futures and options on these markets

Equity Market Neutral Stocks, sometimes options

Long/Short Equity Stocks, sometimes options

Event Driven, Risk Arbitrage Stocks, corporate bonds, bank loans, convertible bonds, options

Distressed Securities Corporate bonds, bank loans, sometimes trade or litigation claims

Managed Futures Commodities, bond futures and options, stock futures and options

Multi-Strategy Any or all of the above

Dedicated Short Bias Short-selling stocks


Attractiveness of Hedge Funds

• Hedge funds (using the HFRI Fund of Hedge Fund Index as a proxy*) offer an attractive risk/return profile compared to traditional equity investments during the last 10 years

Risk/ Return Characteristics(August 99 to J uly 09)

Barclays Agg Bond

HFRI Fund of Fund

S&P 500 TR-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Standard Deviation

Co

mp

ou

nd

Ret

urn

*Over the last ten years, the HFRI Fund Composite Index earned a higher cumulative return versus the HFRI FOF Index because fees-on-fees reduce fund-of-fund returns. However, the HFRI Fund Composite Index suffers from “survivorship bias” because hedge fund liquidations and non-contributions are not included in the hedge fund index, but are included in the fund-of-fund index.


Hedge Funds in Down Markets

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

Aug-Oct 1990 Feb-Mar 1994 J ul-Sep 1998 J an-Feb 2000 Sep-Dec 2000 Sep 2001 Apr-Sep 2002 Sep 2008 - Feb2009

Persion Gulf Fed Tightening LTCM Collapse Tech Wreck I Tech Wreck I I September 11th 2002 Meltdown Recent Meltdown

HFRI Fund of Fund S&P 500 TR


Hedge Funds’ Diverse Returns

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD 2009

S&P 500HFRI Emerging

MarketsHFRI ED:

Merger ArbHFRI RV:

ConvertArbBarclays

Gov't/CreditHFRI Emerging

MarketsHFRI ED: Distressed

HFRI Emerging Markets



Barclays Gov't/Credit

HFRI RV: ConvertArb

28.59% 55.86% 18.02% 13.37% 12.10% 39.36% 18.89% 21.04% 24.26% 24.92% 6.09% 29.33%

HFRI Equity Hedge

HFRI Equity Hedge

HFRI EH: Eq Mrkt Ntrl

HFRI ED: Distressed

HFRI RV: ConvertArb

HFRI ED: Distressed


HFRI Equity Hedge

HFRI ED: Distressed

HFRI Macro HFRI MacroHFRI Emerging

Markets

15.98% 44.22% 14.56% 13.28% 9.05% 29.56% 18.42% 10.60% 15.94% 11.11% 4.83% 20.29%


HFRI Fund Wghtd Comp

HFRI RV: ConvertArb

HFRI Event-Driven

HFRI Macro S&P 500HFRI Event-

DrivenHFRI Fund

Wghtd CompS&P 500

HFRI Equity Hedge

HFRI ED: Merger Arb

HFRI Relative Value

12.00% 31.29% 14.50% 12.18% 7.44% 28.67% 15.01% 9.30% 15.78% 10.48% -5.36% 12.76%


HFRI FOF Composite

HFRI Relative Value


HFRI Relative Value

HFRI Event-Driven

S&P 500HFRI ED: Distressed

HFRI Event-Driven

HFRI FOF Composite


HFRI Equity Hedge

8.30% 26.47% 13.41% 10.36% 5.44% 25.33% 10.86% 8.27% 15.33% 10.25% -5.93% 12.05%

HFRI RV: ConvertArb

HFRI Event-Driven



HFRI ED: Distressed

HFRI MacroHFRI Fund

Wghtd CompHFRI FOF Composite

HFRI ED: Merger Arb


HFRI Relative Value

HFRI Event-Driven

7.77% 24.33% 13.27% 9.40% 5.28% 21.42% 9.03% 7.49% 14.24% 9.96% -18.04% 9.90%

HFRI ED: Merger Arb

S&P 500HFRI Equity

HedgeHFRI Relative

ValueHFRI Emerging

MarketsHFRI Equity

HedgeHFRI Equity

HedgeHFRI Event-

DrivenHFRI Fund

Wghtd CompHFRI Relative

ValueHFRI Fund

Wghtd CompHFRI ED: Distressed

7.23% 21.03% 9.09% 8.92% 3.70% 20.54% 7.68% 7.29% 12.89% 8.94% -19.02% 9.70%

HFRI Macro HFRI MacroHFRI Event-

DrivenHFRI Macro

HFRI FOF Composite


HFRI FOF Composite

HFRI MacroHFRI Relative

ValueBarclays

Gov't/CreditHFRI FOF Composite


6.19% 17.62% 6.74% 6.87% 1.02% 19.55% 6.86% 6.79% 12.37% 7.75% -21.36% 9.46%

HFRI Relative Value

HFRI ED: Distressed




HFRI FOF Composite

HFRI Relative Value

HFRI ED: Merger Arb

HFRI RV: ConvertArb

HFRI ED: Merger Arb

HFRI Event-Driven

HFRI ED: Merger Arb

2.81% 16.94% 4.98% 6.71% 0.98% 11.61% 5.58% 6.25% 12.17% 7.05% -21.82% 7.29%


HFRI Relative Value

HFRI FOF Composite


HFRI ED: Merger Arb

HFRI RV: ConvertArb

HFRI MacroHFRI EH: Eq

Mrkt NtrlHFRI Equity

HedgeHFRI Event-

DrivenHFRI ED: Distressed

HFRI FOF Composite

2.62% 14.73% 4.07% 4.62% -0.87% 9.93% 4.63% 6.22% 11.71% 6.61% -25.20% 5.36%

HFRI Event-Driven

HFRI RV: ConvertArb

HFRI ED: Distressed

HFRI FOF Composite


HFRI Relative Value


HFRI Relative Value

HFRI FOF Composite

S&P 500HFRI Equity

HedgeS&P 500

1.70% 14.41% 2.78% 2.80% -1.45% 9.72% 4.54% 6.02% 10.39% 5.49% -26.65% 3.19%

HFRI ED: Distressed

HFRI ED: Merger Arb

HFRI MacroHFRI ED:

Merger ArbHFRI Event-

DrivenHFRI ED:

Merger ArbHFRI EH: Eq

Mrkt NtrlS&P 500 HFRI Macro

HFRI RV: ConvertArb

HFRI RV: ConvertArb

HFRI Macro

-4.23% 14.34% 1.97% 2.76% -4.30% 7.47% 4.15% 4.91% 8.15% 5.33% -33.71% 1.27%

HFRI FOF Composite


S&P 500HFRI Equity

HedgeHFRI Equity

HedgeBarclays

Gov't/CreditHFRI ED:

Merger ArbBarclays

Gov't/CreditHFRI EH: Eq

Mrkt NtrlHFRI EH: Eq

Mrkt NtrlS&P 500


-5.11% 7.09% -9.09% 0.40% -4.71% 5.07% 4.08% 2.55% 7.32% 5.29% -36.99% 0.59%




S&P 500 S&P 500HFRI EH: Eq

Mrkt NtrlHFRI RV:

ConvertArbHFRI RV:

ConvertArbBarclays

Gov't/CreditHFRI ED: Distressed



-32.96% -2.40% -10.71% -11.85% -22.09% 2.44% 1.18% -1.86% 4.07% 5.08% -37.26% 0.12%

Source: HFR Global Hedge Fund Industry Report – Second Quarter 2009, YTD 2009 Returns through June 30th, 2009

Fund of Hedge Funds


What is a Fund of Fund?

Fund of Funds

Strategy 1

Strategy 2

Strategy 3

HF HF

HF

HFHF

HFHF

HFHF


Benefits of Fund of Funds

• One-stop shop for hedge fund managers and strategy diversification

• Less expensive than building a direct and diversified portfolio in-house which requires dedication of time and staff

• Skilled and experienced staff dedicated to sourcing managers and performing comprehensive investment and operations due diligence, analysis and monitoring

• Risk management overlay to monitor portfolio exposures by asset classes, geography, market cap and leverage and to perform stress tests and scenario analysis

• “Liquidity pooling” allows for greater liquidity and flexibility for reallocation between strategies than direct investments

• “Termination risk” is absorbed at the fund-of-fund level adding liquidity while limiting the likelihood for exposure imbalances when unwinding direct investments with staggered liquidity

• Enhanced returns due to the inheritance of the high-water marks in their underlying managers in 2009


What Other Say About Fund-of-Funds

Barclays Capital Fund of Funds Overview, January 2009

For institutions investing less than $500M in hedge funds, Fund of Hedge Funds provide a valuable service that is not easily replicated without substantial investments in people, infrastructure, and

processes.

AIMA’s Roadmap to Hedge Funds, November 2008

Manager selection has become more difficult as well as labor-intensive over time, this despite the whole industry becoming more transparent and more information being available. A couple of years ago, a

fund of funds would have argued that his value proposition was based on generating “alpha.”

Today, the value-added of a fund of funds manager is probably better described as offering a laborious service at a lower cost than could otherwise be obtained by the investor directly.


Fund of Funds in 2008

Funds of funds demonstrated the following during the 2008 bear market:

• exposed asset-gathering firms who over-promised liquidity

• managed through the crisis without the need for a government bail out

• manager diversification worked

• capital was preserved better:

HFRI FOF S&P 500 Goldman Sachs

Cmmdty

S&P REIT S&P 500 Financials

S&P Listed Private Equity

Total Return -21.4% -37.0% -38.3% -49.4% -57.0% -64.2%

Return needed to recover loss

27% 59% 62% 98% 132% 179%

New Hedge Fund Era


State of the Markets

The markets today:

• Market volatility spiked in the last half of 2008. Many hedge fund managers mismanaged (or failed to manage) this volatility

• Credit is no longer cheap. Hedge fund strategies that rely on leverage for returns stopped working for investors

We anticipate the following changes will be prominent in the New Hedge Fund Era:

• Recognition that low volatility does not equate with alpha but, rather, entails liquidity and pricing risks

• Migration to lower leverage strategies where the ROA of investments is sufficient to achieve the ROE for investors

• Preference for managers that are large enough to survive as institutions, yet small enough to retain an entrepreneurial culture and commercial focus

• Greater attention to managers adding value from alpha through security selection versus through sector market timing or leverage


The Future for Hedge Funds

We anticipate the following changes will be prominent in the New Hedge Fund Era (continued):

• Greater regulation of opaque and illiquid markets that previously were dominated by hedge funds (derivatives, CDS, structured products and OTC trading)

• May lead to more “legitimacy” of hedge funds in eyes of the public as hedge funds become more regulated

• At the end of 2008 there was a shift in negotiating power from hedge funds to their clients and prime brokers

• Expect hedge funds to more closely align their withdrawal terms with the underlying liquidity of the markets they trade

• Hedge fund terms:

Old Era New Era

Management Fees 2% 0.5% to 1.5%Incentive fees 20% 10% to 20%Hurdle rate No PerhapsHigh-water mark Modified IntactClawback No PerhapsLockup period 3 or 5 years 1 to 2 yearsDisclosure Limited DetailedDialogue Infrequent More Frequent


Disclosure / Disclaimer

Dorchester Capital Advisors, LLC is the General Partner of Dorchester Capital Partners, LP (“DCP”), Dorchester Capital Partners Select Opportunities, LP (“DCPSO”), Dorchester Capital Partners III, LP (“DCP III”), Dorchester Capital Partners Global, LP (“DCPG”), Dorchester Capital Partners Low Volatility, LP (“DCPLV”), and Dorchester Capital International Retirement Plan, Ltd (“DCIRP”). Dorchester Capital Advisors, LLC (“DCA”) is the investment manager for Dorchester Capital International Retirement Plan, Ltd (“DCIRP”). Dorchester Capital Advisors International, LLC is the Investment Manager of Dorchester Capital International, Ltd (“DCI”), and Dorchester Capital International Select Opportunities, Ltd (“DCISO”). Dorchester Capital Advisors, LLC (“DCA”) and Dorchester Capital Advisors International, LLC (“DCAI”) are collectively referred to as “Dorchester”. This presentation is not intended to be a risk disclosure document and should be read in conjunction with offering and subscription documents (collectively, the “Documents”) for DCP, DCPSO, DCP III, DCPG, DCP LV, DCIRP, DCI, and/or DCISO, each referred to as the “Fund” or collectively referred to as the “Funds.”

The indices included in this presentation are disclosed to allow for comparison of the Fund’s performance to that of well-known and widely recognized indices.

The S&P 500 (dividends included) is an index of common stock prices and is generally considered representative of the U.S. stock markets.

The Barclays Aggregate Bond Index is comprised of approximately 6,000 publicly traded bonds including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an approximate average maturity of 10 years.

The HFRI Monthly Indices (“HFRI”) are equally weighted performance indices and represent a database of over 1,000 funds. The HFRI are broken down into 37 different categories by strategy. Funds included in the HFRI must report monthly returns net of all fees and report assets in USD. There is no required asset-size minimum or required length of time a fund must be actively trading before inclusion in the HFRI. Trailing 4 months are left as estimates and are subject to change. Performance prior to that is locked and no longer subject to change. The HFRI are updated 3 times a month. We have selected the HFRI indices which include onshore funds only.

Some information contained in this presentation is from third-party sources and believed to be reliable. However, Dorchester does not guarantee the accuracy or completeness of such information.

This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities, units or interests in any Fund. In making decisions to invest in a Fund, prospective investors should rely solely upon their independent investigation, including a review of the Documents. Neither Dorchester nor any of its affiliates, employees or agents are authorized to make (or, through the information in this presentation, are making) any representations or warranties inconsistent with or in addition to those contained in the Documents.

Prospective investors must review the actual Documents for complete information as to the rights and obligations of an investor. Certain historical numbers are included in this document; however, no representation is made that an investor will or is likely to achieve results similar to those shown herein, as such, results may vary. No assurance can be given that the objectives of Dorchester or any of its Funds will be achieved.

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INHERENT IN ANY INVESTMENT IS THE RISK OF LOSS.

Dorchester Capital Advisors, LLC is the General Partner of Dorchester Capital Partners, LP (“DCP”), Dorchester Capital Partners Select Opportunities, LP (“DCPSO”), Dorchester Capital Partners III, LP (“DCP III”), Dorchester Capital Partners Global, LP (“DCPG”), Dorchester Capital Partners Low Volatility, LP (“DCPLV”), and Dorchester Capital International Retirement Plan, Ltd (“DCIRP”). Dorchester Capital Advisors, LLC (“DCA”) is the investment manager for Dorchester Capital International Retirement Plan, Ltd (“DCIRP”). Dorchester Capital Advisors International, LLC is the Investment Manager of Dorchester Capital International, Ltd (“DCI”), and Dorchester Capital International Select Opportunities, Ltd (“DCISO”). Dorchester Capital Advisors, LLC (“DCA”) and Dorchester Capital Advisors International, LLC (“DCAI”) are collectively referred to as “Dorchester”. This presentation is not intended to be a risk disclosure document and should be read in conjunction with offering and subscription documents (collectively, the “Documents”) for DCP, DCPSO, DCP III, DCPG, DCP LV, DCIRP, DCI, and/or DCISO, each referred to as the “Fund” or collectively referred to as the “Funds.”

The indices included in this presentation are disclosed to allow for comparison of the Fund’s performance to that of well-known and widely recognized indices.

The S&P 500 (dividends included) is an index of common stock prices and is generally considered representative of the U.S. stock markets.

The Barclays Aggregate Bond Index is comprised of approximately 6,000 publicly traded bonds including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an approximate average maturity of 10 years.

The HFRI Monthly Indices (“HFRI”) are equally weighted performance indices and represent a database of over 1,000 funds. The HFRI are broken down into 37 different categories by strategy. Funds included in the HFRI must report monthly returns net of all fees and report assets in USD. There is no required asset-size minimum or required length of time a fund must be actively trading before inclusion in the HFRI. Trailing 4 months are left as estimates and are subject to change. Performance prior to that is locked and no longer subject to change. The HFRI are updated 3 times a month. We have selected the HFRI indices which include onshore funds only.

Some information contained in this presentation is from third-party sources and believed to be reliable. However, Dorchester does not guarantee the accuracy or completeness of such information.

This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities, units or interests in any Fund. In making decisions to invest in a Fund, prospective investors should rely solely upon their independent investigation, including a review of the Documents. Neither Dorchester nor any of its affiliates, employees or agents are authorized to make (or, through the information in this presentation, are making) any representations or warranties inconsistent with or in addition to those contained in the Documents.

Prospective investors must review the actual Documents for complete information as to the rights and obligations of an investor. Certain historical numbers are included in this document; however, no representation is made that an investor will or is likely to achieve results similar to those shown herein, as such, results may vary. No assurance can be given that the objectives of Dorchester or any of its Funds will be achieved.

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INHERENT IN ANY INVESTMENT IS THE RISK OF LOSS.

DORCHESTER CAPITAL ADVISORS, LLC11111 Santa Monica Boulevard, Suite 1250

Los Angeles, California USA 90025Attn: Kelsey Quane

+1.310.402.5090 [email protected]

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