Investment Process

We operate a clearly defined and disciplined investment process, featuring two main elements quantitative and qualitative.

> Quantitative

We understand that most managers exhibit cyclicality in their own performance which is dependent on the underlying investment style of the manager. We use proprietary software in-house to give us a competitive advantage in terms of efficiently screening the entire offshore funds universe to identify those funds with the most consistent risk adjusted returns. We then undertake rigorous quantitative analysis on selected funds.

We collect data on over 600 "equity hedge" funds maintained on an in-house database of monthly numbers including unpublished data direct from the managers. The hedge funds are organised into distinct universes on our attribution software system.

We conduct our own unique screening system to identify those managers we wish to interview with regards to style, strategy, risk controls, quality of the company and infrastructure. A review of performance and operational efficiency is also carried out. Around 250 interviews take place annually, usually at the hedge manager's offices. We also meet with new hedge managers ahead of launch and those with limited track records.

> Qualitative

We seek managers that can generate alpha regardless of the direction of the markets and provide very attractive risk adjusted returns with low correlation to equity markets. Capital preservation is a key requirement and the fund is constructed to provide equity style returns with the risk of government bonds.

All of our selected hedge fund managers must have demonstrated exceptional skill previously at bottom up fundamental stock picking but had limited track records in managing hedge funds. We have known the majority of our hedge managers for over 5 years. Most of the short-listed funds have also been known to us for many years.

We conduct interviews with hedge managers and are aware how important the qualitative decision is in making investment decisions. The quantitative analysis section outlines how we access a manager's skill at stock picking, which in terms of performance history also implies market timing and asset allocation ability. We need to consider some of the other factors including the corporate structure of the hedge fund group, the quality of the service providers, the use of trade entry and risk management systems and reconciliation of trades.

We strive to meet with the COO or CFO of the business to ensure our hedge managers are 100% focused on stock picking and not managing the business. We only wish to invest with managers in a stable business structure and although we do have an institutional bias (as most talented managers in Europe have remained with their institutions) we do also hold some smaller, albeit highly successful, boutiques. The biggest risk is actually counterparty risk, which is normally assumed by prime brokers. We do take this into account when constructing portfolios as this is in effect a credit risk.

> Portfolio Construction

The quantitative and qualitative analysis provides a shortlist of up to 80 funds from which to construct a concentrated portfolio. We construct the portfolio based on our analysis of manager skill and the sustainability, persistence and consistency of returns. Therefore our highest conviction ideas will also tend to be the largest holdings in the portfolio.