capital markets i t i review€¦ · employees to the presidio team. jackson crowther, kathleen...

WINTER IS COMING1

They say there is no religion on Wall Street. We respectfully disagree. After every financial disaster investment advisors line up at the confessional to admit their sins and ask for forgiveness. Clients, playing the part of the priest, absolve the advisor and tell him to go forth and sin no more. In the dotcom era the sin was buying stocks valued on nothing more than a story and the number of eyeballs on an internet page. In the wake of the Financial Crisis advisors had a laundry list of trespasses, among them the mortal sin of overindulgence in illiquid investments. Many clients, perhaps feeling somewhat complicit, forgave their advisors after extracting a pledge to reconstitute their investment programs going heavy on liquidity and light on all the asset classes that got them in trouble—mainly hedge funds, real estate and private equity. As we mark the fifth anniversary of the trough in the equity markets (the S&P 500 hit 666 on March 6, 2009), it appears that Wall Street and its clients have not just forgiven but forgotten their most recent sins. Private equity is even more popular today than in 2007, while hedge fund assets under management are at an all-time high. Meanwhile, every quarter brings new headlines about pension fund and endowment fiduciaries cutting their public equity and bond allocations to fund new alternative investments. We recognize that these asset classes can serve a useful purpose in an investor’s portfolio if used properly. Our concern is that in the current environment they are being asked to perform functions for which they are not well suited. It worsens matters that this is happening at a time when most private equity and hedge funds face a mediocre opportunity set. Why, then, are investors once again rushing to alternatives only a few years after some of the most prominent endowments were auctioning off their private

CAPITAL MARKETS

Volume 10, Issue 1, April 2014

REVIEW

FIRM NEWS

WINTER IS COMING

MARKET OVERVIEW

FIXED INCOME

EQUITIES

ALTERNATIVES

CHARTS

IN THIS ISSUE

1

5

6

7

8

10

Executive Chairman Brodie Cobb is now Head of Presidio’s Auto and Truck Investment Banking Group. When Cobb founded The Presidio Group in 1997, it was one of the first investment banks to focus on transactions in the automotive retail sector. To date, the firm has closed more than $2.5 billion in dealership transactions.

Presidio* acted as the exclusive financial advisor to AutoAlert, Inc. on its recapitalization led by Palo Alto, California‐based HGGC, a middle market private equity firm. AutoAlert is a leading and rapidly growing provider of data mining and analytics software‐as‐a‐service (SaaS) solutions to over 1,700 automotive retail dealerships and auto groups in the U.S. Presidio organized and ran the financing and sales process including drafting the offering materials, contacting potential investors and negotiating the transaction, definitive agreements and closing.

We are proud to report as of Q1 2014 our AUM has grown to $4.2B.

This quarter we welcomed four new employees to the Presidio Team. Jackson Crowther, Kathleen Kalu and Monica Garrotto joined the Capital Advisor’s Client Service team, while the Cloud Technology group welcomed associate Wyatt Millar.

1 Motto of House Stark from Game of Thrones

*The Presidio Group’s corporate advisory activities are

performed through its subsidiary Presidio Merchant Partners LLC. Member FINRA, SIPC

Source: PIMCO

Hedge Funds

High Yield

ABS, CMBS

Mortgages, Corporates

Cash

substitutes — designed to generate the mid-single digit returns investors used to expect from bonds but without the sensitivity to interest rates. These pitches may raise the eyebrows of investors who remember how hedge funds were marketed before the financial crisis, when the typical objective was to achieve “equity-like returns with bond-like risk.” Back then, hedge funds were a tantalizing proposition for investors who had seen their equity portfolios sink 40% in the dotcom implosion. Unfortunately, as we pointed out in our 2012 white paper on the industry, hedge funds broadly have failed to live up to the expectations that they laid out in their marketing pitches. Most have not achieved equity-like returns, and only a tiny elite have met the 15-20% return objective

that featured in the typical hedge fund presentation of the early 2000s. Perhaps the only objective on which hedge funds have generally delivered is achieving “bond-like” volatility.

equity holdings while high net worth families were pleading with their hedge fund general partners to honor redemptions? The Federal Reserve seems to be responsible for engineering this mass psychosis. What started as a simple exercise to get investors out of cash and into riskier assets has now gone to an extreme. A few years ago, PIMCO used a set of concentric circles (see previous page) to illustrate how the Fed’s interest rate manipulations might impact risk appetites for bonds. Today we can grade this Fed policy an unequivocal success. In effect, our Central Bank has penalized savers by making it economically painful to keep their money in a savings account. With inflation running at 2% and cash yielding bupkis, the math is simple: cash holders have been losing spending power every year. So conservative investors at first tiptoed and then ran to relatively safe investment grade corporate bonds and government-backed mortgages that offered a yield better than cash. As yields for those securities declined (the prices went up) and intrepid investors gained confidence, they continued to move out on the risk spectrum into asset-backed and junk bonds. This massive shift of capital into the bond markets pushed yields to the absurdly low levels where we find ourselves today (see table).

It is no surprise that institutional investors who generally need a return of 6%-8% to keep up with their liabilities and distributions are once again casting about for higher return opportunities. As our yield table highlights, every dollar allocated to fixed income makes achieving the return hurdle more difficult. Hedge fund salespeople have taken note of which way the wind is blowing and have adapted their pitchbooks accordingly. Today, many funds are pitched as fixed income

PAGE 2

Source: IR&M, Hedge Fund Research (CAGR: Compound Annual Growth Rate)

Growth of assets under management (200-Q3 2012)

Source: Hedge Fund Research, Bloomberg

Barclays US Aggregate

Bond

S&P 500

HFRX

Absolute Return

HFRX Equity Hedge

-1%

2%

5%

8%

2% 4% 6% 8% 10% 12% 14% 16%Std Deviation

Re

turn

April 2005—March 2014

Source: JP Morgan

Sector Yield 3/31/2014

2-Year Treasury 0.44%

5-Year Treasury 1.73%

MBS 3.11%

ABS 1.90%

Corporates 3.10%

High Yield 5.23%

In other words, the average hedge fund investor has lost money slowly. If hedge funds failed to meet their original goals, what gives investors confidence that they will live up to their reconstituted targets? On the question of whether hedge funds will match bond returns—even at today’s rock-bottom yield levels—only time will tell. However, even if hedge funds do manage to satisfy these diminished expectations, the experience is unlikely to be a happy one for investors. This is because in swapping bonds for hedge funds investors are taking on a whole new set of risks. To start, most hedge fund strategies are considerably less liquid than bonds. Moreover, while they may exhibit bond-like volatility in normal markets, hedge funds often have hidden “left tail” exposures that only become apparent during periods of market stress. The allocators who are switching from fixed income to hedge funds may find they sorely miss their plain vanilla bonds in the next crisis. A similar phenomenon is occurring with equities, as this modified version of the concentric circle

graphic illustrates (below left). Investors’ love affair with stocks during the bull market of the past five years has been a bittersweet one. Many were emotionally scarred by the traumatic events of 2008, when indices fell anywhere from 40-60%. When it came time to put money back to work in equities investors did so cautiously at first, by concentrating in high dividend paying stocks. Gradually, as fears of a double dip recession in the United States and a sovereign/banking crisis have faded, investors have grown more comfortable with cyclical stocks. Hedged equity funds have

also attracted interest on the theory that they could make money from both their longs and shorts. Nevertheless, with US stock valuations rising above their long-term averages allocators have found it increasingly difficult to argue that public equities will allow them to meet their actuarial return targets. Filling the vacuum is a new breed of private equity firm that has successfully raised multi-billion dollar funds. Many of these funds have guided return expectations down, to less than the15-20% numbers commonly seen during previous marketing cycles. While typically not in print, in conversation we have heard from many General Partners that their clients would be happy to earn 8-12%.

Source: PIMCO, adapted by Presidio

Source: Credit Suisse

Number of active private equity firms


Number of private equity-backed companies

Private Equity

Long/Short HFs

Cyclicals

High Dividend Stocks

Cash

So how do allocators justify ramping up private equity exposure in this environment? In pitches by the General Partners of such funds, as well as presentations by big private equity allocators and GPs at various conferences, we have heard the following arguments in support of private equity: 1. Even a significantly reduced return is better

than the alternative. 2. Illiquidity is actually a benefit since it

prevents investors from buying high and selling low as public equity owners did in 2008.

3. It is uncorrelated with other asset classes. 4. As long as you diversify by vintage year,

strategy and geography private equity should always be part of the mix.

While point one may have some merit, we view the other arguments as condescending (#2), false (#3), and naïve (#4). Regarding the first point, whether private equity investors will be truly satisfied with a single digit return likely will be a function of its opportunity cost. If public equity returns are muted over the next decade and private equity

Even more impressive than the number of private equity firms and the all-time record in assets is the number of private equity-backed companies already in existence. The graph on the previous page suggests that there are nearly 7,000 companies owned by PE firms, itself a record. With so many businesses already in private equity hands, how many attractive takeover candidates remain for the newly raised PE assets to purchase? The current supply and demand dynamics make it difficult to argue that future returns for this asset class will be better than the historical numbers. Yet what kind of returns has private equity delivered in the past? Credit Suisse offers data that shed some light. Ignoring recent vintages for which it is too soon to tell, we see that early vintage (2000-2003) private equity did offer decent absolute and relative returns for the risk. This is likely because the competition for deals back then was a fraction of what it is today. Compared to the salad days of the private equity pioneers, at present there are nearly 2½ times the number of PE firms, 4½ times the amount of capital, and almost 3 times the number of companies already owned by PE firms.


Mature PE vintages consistently

exhibit outperformance over public

market equivalent returns Values > 1.0 indicate PE

outperformance on a net basis

Median PE Distributions-to-Paid-in-Capital (DPI) multiples by vintage year

PE Kaplan-Schoar Public Market Equivalent (PME) benchmark by vintage year

(Comparison of private equity performance to public market performance)

Funds raised in the past

decade have yet to return

100% of called capital

seemed to be heating up, Europe and Japan were showing signs of coming out of their long slumps, and the picture looked bleak for emerging markets, particularly those that had relied heavily on foreign capital to finance their booms. Opinions about where to invest given these conditions were also fairly uniform. Accelerating growth would be good for stocks and bad for bonds in the U.S. Steady recovery in the developed world and turmoil in emerging markets meant investors should own North American, European and Japanese stocks and avoid developing countries. The U.S. dollar was expected to continue appreciating against most of its counterparts. The major risks that most of the experts were looking out for were a 1990s-style financial crisis in one of the “Fragile Five1” emerging market countries and a sharp rise in interest rates in the United States. As it turns out, the consensus macroeconomic view was not far off for the first quarter of 2014. Growth in the U.S. and other developed countries has remained firm, while most emerging markets have continued to struggle. However, the conventional wisdom on how markets would behave was much less accurate. Stock markets in the developed world rose slightly, but trailed government bonds by a fairly wide margin in Q1. The U.S. dollar index oscillated during the quarter but ended up where it had started. While the emerging market index declined, this was mainly driven by sharp losses in the two index members that are least reliant on foreign capital: China and Russia. The best-performing stock and currency markets in the world were in countries like India and Indonesia that had been on the short list of candidates for a financial crisis.

*** Three months of fresh statistics have done little to resolve the question of whether the U.S. economy is gathering steam or simply plugging along on its post-crisis growth path. The general tone of most economic data this year has so far been slightly weaker than expected, but there are many observers (including several decision makers at the Fed) who feel that inclement weather is the main culprit. Market participants seem similarly confused about when the Fed intends to begin raising short-term interest rates, a topic on which new Fed Chair Janet Yellen and her colleagues have offered somewhat contradictory views.

outperforms over the holding period, today’s decision-makers may ultimately be satisfied with their allocation. Yet given the illiquidity of the asset class, committing money to private equity today reduces any ability to change course or take advantage of future, unknown opportunities. Viewed in conjunction with the concurrent shift from fixed income to hedge funds, the move from public to private equity is likely to end badly, with investors lamenting the higher fees and opportunity costs of tying up their capital in a period of expensive valuations. As in the mid-2000s, when markets were benign, outlooks were rosy, and liquidity was plentiful, it is hard to see the looming risks created by these trends in institutional asset allocation. But much like the turkey who lives a grand life for 364 days of the year and believes the fourth Thursday of November will be a day like any other, we are all living with them — whether we realize it or not. We argue for caution. Hedge funds are not replacements for fixed income. Most illiquid strategies are not currently commanding sufficiently large return premiums to compensate for the added risk. Cash, today’s favorite whipping boy, will certainly be much appreciated when future opportunities arise. With apologies to non-viewers of Game of Thrones, “winter is coming.”

MARKET OVERVIEW We have said this before, but it bears repeating: most investors should ignore macroeconomic headlines and instead focus on the prices that they pay for assets. Macro variables like GDP growth, inflation and exchange rates are devilishly hard to predict, and the data points that CNBC and Fox Business plaster on the screen are often noise rather than meaningful indicators of the direction of the economy. Most of us would be better off tuning out the latest statistical release and concentrating instead on whether the assets we own are priced to weather adverse surprises and deliver acceptable returns over the long term. The first quarter of 2014 is a good illustration of the futility of focusing on economic headlines. As we pointed out in our last commentary, coming into the year there was broad consensus about where the global economy was heading. The U.S.

3. Brazil, India, Indonesia, South Africa and Turkey

that bond investors were fairly relaxed about the accession of new Fed Chair Janet Yellen. Dr. Yellen’s predecessors were not nearly as fortunate—10-year yields spiked nearly 50 basis points when outgoing Chair Ben Bernanke took over in the first quarter of 2006, and Alan Greenspan’s first quarter on the job in the summer of 1987 saw yields spike from 8.4% to 9.6%. Market reaction was also relatively subdued when Yellen suggested in her first press conference as FOMC Chair that the Fed might start hiking short-term interest rates “something around the order of around six months” after it ends its bond purchases. Both this statement and the projections of the path of Fed funds rates that the individual Fed members submitted as part of their March policy statement were more aggressive than markets had previously been pricing in. Unlike last year, however, bond investors have grown less skittish in their reactions to new information about the Fed’s intentions. Interest rates rose only modestly in the final weeks of the quarter. Three main forces provided tailwinds to the bond markets over the past quarter. The first was a series of disappointing economic statistics, including the payroll report released in early January which registered only 74,000 job gains, compared to a consensus estimate of about 200,000. Many observers continue to believe that the recent weak indicators are a temporary phenomenon created by a severe winter, but a string of below-consensus numbers has created some unease.

Despite the cloudy outlook, most markets around the world do not seem priced cheaply enough to shrug off negative surprises. Government bonds in all but a few countries sport real interest rates below 1.5%, which is well below the long-term historical average and provides investors with little cushion against rising inflation or tighter monetary policy. Credit spreads have sunk nearly to the all-time low levels of the mid-2000s, and all-in yields on junk bonds are lower than in 2006. Global equity markets—with some exceptions—look expensively priced on nearly every valuation metric except for those which compare stock market yields with those of bonds. As we pointed out last quarter, years of steadily rising prices and muted volatility seem to have dulled investors’ fear of losing money. This set of conditions argues for caution, and most of our managers remain as conservatively positioned as they were to start the year.

FIXED INCOME The much-anticipated next leg down in global bond prices failed to materialize in the first quarter of 2014, as all sectors of the bond market posted robust returns. Having begun to trim its $85 billion monthly bond purchasing program at the end of last year, the Fed proceeded with further reductions at its January and March 2014 meetings. Because the pace of tapering over the past few months has been entirely consistent with market expectations, Treasury and mortgage markets have taken the withdrawal of quantitative easing in stride. The decline in 10-year Treasury yields from just over 3% to 2.7% during the first quarter suggests

Fed Chair Janet Yellen

Source: St. Louis Federal Reserve

Fed Target

The second force that has kept a lid on interest rates is low inflation. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures deflator excluding food and energy (Core PCE), has continued drifting downward to a 1.1% annual rate, almost a full percentage point lower than the central bank’s stated target. With recent employment reports showing no upward pressure on wages, there have been some calls for the Fed to act more forcefully to bring inflation closer to target, either by announcing a commitment to keep rates at zero indefinitely or by halting its tapering of quantitative easing. The third force that appears to have suppressed interest rates in the early months of the year is geopolitical tension. 10-year Treasury yields reached their lows in early March when the confrontation between Russia and Ukraine was at its most acute. Other traditional safe haven assets, like gold and German bunds, also saw strong demand in the first quarter. Municipal bonds benefited from favorable supply/demand dynamics and posted healthy gains. Issuance during the quarter declined by 25% with respect to the same period in 2013, and last year’s relentless outflows from municipal bond mutual funds turned into modest inflows during the early months of 2014. Like the Treasury curve, the municipal yield curve flattened significantly during the past three months, which played into the hands of value-oriented investors such as Presidio’s core municipal bond manager. In recent years, the 5-year belly of the municipal bond curve has attracted large flows from investors with intermediate maturity mandates. This has created a significant gap in value between 5-year municipals, which yield about 73% of comparable Treasuries, and 10-year municipals, which yield over 90% of 10-year Treasuries. During Q1 2014, 5-year municipal yields ticked up slightly while 10- and 15-year yields declined by 26 and 30 basis points respectively. Our manager, who owns some longer-dated bonds and has minimal exposure to the 5-year segment, profited from these market dynamics.

EQUITIES To the casual observer, the trends that drove global equity markets during 2013 may appear to have remained largely in place during the first quarter of 2014. Global share prices rose, albeit

more slowly and with more volatility than in the second half of last year. U.S. stocks continued to outpace their international counterparts, while emerging markets were once again the laggards. However, a closer look at recent market action suggests that many of last year’s most popular trades are losing momentum, while some of the most reviled segments of the global equity markets are beginning to show signs of life. Mean reversion is making a comeback, as illustrated by the following examples:

Biotechnology stocks. The Nasdaq Biotechnology Index (NBI), which was up over 60% in 2013, peaked in late February having notched an additional 20% year-to-date gain. The index plunged by more than 13% during the final weeks of the quarter and has continued to fall sharply in the early days of April. Even after this decline the NBI trades at 7.5 times book value, well in excess of its late-1990s peak valuation of 6 times book.

Dividend-payers. Stocks with high dividend yields were among the worst performers during the second half of 2013, as the prospect of rising interest rates spoiled investors’ appetite for income. Aversion to interest rate-sensitive stocks proved short-lived, however, and dividend-paying stocks led the markets in the first quarter of 2014. The S&P 500 utilities index was up 10.1%, while the NAREIT index rose 8.5%.

The Fragile Five. This term was coined last year as shorthand for the group of emerging market countries that seemed most vulnerable to tightening U.S. monetary policy. Brazil, India, Indonesia, South Africa, and Turkey all face relatively high inflation and slow GDP growth and have relied on foreign capital inflows to finance their current account deficits. All five produced losses for U.S. dollar-based investors in 2013, and most continued to struggle in the early weeks of this year. This changed dramatically during the quarter, and by the end of March every member of the Fragile Five was in positive

territory. Indonesia gained 21% in U.S. dollar terms in Q1, while India rose over 8% and even relative laggard Brazil managed to beat the U.S. with a first quarter return of 2.8%.

The Japanese Reflation Trade. No major equity market performed as strongly in local currency terms last year as Japan’s, where the radical monetary policies of Prime Minister Shinzo Abe showed signs of reversing deflationary dynamics. Even after taking into account the 18% depreciation in the currency produced by Abe’s policies, Japanese stocks were up over 27% last year in U.S. dollars. During the first quarter of 2014 Japan struggled with weaker growth and fears that an impending consumption tax hike would stifle the recovery. Global equity investors’ enthusiasm for “Abe-nomics” waned and Japanese stocks ended the quarter down 5.5% in U.S. dollar terms, making them the worst performer among developed markets.

Compared to last year’s difficult conditions, this type of market environment has been much more favorable for Presidio’s active equity managers. Nearly all have outperformed so far in 2014, some by very wide margins. Broadly speaking, our managers benefited from their avoidance of richly valued segments of the market—like U.S. biotech stocks—that experienced sudden reversals in Q1.

Because most markets rose only modestly for the quarter our managers’ large cash holdings were less of a drag on performance than they were last year. In some cases managers with large cash reserves were able to take advantage of periods of weakness to initiate new positions. Some also benefited from their decisions to buy stocks in sectors or geographies that fell out of favor last year, such as REITs, utilities and companies with significant exposure to emerging markets.

ALTERNATIVE INVESTMENTS One of the most visible trends in the alternative investment industry over the past few years is the launch of a raft of “40 Act hedge funds.” These are vehicles that pursue strategies that have traditionally been associated with hedge funds—such as long/short equity, managed futures or currency trading—in a tightly regulated mutual fund with daily liquidity and no performance fees. A quick search on Morningstar yields 1255 “alternative” funds as of early 2014, a number that shrinks to about 270 once one drops funds with multiple share classes and those designed to provide simple leveraged or inverse exposures to broad market indices (e.g., the Rydex Russell 2000 2x strategy). Of these, less than half have track records going back to 2011, the last time we had anything resembling a proper bear market. Only 40 funds on the current list were in existence at the

beginning of 2008. Recognizing that we are dealing with a relatively small sample of funds with short track records, we thought it would be interesting to track the returns of the funds in the Morningstar database over the past several years, to assess how they have performed in both absolute terms and relative to their old-line 2 and 20 counterparts. The table on the previous page shows the results. Some conclusions from the data: 1. Like all hedge funds, 40 Act alternative funds

have on average delivered poor absolute returns over the full market cycle. Average annual returns since 2008 for the median fund are 1.4% net of fees.

2. However, 40 Act mutual funds have beaten their

LP counterparts (as measured by the HFRX Global Hedge Fund index) by almost 300 bps over this period. The outperformance is uniform across categories, as well (with the exception of managed futures funds, which have a relatively short history in the mutual fund format).

3. The typical 40 Act mutual fund does not appear

to have beaten its LP counterpart by taking more risk. Note the performance of long/short strategies. In 2011 the median fund among the 40 Act long/short mutual funds lost 1.7%, compared to a median loss for long/short LP funds of over 19%. Having lost less in 2011, long/short mutual funds have also proceeded to outperform on the upside during 2012-2013.

4. There appears to be little evidence that the tight

constraints under which 40 Act hedge funds operate have caused their performance to suffer, at least compared to the average mutual fund. Of course, the significantly lower fees of the mutual funds help offset this reduced flexibility.

5. While the mutual funds have outperformed over

the past several years, this does not mean that the strategies that all of them are pursuing are appropriate for daily liquidity vehicles. The growth of the sector over the past several years and the proliferation of complex strategies should give investors pause when considering these funds. While the small group of funds that existed in 2008 weathered the financial crisis reasonably well, it is difficult to predict what

conditions might look like now that alternative mutual funds control a significantly larger pool of assets.

The bottom line is that these retail hedge fund products do not appear to be objectively worse than traditional hedge funds with higher fees and more restrictive liquidity terms. As in the broader hedge fund universe, 40 Act hedge funds are a heterogeneous group comprised of a handful of genuinely talented managers and a larger group peddling cleverly disguised directional market exposure, which is not worth the fees. Presidio has spent limited time researching these funds because most of the hedge fund strategies that we believe offer attractive diversification and return potential are not appropriate for daily liquidity vehicles. We recognize that there are exceptions to this rule, however, and believe that a very small group of these funds may serve a useful role in the portfolios of investors who are unable or unwilling to invest in traditional LP hedge funds.

MARKET OVERVIEW AND HEDGE FUNDS

Graphs based on data from PerTrac Analytical Platform


PAGE 11

Hedge Fund indices are HFRI & HFRX

FIXED INCOME MARKETS


PAGE 12 EQUITY MARKETS

SAN FRANCISCO (415) 449 1050

DALLAS (214) 855 2200

www.thepresidiogroup.com

Monthly Return (net) is the change in value of all investment positions less all fund expenses including management fees and incentive

allocation. This quantity is divided by beginning Net Asset Value to state it on a percentage basis.

Barclays Capital Aggregate Bond Index is an unmanaged broad base index comprised of intermediate term, investment grade bonds including Treasury bills, Government agency bonds, mortgage-backed bonds, Corporate bonds, and foreign bonds. The index is

considered representative of the fixed income market as a whole.

Barclays U.S. TIPS is an unmanaged index comprised of U.S. Treasury Inflation Protected Securities with one or more years remaining

maturity with total outstanding issue size of $500mm or more and measures the performance of U.S. TIPS market.

Barclays Muni 1-yr is an unmanaged index comprised of investment grade, tax-exempt Municipal bond issues with maturities of one to

two years, and is considered representative of the short-term Municipal bond market.

Barclays Muni 5-yr is an unmanaged index comprised of 4-6 year duration, fixed-rate, intermediate-duration, tax-exempt bonds

representative of the municipal bond market of intermediate duration.

Merrill Lynch High Yield Master II Index is an unmanaged index that tracks the performance of below investment grade U.S.

dollar-denominated corporate bonds publically issued in the U.S. domestic market.

Citi Non-U.S. World Government Bond Index (Unhedged) is an unmanaged market capitalization-weighted index consisting of

government bond markets (except the U.S.) with remaining maturities of at least one year. The index is not hedged to the U.S. dollar.

JPMorgan GBI EM Index is an index comprised of emerging market government debt denominated in local currencies.

S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is

designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.

Dow Jones Industrial Average is a price-weighted average of the market value of 30 major U.S. corporations listed on the New York

Stock Exchange. It is considered to be indicative of the movement of the entire U.S. stockmarket.

Nasdaq Composite is a market cap-weighted index comprising of over 3,000 common equities listed on the Nasdaq stock exchange.

Russell 3000 represents approximately 98% of the U.S. equity market. The index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad equity market and is completely reconstituted annually to ensure new and growing equities are

reflected.

Russell 2000 is a market cap-weighted index that measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000, or 10% in total market-capitalization, of the smallest securities of the Russell 3000 based on a

combination of market cap and current index membership.

MSCI EAFE is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand,

Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI EM is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The index consists of the following 5 emerging market country indices: Brazil, Chile, Colombia,

Mexico, and Peru.

HFRI FOF Composite is a benchmark of hedge fund performance which is engineered to achieve representative performance of a larger

universe of hedge fund strategies that invest with multiple managers through funds or separate accounts.

HRFX Equity Hedge Index is a benchmark of hedge fund performance which is engineered to achieve representative performance of a

larger universe of hedge fund strategies that maintain both long and short positions primarily in equity and equity derivative securities.

HFRX Event Driven is a benchmark of hedge fund performance which is engineered to achieve representative performance of a larger universe of hedge fund strategies that maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, security

issuance or other capital structure adjustments.

HFRX Relative Value Arbitrage is a benchmark of hedge fund performance which is engineered to achieve representative performance of a larger universe of hedge fund strategies that maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. This includes a variety of fundamental and quantitative

techniques across equity, fixed income, derivative or other security types.

DEFINITION OF TERMS

These insights come from Presidio Capital Advisors LLC, a SEC-registered investment advisory firm and a subsidiary of The Presidio Group LLC. Past performance does not guarantee future results. The presentation of index data does not reflect a belief by the firm that the indices are comparable to any funds managed by Presidio’s managers. The data only provides some indication of the equities market during the relevant period. All information contained herein has been obtained from sources deemed to be reliable, but its accuracy and completeness is not guaranteed. This material is proprietary and is not allowed to be reproduced, other than for your own personal, noncommercial use, without prior written permission from Presidio.

©2014 The Presidio Group LLC.

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