Il processo di due diligence in un Fondo di Hedge Funds Centro di Studi Bancari Villa Negroni 18 giugno 2004 Dr. Massimo Scolari Zenit Alternative Investments

Zenit Alternative Investments Sgr Profilo della Società Zenit Alternative Investments Sgr è una Società del gruppo P.F.M. Finanziaria – Professional Fund Management. Zenit Alternative Investments Sgr è una Società di gestione di fondi comuni di investimento di tipo speculativo autorizzata dalla Banca d’Italia nell’agosto 2002 ed iscritta all’Albo delle Sgr n.149. Nel maggio del 2003 la Società ha avviato l’operatività del primo Fondo di Fondi Speculativo, Zenit Hunter, Fondo multistrategy low volatility. Nel maggio del 2004 la Società ha ottenuto l’autorizzazione della Banca d’Italia per l’avvio di un nuovo Fondo di Fondi Speculativo, Zenit Advanced Strategies, che amplia la gamma dei prodotti nell’ambito della gestione alternativa.

Summary Perché gli Hedge Funds falliscono? (pag.4) L’importanza del processo di due diligence (pag.6) Il nostro approccio (pag.13) Sound practises for hedge funds managers (pag.17) La due diligence di un fondo di hedge funds (pag.30)

Le cause dei fallimenti degli hedge funds Da una ricerca condotta da C. Kundro e S.Feffer (Capco) su un campione di 100 casi di fallimento è emerso che: Il 6% ha chiuso per il rischio di business Il 38% per scelte di investimento sbagliate Il 50% a causa di rischi operativi

Fallimenti e rischi operativi Il 41% dei fallimenti per rischi operativi ha avuto origine in false dichiarazione del gestore Il 30% per frodi e appropriazione indebita Il 14% per investimenti fuori dalle linee guida 6% per strumenti tecnologici inadeguati

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Fonte: Frank J. Travers Director of Research Cic Group, Inc.

Il nostro approccio: Considerazioni introduttive Il prospetto informativo (offering memorandum) Due diligence come processo continuo Il controllo incrociato delle informazioni Caratteristiche della comunicazione dei Nav Sound practises for hedge funds managers

Manager selection Fonti di informazione Database esterni Adviser Relazioni personali Articoli di stampa o siti specializzati

Processo di selezione Criteri oggettivi e soggettivi per l’inclusione nella Selection list Metodi di analisi quantitativa (risk report) Processo di analisi qualitativa (due diligence)

Due diligence Analisi dell’Offering memorandum e del sito internet della Società Questionario iniziale (informazioni mancanti) 1° Incontro (Junior) 2° Incontro (Senior) Controllo incrociato delle informazioni (fonti esterne) Confronto con l’analisi quantitativa Relazione al Comitato “Due diligence” e predisposizione di una scheda analitica del manager (qualitativa e quantitativa) Monitoraggio Nav (frequenza, timing, accuratezza) Monitoraggio Client report Proposta di investimento al Comitato Investimenti Visite periodiche di aggiornamento Reporting trimestrale al Comitato “Due diligence”

Sound practises for Hedge fund managers Il documento è pubblicato da Managed Funds Association (2003) Mfa raccoglie oltre 700 membri che gestiscono una significativa quota del mercato degli Hedge funds. Web: www.mfainfo.org

Sound practises for Hedge fund managers La politica di gestione ed i controlli interni, con partcolare riferimento ai parametri di rischio e al monitoraggio del trading Responsabilità nei confronti degli investitori Procedure per la corretta valutazione degli asset Risk management (measurement and monitoring) funzionale al rispetto degli obiettivi Controlli regolamentari e compliance Business continuity, disaster recovery

Management and internal controls Consistent with its investment mandate, a Hedge Fund Manager should define the investment objectives and risk parameters applicable to a Hedge Fund, and the trading policies and risk limits necessary to achieve these objectives, in accordance with the investment management agreement with the Hedge Fund. Suitably qualified personnel should be retained and adequate systems established (either internally or through outsourcing) to produce periodic reporting that permits the Hedge Fund Manager to monitor trading activities and operations as well as risk levels effectively. If third-party service providers perform key business functions (such as net asset value calculation or risk monitoring), they also should be subject to appropriate controls and review processes.

Attività di gestione e controlli interni Definizione degli obiettivi del Fondo e dei parametri di rischio Definizione delle strategie di trading e dei limiti di rischio compatibili Controlli interni sul rispetto della policy e dei limiti di rischio Allocazione del capitale del Fondo tra diversi manager. Controlli integrati sull’attività Terze parti: metodo di selezione e di monitoragio dell’attività (prime brokers, Fund Administrator, Valuation, Risk monitoring ecc.)

Monitoraggio del rischio La funzione di risk management deve essere istituita (interna o esterna) Esame dei rischi di mercato e della performance Scomposizione Esposizione a shock esogeni

2. Responsabilities to investors A Hedge Fund Manager should work together with the Hedge Fund so that investors are provided with information regarding the Hedge Fund’s investment objectives and strategies, as well as periodic summary performance information, in order to enhance the ability of investors to determine the appropriateness of an investment in the Hedge Fund.

3. Valuation policies and procedures A Hedge Fund Manager should determine policies for the manner and frequency of computing net asset value, or “NAV”, based upon GAAP (as defined below) and its management agreement with the Hedge Fund and seek to ensure that material aspects of those policies are appropriately disclosed. Such policies should establish valuation methods that are fair, consistent and verifiable, recognizing that investors may both subscribe and redeem interests in the Hedge Fund in reliance on such values. A Hedge Fund Manager should also develop policies for the manner and frequency of computing portfolio valuation for purposes of internal risk monitoring of the portfolio.

4. Risk monitoring Current market practice is to focus on three categories of risk that are measurable –“market risk,” “credit risk” (including sovereign risk) and “liquidity risk”. In addition a Hedge Fund Manager should seek to assess “operational risk” depending on its particular circumstances.

Funding Liquidity risk Funding liquidity is critical to a Hedge Fund Manager’s ability to continue trading in times of stress. Funding liquidity analysis should take into account the investment strategies employed, the terms governing the rights of investors to redeem their interests and the liquidity of assets (e.g., all things being equal, the longer the expected period necessary to liquidate assets, the greater the potential funding requirements) and the funding arrangements negotiated with counterparties such as prime brokers. Adequate funding liquidity gives a Hedge Fund Manager the ability to continue a trading strategy without being forced to liquidate assets when losses arise.

Leverage A Hedge Fund Manager should recognize that, although leverage is not an independent source of risk, leverage is important because of the magnifying effect it can have on market risk, credit risk and liquidity risk. Recognizing the impact that leverage can have on a portfolio’s exposure to market risk, credit risk, and liquidity risk, a Hedge Fund Manager should assess the degree to which a Hedge Fund is able to modify its risk-based leverage in periods of stress or increased market risk.

5. Regulatory and documentation controls A Hedge Fund Manager should seek to actively monitor and manage its regulatory responsibilities to ensure compliance with all applicable rules and regulations. A Hedge Fund Manager also should pursue a consistent and methodical approach to documenting transactions in order to enhance the legal certainty of its positions.

6. Disaster recovery and business continuity While the need to establish a functional disaster recovery and business continuity plan (“BCP”) is not unique to Hedge Funds, it is particularly important for a Hedge Fund Manager because the inability to carry out routine trading and risk monitoring functions (even on a very short-term basis) as a result of a disruption could result in large financial losses.

Funds of hedge funds Questionario Aima Background Information Product Information Performance Asset Allocation/Style Allocation Due Diligence/Manager Selection Portfolio Construction Risk Management Administration/Operations Client Information/Reporting Compliance/Legal

BACKGROUND information Company name: Address: Telephone: Fax: E-mail: Website: Name of contacts: Title of contacts: Telephone of contacts : E-mail of contacts:

Company Background Provide a history of the main business activities of the Company since inception with the most important milestones: Who were the founders of the Company? if they are no longer with the company, why did they leave?

Outline the intended future direction of the Company or Group (including activities outside the fund of fund business) What is the projected growth of assets under management and employees? What are the critical success factors in achieving the business plan? What is the firm’s peak capacity given the constraints of your strategy? Do you currently have any expansion plans (new funds, additional tranches)? How much money could be managed under the current trading methodology without being restricted by position limits?

Provide details of the firm’s current ownership structure and any changes in the last three years: Provide an organisation chart:

Staff information How many employees does the Company have? How many are employed in the fund of funds activity? Please split your current staff amongst the following activities, providing details of experience and tenure: ·     Portfolio Management ·     Fund Research & Due Diligence ·     Client Services · Operations

Explain any significant employee turnover: How does the Company attract new people? Provide a brief background of key personnel (education, professional background): Explain the compensation scheme for key personnel.

Asset management activities Does the firm conduct any other business than asset management in alternative investments? State the nature of those other businesses: Does the firm manage investments of other asset classes (incl. traditional assets), too? If so, explain: Does the firm manage funds of funds in different strategies? If so, describe: Which investor group does the firm primarily target? Provide a list of main clients (incl. size of assets, duration of client relationship):

What are the current assets under management? Show a breakdown of assets under management by:         - Client group - Strategy What is the greatest percentage of assets under management represented by any single and by the three largest clients?

Product information – General Provide a short description of all products (public and private, where disclosure possible) of the firm, e.g. fund of funds, advisory mandates, client portfolios, structured products, etc. Include at least:

Investment objective (including target return and target risk) Target investors Legal structure Asset allocation Number of funds in the portfolio Current size Date of inception Fee structure Conditions for Subscriptions and Redemptions

Provide a breakdown of assets under management by Fund including Investment Style; Inception Date; and targeted Risk/ Return: (Fund of fund business only) Does the Company apply leverage to some or all of its products? If so, please explain:

Performance Provide historical performance data for all products (in electronic form, where possible), including: Monthly returns Standard deviation (annualised) Three largest drawdowns and recovery periods Percentage of positive/negative months

Discuss the performance of each fund including any significant events or drawdowns. To what extent has performance varied from the targets? Describe the worst performing manager in which you have invested. Describe the reason for the poor performance & how it was dealt with: State which underlying fund was held for the shortest period of time as well as the duration & reason for this: State in which period performance is actual or pro forma (backtracked)? Is performance net of fees to the investor?

Asset allocation/ Style allocation Describe the firm’s asset allocation process: On what basis does the firm define and change the asset allocation of the portfolios? On what periodicity is the asset allocation of the portfolios reviews? For non-standard products, to what extent can the investor be involved in the asset allocation process? Do investment guidelines exist for all products? If so, please provide sample: How can the guidelines be altered?

Due diligence/ Manager selection On what principles are the firm’s due diligence process based? Describe in detail the firm’s due diligence process. Provide examples of reports and working papers, where available: Name the minimum requirements (killer criteria) a manager has to meet, if any, to pass the due diligence: Do you conduct on-site visits with the managers?

How much time is spent with each manager during the due diligence process? Before initial investment Every following year How many new managers do you analyse per year? In how many of the analysed managers do you finally invest? Do you carry out due diligence checks on the administrator or any other service provider to the target investee funds? If so, please describe: How many managers are currently on your approved list? How much capacity is available from managers on the approved list? Please provide breakdown by strategy:

Portfolio construction Explain the qualitative and quantitative criteria used in your portfolio construction process: State the average turnover of managers within the portfolios: Does the turnover of managers in different portfolios vary substantially? What are the main reasons for managers to be excluded from an existing portfolio?

Has a manager included in a portfolio of the firm ever gone out of business due to losses? If yes, what are the lessons learnt from that experience and how have they been applied to your business? Are portfolios transparent to the investor? How does the firm secure capacity with top class managers now and in the future? What is the competitive edge in the firm’s investment strategy? How sustainable is this competitive edge?

Risk management Does the company maintain a written risk management policy? If yes, provide a copy: What risk management concepts does the firm apply to its portfolios? Describe the firm’s quantitative risk management tools. Provide examples, where available: Does the firm apply leverage to some or all of its products? If so, please explain: Does the firm maintain a firm wide risk management system including operational, legal, reputational and business risks? If so, please describe:

Administration/ Operations Provide an overview of the process used for recording, settling and reconciling investments in underlying funds, including: A time schedule outlining key milestones in the investment process. The process used to record & confirm transactions with underlying funds. The settlement & clearing process used. The process used for independently calculating & reporting the NAV of both individual funds and the fund of fund overall.

Outline the major operational risks faced & the controls in place to monitor & manage these risks: If services are outsourced: Which tasks are fulfilled by external service providers (include names of companies? How long have the relationships with those service providers lasted? Has the firm ever terminated any service providers (including auditors)? If so, explain the circumstances. Provide a full description of fee arrangements with any service providers. Does any ownership or other legal relationship exist between any service provider & any other organisation stated in this document?

How often are estimated / final NAVs provided? Is the NAV of the Fund externally published (eg Bloomberg/Reuters)? Detail the valuation source & frequency (daily, weekly, monthly) of valuations for underlying funds. Are these valuations verified independently? Provide details of all bank accounts of the Fund.

Who is authorised to transfer funds from the custody account Who is authorised to transfer funds from the custody account? What controls are in place to ensure the funds are adequately safeguarded? Do you keep any cash on hand to meet liquidity needs? Describe the back-up and recovery facilities available to maintain the functioning of the business in the event of a major unforeseen event: (eg fire damage to main offices.)

Client Information/ Reporting What kinds of reports are sent to investors? Provide sample reports: Can investors receive customised reports? What is the periodicity of the reporting? Are audited reports available to the investor? Provide sample: Does the company publish regularly in the press? Provide sample: Has the company published or commissioned any research/academic papers? Provide samples:

Compliance/Legal Is the firm registered with any regulatory and/or supervisory bodies? When was the last inspection of those bodies? Provide details of any legal disputes (within the last 5 years) or litigation in which the Company and/or any of the Funds, Managers, Advisors, Custodian or any other company within the group is involved: Does the company have a full time compliance officer? Does the company have a written compliance manual? If yes, please provide a copy:

Provide a list of professional counterparties the firm maintains a business relationship with:       Custodians     Administrators       Legal advisors       Auditors       Banks       Distribution channels       External marketers Other important business partners

Detail any changes in any of the service providers above in the past 5 years, including reasons for the change Provide a summary of the current insurance arrangements of the company & a brief description of what that insurance covers: Outline the procedures in place to prevent money laundering activities – particularly associated with the receipt of subscriptions from investors: How does the firm ensure an alignment of interests between the firm, as fund manager, and the investor?

How much of the firm’s or the partners’ money is invested in the firm’s products? Are there any conflicts of interest of which the investor should be aware? Distribution of single manager funds? Consulting or brokerage arrangements with single manager funds? Brokerage arrangements?

Zenit Alternative Investments Sgr Via Privata Maria Teresa 7 20123 Milano Italy Web www.zenitalternative.it Tel +39.02.806071 Massimo Scolari m.scolari@zenitalternative.it