Mutual Fund Directors Forum
November 28, 2012
Devin McCune, Head of Board Reporting and Compliance, Thomson Reuters
Laurie Thomsen, Independent Trustee, MFS Funds
Elizabeth Reza, Ropes & Gray LLP

Increasing Interest
• Both investors and sponsors have shown increased interest in registered “alternative” investment products
• Reasons
– Interest by retail investors in hedge funds and other alternative strategies
– Interest by institutions in transparency and liquidity
– Focus on absolute returns/uncorrelated returns
– Regulatory developments
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Alternative Fund Launches in Past Year
Alternative
Classification
Absolute Return
Long Short Equity
Managed Futures
Specialty Fixed
Income
Commodities
Extended US Large
Cap Core
Equity Market
Neutral
Dedicated Short
Bias
Currency
Equity Leveraged
New Launches
11/01/11-10/31/12
77
39
39
14
29
11
10
8
8
7
3
Total Number of
Funds
258
192
71
88
42
55
100
157
70
177
Percentage
Increase
30%
20%
55%
16%
145%
20%
10%
5%
11%
4%
Source: Lipper

• Absolute Return Funds
– Typically seek positive returns (generally above inflation) over a certain period/market cycle
– Generally has flexibility to “go anywhere”
Absolute Return Funds
Commodities
Precious Metals
Market Neutral
Indexing
Event
Driven
Currencies
Foreign
Securities
Hedging
REITs
Arbitrage
Dedicated Short Bias
Derivatives
Short Sale
Convertibles
Emerging
Markets
MLPs
4
Leverage
Managed Futures
Long/Short
Source: Lipper

Examples of Alternative Products (cont.)
• Long/Short Funds
– Typically achieve long and short exposure through short sales and/or derivative positions
– 130/30 funds use short sales to increase long exposure
Long Short Equity
Commodities Market Neutral
Indexing
Currencies
Hedging
Event Driven
Foreign Securities
Arbitrage
Dedicated Short Bias
Managed Futures
Derivatives
Leverage
Short Sale
Long/Short
Convertibles
Emerging Markets
Source: Lipper
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Examples of Alternative Products (cont.)
• Managed Futures Funds
– Aim to provide low correlation to stock and bond investments through investments in futures
– Focus of CFTC/NFA regulatory initiatives
Managed Futures Funds
Commodities
Indexing
Foreign Securities
Managed
Futures
Currencies
Leverage
Derivatives
Long/Short
Short Sale
Source: Lipper
MLPs
6
Emerging Markets

Examples of Alternative Products (cont.)
• Commodity Funds
– Capitalize on inflation fears and lower correlation to securities portfolios
– Regulatory Developments
• Amendments regarding registration
• Treatment of commodity subsidiaries
Commodities
Market Neutral
Precious Metals
Derivatives
Long/Short
Leverage
7 Arbitrage
Indexing
Source: Lipper

Examples of Alternative Products (cont.)
• Market Neutral Funds
– Use long and short exposure to seek to eliminate correlation to broad market movements
Equity Market Neutral Funds
Infrastructure
Derivatives
Market
Neutral
Short Sale
Event Driven
Foreign Securities
Hedging
Dedicated Short Bias
Managed
Futures
Convertibles
8
MLPs
Leverage
Long/Short
Source: Lipper

Examples of Alternative Products (cont.)
• Multi-Strategy Funds (or “Manager of Manager” Funds)
– Allocation of “sleeves” to multiple portfolio management teams
– Managers often seek to implement hedge fund/alternative strategies, subject to regulatory restrictions
• Registered Fund of Hedge Funds
– Permits access for less than the minimum investment level, making diversification easier to achieve
– Regulators have imposed eligibility requirements notwithstanding
1933 and 1940 Act registration
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Challenges for Board
• Understanding strategy and the fund’s role
– How will the alternative product behave on its own and in tandem with other portfolio holdings and/or products?
• Appropriate expertise (portfolio management and operational)
– Does the adviser possess the necessary expertise for this alternative product?
• Lack of track record may make evaluation difficult
• Track record may have been developed in a non-1940 Act product
• Compliance considerations (liquidity, valuation, leverage, etc.)
• Accounting
• Tax
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Challenges for Board (cont.)
• How should the board measure success?
– Understand the aim/goal of the alternative product
– Define how success should be measured
• Prior to launch, if possible
• Complexity may make peer analysis and benchmark comparison “best available”
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Challenges for Board (cont.)
• How should the board measure success (cont.)?
– Performance benchmarking
• Provide blended indexes by strategy, if possible
• Hurdle rate analysis of returns
• Performance by investment sleeve
• Provide risk measures for analysis
– Expense benchmarking
• Multiple techniques cause expenses to vary
• Benchmark against cost to manage traditional assets
• Look for peer groups comprised of funds with similar investment techniques and weightings, if possible
• Be wary of “outliers” within peer group
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Challenges for Board (cont.)
• Risk Management
– Does management have a process for identifying and managing risk?
– Has strategy been tested in times of market stress?
• Managing the sales process
– Will wholesalers/brokers be able to properly sell product?
• Conflicts issues
13

Process
• No “one size fits all” solution
• Consider executive session pre-meetings
• Consider 2-step process – conceptual proposal then specific approvals
• Consider providing a template with specific questions the
Board wants answered in connection with new fund launches
• Consider forming a special committee to oversee alternative products
– ad hoc or permanent
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This summary should not be construed as legal advice or a legal opinion on any specific facts or circumstances and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. © 2012
Ropes & Gray LLP
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