Primary Advisory Services
NHC’s objective with respect to the Primary Advisory Services is to provide the Advised Funds
with capital appreciation consistent with their risk and return targets through the allocation of
each Advised Fund’s portfolio assets among a group of Underlying Managers (any such
investments made in Underlying Funds or through separate accounts by the Advised Funds, the
“Portfolio”). We seek to maximize returns while (i) minimizing the influence of systematic
market risks such as equity, credit and interest rates in order to create a more idiosyncratic risk
profile and (ii) controlling drawdown risks in periods of stress. We generally seek to recommend
Underlying Managers (i) whose core investment beliefs are broadly aligned with ours (ii) who
are expected to provide reasonable transparency regarding the investment process and (iii) who
we believe have reasonable portfolio construction and risk management skills. Underlying
Managers that we recommend pursue a variety of investment strategies that include equity-
driven, relative value, multi-strategy, emerging markets, corporate distressed, structured credit,
tactical trading and other strategies. Many of our Underlying Managers tend to invest in more
illiquid and complex asset classes including exotic and specialist investments. The Advised
Funds generally invest through pooled or single-investor investment vehicles that are organized
as corporations, limited partnerships or other limited liability vehicles.
NHC primarily identifies new ideas and Underlying Managers through its own research,
including review of publications and dialogue with hedge fund managers, capital introduction
firms or other market experts. After identifying an Underlying Manager, NHC performs due
diligence which includes both quantitative and qualitative elements. NHC endeavours to analyze
an Underlying Manager’s strategy, philosophy and decision-making process, proprietary models,
research and portfolio management systems, and organizational structure as well as the quality of
its investment professionals.
The essence of NHC’s due diligence is to seek to understand:
the market inefficiency that the strategy seeks to exploit;
the edge or cleverness (competitive advantage) that an Underlying Manager brings to the
strategy;
the risks to which the strategy is exposed;
and to assess:
the skill and qualifications of the Underlying Manager’s professional staff;
the adequacy and competence of the Underlying Manager’s non-investment functions
(e.g., operations, accounting, compliance, information technology);
the expected risk and return of the strategy and its expected performance in certain
unfavorable market scenarios;
the suitability of the strategy in light of the investment objectives and guidelines of the
Advised Funds.
Business and operational due diligence generally consists of performing assessments of an
Underlying Fund’s business and operational factors through meetings with personnel at the
Underlying Fund’s Underlying Manager. NHC analyzes a variety of things including, for
example, an Underlying Manager’s business stability, investment pedigree, character references,
key person risk, alignment of interests, fairness of fees (a function of quality and quantity of
alpha), asset/liability structure, suitability/terms of leverage, internal control environment,
pricing procedures, suitability of compliance procedures and the independent oversight provided
by an administrator and auditor. NHC from time to time modifies the way in which it
implements or carries out any of the investment and operational due diligence processes with
respect to particular investments, including to improve our processes.
Certain risks relating to allocating assets among Underlying Managers of Underlying Funds are
set forth below. The risks of investing in each Underlying Fund are generally described by such
Underlying Funds in their offering documents. We provide a memorandum containing our
analysis and recommendations to the Advised Funds and the Client Adviser, in a format and
containing the information requested by the Client Adviser, which highlights certain risks.
Additionally, the Client Adviser is afforded an opportunity to ask NHC to provide or obtain
additional information or analysis regarding the potential investment prior to making the
investment decision. Further, the offering documents of the Underlying Funds provide a more
detailed description of the risks and are provided to the Advised Funds and the Client Adviser
and their legal counsel for their review.
Risk of Loss. Allocating assets to Underlying Managers of Underlying Funds who trade and
invest in securities involves risk of loss that clients should be prepared to bear. The following
risk factors are not intended to be a full or complete listing of all the risk factors involved in
investing, and clients should engage in their own evaluation of these and other potential risks.
Past performances of the Portfolio provides no indication of future performance of the
investments currently in the Portfolio or any future investment in any Underlying Fund.
Illiquidity and Actions of Underlying Managers. Investments in the Underlying Funds
recommended by NHC are generally more illiquid than investments in traditional marketable
securities. No readily available market exists for interests in the Underlying Funds.
In many cases, the Advised Funds cannot redeem or withdraw assets from an Underlying Fund.
To the extent that the Advised Funds have a right to redeem an investment in an Underlying
Fund, such right in certain instances is subject to contractual lock-ups or other agreed restrictions
as to timing or amount of the redemption or withdrawal. Additionally, some Underlying
Managers have the right to impose limitations on such redemptions, including by suspending the
determination of the net asset value of the Underlying Fund; suspending redemptions, in whole
or in part; imposing gates or restrictions on redemptions above a certain amount or percentage;
assigning a majority of the Underlying Fund assets to a side pocket; paying out redemptions in-
kind or distributing certain or all assets into a special purpose vehicle or account. An
investment in an Underlying Fund is also generally not transferable except with the Underlying
Manager’s consent, which may be withheld at its discretion. Consequently, the Advised Funds
should generally not expect to be able to liquidate their investments in the Underlying Funds for
prolonged periods of time and should therefore be prepared to bear the economic risk of such
investment for an indefinite period.
Lack of Control. NHC will not control the Underlying Managers, their choice of investments or
other investment decisions, which are entirely within the control of the Underlying Managers.
NHC will have no control over the day-to-day operations (including the compliance with
applicable laws and regulations) of any proposed or existing Underlying Manager.
In addition, we will not have any control over the institutions selected by the Underlying
Managers for brokerage, clearing and custody services. Bankruptcy or fraud at one of these
institutions could impair the operational capabilities or the capital position of an Underlying
Fund.
Further, our investment selection process cannot ensure that Underlying Managers will perform
as desired.
Monitoring Underlying Managers. NHC ultimately must rely on each Underlying Manager to
operate in accordance with the investment strategy and guidelines laid out by such Underlying
Manager, and the accuracy of the information provided to the Underlying Fund by such
Underlying Manager. While NHC does perform ongoing monitoring of the Underlying Funds,
we would not necessarily become aware of undesirable activities at an Underlying Fund,
including without limitation, an Underlying Manager’s incurring unreported risks, investment
style drift or even regulatory breach or fraud.
Risk Controls. NHC will not control the risk controls or compliance procedures of Underlying
Managers and as we have no assurances that the Underlying Managers’ risk controls and
procedures will be adequate to avoid adverse results.
Multiple Underlying Managers. Because Underlying Managers will make their trading decisions
independently, it is theoretically possible that one or more of such Underlying Managers will, at
any time, take investment positions that are opposite to positions taken by other Underlying
Managers. It is also possible that the Underlying Managers will on occasion be competing with
each other for similar positions at the same time, and the resulting lack of diversification will
subject the investments of the Advised Funds to more rapid changes in value than would be the
case if the assets of the Advised Funds were more widely diversified. Also, a particular
Underlying Manager will take positions for its other clients that are opposite to positions taken
for the Underlying Funds.
Incentive-Based Compensation Arrangements of NHC and the Underlying Managers.
The
Underlying Managers generally will be compensated through incentive-based arrangements, as is
NHC. Under such arrangements, NHC and the Underlying Manager will often benefit from
appreciation, including unrealized appreciation, in the value of the Underlying Fund, but in
certain instances will not be similarly penalized for realized losses or decreases in the value of
the Underlying Fund. Such fee arrangements create an incentive for NHC and the Underlying
Managers to make purchases that are unduly risky or speculative.
Asset-Based Compensation. In addition to incentive-based compensation, a portion of NHC’s
compensation is derived from an asset-based management fee and the overall amount of fees that
NHC will receive will increase as the Portfolio’s net invested assets under management increase.
This may incentivize NHC to recommend investing in Underlying Funds more quickly or to
delay in recommending the redemption from an Underlying Fund than if such arrangements were
not in place.
Access to Information. NHC requests information from each Underlying Manager regarding the
relevant Underlying Fund’s historical performance and investment strategy. We also request
portfolio information on a continuing basis from each Underlying Manager. However, we will
not always be provided with such information for a variety of reasons, including if certain of this
information is considered proprietary information by an Underlying Manager. Additionally, the
Underlying Funds in which the Advised Funds invest are generally not offered pursuant to
registration statements effective under the Securities Act and Underlying Funds generally are not
subject to the periodic information and reporting provisions of the Securities Exchange Act of
1934. This lack of access to information makes it more difficult for us to monitor the Underlying
Funds and/or make appropriate recommendations regarding various actions in relation to the
selection and allocation of assets among Underlying Managers or the redemption of assets
already invested in Underlying Funds. Additionally, NHC generally does not have access to
information regarding the investment activities of affiliates of the Advised Funds that are not
advised by NHC. As such, there is the potential that interests of these non-advised affiliates and
those of the NHC’s clients or the Underlying Funds could become conflicted in a manner that
NHC is unable to identify, monitor or work to resolve.
Weaknesses in the Valuation Policies or Procedures of Underlying Funds. Neither NHC nor the
Advised Funds have control over the valuation policies or procedures employed by the
Underlying Funds or their respective Underlying Managers or administrators and NHC is not
responsible for confirming the accuracy of any of the valuations provided by any of them. There
may be differences among the Underlying Funds with respect to the valuation of the same assets
due to differences in valuation policies and procedures. Weaknesses or differences in the
valuation policies or procedures of Underlying Funds, their administrators, or the Underlying
Managers could materially impact Underlying Fund performance and the fees payable to NHC.
To the extent that an Underlying Manager, or other non-independent party, determines the value
of an Underlying Fund’s assets, it may face a conflict of interest in valuing such assets because
of the effect of such value on its compensation.
Possibility of Misappropriation of Assets and Fraud. When an Advised Fund invests in an
Underlying Fund, it generally does not have custody of the assets invested. As such, there is a
risk that the Underlying Manager personnel could misappropriate the Advised Fund’s securities
or funds. Underlying Managers may engage in fraud or other misconduct with respect to the
assets of the Underlying Fund, and there can be no assurance that NHC will be able to prevent
fraud or misconduct by the Underlying Managers or other persons.
Forward-looking Statements and other Information. From time to time, NHC will provide the
Advised Funds and the Client Adviser with reports, analysis and other materials that contain
forward-looking statements, such as, for example, levels of expected returns or expected risk
associated with an existing or potential Underlying Fund or the Portfolio as a whole and
forecasts regarding sources and uses of cash. These forward-looking statements, as well as other
statements contained in these reports, analysis and other materials are based on information
provided by third parties that NHC believes to be reliable but does not independently verify and,
as such NHC cannot guarantee that any of the forward-looking statements made in such
materials will become true. To the extent that the Advised Funds or the Client Adviser rely on
any information that NHC provides to any of them in deciding to make any investment or
divestiture, differences between actual events and the forward-looking statements contained in
materials provided by NHC could result in significant investment losses, including loss of
principal.
Hedging Transactions. Many Underlying Funds from time to time engage in hedging
transactions (such as forwards, short sales, swaps or options on currencies, interest rates,
securities and indices) to attempt to mitigate risk of loss. However, it is impossible to fully hedge
an investment due to the impossibility of identifying all possible risks, the uncertainty as to the
economic factors to which an investment’s performance is sensitive, the amount and timing of
projected cash flows and investment returns and the cost to obtain sufficient hedges. It is also
possible, in certain situations, that hedges will increase risk rather than reduce it. In certain
hedging transactions NHC provides guidance to certain Underlying Managers on the desired
level of risk exposure based on our estimates of the Underlying Funds’ risk, return and other
assertions that later prove to be inaccurate. The success of any hedging transactions will be
subject to the ability of the Underlying Manger, or NHC in certain instances, to correctly identify
the risk and predict correlations between the value of portfolio assets and the direction of
external factors such as currency exchange rates, interest rates and securities prices. The
effectiveness of a hedging technique depends upon the extent to which price movements in assets
that are hedged correlate with price movements of the hedging instrument selected, and
unanticipated changes may result in a poorer overall performance for the Advised Funds than if
the Advised Funds had not entered into such hedging transaction. Conversely, there may be
identified risks in the Advised Fund’s portfolio that are not hedged because adequate hedging
transactions may not be possible or advisable to enter into based on available terms.
Monitoring Services In addition to the Primary Advisory Services, NHC performs Monitoring Services with respect to
certain legacy investments in pooled investment vehicles made by European pension fund clients
of the Client Advisers (such clients, solely in their capacity as investors in such investments, the
“Legacy Investment Clients”).
In its performance of the Monitoring Services, NHC and the Client Adviser have agreed that
NHC will conduct ongoing monitoring of these legacy investments using the same general
process (except as noted in Item 13 below) that NHC uses in monitoring investments that make
up the Portfolio. If requested by the Client Adviser, the Monitoring Services sometimes include
the participation of NHC employees on advisory boards or similar committees of funds in which
the Legacy Investment Clients have invested.
Further, NHC and the Client Adviser have agreed that absent an express request by the Client
Adviser, NHC will not actively source or recommend investments with managers with whom the
Legacy Investment Clients have not already made an investment. Instead, all new investment
opportunities will be recommended for the benefit of the Advised Funds, even if such
investments would otherwise be suitable or appropriate for the Legacy Investment Clients. NHC
will from time to time, however, in the ordinary course of its provision of the Monitoring
Services, or at the request of the Client Adviser (including to satisfy return and/or risk
characteristics that the Client Adviser sets with respect to the investments that are the subject of
Monitoring Services), make recommendations to the Client Adviser regarding dispositions,
withdrawals, co-investments, follow-on investments, strategic relationships, or other similar
transactions that relate to existing investments that are the subject of the Monitoring Services.
Any decision to proceed with such a recommendation will reside exclusively with the Client
Adviser. In certain circumstances (such as, for example, if the return and/or risk characteristics
sought by the Advised Funds (other than the Monitored Fund) differ from those of the Legacy
Investment Clients) where the Legacy Investment Clients and the Advised Funds have both
invested in vehicles or accounts that pursue the same or substantially similar investment
strategies, it is possible that NHC will recommend an additional investment in or a redemption
from the investment of the Advised Funds while not simultaneously recommending a similar
action with respect to the investment of the Legacy Investment Clients (or vice versa).
Risks Related to Lack of Compensation. Except as described above, NHC does not anticipate
providing investment recommendations regarding new investments to the Client Adviser in
connection with the Monitoring Services. However, in circumstances in which NHC does
provide such investment recommendations to the Client Adviser in the future, the lack of any
compensation as it relates to the Monitoring Services could create an incentive for NHC to favor
the interests of Advised Funds over the interests of the Legacy Investment Clients when
recommending new investments. Similarly, this lack of compensation may create an incentive
for NHC to favor the fee-paying Advised Funds in respect of dispositions – either by
recommending the disposition of an investment that is the subject of the Monitoring Services in a
situation where NHC would not make a similar recommendation with respect to the fee-paying
Advised Funds or by giving the fee-paying Advised Funds priority with regard to opportunities
to dispose of investments that are jointly held by the fee-paying Advised Funds and the Legacy
Investment Clients.
Cybersecurity Risk. Cyberattacks and security vulnerabilities could result in a breach despite the
various protections utilized by NHC, NHC vendors or the Underlying Managers. A breach could
potentially result in the disclosure of client data, the misuse of confidential or proprietary
information, theft of assets, regulatory issues or damage to the reputation of the firm or its
clients.
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