Demystifying BAAM (Blackstone)

As requested by @MBAGrad2015" in my previous post (about GSO) and several other users who pm-ed me about BAAM, I decided to start another "demystifying" thread - the Blackstone's 2014 Hedge Fund Solutions (BAAM) overview. All is based on few recent presentations that I was able to gather.

Again, I'd like to use this thread as an invite for other monkeys with more valuable info, so please feel free to chime in.

Hope some of you guys find this useful. Don't forget to check the attachments.

BX PRINCIPAL INVESTMENT BUSINESS

- Largest discretionary allocator to HFs in the world
+ over $20 bn larger than the next largest fund of hedge funds competitor

- Separated from traditional competitors
+ 31% AUM CAGR since 2001 for BAAM, compared to 13% for other fund of funds over $1 billion
+ 18% AUM CAGR since the end of 2008 for BAAM, compared to ‐5% for other fund of funds over $1 billion

- Meaningful business diversification and product innovation
+ One of the largest hedge fund seeders in the world – over $2.6 billion deployed over 2 funds
+ Creation of Special Situations Investing Group – $5.4 billion deployed
+ Long‐Only solution business utilizing hedge fund talent – $3.4 billion in AUM
+ Significant growth opportunity in the liquid registered fund market – $1.5 billion raised to date
+ Purchasing of GP interests in established hedge funds – closed on $1.4 billion, expected to close on up to $3 billion in total

Innovation has been the key to BAAM’s growth

Diverse array of commingled and customized investor solutions

BAAM’s growth has outpaced the industry

Diverse and institutional client base

- Institutional composition of BX's client base provides the business with stability
+ Emphasis on transparency, knowledge transfer and investor education
+ Institutional investor base allows for customization and innovation

Deep relationships with institutional investors: Asset flows from existing vs. new clients

- Flows from existing investors remain the majority of BAAM’s gross external inflows

Select financial highlights

BAAM continues to be a high-growth business

- BAAM has maintained strong financial performance across major metrics

hedge fund industry growth continues after financial crisis

- Industry Dynamics Have Supported BAAM’s Rapid Growth

Institutions driving recent growth in hedge fund industry AUM

- Hedge Fund investor base is now predominantly institutional

- BAAM expects individuals to return, albeit a different market segment (retail) requiring more liquid, regulated investment vehicles

Hedge funds becoming a larger part of institutional portfolios

- Pension Funds are increasing allocations to hedge funds:
+ A majority of institutions, including pension plans, endowments, foundations and insurers, reported increased hedge fund holdings last year
+ Pension funds, in particular, are increasing their hedge fund investments, with over 60% of them having increased such holdings in 2012
+ 65% of investors, including 79% of institutions, targeted returns between 5% and 10% for their hedge fund investments in 2013

Hedge funds continue to attract talent given their flexibility

- Dodd‐Frank, Basel III, and other global regulatory changes are reducing the ability of investment banks, commercial banks, and insurance companies to compete with hedge funds

- Human capital is leaving the sell side as it is forced to reduce capital allocation to opportunistic and quantitative trading strategies, thus increasing the flow of top talent to hedge funds

- The market recovery has heightened entrepreneurial ambitions for talented asset managers seeking the most favorable compensation structures

Hedge funds currently represent only a fraction of global assets

- Total capital invested in hedge funds exceeded $2 trillion for the first time in 2012

- Hedge funds represent less than 2.0% of global financial assets

- Average 10‐year rolling Sharpe ratio of 1.2 for the HFRI Composite

BAAM has produced attractive risk-adjusted performance

Historically, BAAM has mitigated loss in severe equity market downturns

BAAM has produced attractive risk-adjusted performance

- Since the institutionalization of BAAM’s business in 2000, on an annualized basis the BAAM Principal Solutions Composite is up 6.77%, outperforming:
+ HFRI FOF Composite Index (+3.77%)
+ HFRX Global HF Index (+3.56%)
+ MSCI ACW TR Index (+3.19%)
+ S&P 500 TR Index (+3.60%)

BAAM: Negotiating attractive exposures and terms with managers

BAAM: A Global Business Constantly Evolving

Innovation Process

Innovation Process Case Study: Blackstone Strategic Capital Advisors (“BSCA”)

Hedge Fund Ownership: Blackstone Strategic Capital Advisors

Innovation Process Case Study: Blackstone Strategic Opportunity Fund (“BSOF”)

Innovation Process Case Study: Blackstone Multi‐Manager Fund

Disclosures Relating to Negotiated Structures / Transactions

- Number of Negotiated Structures / Transactions:
+ Data as of 1/1/14. Count includes customized vehicles, vehicles with negotiated fee discounts, seeding platform funds and co‐investment deals that occurred during each year presented.
+ Volume does not double count (i.e., where a vehicle is customized capacity and has a negotiated fee discount, that vehicle is counted only once).

- Percent of BAAM AUM:
+ Calculated by dividing total amount invested by BAAM in all customized vehicles, seeding platform funds, vehicles with negotiated fee discounts, and co‐investments (BSOF transactions) by BAAM's total AUM as of January 1 of the following year for each year presented.
+ For purposes of this slide, BAAM includes Blackstone Strategic Alliance Advisors L.L.C. and Blackstone Alternative Solutions L.L.C., BAAM’s affiliated advisors.

- Customized Capacity Vehicles:
+ Includes funds where BAAM is the sole external investor and funds with which BAAM has negotiated guaranteed capacity

- Co‐Investments (BSOF Transactions):
+ Includes deals that have been funded by Blackstone Strategic Opportunity Funds or approved for investment as of 12/31/2013.
+ Deals that have been approved for investment but not yet funded are not included in the percentage of BAAM AUM in negotiated structures.

- Vehicles with Negotiated Fee Discounts:
+ Based on negotiations completed through 2013
+ Includes both beneficial fees exclusively negotiated for BAAM and beneficial fees applicable to some or all other investors where BAAM participated in the negotiations
+ Negotiated benefits to BAAM funds will fluctuate depending on related AUM

- Seeding Platform Funds (Seed Transactions):
+ Includes all underlying managers seeded by the Blackstone Strategic Alliance Funds