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16 | Envestnet | PMC Investment Methodology Guide FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY alternative strategies may be simpler to implement, they still require rigorous due diligence, due to a rapidly growing universe, increasingly complex strategies, and misaligned expectations. PMC views hedge-fund-like mutual funds, commonly referred to as "liquid alternatives," as nontraditional investment strategies, rather than as a separate asset class. Like traditional managers, managers of alternative strategies take positions in the four major asset classes (equities, bonds, commodities, and currencies), albeit in conjunction with hedging strategies, through either derivative structures or, to a lesser extent, nonpublic markets. PMC follows the same multifactor mutual fund evaluation process defined above, combining both quantitative and qualitative analysis, guided by the philosophy that all returns (both for traditional and nontraditional strategies) originate from risk exposures. In this regard, nontraditional strategies are no different from traditional strategies; where they differ is in the risk exposures that a manager of an alternative strategy either seeks or accepts to generate returns. Additionally, within the nontraditional space, idiosyncratic manager risks, such as embedded economic leverage in derivative contracts, are much more pronounced. Our job is to understand these risks, whether investment- related or otherwise. PMC seeks to answer the following questions when evaluating liquid alternatives: • Has the manager done this in the past? What evidence of success exists? Has the manager generated true alpha, or is this alternative beta? • Does the firm have sufficient people resources in the front offices? How adequate are its systems, infrastructure, and data feeds? • Is the strategy appropriate for a mutual fund vehicle? Once we complete the review process, we designate liquid alternative mutual funds as "Available" or "Approved- Qualitative," and the funds may receive additional portfolio attributes as needed ("Select" and "Watch"). Additionally, all liquid alternatives are automatically mapped to Envestnet styles, using Morningstar Categories as described in the PMC Investment Style Methodology document. These liquid alternatives styles continue to be supported by PMC's CMA methodology and annual updates. Strategist Portfolios Strategist portfolios are asset- allocated managed account investment solutions composed of some combination of mutual funds, Firm Strategy Performance • Firm and Strategy Assets • Product and Asset Distribution and Diversification • Business Structure and Operations • Key Investment Personnel • Legal and Compliance • Investment Philosophy and Process • Strategy Mandate and Positioning • Risk Analysis • Portfolio Holdings Analysis • Investment Results • Portfolio Attribution • Composite Analysis Quantitative Qualitative Investment Style Methodology PMC Investment Style Methodology Download the document