alternative fund linked derivatives

Alternative Fund Linked Derivatives

Portable Alpha, Absolute Return Strategies& Capital Preservation Techniques

VIII ALMATY INTERBANKING CONFERENCE27th September 2007

2

Agenda

1. What do we mean by Alphaα

2. Absolute Return Strategies

3. Capital Preservation Techniques

3

1What do we mean by Alpha?

4

An actively managed traditional long only fund (or portfolio’s) return is broadly based on two constituents:

The first is beta, i.e. the extent to which such fund moves with the market - thus representing the passive return or increase in the fund’s value along with the overall market; and

The second is alpha, i.e. a measure of a manager’s ability to generate returns by choosing investments that out perform the market.

“Alpha” can be considered the “excess return” generated by an actively managed fund vis-à-vis a particular market index (or risk free rate) and is increasingly a common way of assessing such manager’s performance.

In simple terms, “manager skill” can be expressed as follows:

What do we mean by Alpha?

Fund Alphaα = Fund Performance – Market Beta β

5

-20%0%

20%40%60%80%

100%120%140%160%

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Fund Performance Benchmark

Out-performance /Under-performance

+

Benchmark Return(i.e. Asset Class

Performance)

= alpha

= beta

Total Return

100%

Fund Returnalpha = Out-performance over benchmark


The following example demonstrates how a relatively small amount of alpha can accumulate over time to make a meaningful impact on overall performance.

However, since alpha can be both positive or negative, an active manager that fails to generate returns in excess of the market - but instead under-performs the market - can be thought to generate negative alpha.

Accordingly, manager selection is crucial to the success of an alpha strategy.

Jan-01

6

In this example, alpha represents the out-performance of a fund relative to the market and may be positive in both up and down markets as long as the manager is able to out-perform its benchmark.

Fund Return

Asset Class Return (beta)

Out-Performance (alpha)

PerformancePerformance

Fund delivers positive return when benchmark delivers negative returns.

Performance

Fund delivers less negative return than benchmark in down markets.


Positive alpha can be generated in different market conditions:

Manager Skill can generate alpha in rising, falling & side-ways markets

Fund delivers higher return than benchmark in up markets.

7

Case Study #1: Isolating Alphaα

JP Morgan EMBI Global

Alphaα seeks to capture the “manager skill” or outperformance of the Insight Emerging Market Bond Fund USD (EM Bond) over the JP Morgan EMBI Global

A long notional position in EM Bond coupled with a short notional position in the EMBI Global powers the Alphaαengine.

EM Bond AlphaαEM Bond Alphaα Insight EM Fund USD

Alphaα

N.B. Graphs are for illustrative purposes only and are gross of any fees. Past performance is not indicative of future results.

Source: ABN AMRO

80%

100%

120%

140%

160%

180%

200%

Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07

Index

Insight EM Alpha

Alpha

60%

80%

100%

120%

140%

160%


Index

80%

100%

120%

140%

160%

180%

200%


Insight EM Alpha

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Case Study #1: Insight Investment Management

Insight AlphaαInsight Alphaα

The Insight Fund has consistently delivered significantly more positive than negative alpha vis-à-vis the Index.

For the period

observed, the Alphaα has on average yielded 0.4% a month.

N.B. Graphs are for illustrative purposes only and are gross of any fees. Past performance is not indicative of future results.

Source: ABN AMRO

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%


Cumulative OutperformanceCumulative Outperformance

Monthly ReturnsMonthly Returns

80%

100%

120%

140%

160%

180%

200%

Jun-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Feb-07

NA

V

0%

5%

10%

15%

20%

25%

30%

35%

40%

Ou

rpe

rfo

rma

nc

e

Outperformance Index Insight EM Alpha

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2Absolute Return Strategies

10

Absolute Return Strategies

Absolute Return Strategies differ from traditional relative return strategies in that they are concerned with the actual return of a particular asset and do not generally compare to any other measure or benchmark.

A mutual fund typically seeks to produce returns that are better that its peers, its fund category, and/or the market as a whole. This type of fund management approach is referred to as relative return. An Absolute Return Strategy seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds.

Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.

Alfred Winslow Jones is credited with establishing the first absolute return fund in New York in 1949. More recently, approach to absolute return fund investing has become one of the fastest growing investment products in the world and is more commonly known today as Hedge Funds!

.

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Superior and Sustainable Risk Adjusted Returns

Uncorrelated to Traditional Asset Classes (Zero Beta)

Market Neutral Investment Strategies

Access to alternative and sophisticated investment techniques:

Why invest in Absolute Return Strategies

Absolute Return Strategies

Absolute return investment techniques include short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.

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Variety of Absolute Return Styles

Hedge Fund StrategiesHedge Fund Strategies

0%

50%

100%

150%

200%

250%

J an-00 Oct-00 J ul-01 Apr-02 J an-03 Oct-03 J ul-04 Apr-05 J an-06 Oct-06 J ul-07

Equity Neutral

Event driven

Dedicated Short Bias

Managed Futures

Convertible Arbitrage

DiversificationDiversification

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%

Aug-90 Nov-91 Feb-93 May-94 Aug-95 Nov-96 Feb-98 May-99 Aug-00 Nov-01 Feb-03 May-04 Aug-05 Nov-06

HFRI Composite

MSCI World Equity

Certain strategies within the Hedge Fund space have tended to outperform others over time

Diversification enables consistent outperformance through time and lower volatility than pure single strategy exposure

13

Case Study #2: Diversified Fund of Hedge Funds

Cover a wide range of strategies, regions, sectors and investment objectives in order to create stable returns.

Allocate assets to established and new independent investment managers to diversify risk and gain exposure to a range of investment opportunities.

Fund updates including asset allocation and top managers are made available on a monthly basis.

Typically no leverage on fund of funds level.

Diversification by inclusion of up to 100 underlying funds, 11 different strategies and four investment regions both developed and emerging over all asset classes.

Superior historical returns compared to traditional asset classes with relatively lower associated volatility as measured by standard deviation.

Why choose a large diversified Fund of Hedge Funds?

14

Global Macro16%

Other2%

Global Equity Long15%

Emerging Markets6%

US Emerging Grow th9%

Japan Long/Short7%

Europe Long/Short8%

Event Driven7%

US Long.Short30%

Case Study #2: Permal Investment Management

Annualised Return Vs Traditional Investments

Permal Investment Holdings

AEX Index

Citigroup

World Bond

Index

HFR FoF

Hedge Fund Index

1 Year 16.57% 17.60% 5.06% 15.04%

3 Years 13.23% 17.39% 4.50% 10.78%

5 Years 11.87% 7.99% 6.71% 9.18%

Inception Date (March 1992)

11.14% 9.24% 6.61% 9.26%

Volatility

1 Year 3.12% 8.38% 5.95% 2.29%

3 Years 5.68% 10.24% 5.87% 3.89%

5 Years 5.74% 19.34% 6.76% 3.49%

Inception Date (March 1992)

8.85% 19.00% 6.33% 5.57%

Multi-Manager Multi-Strategy Multi-Style

Global diversification

Balanced, diversified exposure to U.S. and global financial markets employing long/short and

global macro strategies.

Returns shown are net after fees. Past or projected performance is not necessarily a guide to future results. The value of the investment may go down as well as up. Data as of July ’07.

15

Case Study #3: Thematic Fund of Hedge Funds

Emerging Hedge Fund Mangers have demonstrated an ability to outperform:

Easier to deploy capital in profitable trades - Eager and hungry

More agile and faster with their investments - Investing in future capacity

Significant personal net worth in their fund - Non-correlated to established managers

10 10050 500 1000

0.5%

1.0%

1.5%

2.0%

2.5%

AUM （ US$1 Million ）

Avera

ge M

on

thly

Retu

rn

Source: Infiniti Capital AG

Why focus on emerging managers?

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Case Study #3: Infiniti Capital

0%

50%

100%

150%

200%

250%

300%

Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07

Conquistador II Sub Trust

Credit Suisse Tremont Investable Hedge Fund Index

Citigroup World Govt Bond Index

S&P 500

The Conquistador II Fund has outperformed both the Credit Suisse Tremont Investable Hedge Fund Index and the S&P 500 Index

The Fund also offers low volatility…

Source: ABN AMRO, Infiniti Capital AG, Bloomberg, Data as of July 07 Source: ABN AMRO, Infiniti Capital AG, Bloomberg, as of July 07

Simulated Historical Returns (Jan-00 to May-07) Risk / Return Profile

1. Please note all data referring to the Conquistador Fund II is simulated prior to January 2007, and is provided by Infiniti Capital AG. Simulated past performance is not indicative of future results

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0% 2% 4% 6% 8% 10% 12% 14% 16%

Annu

alis

ed R

etur

n

Conquistador II Sub Trust

Credit Suisse Tremont Investable Hedge Fund Index

Citigroup World Govt Bond Index

S&P 500

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3Capital Preservation Techniques

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Capital Preservation Techniques

Static guarantee with fund exposure

Static guarantee with call option exposure

Vanilla dynamic guarantee (CPPI)

Continuous dynamic guarantee (PCPI)

Dynamic versus Static comparison

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Static guarantee with fund exposure

InvestorInvestor

IssuerIssuer

Cash

Guarantee ComponentGuarantee Component

Fund Component

Fund Component

100% - X%X%

Notes

Structure Overview: Investor purchases Medium Term Note

(MTN) Issuer allocates X% of the issuance

proceeds to Zero Coupon Notes priced to mature at Par

100% Issue price less X% ZCN is allocated/committed to the Fund Component (or “risky asset”)

Investor receives 100% + value of the Fund Component at maturity

Why choose Bond & Fund Structure? Cost effective guaranteed structure for

illiquid or hard to mark assets Medium Term Notes can be rated (per

Issuer), listed, transferable, marked to market, pledged as collateral, repo’d – but can not be typically unwound prior to intended maturity

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Static guarantee with call option exposure

InvestorInvestor

IssuerIssuer

Cash

Guarantee ComponentGuarantee Component

Call OptionCall

Option

100% - X%X%

Notes


(MTN) Issuer allocates X% of the issuance

proceeds to Zero Coupon Notes priced to mature at Par

100% Issue price less X% ZCN is used to purchase Call Options on the risky asset

Investor receives 100% + value of the Fund Component at maturity

Why choose Bond & Call Structure? Higher (geared) exposure to risky assets

& certainty of payout (vis-à-vis dynamic structures)

Medium Term Notes can be rated (per Issuer), listed, transferable, marked to market, pledged as collateral, repo’d – and offer improved liquidity, typically with associated break costs

21


InvestorInvestor

IssuerIssuer

Cash

Fund Component

(FC)

Fund Component

(FC)

CashComponent

(CC)

CashComponent

(CC)

Notes


(MTN) Issuer employs Constant Proportion

Portfolio Insurance (CPPI) technique to allocate Note’s issuance proceeds amongst the three components that typically comprise the “CPPI Index”:

The Fund Component (FC) consists of a notional investment in the risky assets

The Cash Component (CC) consists of a notional loan extended by the Issuer to provide leveraged exposure to the FC or a cash deposit (e.g. when de-leverage has occurred)

The Bond Component (BC) consists of a notional investment in Zero Coupon Notes to ensure that in a “cash-out” event a minimum of 100% is repaid at maturity

Bond Component

(BC)

Bond Component

(BC)

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At Inception, if = M, where M = 5.

If the ratio of the FC (or Participation) over the Equity Gap (EG) decreases

below pre-defined trigger levels (e.g. 4.5) a reallocation from CC to FC will

occur.

If the ratio of the FC (or Participation) over the Equity Gap increases above

pre-defined trigger levels (e.g. 5.5) an allocation (or “de-allocation”) from the

FC to the CC will follow.

The Issuer guarantees against Gap Risk, thus ensuring that, at the very

least, a Client’s initial principal investment is returned at maturity.

Positive returns above the principal amount protected by the Note are paid to

Note holders at maturity.

where

EG = Equity Gap between

the CPPI Index and the price

of the implied bond floor

(or“zero”),

M = Multiplier (e.g. 5), &

CAP = Leverage Cap

(typically 150%)

N.b. the maximum leverage

cap for fund-linked CPPI is

dependant on the volatility

of the underlying

investments

Participation typically = Min ( CAP , (EG x M) )

G

Then rebalancing would typically be triggered if M = (<4.5, >5.5)

Participation


23

Why choose vanilla CPPI? Controlled leverage: typically

more than 100% of the Note’s issuance proceeds are invested in FC at inception

Soft landing: should Note NAV decline, exposure to the risky asset is reduced via the CPPI’s de-leveraging strategy

Gap risk protection: should the Fund NAV decline sharply, a full allocation to BC may occur (i.e. a “cash-out” will be called) and the Issuer will cover any “short-fall” to ensure full 100% protection at maturity (Scenario 2)

CPPI rewards good performance: embedded dynamic Leverage can help boost the Note NAV to out perform the Fund NAV (Scenario 1)

Sample simulation Time(in Years)

Note NAV (Scenario 2)

0%

100%

200%

0 1 2 3 4 5 6 7

Protected Amount

Implied Bond Floor

Note NAV (Scenario 1)

Maturity

Fund NAV(Scenario 2)

Fund NAV (Scenario 1)

NAV

Equity Gap Gap Risk

This graph is for illustration purposes only.


24


InvestorInvestor

IssuerIssuer

Cash

Fund Component

(FC)

Fund Component

(FC)

CashComponent

(CC)

CashComponent

(CC)

Notes


(MTN) Issuer employs Partial Continuous

Portfolio Insurance (PCPI) technique to allocate Note’s issuance proceeds amongst the two components that typically comprise the “PCPI Index”:

The Fund Component (FC) consists of a notional investment in the risky assets

The Cash Component (CC) consists of a notional loan extended by the Issuer to provide leveraged exposure to the FC or a cash deposit (e.g. when de-leverage has occurred).

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At Inception, if = M, where M = 5.

If the ratio of the FC (or Participation) over the “Partial” Equity Gap (EGadj)

decreases below pre-defined trigger levels a reallocation from CC to FC

will occur.

If the ratio of the FC (or Participation) over EGadj increases above pre-

defined trigger levels (e.g. 5.5) an allocation (or “de-allocation”) from the

FC to the CC will follow.

The Issuer guarantees against Gap Risk, thus ensuring that, at the very

least, a certain minimum percentage of highest NAV is available to the

Client on an ongoing basis.

where

EGadj = “Partial” Equity Gap

between the adjusted CPPI

Index and an agreed

percentage of highest NAV,

M = Multiplier, &

CAP = Leverage Cap

(typically 150%)

N.b. the maximum leverage

cap for fund-linked CPPI is

dependant on the volatility

of the underlying

investments

Participation typically = Min ( CAP , (EGadj x M) )

Gadj

rebalancing would typically be triggered if M = (<90% x M, >110% x M)

Participation


26

Why choose vanilla PCPI?In addition to the typical benefits of CPPI, the PCPI offers: Flexibility:

Open ended structure Continuous Offering

Immunity: No ‘pull-to-par’ effect of the

Bond Floor No Interest Rate Sensitivity No permanent cash-out event

Protection: protects a certain percentage of the highest investment value achieved since inception

Funding: when issued as a Fund issuance proceeds can remain with the Issuer of the Fund


Sample simulation Time(in Years)

0%

100%

0 1 2 3 4 5 6 7

Maturity

NAVFund NAV

200%

Equity NAV

Minimum Protected

Amount 80%

Equity Gap

This graph is for illustration purposes only and assumes a continuous protection level of 80%

27

Dynamic versus Static Comparison

Path-dependant

Participation variable

Initial participation usually >100%

Participation increases with

performance and/or tenor

Interest rates relevant over lifetime

Leverage & Participation variable

Greater flexibility to incorporate

coupons & distribution fees

Pay-out at maturity is the greater of

par and Note NAV

Path-independent

Participation fixed

Initial participation usually <100%

Participation increases with the

tenor of the Note

Interest rates relevant at inception

Leverage & Participation fixed

Pay-out at maturity is equal to Par

plus a pre-defined percentage of

any out-performance of the

underlying asset

The vast majority of Fund Linked Structured Products comprise of ”CPPI” style Principal Protected Notes.

Dynamic CPPI Structures Static Structures

28

Potential Benefits

Yield enhancement

Limited recourse leverage

Efficient use of capital

Efficient risk budgeting – between asset classes and within a fund of funds portfolio

Cost of leverage is still low – but increasing!!

Potential Benefits

Yield enhancement

Limited recourse leverage

Efficient use of capital

Efficient risk budgeting – between asset classes and within a fund of funds portfolio

Cost of leverage is still low – but increasing!!

Leveraged Products

Securities, Derivatives or Funds providing leveraged participation to the performance of underlying Funds (or Fund-of-funds)

Maximum loss is limited to the initial investment (limited liability)

Leveraged Products

Securities, Derivatives or Funds providing leveraged participation to the performance of underlying Funds (or Fund-of-funds)

Maximum loss is limited to the initial investment (limited liability)

Summary Overview

Pass-Through Products

Securities linked to the performance of underlying Fund (or Fund-of-funds)

No principal protection or leverage – mirrors performance of underlying Fund 1:1 (gross of fees)

Pass-Through Products

Securities linked to the performance of underlying Fund (or Fund-of-funds)

No principal protection or leverage – mirrors performance of underlying Fund 1:1 (gross of fees)

Potential Benefits

Operationally easy access to fund investments – especially alternative investments

Increased liquidity

Possibility of hedging currency risk

Regulatory treatment

Tax treatment

Mitigation of reputation risk

Potential Benefits

Operationally easy access to fund investments – especially alternative investments

Increased liquidity

Possibility of hedging currency risk


Tax treatment

Mitigation of reputation risk

Delivered in:

MTN

SPV

Certificate

Schuldschein

TRS

Potential Benefits

Limited downside on actively managed investments

Lowers the barrier of entry into new asset classes


Reduces reputation risk

Tax treatment

Flexibility – possibility to include leverage and modify cash flow profile

Potential Benefits

Limited downside on actively managed investments

Lowers the barrier of entry into new asset classes


Reduces reputation risk

Tax treatment

Flexibility – possibility to include leverage and modify cash flow profile

Protected Products

Securities, Derivatives or Funds providing participation to the performance of an underlying Fund, whilst protecting part or all of initial investment

Protected Products

Securities, Derivatives or Funds providing participation to the performance of an underlying Fund, whilst protecting part or all of initial investment

29

James Galvin

Assistant Director

London +44 207 678 5851

[email protected]

Fund Linked Derivatives Marketing Team (Europe)

Jackie Lin

Vice President

Hong Kong (852) 2700-3165

[email protected]

Richard Patey

Director

London +44 207 678 6137

[email protected]

Contacts

Fund Linked Derivatives Marketing Team (Asia)

Stephen Kingham

Global Head

London +44 207 678 5449

[email protected]

Pieter Oyens

Head of Asia

Hong Kong (852) 2700-3170

[email protected]

Thomas Jamet

Vice President

Hong Kong (852) 2700-3026

[email protected]

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Disclaimer

This document has been prepared for professional and institutional clients by ABN AMRO Bank N.V. and its affiliates (“ABN AMRO”) for information and discussion purposes only. It shall not be construed as, and does not form part of an offer, nor invitation to offer, nor a solicitation or recommendation to enter into any transaction, nor is it an official or unofficial confirmation of terms. No representation, warranty or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained herein. ABN AMRO accepts no obligation to any recipient to update or correct any such information. No act or omission of ABN AMRO or any of its directors, officers, employees or agents in relation to the information contained herein shall constitute, or be deemed to constitute, a representation, warranty or undertaking of or by ABN AMRO or any such person. Any person who subsequently acquires securities or other financial interests mentioned herein must only rely on the terms of the definitive Offering Circular to be issued in connection herewith, on the basis of which alone subscriptions for securities or other financial interests may be made. This document does not constitute an Offering Circular and is not intended to provide the sole basis for any evaluation of transactions in securities or financial interests mentioned herein.ABN AMRO may act or have acted as market-maker in the securities or other financial instruments discussed in this material. ABN AMRO or its officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this material may from time to time have long or short positions in securities or other financial instruments referred to in this material. ABN AMRO is not acting as a financial adviser or in a fiduciary capacity in respect of any transaction or the securities or other obligations referred to herein. ABN AMRO makes no representation and gives no advice in respect of any tax, legal or accounting matters in any applicable jurisdiction. This document is not intended for distribution to, or use by private customers or any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information contained herein is proprietary to ABN AMRO is provided upon request to selected recipients and may not be given (in whole or in part) or otherwise distributed to any other third party without the written permission of ABN AMRO. Distribution of the document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of ABN AMRO Incorporated, Park Avenue Plaza, 55 East 52nd Street, New York, N.Y. 10055, US, tel +1 212 409 1000, fax +1 212 409 5222ABN AMRO is authorised by De Nederlandsche Bank and by the Financial Services Authority; regulated by the Financial Services Authority for the conduct of UK business. This document may only be distributed in the United Kingdom to market counterparties and intermediate customers as defined by the Financial Services Authority.

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