Andrew McCafferyAberdeen Asset Management

Absolute return investing, looking to achieve higher quality risk adjusted returns

International Investment Italian Forum 2007

2

Cumulative and yearly asset flows

Overall asset inflows

• The hedge fund industry has experienced record inflows in 2006, and even higher to new records n 2007

• Asset inflows into all strategies totaled $126bn in 2006, compared to $47bn in 2005 and $74bn in 2004. Database provider totals range from $2.1trn - $2.5trn now

• Industry has experienced 25% YoY growth since 1990

• However still small when compared with global asset values – Est $160trn worldwide, so less than 2% of assets

Source: Hedge Fund Research, OECD

The hedge fund industry has experienced high levels of asset inflows in recent years

1,105

4

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18616716896

5839

257

368 375 456539

626

820

973

1,427

91 57 15 37 28 8

-1

55 23 4799 71 74 47 126

-5050

150250350450550650750850950

1,0501,1501,2501,3501,4501,5501,650

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Ass

ets

($bn

)Estimated assets (including performances) Estimated asset flow

The ‘Institutional Age’ begins...

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From 90%+ in Global Macro only in 1990

Estimated HF strategy decomposition

Source: HFR

Sector 5.1%

Equity non-hedge 4.2%

Equity market neutral 2.5%

Equity hedge 28.8%Equity 40.6%

Fixed income relative value 2.9%

MBS 2.1%

High yield 0.9%

Diversified 1.2%

Convertible bonds 0.1%

Relative value arbitrage 13.3%

Merger arbitrage 1.6%

Convertible arbitrage 3.2%

Fixed income 7.2%

Arbitrage 21.0%Regulation D 0.2%Short selling 0.3%Market timing 0.4%

Event driven 13.6%

Distressed securities 4.4%

Emerging markets 4.4%

Macro 11.0%

Growing diversity, growing opportunity

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Simple perspectives on ‘Absolute Return’

• Absolute Return – A style of investing that seeks to preserve capital and produce superior risk adjusted returns

- Lowly or non correlated performance to traditional asset classes

- Minimise downside losses through active, specialised investment and risk management

• The Absolute Return approach combines traditional fund manager’s skills of exploiting market opportunities with the trader’s skill in managing total risk to produce a positive asymmetric return profile

• Can be viewed as a portfolio where you use ‘cash’, or the ‘risk free rate’, as the ‘benchmark’ and the manager is actively seeking to hedge out the downside risks

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What are ‘Absolute Return strategies’?

• Portfolios are not artificially constrained, ensuring access to the most attractive asset classes and financial instruments types in all market conditions

• Utilises:

- Leverage – To enhance returns in high confidence trades

- Short sales – To take advantage of downside movement in markets and individual securities

- Combining leverage and short selling allows one to manage/reduce risk within a portfolio, eg

• As a fundamental view driven trade, eg sell an equal risk amount of BP (equity or credit risk) vs a long position in an Exxon Mobil security

• By allowing offsetting exposures to be created, eg sell a CDS vs convertible bond credit risk

• Skilfully combined together, within a strong risk management framework, it provides the opportunity to improve the quality of returns and utilise risk more cost effectively

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Perspectives on portfolio risk

Relative-return model (market-based)

Absolute-return model (skill-based)

Return objective Relative to an asset benchmark Absolute, positive return

This means: Capture asset class premium Identify and exploit investment opportunities

Risk management Tracking error to benchmark Total risk of positions, ‘tail risk’ management

This means: Capture asset class premium Preserve capital

Source: Original – UBS AS/AAM

Symmetrical return profile

Asymmetrical return profile

Measure value of portfolio at risk, assess how different stress scenarios can impact and then actively manage the profile

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Hedge fund assets still small, ‘alpha’ to remain plentiful for the skilled…

Sources: OECD/IMF/IFSL/ICI/HFR/Morgan Stanley, Q2 07

160.0

44.0 40.8

23.2 20.216.6

2.5 2.0+2.5+

33.3

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Institutionalinvestors

Global(domestic)

bonds

Globalequities

Globalwealth HNWI

Globalpensionfunds

Globalmutual funds

Globalinsurance

assets

SWFs Largestglobal AM

Global hedgefunds

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CDS now in excess of $45trn, Equity at $10trn+, with IR/FX OTC above $350trn*

Growth of OTC credit and equity derivative markets – Innovation accelerates and liquidity grows…

* End H1 07Source: ISDA Market Dealers Survey data

Corporate bonds o/s 2.0 2.5 3.0 3.5 3.8 4.2 5.0 5.0 4.8 5.1

Credit default swaps - - - - 0.9 2.1 3.8 8.4 17.0 26.0

OTC equity derivatives - - - - - 2.4 3.4 4.1 5.5 6.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

$trn

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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Hedge funds: Low correlation, enhancing diversification benefits

Since Jan 93 WGBI WORLD FIXED INC ARB EMERG MARKETS

MSCI WORLD CONV ARBITRAGE

EQUITY MKT NTRL

LONG/ SHORT EQTY

GLOBAL MACRO

Annualised rate of return 5.52% 6.11% 7.10% 7.70% 8.43% 9.45% 10.66% 12.01%

Standard deviation 6.34% 3.77% 16.81% 13.77% 4.67% 2.85% 9.93% 10.67%

Information ratio* 0.87 1.62 0.42 0.56 1.80 3.32 1.07 1.13

CONV ARBITRAGE

EMERG MARKETS

EQUITY MKT NTRL

FIXED INC ARB GLOBAL MACRO

LONG/SHORT EQTY

MSCI WORLD WGBI WORLD

CONV ARBITRAGE 1

EMERG MARKETS 0.34 1

EQUITY MKT NTRL 0.34 0.23 1

FIXED INC ARB 0.54 0.28 0.11 1

GLOBAL MACRO 0.31 0.40 0.20 0.48 1

LONG/SHORT EQTY 0.29 0.62 0.34 0.21 0.42 1

MSCI WORLD 0.14 0.56 0.34 0.05 0.19 0.64 1

WGBI WORLD -0.08 -0.16 0.10 -0.08 -0.12 0.06 0.07 1

* Information ratio defined as the excess returns over the benchmark divided by the volatility of the portfolio return, ie the return per unit of riskSource: CSFB/Tremont

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Rolling 12 month correlations*

Correlation movement

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Funds of Hedge Funds Multi-Strategy Funds

* 1 year rolling correlation vs MSCI WorldSource: HFR, CS Tremont, MSCI

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Outperforming in bad years, and good years…

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2002Lehman Bond Agg 10.26HFRI Convertible Arbitrage Index 9.05 HFRI Fixed Income 8.87 HFRI Macro Index 7.44 HFRI Relative Value Arbitrage Index 5.44 HFRI Fund of Funds Composite Index 1.02 HFRI Merger Arbitrage Index -0.87 HFRI Fund Weighted Composite Index -1.45 HFRI Event-Driven Index -4.30 HFRI Equity Hedge Index -4.71 S&P500 -17.82MCSI World -21.05S&P MIB -27.74

Returns in 2002 – A bad year for equitiesAbsolute return Traditional indices

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Returns in 2006 – A good year for equities

2006HFRI Emerging Markets 24.29S&P MIB 20.02HFRI Equity Market Neutral Index 17.56HFRI Merger Arbitrage Index 15.67HFRI Event-Driven Index 15.30MSCI World 13.51HFRI Fund Weighted Composite Index 12.85HFRI Relative Value Arbitrage Index 12.38HFRI Convertible Arbitrage Index 12.17S&P500 12.09HFRI Equity Hedge Index 11.68HFRI Fund of Funds Composite Index 10.35HFRI Fixed Income 8.87HFRI Macro Index 8.54Lehman Bond Agg 4.33

Absolute return Traditional indices

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Hedge funds perform well in positive and negative markets

Hedge funds: A longer term performance perspective

Source: CSFB/Tremont indices data

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1993 1995 1996 1997 1998 2000 2001 2002 2003 2005 2006

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MSCI World Long/Short Eqty WGBI World

High quality of downside risk management pays dividends over time

Value of the preserving capital principle

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Performance statistics

* One zero return monthSource: HFRI, CS Tremont 1 Jan 96 – 30 Sep 07, monthly return data

Equity/bond and hedge fund indices

  WGBI/MSCI World 50/50 weighting HFRI fund of funds CS Tremont Multi-Strategy

Return statistics    

Annual average compound return 6.19% 8.14% 10.01%

Positive months 89 95 121

Negative months 51 45 19

Best month 18.99% 6.85% 3.12%

Worst month -16.68% 7.47% -4.76%

Maximum 12 months rolling 24.46% 29.14% 19.03%

Minimum 12 months rolling -10.68% -9.18% 2.07%

Maximum drawdown -20.25% -14.02% -4.88%

Total return since inception 72.21% 158.34% 221.60%

Annualised standard deviation

Since inception 11.06% 5.81% 3.63%

Last 12 months 3.37% 4.04% 3.81%

Risk ratios

Sharpe ratio 0.19 0.66 1.51

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To summarise

• Absolute Return investing involves unconstrained and continually evolving strategies to capture market opportunities, both for the short term and the long term

• Absolute Return investing can deliver a diversifying return profile to underlying asset markets and high quality compounded returns through the active management to limit draw-downs

• Absolute Return investing benefits from a growing, and constantly innovating financial market, with access to the broadest range of trading and investment ideas available

• The quality of managing risk around trade and portfolio investments provides the opportunity for significantly higher quality risk adjusted returns versus outright exposure in asset markets in the medium to longer term

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For professional use onlyNot for public distribution

• Investors should be aware that past performance is not a guide to future returns, the price of shares and the income from them can fall as well as arise and investors may not get back the amount that they invested initially

• The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by intermediate customers/market counterparties and not the general public. The information is being given only to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of AAM