April 2014 | For professional investors or advisers only

Andrew Dreaneen Head of Schroder GAIA Product and Business Development

Family Office Forum Wiesbaden 5-7 May 2014

How to select an Alternative Fund Manager under UCITS

How to select an Alternative Fund Manager under UCITSAgenda

Hedge fund trends – how investors include hedge funds in portfolio construction/ how this has changed through time

Why liquid alternatives make sense now - a new tool in the tool kit, liquidity/ regulation, volatility management/ downside protection

Alternative UCITS trends – UCITS vs Offshore growth, largest UCITS funds/ largest platforms, very strong demand from private banks and family offices

How to select Alternative UCITS Funds –

Alternative UCITS platforms – high level overview, example of the benefits of including alternatives UCITS vs equity markets

Source: Schroders

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Two Key Hedge Fund Trends

Investors now see hedge funds as "shock absorbers"

1. Rationale for using hedge funds has changed through time

Source: Citi Prime Finance analysis, MSCI, S&P, Bloomberg, HFR, as at December 2012

Capture Excess Performance

Diversification & Risk-Adjusted Returns

Downside Protection

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Illustrative Risk-Aligned Institutional Investor Portfolio

2. Hedge funds now included in clients ‘core’ portfolio A risk aligned approach to portfolio construction, positioning strategies by directionality and liquidity

Source: Citi Prime Finance, as at November 2013

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The Rise of Alternative Mutual FundsA new tool in the toolkit for private banks and family offices

Overall Hedge Fund AUM Expected to Grow StronglyLiquid alternatives expected to grow to 1/3rd of total hedge fund AUM

Source: Citi Prime Finance analysis, SEI, Strategic Insight, Federal Reserve Current Populations Survey, Cerulli Associates, Deloitte Center for Financial Services, as at August 2013

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European Hedge Fund IndustryEvolution of AUM and Number of Funds

Source: Eurekahedge, as at 28 February 2014

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Feb

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

No. of Funds (LHS) AUM (RHS)

European Hedge Fund AUM back to all time peaks

No. of Funds AUM bn

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AUM: Offshore hedge funds vs. UCITS hedge funds Flows: Offshore hedge funds vs. UCITS hedge funds

European Hedge Fund IndustryInvestors now clearly prefer UCITS hedge funds

Source: Eurekahedge based on head office location Europe plus geographical mandate Europe, to 28 February 2014

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14200

220

240

260

280

300

320

340

360

380

400

420

440

0

20

40

60

80

100

120

140

160

180

200

220

240

Offshore European Hedge Funds (LHS)UCITS European Hedge Funds (RHS)

Au

M (

$B

n)

Au

M (

$B

n)

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

UCITS European Hedge FundsOffshore European Hedge Funds

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Alternative UCITS AUM has increased substantially since 2009 and now stand at c.€200bn (c.$290bn)

There are 768 single manager alternative UCITS in the market today, 75% of these have been launched since 2009

Alternative UCITS GrowthEvidence of strong investor demand

Source: ALIX Capital, 28 February 2014

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Offshore hedge funds 18x larger than 40 Act alternatives but only received 1.5x 12 month net flows

40 Act alternatives industry grown at CAGR 33% (vs. 14% for offshore hedge fund industry)

40 Act alternative funds managed by a hedge fund manager have grown even faster at 83% CAGR

Similar Growth Dynamics in the US Mutual Fund (40Act)The rise of the liquid alternatives market in the US

Source: Strategic Insight, Morningstar, as at June 2013

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2013 Hedge Fund AUM by Investor SegmentUCITS hedge fund growth fuelled by European Private Banks and Family Offices

Source: Towers Watson Global Pension Asset Study, Towers Watson Global Alternatives Survey, Swiss Re Sigma Report, NA CUBO-Common fund Institute Endowment study, Wharton Global Family Alliance Single Family Office Study, Scorpio Partnership Global Private Banking Asset Allocator, OECD Sovereign Wealth and Pension Fund Issues, and strategic Consulting 2014 Market Sizing Model, as at December 2013

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Adoption by more advisors contribute to growth over next 5-10 years – similar to ETF’s

Will Liquid Alternatives Follow Same Trajectory as ETFs?c.400 US40Act alternative mutual funds today – same as ETFs in 2006

Sources: Goldman Sachs, Simfund, Cerulli Associates, as at December 2013

"Retail Liquid Alternatives: the next frontier" is a US$ 2 trillion AUM 5 to 10 years from now.

Goldman Sachs

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Why Liquid Alternatives now?

HFI Alternative UCITS Index vs. traditional 60/40 portfolio

Liquid Alternatives have superior risk adjusted returns

Source: Citi Prime Finance analysis, Hedge Fund Intelligence Alternative UCITS Composite Index, Bloomberg, MSCINote: Traditional Investment Portfolio comprised of 60% equity investment represented by the MSCI World Index and 40% fixed income investment represented by the Citigroup Big Bond Index, as at February 2013

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Main reservations and typical alternative allocationsFees, Liquidity, Education

Sources: Goldman Sachs, Morningstar/Barron’s, McKinsey, Simfund, November 2013

Can retail allocations to alternatives increase with the introduction of Liquid Alternatives?

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Barbell Approach – Blending ETFs With Liquid AlternativesBarbelling expected to help drive liquid alternatives growth

What is the “barbell”?

As investors are focussed on fees and increase allocations to ETFs for cheap beta these fee savings can support the growth of the more expensive liquid alternative mutual funds and potentially see allocations increase from 4% currently to 16% over the next 5-10 years

Source: Goldman Sachs Global Investment Research, as at November 2013

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How to select Alternative UCITS Funds

Manager Selection Process and MonitoringOverview

Source: Schroders, April 2014

Strategy Selection

Investment Due Diligence

Operational Due Diligence

Ongoing Risk Management

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Strategy SelectionSearch for products that fit within the UCITS framework

Source: Schroders as at 31 March 2014Note: this chart is meant to be indicative only. There will be different types of funds within each of these strategies which may or may not be eligible for UCITS. Each hedge fund needs to be evaluated on a case by case basis. Sophisticated UCITS funds can potentially permit high leverage, so long as VaR limits are respected

More leverage

Less LiquidLiquid

No Leverage

Macro & CTA

Long short equity (trading)

Convertible bond arbitrage

Long short equity (fundamental)

Event driven(Equity)

Long biased convertible bonds

Fixed income arbitrage

Long short equity (small cap)

Event driven (credit)

Emerging Market credit

Long short credit

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Investment Manager SelectionPerform full due diligence based on key requirements for a given strategy

Investment Due Diligence

Experience

Track record and skill

Investment Process

Integrity

Size

Reputation

Risk Due Diligence

Risk management capabilities

Fit with UCITS constraints

– Liquidity

– Eligible assets

– Leverage

– VaR

Initial review of available regulatory, marketing, and personnel materials

Full documentation review covering all key business areas

Onsite visit including thorough validation of all points and processes raised in the documentation review

Operational Due Diligence

Source: Schroders, April 2014

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Introducing Alternative UCITS Platforms

Alternative UCITS Platforms

Source: Kepler Partners LLP as at December 2013

Investment Bank Platforms Asset Manager Platforms Independent/ Boutique Platforms

Merrill Lynch Investment Solutions Schroder GAIA Alceda UCITS Platform

Deutsche Bank Luma Solutions Services Alpha UCITS

Goldman Sachs Lyxor Asset Management Altex UCITS

JP Morgan Mansart Investments E.I. Sturdza Strategic Management Ltd Bryan Garnier

Morgan Stanley FundLogic Independent UCITS

Nomura AIM Montlake UCITS Platform

SEB Prime Solutions UCITS Universal Investments

UBS Liquid Alpha

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Schroder GAIA is a Market Leading PlatformLargest alternative UCITS platforms by AUM

Source: Schroders and Bloomberg as at 31 March 2014

16 6 19 12 15 3No ofFunds

AUM USD(m)

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0

1000

2000

3000

4000

5000

6000

Schroder GAIADedicated platform for liquid alternative strategies

Offers access to leading hedge fund managers in a transparent format

The individual mutual funds on the platform are subject to ‘gold standard’ regulation

The funds are directly invested as opposed to a master feeder/index approach

Active risk management performed by managers and independently by Schroders

Schroders performs extensive due diligence on each external manager

There are no side pockets or investor lock ups

Source: Schroders

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Schroder GAIA

Source: Schroders as at 31 March 2014. *hard closed **scheduled hard closure *** subject to CSSF approval

Fund Strategy Geographic Focus Portfolio Manager (External) Launch Date AUM (USD)

Schroder GAIA Egerton Equity* Equity long short Europe & US John Armitage, Egerton Capital 25 Nov 09 1,403m

Schroder GAIA Sirios US Equity** Equity long short Predominantly US John Brennan, Sirios Capital Management 27 Feb 13 2,873m

Schroder GAIA Avoca Credit Credit long short Predominantly Europe Simon Thorp, Avoca Capital Management 6 Nov 13 394m

Schroder GAIA Paulson Merger Arbitrage***

Merger Arbitrage US, Canada and Western Europe John Paulson, Paulson & Co. TBC 25m

(seed capital)

Fund Strategy Geographic Focus Portfolio Manager (Schroders) Launch Date AUM (USD)

Schroder GAIA Global Macro Fixed Income Macro Global Bob Jolly, Schroders 1 Oct 12 124m

Schroder GAIA Cat Bond** Catastrophe Bonds Global Daniel Ineichen, Schroders 21 Oct 13 701m

Overview of sub-funds

Total AUM 5,520m

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Schroder GAIA Alternative UCITS fundsFocus on well established managers with long track records

Source: Morningstar. Analysis shown from January 2002 (common inception date) to February 2014. CQS has been excluded given the strategy launched in 2008. The data shown for ‘Paulson’ and ‘NGA’ is the net performance of existing offshore hedge fund strategies we plan to launch on Schroder GAIA during 2014. The performance is indicative only and the past performance of the offshore fund should not be taken as a guide to future performance of the potential GAIA fund

Egerton

Sirios

Avoca

Paulson

NGA

MSCI World

Egerton Avoca

MSCI World

Sirios

Paulson NGA

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Schroder GAIA Alternative UCITS fundsAll strategies have outperformed equity markets on a risk adjusted basis

Source: Morningstar. Analysis shown from January 2002 (common inception date) to February 2014. *Planned launches in 2014. The data shown for ‘Paulson’ and ‘NGA’ is the net performance of existing offshore hedge fund strategies we plan to launch on Schroder GAIA during 2014. The performance is indicative only and the past performance of the offshore fund should not be taken as a guide to future performance of the potential GAIA fund

EgertonSirios Avoca

MSCI World

PaulsonNGA

Return Std Dev Sharpe Ratio

Schroder GAIA NGA Liquid Distressed* 13.1 12.2 0.9

Schroder GAIA Paulson Merger Arbitrage* 12.2 8.1 1.3

Schroder GAIA Avoca Credit Long Short 9.8 7.2 1.1

Schroder GAIA Egerton Equity Long Short 10.0 8.8 1.0

Schroder GAIA Sirios US Equity Long Short 8.1 9.0 0.7

MSCI World 4.9 14.6 0.3

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Leading Alternative Investment Managers Combine Managers for Superior Risk Adjusted Returns

Schroder GAIA Alternative UCITS fundsCombining alternative funds provides superior risk adjusted returns

Source: Morningstar. Analysis shown from January 2002 (common inception date) to February 2014. * The data shown for ‘Schroder GAIA Alternative UCITS’ represents a 20% allocation to each of the existing Schroder GAIA funds (Egerton, Sirios and Avoca) and a 20% allocation to each of the strategies we plan to launch on Schroder GAIA during 2014 (Paulson and NGA). This portfolio is a simulation and has been used for illustrative purposes only

Schroder GAIA Alternative UCITS*

MSCI World NR LCL

Return Std Dev Sharpe Ratio

Schroder GAIA Alternative UCITS* 10.8 6.3 1.4

MSCI World NR LCL 4.9 14.6 0.3

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Conclusion

Alternative mutual funds represent a new and rapidly growing asset class for investors

Long short strategies make sense now to help diversify client portfolios

Investors should consider blending long only strategies together with long short strategies and include alternative funds within the core portfolio as opposed to an alternatives bucket

Family Offices and Private Banks should focus on established managers that have a proven track record of producing consistent risk adjusted returns

Emphasis should be on strategies with uncorrelated returns streams, reduced volatility and proven downside protection

The Schroder GAIA platform offers a select group of high quality alternative investment managers within the safeguards of a liquid mutual fund format which is subject to ‘gold standard’ regulation.

Source: Schroders, April 2014

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This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder GAIA (the “Company”). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copied of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus.

Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Schroders has expressed its own views and opinions in this document and these may change.

Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.lu contains additional disclaimers which apply to the third party data. Schroders has expressed its own views and opinions in this presentation and these may change.

This presentation is issued by Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, all telephone calls are recorded.

Important information

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