Independent specialists in tailor-made portfolios of hedge funds since 1989International Asset Management Limited

Managing Risk in a Fund of Hedge Funds post 2008– A personal perspective two years on

Bernard Minsky

Head of Portfolio Analysis and Risk Management

June 2010

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Agenda

A chronology – 2006 to 2010

Risk management before 2008

Our view in December 2008

Fifteen minutes of fame

Brave New World or Animal Farm

Not just about risk management

Concluding thoughts

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A chronology – 2006 to 2010

Jan Feb Jun Aug Sep Dec

2007

MarketSub prime

losses emergeBear Stearns

HF failQuant equity

lossesNorthern Rock

bailed out by HMG

IAMTCI writes toABN AMRO

Increase allocation to conviction picks

Consortium buysABN AMRO

IAM Managementstart negotiating

buy-out

Jan-Feb Mar Jul Aug Sep Oct-Dec Dec

2008

MarketPeloton and Carlyle

hedge funds failBear Stearns bailed by JP Morgan/Fed

Lehman bankruptcy, AIG, ML etc

Market turmoil,liquidity strike

Madoff fraud‘exposed’

IAMFIRV managers under spotlight

Employees buy- back from Fortis

Enhanced risk management

approved

Portfolio losses and redemptions

IAM never hadMadoff exposure.

Jan Mar Apr Oct Dec

2009

MarketEquity and credit

markets turn positiveAIFM draft published

Galleon insider trading

New Greek Govt austerity programme

IAMPortfolio rotation

programme startsPortfoliosbearish

Review risk aggregator products

First significant new client portfolio

Jan-Apr Apr May

2010

MarketContinuing fallout

from GreeceSEC sues Goldman

SachsEU bailout, Club Med

risk

IAMStart Risk

Aggregation project

Jan

2006 IAMABN AMRO

buys IAM

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IAM risk management before 2008

Strong due diligence programmeCollegiate style of portfolio management

Issues with approach

Never invested in fraud or operational

blow ups

Tremendous network of contacts for

reference checking

Conservative approach, true due

diligence veto

Bespoke portfolios not

comingled funds

Manager driven

Subjective approach to sizing

Lack of detailed risk exposure

reporting by managers

Difficult to compare risk across

managers even within a strategy

Under-use of background

checking agencies

Research analysts assessed

manager’s investment risk profile

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Our view in December 2008: Macro events

Credit crisis Policy shiftsEvent risks raise correlation levels dramatically

Financial system became too complex

for its own good

When banks are in trouble we are all

in trouble

2007’s year-end liquidity crisis did not

reverse in January as many

anticipated

Central banks concerned with inflation

through early 2008 (not Fed)

Targeted changes to short-selling in

July and September

Government providing capital to banks

Loose monetary policies

Credit crunch has spiraled into a

widespread liquidity and

confidence crisis

Question marks regarding bank

solvency triggered further redemptions

which has a knock-on effect

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Our view in December 2008: Industry issues

Shorting Redemption risk Financing

Short selling regulatory changes

Pension fund stock lending shifts will

cause the largest risk

“Short-termism” in the hedge fund

investing community

– Money classed as long term

suddenly ‘hot’

– “Game Theoretic” pre-emptive

redemptions

Madoff devastates remaining

confidence in hedge funds credibility

Private bank redemptions expected to

be much greater than institutional

Significant number of financial

institutions reducing/withdrawing

credit lines to funds

Trade financing that is offered will be

more expensive

Longer duration trades financing will

continue to be problematic

Reduced range of securities financed

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Our view in December 2008: IAM challenges

Manager selection Slow to sell Long/Short managers Difficult to rotate in and out of strategies

High profile blowups avoided such

as Madoff, Focus, Ospraie,

Peloton, Carlyle

Several IAM managers performed

poorly, but to a lesser extent

Sizing and asset allocation have been

a negative factor

Slow to react to differing views

amongst credit and equity managers

Increased risk outlook and reduced

allocation but not by enough

Too many of our managers remained

long bias or with high level of

gross exposure

Had not converted a positive outlook

on certain strategies to

investable opportunities

Perceived lack of suitable managers in

these strategies

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Our view in December 2008: A changed industry

Less crowding Simplicity of strategy Less leverage

Fewer risk takers in the industry

Fewer funds

Simple equity long/short, trading, event

driven, credit arbitrage have the

greatest opportunities going forward;

Small Relative Value funds

(<US$1 billion) will be problematic, as

prime brokers will offer less attractive

credit lines

Smaller long/short equity funds will not

be impacted, as they are less reliant

on financing

Little appetite for path-

dependant strategies

Too much volatility

Investment bank model

has disappeared

Quality of risk/reward under

more scrutiny

There will still be attractive

opportunities on an unlevered basis,

with no threat of overcrowding

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Our view in December 2008 – IAM Response

Macro events Industry issues IAM challenges Changed industry

Development

at IAM

Developed strategy

forecasting process

Emphasised top-down

asset allocation

Renewed focus on:

Redemption risk

Counterparty risk

New Corporate

Governance

Portfolio management

process review

Consolidation

of names

Risk budgeting

New opportunities:

CTA basket

Macro

Equity Long/Short

Long/Short Credit and

Distressed

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Fifteen minutes of fame

Nobody thanks you for saying yes…

…but they know who to blame if it goes wrong

Risk management in bright focus

Conflicts in responsibility for manager liaison and risk

management

Everybody second guesses… with hindsight, but we did

make mistakes

Bespoke portfolios sheltered from “Game Theoretic”

redemptions

Strong operational due diligence meant no Madoff

A chance to make changes

Managers becoming more transparent

Framework for quantitative approach already in place

Profile of good risk control procedures raised to highest level

Every client and prospect wants to meet the risk team

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Brave New World or Animal Farm

Rewrote Risk Policy for new board to approve

Founded Risk and Compliance Committee as sub-committee of the Board

Changed reporting line for Head of Due Diligence

Introduced quantitative risk budgeting process

Subscribe to risk aggregation service, and background checking service

Revamped monitoring of existing managers to align with governance change

Overcoming scepticism within the firm

Finding resources to produce the analyses

Gaining manager support to increase portfolio transparency

Allowing portfolio managers to manage, yet

Justifying the controls as markets ease and avoiding pro-cyclicality

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New risk budgeting process

Objective Approach Output

To quantify worst-case losses without

diversification considerations

To set allocation limits for each

underlying manager

To ensure PMC decisions are made in

a risk aware framework

Use up-to-date readily available

data from managers: i.e. exposure;

maximum drawdown,

portfolio concentration

Each fund is rated according to how it

reacts to a battery of stresses, and

measured across four factors:

1. Directionality

2. Concentration

3. Leverage

4. Liquidity

The risk budget framework assigns a

maximum allocation (as a % of the

portfolio) to each approved manager

Risk budgets are mandatory and rules

for managing breaches are in the

firm’s policies

Risk budgets are specific to mandated

portfolio risk tolerance

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Risk budgets

 Manager1. Credit

Fund

2. Event

Driven Fund

3. Equity

Market

Neutral

4. Long-

Biased

Equity Fund

5. Macro

Fund

6. Short-term

CTA

7. Generic

CTA

Market Risk Test (%) 0.5 9.0 3.0 12.8 28.2 4.7 7.6

Concentration Test (%) 4.9 4.5 2.0 2.8 0.0 0.0 8.9

Leverage Test (%) 10.0 4.3 3.1 3.6 32.1 3.6 5.0

Historic Max Drawdown (%) x 67% 1.2 2.5 2.3 21.5 5.4 6.7 17.2

Liquidity Rating 2 3 1 1 1 1 1

Worst Case Loss (%) 12.5 13.5 3.1 21.5 32.1 6.7 17.2

Low Risk Appetite (%) 4.0 3.7 16.1 2.3 1.6 7.5 2.9

Medium Risk Appetite (%) 6.0 5.6 24.2 3.5 2.3 11.2 4.4

High Risk Appetite (%) 8.0 7.4 32.3 4.6 3.1 14.9 5.8

Example – Proposed Allocation in

a High Risk Portfolio

(3–8% min/max allocation)

4.5 4 8 3 1 6 4

Source: IAM.

Portfolio Construction

Optimal strategy weights

Approved manager suitability

Portfolio Management Committee approval

Rigorous testing through IAM Software

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Downside risk measurement rather than dispersion measurement

Co-drawdown is the probability of the column fund suffering a loss at the same time a row fund suffers a loss.Source: IAM.

High Correlation Medium Correlation Low Correlation

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

1 AlphaGen Crucis 100.0% 48.0% 56.2% -25.7% 18.8% 5.3% 70.3% 16.9% 50.3% 35.8% 42.9% 43.9% 55.2% 15.5% 64.3% 25.8% 1.2% 15.1% -20.5% -45.4% 23.4% -3.3% 23.2%

2 Alydar Capital 48.0% 100.0% 36.5% 6.1% 52.1% 26.1% 31.6% 41.8% 45.1% 60.0% 36.7% 31.9% 32.7% 33.9% 29.1% 30.7% -4.2% 11.3% -2.0% 7.0% -1.3% 22.5% -8.3%

3 Asian Credit Hedge 56.2% 36.5% 100.0% 12.4% 34.2% 43.9% 59.9% -21.3% 69.7% 61.7% 27.9% 69.8% 36.2% 9.2% 79.2% 61.5% 34.0% 13.2% -20.0% 11.0% 46.9% 3.5% 62.1%

4 BlueTrend -25.7% 6.1% 12.4% 100.0% 28.5% -3.2% -34.2% -3.8% 14.1% 5.3% 14.2% 19.7% -16.9% 30.1% -3.2% 40.6% 38.5% 46.1% 8.1% 69.8% 18.2% 44.5% 7.2%

5 Capula Global Relative Value 18.8% 52.1% 34.2% 28.5% 100.0% 31.9% 12.9% 11.2% 37.0% 46.7% 34.1% 38.3% 22.1% 38.4% 18.0% 32.9% -0.2% 20.7% -26.6% 14.1% -4.0% 51.7% 10.6%

6 Claren Road Credit 5.3% 26.1% 43.9% -3.2% 31.9% 100.0% 4.6% -24.9% 10.1% 67.2% 7.9% 21.5% -3.4% 17.2% 35.9% 32.9% 11.1% -38.6% 25.9% 36.1% 2.3% 36.2% 48.9%

7 Davidson Kempner International 70.3% 31.6% 59.9% -34.2% 12.9% 4.6% 100.0% 8.0% 70.5% 42.8% 5.6% 65.4% 36.6% -19.9% 77.6% 19.2% -5.0% 5.0% -29.2% -33.8% 45.3% -28.3% 29.3%

8 DB Equilibria J apan 16.9% 41.8% -21.3% -3.8% 11.2% -24.9% 8.0% 100.0% 17.0% 9.6% 22.0% 18.0% 15.3% -11.9% -4.0% -16.4% -33.3% 29.7% 26.4% -20.3% -14.2% 17.0% -40.9%

9 EB Asia Absolute Return 50.3% 45.1% 69.7% 14.1% 37.0% 10.1% 70.5% 17.0% 100.0% 63.5% 19.9% 74.5% 21.6% -1.8% 67.6% 47.7% 11.3% 24.5% -27.1% 3.6% 54.6% 5.9% 24.3%

10 Exane Templiers fund 35.8% 60.0% 61.7% 5.3% 46.7% 67.2% 42.8% 9.6% 63.5% 100.0% 4.9% 57.2% -8.4% -4.5% 62.6% 32.4% -9.5% 2.2% 17.3% 31.4% 45.9% 41.6% 26.5%

11 Horizon P ortfolio Ltd 42.9% 36.7% 27.9% 14.2% 34.1% 7.9% 5.6% 22.0% 19.9% 4.9% 100.0% 23.3% 72.5% 62.4% 22.2% 62.7% 51.5% -6.3% -28.4% -24.1% -38.2% 1.9% 34.4%

12 Karsch Capital 43.9% 31.9% 69.8% 19.7% 38.3% 21.5% 65.4% 18.0% 74.5% 57.2% 23.3% 100.0% 29.6% -5.7% 81.3% 48.5% 18.3% 37.7% -4.1% 7.0% 52.9% 12.5% 52.5%

13 M&G Episode Inc. 55.2% 32.7% 36.2% -16.9% 22.1% -3.4% 36.6% 15.3% 21.6% -8.4% 72.5% 29.6% 100.0% 48.0% 32.1% 48.5% 37.8% -13.8% -39.0% -45.6% -34.2% -28.8% 33.7%

14 New Star UK Gemini Hedge USD 15.5% 33.9% 9.2% 30.1% 38.4% 17.2% -19.9% -11.9% -1.8% -4.5% 62.4% -5.7% 48.0% 100.0% -11.1% 55.3% 48.5% -5.8% -26.3% 9.1% -39.8% 20.8% 19.8%

15 OZ Overseas II 64.3% 29.1% 79.2% -3.2% 18.0% 35.9% 77.6% -4.0% 67.6% 62.6% 22.2% 81.3% 32.1% -11.1% 100.0% 46.7% 20.1% 7.3% 0.9% -1.0% 58.8% -6.7% 61.2%

16 P FM Diversified Offshore 25.8% 30.7% 61.5% 40.6% 32.9% 32.9% 19.2% -16.4% 47.7% 32.4% 62.7% 48.5% 48.5% 55.3% 46.7% 100.0% 81.9% -5.4% -25.2% 22.3% 6.8% 2.9% 62.3%

17 SCP Ocean 1.2% -4.2% 34.0% 38.5% -0.2% 11.1% -5.0% -33.3% 11.3% -9.5% 51.5% 18.3% 37.8% 48.5% 20.1% 81.9% 100.0% -15.7% -22.9% 12.8% -1.9% -19.3% 62.4%

18 TT Mid-Cap Europe Long Short 15.1% 11.3% 13.2% 46.1% 20.7% -38.6% 5.0% 29.7% 24.5% 2.2% -6.3% 37.7% -13.8% -5.8% 7.3% -5.4% -15.7% 100.0% 5.7% 8.4% 45.1% 42.4% -10.0%

19 Tudor Tensor -20.5% -2.0% -20.0% 8.1% -26.6% 25.9% -29.2% 26.4% -27.1% 17.3% -28.4% -4.1% -39.0% -26.3% 0.9% -25.2% -22.9% 5.7% 100.0% 39.6% 21.7% 32.9% -3.0%

20 Winton Futures -45.4% 7.0% 11.0% 69.8% 14.1% 36.1% -33.8% -20.3% 3.6% 31.4% -24.1% 7.0% -45.6% 9.1% -1.0% 22.3% 12.8% 8.4% 39.6% 100.0% 23.4% 38.0% 2.1%

21 York European Opportunities 23.4% -1.3% 46.9% 18.2% -4.0% 2.3% 45.3% -14.2% 54.6% 45.9% -38.2% 52.9% -34.2% -39.8% 58.8% 6.8% -1.9% 45.1% 21.7% 23.4% 100.0% 17.4% 26.2%

22 COMAC Global Macro Fund -3.3% 22.5% 3.5% 44.5% 51.7% 36.2% -28.3% 17.0% 5.9% 41.6% 1.9% 12.5% -28.8% 20.8% -6.7% 2.9% -19.3% 42.4% 32.9% 38.0% 17.4% 100.0% -5.5%

23 Brigade Lvgd. Cap. Structures Fund 23.2% -8.3% 62.1% 7.2% 10.6% 48.9% 29.3% -40.9% 24.3% 26.5% 34.4% 52.5% 33.7% 19.8% 61.2% 62.3% 62.4% -10.0% -3.0% 2.1% 26.2% -5.5% 100.0%

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High Correlation Medium Correlation Low CorrelationHigh Correlation Medium Correlation Low Correlation

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

1 AlphaGen Crucis 100.0% 48.0% 56.2% -25.7% 18.8% 5.3% 70.3% 16.9% 50.3% 35.8% 42.9% 43.9% 55.2% 15.5% 64.3% 25.8% 1.2% 15.1% -20.5% -45.4% 23.4% -3.3% 23.2%

2 Alydar Capital 48.0% 100.0% 36.5% 6.1% 52.1% 26.1% 31.6% 41.8% 45.1% 60.0% 36.7% 31.9% 32.7% 33.9% 29.1% 30.7% -4.2% 11.3% -2.0% 7.0% -1.3% 22.5% -8.3%

3 Asian Credit Hedge 56.2% 36.5% 100.0% 12.4% 34.2% 43.9% 59.9% -21.3% 69.7% 61.7% 27.9% 69.8% 36.2% 9.2% 79.2% 61.5% 34.0% 13.2% -20.0% 11.0% 46.9% 3.5% 62.1%

4 BlueTrend -25.7% 6.1% 12.4% 100.0% 28.5% -3.2% -34.2% -3.8% 14.1% 5.3% 14.2% 19.7% -16.9% 30.1% -3.2% 40.6% 38.5% 46.1% 8.1% 69.8% 18.2% 44.5% 7.2%

5 Capula Global Relative Value 18.8% 52.1% 34.2% 28.5% 100.0% 31.9% 12.9% 11.2% 37.0% 46.7% 34.1% 38.3% 22.1% 38.4% 18.0% 32.9% -0.2% 20.7% -26.6% 14.1% -4.0% 51.7% 10.6%

6 Claren Road Credit 5.3% 26.1% 43.9% -3.2% 31.9% 100.0% 4.6% -24.9% 10.1% 67.2% 7.9% 21.5% -3.4% 17.2% 35.9% 32.9% 11.1% -38.6% 25.9% 36.1% 2.3% 36.2% 48.9%

7 Davidson Kempner International 70.3% 31.6% 59.9% -34.2% 12.9% 4.6% 100.0% 8.0% 70.5% 42.8% 5.6% 65.4% 36.6% -19.9% 77.6% 19.2% -5.0% 5.0% -29.2% -33.8% 45.3% -28.3% 29.3%

8 DB Equilibria J apan 16.9% 41.8% -21.3% -3.8% 11.2% -24.9% 8.0% 100.0% 17.0% 9.6% 22.0% 18.0% 15.3% -11.9% -4.0% -16.4% -33.3% 29.7% 26.4% -20.3% -14.2% 17.0% -40.9%

9 EB Asia Absolute Return 50.3% 45.1% 69.7% 14.1% 37.0% 10.1% 70.5% 17.0% 100.0% 63.5% 19.9% 74.5% 21.6% -1.8% 67.6% 47.7% 11.3% 24.5% -27.1% 3.6% 54.6% 5.9% 24.3%

10 Exane Templiers fund 35.8% 60.0% 61.7% 5.3% 46.7% 67.2% 42.8% 9.6% 63.5% 100.0% 4.9% 57.2% -8.4% -4.5% 62.6% 32.4% -9.5% 2.2% 17.3% 31.4% 45.9% 41.6% 26.5%

11 Horizon P ortfolio Ltd 42.9% 36.7% 27.9% 14.2% 34.1% 7.9% 5.6% 22.0% 19.9% 4.9% 100.0% 23.3% 72.5% 62.4% 22.2% 62.7% 51.5% -6.3% -28.4% -24.1% -38.2% 1.9% 34.4%

12 Karsch Capital 43.9% 31.9% 69.8% 19.7% 38.3% 21.5% 65.4% 18.0% 74.5% 57.2% 23.3% 100.0% 29.6% -5.7% 81.3% 48.5% 18.3% 37.7% -4.1% 7.0% 52.9% 12.5% 52.5%

13 M&G Episode Inc. 55.2% 32.7% 36.2% -16.9% 22.1% -3.4% 36.6% 15.3% 21.6% -8.4% 72.5% 29.6% 100.0% 48.0% 32.1% 48.5% 37.8% -13.8% -39.0% -45.6% -34.2% -28.8% 33.7%

14 New Star UK Gemini Hedge USD 15.5% 33.9% 9.2% 30.1% 38.4% 17.2% -19.9% -11.9% -1.8% -4.5% 62.4% -5.7% 48.0% 100.0% -11.1% 55.3% 48.5% -5.8% -26.3% 9.1% -39.8% 20.8% 19.8%

15 OZ Overseas II 64.3% 29.1% 79.2% -3.2% 18.0% 35.9% 77.6% -4.0% 67.6% 62.6% 22.2% 81.3% 32.1% -11.1% 100.0% 46.7% 20.1% 7.3% 0.9% -1.0% 58.8% -6.7% 61.2%

16 P FM Diversified Offshore 25.8% 30.7% 61.5% 40.6% 32.9% 32.9% 19.2% -16.4% 47.7% 32.4% 62.7% 48.5% 48.5% 55.3% 46.7% 100.0% 81.9% -5.4% -25.2% 22.3% 6.8% 2.9% 62.3%

17 SCP Ocean 1.2% -4.2% 34.0% 38.5% -0.2% 11.1% -5.0% -33.3% 11.3% -9.5% 51.5% 18.3% 37.8% 48.5% 20.1% 81.9% 100.0% -15.7% -22.9% 12.8% -1.9% -19.3% 62.4%

18 TT Mid-Cap Europe Long Short 15.1% 11.3% 13.2% 46.1% 20.7% -38.6% 5.0% 29.7% 24.5% 2.2% -6.3% 37.7% -13.8% -5.8% 7.3% -5.4% -15.7% 100.0% 5.7% 8.4% 45.1% 42.4% -10.0%

19 Tudor Tensor -20.5% -2.0% -20.0% 8.1% -26.6% 25.9% -29.2% 26.4% -27.1% 17.3% -28.4% -4.1% -39.0% -26.3% 0.9% -25.2% -22.9% 5.7% 100.0% 39.6% 21.7% 32.9% -3.0%

20 Winton Futures -45.4% 7.0% 11.0% 69.8% 14.1% 36.1% -33.8% -20.3% 3.6% 31.4% -24.1% 7.0% -45.6% 9.1% -1.0% 22.3% 12.8% 8.4% 39.6% 100.0% 23.4% 38.0% 2.1%

21 York European Opportunities 23.4% -1.3% 46.9% 18.2% -4.0% 2.3% 45.3% -14.2% 54.6% 45.9% -38.2% 52.9% -34.2% -39.8% 58.8% 6.8% -1.9% 45.1% 21.7% 23.4% 100.0% 17.4% 26.2%

22 COMAC Global Macro Fund -3.3% 22.5% 3.5% 44.5% 51.7% 36.2% -28.3% 17.0% 5.9% 41.6% 1.9% 12.5% -28.8% 20.8% -6.7% 2.9% -19.3% 42.4% 32.9% 38.0% 17.4% 100.0% -5.5%

23 Brigade Lvgd. Cap. Structures Fund 23.2% -8.3% 62.1% 7.2% 10.6% 48.9% 29.3% -40.9% 24.3% 26.5% 34.4% 52.5% 33.7% 19.8% 61.2% 62.3% 62.4% -10.0% -3.0% 2.1% 26.2% -5.5% 100.0%

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Correlation

Co-Drawdown

High Co-drawdown Medium Co-drawdown Low Co-drawdown

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

1 AlphaGen Crucis 100.0% 18.6% 19.0% 52.6% 29.3% 28.8% 26.5% 39.8% 20.5% 39.4% 37.9% 30.9% 41.9% 32.1% 19.9% 20.1% 30.9% 48.1% 20.5% 31.1% 30.9% 62.6% 39.1%

2 Alydar Capital 15.1% 100.0% 33.6% 49.2% 22.7% 24.1% 30.3% 25.3% 55.3% 36.4% 32.0% 61.8% 44.7% 37.2% 38.5% 44.5% 39.6% 23.5% 31.1% 46.2% 56.3% 50.0% 8.7%

3 Asian Credit Hedge 21.1% 45.9% 100.0% 60.6% 15.7% 33.4% 30.5% 20.2% 46.5% 40.3% 39.5% 53.0% 42.4% 40.6% 39.6% 18.8% 35.8% 45.9% 24.2% 55.3% 66.2% 39.5% 40.0%

4 BlueTrend 27.7% 31.8% 28.7% 100.0% 15.3% 27.7% 15.6% 35.5% 44.3% 25.3% 30.0% 51.7% 30.3% 33.0% 16.0% 34.2% 31.3% 33.2% 53.3% 86.7% 37.0% 43.3% 32.5%

5 Capula Global Relative Value 28.0% 26.7% 13.5% 27.8% 100.0% 24.5% 16.0% 25.1% 37.2% 40.0% 38.9% 51.7% 31.8% 13.1% 42.8% 35.3% 17.2% 47.0% 28.7% 42.1% 42.6% 42.5% 33.1%

6 Claren Road Credit 32.2% 33.1% 33.6% 58.8% 28.6% 100.0% 23.3% 34.1% 68.1% 51.0% 30.0% 67.6% 52.8% 41.9% 52.5% 32.1% 44.1% 32.3% 34.4% 46.8% 44.1% 52.1% 74.7%

7 Davidson Kempner International 35.7% 50.2% 37.0% 40.1% 22.5% 28.1% 100.0% 35.2% 52.8% 33.1% 7.9% 62.6% 62.9% 34.9% 77.5% 48.8% 42.2% 40.1% 52.4% 50.7% 64.8% 21.1% 21.1%

8 DB Equilibria J apan 32.7% 25.6% 15.0% 55.5% 21.5% 25.1% 21.5% 100.0% 46.7% 38.5% 58.3% 47.0% 43.4% 28.6% 30.7% 37.6% 42.9% 8.5% 43.6% 49.6% 39.8% 46.9% 38.4%

9 EB Asia Absolute Return 13.8% 45.9% 28.3% 56.9% 26.3% 41.2% 26.4% 38.4% 100.0% 37.3% 30.4% 61.5% 56.1% 31.3% 45.3% 60.2% 46.0% 21.7% 39.3% 54.1% 46.2% 32.6% 40.9%

10 Exane Templiers fund 33.2% 37.6% 30.6% 40.6% 35.2% 38.4% 20.7% 39.5% 46.4% 100.0% 45.0% 68.1% 58.8% 59.0% 35.8% 43.0% 48.6% 35.5% 22.8% 36.5% 62.6% 37.5% 45.5%

11 Horizon P ortfolio Ltd 26.9% 27.9% 25.2% 40.5% 28.8% 19.0% 4.2% 50.3% 31.9% 37.9% 100.0% 38.8% 59.8% 30.3% 22.8% 25.6% 40.4% 13.2% 30.2% 41.7% 39.4% 38.1% 30.3%

12 Karsch Capital 19.5% 47.9% 30.1% 62.0% 34.1% 38.1% 29.3% 36.1% 57.4% 51.0% 34.5% 100.0% 56.2% 41.9% 40.6% 47.9% 43.4% 39.7% 39.8% 67.7% 60.2% 40.9% 41.2%

13 M&G Episode Inc. 24.8% 32.6% 22.7% 34.2% 19.7% 28.0% 27.7% 31.3% 49.3% 41.4% 50.1% 52.9% 100.0% 41.8% 32.3% 43.0% 35.8% 12.7% 24.6% 39.4% 39.2% 32.4% 37.4%

14 New Star UK Gemini Hedge USD 30.9% 43.9% 35.2% 60.4% 13.2% 36.1% 24.9% 33.5% 44.6% 67.5% 41.1% 64.0% 67.8% 100.0% 32.4% 44.5% 47.1% 42.3% 15.1% 52.0% 52.8% 44.1% 33.5%

15 OZ Overseas II 20.8% 49.5% 37.4% 32.0% 46.9% 49.2% 60.1% 39.1% 70.3% 44.5% 33.6% 67.4% 57.0% 35.3% 100.0% 48.4% 51.6% 31.6% 41.5% 47.5% 69.1% 45.7% 35.5%

16 P FM Diversified Offshore 15.2% 41.2% 12.8% 48.9% 27.8% 21.6% 27.2% 34.5% 67.1% 38.5% 27.2% 57.2% 54.5% 34.8% 34.8% 100.0% 38.4% 23.6% 21.7% 55.8% 43.0% 34.2% 33.8%

17 SCP Ocean 35.0% 55.1% 36.6% 67.4% 20.3% 44.7% 35.5% 59.2% 77.2% 65.4% 64.5% 78.0% 68.3% 55.4% 55.8% 57.8% 100.0% 24.3% 30.9% 55.2% 79.8% 43.9% 35.0%

18 TT Mid-Cap Europe Long Short 39.2% 23.5% 33.6% 51.3% 40.0% 23.5% 24.2% 8.4% 26.2% 34.3% 15.2% 51.2% 17.5% 35.7% 24.6% 25.6% 17.5% 100.0% 25.6% 60.1% 43.2% 40.9% 32.0%

19 Tudor Tensor 16.0% 29.8% 17.0% 79.1% 23.4% 24.0% 30.3% 41.4% 45.3% 21.1% 33.2% 49.2% 32.3% 12.2% 30.9% 22.5% 21.3% 24.6% 100.0% 84.3% 30.5% 31.5% 31.8%

20 Winton Futures 15.2% 27.8% 24.3% 80.6% 21.5% 20.5% 18.4% 29.5% 39.1% 21.2% 28.8% 52.5% 32.5% 26.4% 22.2% 36.2% 23.8% 36.1% 52.9% 100.0% 37.3% 37.0% 27.9%

21 York European Opportunities 26.1% 58.4% 50.3% 59.4% 37.6% 33.3% 40.5% 40.9% 57.7% 62.8% 46.9% 80.5% 55.8% 46.3% 55.7% 48.3% 59.4% 44.8% 33.0% 64.4% 100.0% 55.0% 31.0%

22 COMAC Global Macro Fund 35.3% 34.6% 20.0% 46.4% 25.0% 26.3% 8.8% 32.2% 27.2% 25.1% 30.3% 36.5% 30.8% 25.8% 24.6% 25.6% 21.8% 28.3% 22.7% 42.7% 36.7% 100.0% 31.0%

23 Brigade Lvgd. Cap. Structures Fund 31.8% 8.7% 29.3% 50.3% 28.2% 54.3% 12.7% 38.0% 49.2% 44.0% 34.7% 53.0% 51.3% 28.3% 27.6% 36.5% 25.1% 32.0% 33.1% 46.3% 29.9% 44.7% 100.0%

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High Co-drawdown Medium Co-drawdown Low Co-drawdownHigh Co-drawdown Medium Co-drawdown Low Co-drawdown

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

1 AlphaGen Crucis 100.0% 18.6% 19.0% 52.6% 29.3% 28.8% 26.5% 39.8% 20.5% 39.4% 37.9% 30.9% 41.9% 32.1% 19.9% 20.1% 30.9% 48.1% 20.5% 31.1% 30.9% 62.6% 39.1%

2 Alydar Capital 15.1% 100.0% 33.6% 49.2% 22.7% 24.1% 30.3% 25.3% 55.3% 36.4% 32.0% 61.8% 44.7% 37.2% 38.5% 44.5% 39.6% 23.5% 31.1% 46.2% 56.3% 50.0% 8.7%

3 Asian Credit Hedge 21.1% 45.9% 100.0% 60.6% 15.7% 33.4% 30.5% 20.2% 46.5% 40.3% 39.5% 53.0% 42.4% 40.6% 39.6% 18.8% 35.8% 45.9% 24.2% 55.3% 66.2% 39.5% 40.0%

4 BlueTrend 27.7% 31.8% 28.7% 100.0% 15.3% 27.7% 15.6% 35.5% 44.3% 25.3% 30.0% 51.7% 30.3% 33.0% 16.0% 34.2% 31.3% 33.2% 53.3% 86.7% 37.0% 43.3% 32.5%

5 Capula Global Relative Value 28.0% 26.7% 13.5% 27.8% 100.0% 24.5% 16.0% 25.1% 37.2% 40.0% 38.9% 51.7% 31.8% 13.1% 42.8% 35.3% 17.2% 47.0% 28.7% 42.1% 42.6% 42.5% 33.1%

6 Claren Road Credit 32.2% 33.1% 33.6% 58.8% 28.6% 100.0% 23.3% 34.1% 68.1% 51.0% 30.0% 67.6% 52.8% 41.9% 52.5% 32.1% 44.1% 32.3% 34.4% 46.8% 44.1% 52.1% 74.7%

7 Davidson Kempner International 35.7% 50.2% 37.0% 40.1% 22.5% 28.1% 100.0% 35.2% 52.8% 33.1% 7.9% 62.6% 62.9% 34.9% 77.5% 48.8% 42.2% 40.1% 52.4% 50.7% 64.8% 21.1% 21.1%

8 DB Equilibria J apan 32.7% 25.6% 15.0% 55.5% 21.5% 25.1% 21.5% 100.0% 46.7% 38.5% 58.3% 47.0% 43.4% 28.6% 30.7% 37.6% 42.9% 8.5% 43.6% 49.6% 39.8% 46.9% 38.4%

9 EB Asia Absolute Return 13.8% 45.9% 28.3% 56.9% 26.3% 41.2% 26.4% 38.4% 100.0% 37.3% 30.4% 61.5% 56.1% 31.3% 45.3% 60.2% 46.0% 21.7% 39.3% 54.1% 46.2% 32.6% 40.9%

10 Exane Templiers fund 33.2% 37.6% 30.6% 40.6% 35.2% 38.4% 20.7% 39.5% 46.4% 100.0% 45.0% 68.1% 58.8% 59.0% 35.8% 43.0% 48.6% 35.5% 22.8% 36.5% 62.6% 37.5% 45.5%

11 Horizon P ortfolio Ltd 26.9% 27.9% 25.2% 40.5% 28.8% 19.0% 4.2% 50.3% 31.9% 37.9% 100.0% 38.8% 59.8% 30.3% 22.8% 25.6% 40.4% 13.2% 30.2% 41.7% 39.4% 38.1% 30.3%

12 Karsch Capital 19.5% 47.9% 30.1% 62.0% 34.1% 38.1% 29.3% 36.1% 57.4% 51.0% 34.5% 100.0% 56.2% 41.9% 40.6% 47.9% 43.4% 39.7% 39.8% 67.7% 60.2% 40.9% 41.2%

13 M&G Episode Inc. 24.8% 32.6% 22.7% 34.2% 19.7% 28.0% 27.7% 31.3% 49.3% 41.4% 50.1% 52.9% 100.0% 41.8% 32.3% 43.0% 35.8% 12.7% 24.6% 39.4% 39.2% 32.4% 37.4%

14 New Star UK Gemini Hedge USD 30.9% 43.9% 35.2% 60.4% 13.2% 36.1% 24.9% 33.5% 44.6% 67.5% 41.1% 64.0% 67.8% 100.0% 32.4% 44.5% 47.1% 42.3% 15.1% 52.0% 52.8% 44.1% 33.5%

15 OZ Overseas II 20.8% 49.5% 37.4% 32.0% 46.9% 49.2% 60.1% 39.1% 70.3% 44.5% 33.6% 67.4% 57.0% 35.3% 100.0% 48.4% 51.6% 31.6% 41.5% 47.5% 69.1% 45.7% 35.5%

16 P FM Diversified Offshore 15.2% 41.2% 12.8% 48.9% 27.8% 21.6% 27.2% 34.5% 67.1% 38.5% 27.2% 57.2% 54.5% 34.8% 34.8% 100.0% 38.4% 23.6% 21.7% 55.8% 43.0% 34.2% 33.8%

17 SCP Ocean 35.0% 55.1% 36.6% 67.4% 20.3% 44.7% 35.5% 59.2% 77.2% 65.4% 64.5% 78.0% 68.3% 55.4% 55.8% 57.8% 100.0% 24.3% 30.9% 55.2% 79.8% 43.9% 35.0%

18 TT Mid-Cap Europe Long Short 39.2% 23.5% 33.6% 51.3% 40.0% 23.5% 24.2% 8.4% 26.2% 34.3% 15.2% 51.2% 17.5% 35.7% 24.6% 25.6% 17.5% 100.0% 25.6% 60.1% 43.2% 40.9% 32.0%

19 Tudor Tensor 16.0% 29.8% 17.0% 79.1% 23.4% 24.0% 30.3% 41.4% 45.3% 21.1% 33.2% 49.2% 32.3% 12.2% 30.9% 22.5% 21.3% 24.6% 100.0% 84.3% 30.5% 31.5% 31.8%

20 Winton Futures 15.2% 27.8% 24.3% 80.6% 21.5% 20.5% 18.4% 29.5% 39.1% 21.2% 28.8% 52.5% 32.5% 26.4% 22.2% 36.2% 23.8% 36.1% 52.9% 100.0% 37.3% 37.0% 27.9%

21 York European Opportunities 26.1% 58.4% 50.3% 59.4% 37.6% 33.3% 40.5% 40.9% 57.7% 62.8% 46.9% 80.5% 55.8% 46.3% 55.7% 48.3% 59.4% 44.8% 33.0% 64.4% 100.0% 55.0% 31.0%

22 COMAC Global Macro Fund 35.3% 34.6% 20.0% 46.4% 25.0% 26.3% 8.8% 32.2% 27.2% 25.1% 30.3% 36.5% 30.8% 25.8% 24.6% 25.6% 21.8% 28.3% 22.7% 42.7% 36.7% 100.0% 31.0%

23 Brigade Lvgd. Cap. Structures Fund 31.8% 8.7% 29.3% 50.3% 28.2% 54.3% 12.7% 38.0% 49.2% 44.0% 34.7% 53.0% 51.3% 28.3% 27.6% 36.5% 25.1% 32.0% 33.1% 46.3% 29.9% 44.7% 100.0%

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15

Not just about risk management

New Board makes

its mark

New governance structure introduced

Emphasis needed for clear definition of philosophy, style and

processes

Confirmed commitment to Bespoke Portfolio product

Semi-annual review of progress with CEO

Improves portfolio

management

process

More use of top-down strategy analysis

Portfolio Manager responsibility allocated to committee members

Better quantitative tools and better use made of them

Investment Committee member linked to each manager relationship

16

Enhancing portfolio construction

Strategic Asset

Allocation

Manager Selection and

Risk Budgeting

Portfolio

Optimisation

Portfolio Scenarios

Simulations

Rigorous Testing Process

Forecasting

and Analysis

Maximum allocation

for a given risk appetite

Challenges

allocation

Evaluate performance

and risk characteristics

and validate allocations

Portfolio Construction

Optimal strategy weights

Approved manager suitability

Portfolio Management Committee approval

Rigorous testing through IAM Software

17

Backtests and forecasts

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Au

g-0

3

No

v-0

3

Fe

b-0

4

Ma

y-0

4

Au

g-0

4

No

v-0

4

Fe

b-0

5

Ma

y-0

5

Au

g-0

5

No

v-0

5

Fe

b-0

6

Ma

y-0

6

Au

g-0

6

No

v-0

6

Fe

b-0

7

Ma

y-0

7

Au

g-0

7

No

v-0

7

Fe

b-0

8

Ma

y-0

8

Mo

nth

ly R

etu

rn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cu

mu

lative

Re

turn

Monthly Portfolio Returns (LHS) MSCI World Index (US$) (RHS) Cumulative Portfolio Returns (RHS)

Historical backtest

Simulated forecast

-5%

0%

5%

10%

15%

20%

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Cum

ulat

ive

Ret

urns

95th Percentile

80th Percentile

Mean

Median

20th Percentile

5th Percentile

0%

1%

2%

3%

4%

5%

6%

7%

-20% -10% 0% 10% 20% 30% 40%

Future views and confidence

Neutral

Negative Positive

Mixed

Stress test

-4.0%Worst Case

Expected outcome

Scenario

3.1%+20%Equity

-3.1%-20%

0.1%+100bpFixed Income - Rates

-0.1%-100bp

0.1%DoubleFixed Income - Credit

-0.1%Halve

-0.5%-20%

0.5%+20%Commodities

-0.2%-10%

0.2%+10%Currencies

-4.0%Worst Case

Expected outcome

Scenario

3.1%+20%Equity

-3.1%-20%

0.1%+100bpFixed Income - Rates

-0.1%-100bp

0.1%DoubleFixed Income - Credit

-0.1%Halve

-0.5%-20%

0.5%+20%Commodities

-0.2%-10%

0.2%+10%Currencies

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Manager contribution

All-weather manager

Contribution to Positive Months Contribution to Negative Months

Bell-weathermanager

18

Concluding thoughts

Was this an Ancient Greek Tragedy?

- Hubris, Nemesis and Catharsis

Or a painful learning experience?

- Bespoke portfolios work

- Keynes was right about the long term

- Liquidity, transparency and simplicity

- Process, process and process

Maintain your own equilibrium

- Have a thick skin, but admit your failings

- Be part of the solution not the problem

- Stand up for what you believe

19

This document was prepared by IAM, a company authorised and regulated by the Financial Services Authority (FSA). The information contained herein is not for distribution and does not constitute or form part of any offer, recommendation or invitation to participate in any product. It does not take into account the investment objectives, financial situation and particular needs of any investor. Any investor or prospective investor should consider whether such investment is appropriate to their particular investment needs and financial circumstances and consult the offering memoranda of the product which are available upon request. Past performance is no indication or guarantee of future performance. The value of investments may fluctuate and prospective investors may not recover the full amount initially invested. The products described herein are not subject to approval or regulation by the FSA and as such the Financial Services Compensation Scheme will generally not apply.

This document has been prepared by IAM on information available to them and has not been independently verified. Accordingly, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information contained in this document. No liability whatsoever is accepted for any loss arising from any use of this document or its contents. This document is being supplied to you on the basis that you are an entity of a type falling within one of the approved categories described in the Financial Services and Markets Act 2000 and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose. By accepting receipt of this document, you agree to be bound by the limitations set out above.

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