Alternative Investments “Outlook for the Investment Management Industry”

1. Alternative Investments“Outlook for the Investment Management Industry” San Antonio October 17, 2007 Bank Depository User Group Meeting

2. The Mystery of Alternative Investments What are they?? and what do they do???? Perception Vs. Reality 1

3. Alternative Investments – Perception vs. Reality Questionnaire: Do Private Equity Funds Buy Only Private Companies? Do Hedge Funds Hedge? Do Real Estate Investments Appreciate with Property Values? Do Structured Products Perform Like the Underlying Asset or Index? 2

4. What are alternative investments? • Incentive based investment management • Less liquid and longer term investment vehicles • Absolute return investments • Skill based investment vehicles 3

5. Examples of Alternative Investments • Hedge Funds • Private Equity & Venture Capital • Real Estate Investment • Structured Notes • Commodity Funds? 4

6. Benefits of Alternative Investments in Investment Portfolios • Performance • Diversification • Non Correlation ? • Lower Volatility? • Downside Protection? 5

7. Reality • Less Volatile • Absolute return • Provide diversification Do Alternative Investments Increase Portfolio Risk? Perception • More Volatile • Market risk is large • Highly Speculative 6 1

8. What are the real risks in alternative investments? • Illiquidity • Leverage • Redemptions • Less regulated 7 1

9. Alternative Investments vs.Traditional Funds Pros and Cons Traditional Long Only Investments Asset Allocation Alternative Investments • Absolute Return • Tax Inefficient • Active Risk Management • Variable Concentration of Holdings • Benchmarking Less Relevant • Not Dependent on Market Direction • Large Assets Detract from Performance • Less Transparent • Less Regulated • Higher Minimum Investment Required • Less Liquidity – “Lock-ups” • Higher Fees and Manager Incentives • Relative Return Measurement • Longer Term & Tax Efficiency • Less Turnover and Trading Cost • Often Greater Diversification • Benchmarked Performance • Will Lose Money in Down Markets • Scalable Asset Growth • Greater Transparency • Regulated • Lower Investment Minimums • Daily Liquidity • Lower Fees; Lower Incentives 8

10. Mercer Investment Consulting Survey • Diversification • Performance Reducing risk in combination with enhancing return is the most common motivation for asset allocation to alternative investments – more specifically hedge funds Survey respondents pointed to a lack of understanding of alternative investment strategies as a serious challenge While increased asset allocations were expected…. More education was needed 9

11. Diversification - Increased Asset Classes 10

12. Performance of alternative investments vs. traditional Annualized returns 1994-2006 Source: Goldman Sachs Thomson Venture Hennessee Hedge Fund Group 11

13. 2006 Performance for Alternative Investments • “Boom Year” 36.06% 23.3% 14.79% 11.20% 11.36% 10.62% Hedge Funds Private Equity REITs 12 10 year Annualized return information - Sources:Hennessee Hedge Fund Group NAREIT, Thomson Venture Capital Assoc., Institutional Investor, JP Morgan 1

14. Benefits of Alternative Investments Non Correlation, Lower Volatility & Capital Preservation *Data from Goldman Sachs Jan. ’94 through Dec.’06 13

15. Demand for Alternative Investments Public vs. Private Investing 2005 $139.6B $135.8B Source: Federal Reserve Bank of Chicago Private Equity Conference 2006 14

16. Demand for Alternative Investments Hedge Fund Capital Under Management $1.500 B $500 Billion $1.500 Billion $500 B 2006 1999 15 Source: Federal Reserve Bank of Chicago Private Equity Conference 2006 1

17. Private Equity Dollars Raised Buyout Funds (Excludes Venture Capital) $ Billion 16 Source: Private Equity Analyst, Willis Stein Partners

18. Institutional Asset Managers Offering Alternative Investments • Private Equity • Real Estate • Hedge Funds • Structured Products Do not offer Alternative Investments Offer Alternative Investments 17

19. Alternative Investments - For Asset Managers… Disproportionate Profitability Proportion of firm’s institutional assets and revenues from Alternative Investments 2006 Assets Revenues 15% 36% Source: McKinsey 2006 18

20. Alternative Investments Pricing Power vs. Traditional Funds Structured Products Hedge Funds Real Estate Firm Managed Hedge Funds Equity –41 BPS Fixed Inc.- 18 BPS Money Market - 12 BPS Annual Management Fees in Basis Points Source: McKinsey 19

21. Core & Satellite Investment Model Consultants Getting on Board As Traditional Managers Fall Out of Favor Skill based Skill based Skill based Core Investments Market based returns ETFs, Index, Passive Skill based Risk based Risk based 20

22. Institutional AUM Favor Alternatives and Cheap Beta Growth Rates “Cheap Beta” “Traditional” Alternatives Alpha Strategies International Source: McKinsey & Company 21

23. Alternative Investments Defined Benefit Asset Allocations Trends 2006 Alpha Strategy Alternatives +12% U.S Equity –6% Fixed Income +28% Quantitative Enhanced +28% Source: McKinsey & Company 22

24. Pension Fund Return Assumptions S&P 500 Companies 1999 Average: 9.2% 2006 Average: 8.1% % of Companies Return Assumptions Source: JP Morgan 23

25. Performance of alternative investments vs. traditional Annualized returns 2002-2006 Source: Goldman Sachs Thomson Venture Hennessee Hedge Fund Group 24

26. More Growth is on the Way from Pension Investors Endowments, and High Net Worth Individuals are there Asset Allocation Percentages – 25 Source: JP Morgan, Merrill Lynch, Cap Gemini

27. Alternative Investment Outlook – Major Themes for 2007 Expanded Customer Adoption of Alternative Investments • Diversification Driven • Non Correlation Driven • Performance Driven Firms will increasingly look to alternative investments To generate increased revenues and profitability 26