Alternative Asset Management Group

1. Alternative Asset Management Group Alternative Investments: Hedge Fund Industry Review 2004 and Perspectives 2005 Union Bancaire Privée • 96-98, rue du Rhône • 1211 Geneva 1 • Tel. +4122 819 2111

2. Continued Friendly Growth for Financial Markets • The world growth will reach 3% in 2005; the US, China and some emerging lead the growth. • The US and Chinese demands fuel the supply from the rest of the world. The industrial cycle remains in a good shape, but the demand varies across the regions. • Capex and exports should remain the most dynamic components of GDP. • Inflation is under control; oil prices remain a source of volatility. • Private demand and supply are keys in this phase of the cycle; the end of reflation policy, except perhaps for Japan. • Policy-mix manages a gradual return to neutral monetary rates and more balanced budgets. • Ingredients to the 2005 profit cycle: a mixed of still robust volumes rising margins and some restructuring.

3. World Scenario: Moderate and Less Synchronized Growth GDP YoY%, vol.

4. Emerging Countries: High Growth to be Managed • Growth in emerging countries remain on a high level; structural high growth in demand. • The high growth trend could generate frictions: stop and go policies, inflation pressures, mixed results in policy-mix. • 40% of the world population will be located in India-Asia area in 2050.

5. Eurozone: Weak and Uncertain Growth • The industrial cycle shows some revival thanks to Germany, but on a low basis; The export trend is fueled by US and Asian demand for capital goods. • Signs of weakness are still there: a fragile growth in industry through the countries and a mixed picture in services. • Demand side is still too fragile: unemployment is a concern and structural reforms are made at a low speed.

6. Japan: Finally Some Positive Signs • A bottom could have been reached in production after the Q4 slowdown. • Machinery orders are still booming, thanks to foreign orders; capex and export will continue to lead the growth. • Service industry is in a positive trend: a booming activity in the business service sector. • Restructuring in the economy is going on.

7. Balanced Portfolios: Continued Investments in Bonds and Risky Assets

8. Investment Themes • Japanese stock market • Emerging and Asian equities • Gold • Commodities – natural resources • Special situation in some emerging currencies

9. Risks in the Scenario (Again ?) On the negative side : • Oil price shock (again?) • Geopolitics and terrorism (again?) • A new war • Systemic risks in the financial sector or specific credit segments. • World housing markets : a post bubble correction with negative impact on stocks • Recession in OECD • A new crisis in Asia On the positive side: • A counter-shock in oil market • More fiscal or monetary stimulus • A growth scenario in line with potential in the G7 • A G7 global agreement on currencies • End of terrorism and stabilization in the Middle East.

10. Record Asset Inflows in 2004 • The hedge fund industry gained US $16.3 billion in net assets during Q4 of 2004 year, the smallest quarterly inflow for the year • Total net flows for the industry in 2004 were a record $123 billion compared to $72.2 billion for 2003. • Total hedge fund universe now estimated at $975 bn, with an additional $300 bn in privately managed accounts. • UBP independently estimated to be third largest allocator, with AuM of around $18.1bn • Strategies attracting greatest share of net assets in 2004: Long/Short Equity, at £33 bn, Event Driven at 25.7 bn, and Global Macro with $16.7 bn. • Convertible Arbitrage and Equity Market Neutral strategies saw net outflows during Q4, largely due to the low volatility environment • In Equity Market Neutral trading, managers with a fundamental bias performed better than those with a statistical bent. • Source: TASS

11. Hedge Fund Industry Asset Flows All Funds January 1994 - December 2004

12. Hedge Fund Strategy Returns2004

13. Hedge Fund Strategy Returns Inception 1993 – December 2004

14. Hedge Fund Industry Assets by Strategy 1993 - 2004

15. Major Asset Classes Performances

16. VIX Volatility Index • Of 126 months where the VIX > than 20% 168 bps out-performance of HRF FoF US where VIX < 20%. • Mid-level volatility (VIX at 18-25%) is best for hedge funds • Volatility spikes negative hedge fund returns and low volatility sub-level returns.

17. Are Hedge-Funds suffering only from increased assets allocated? • Reversal of trends (FX, rates, metals), concomitant decline in equities and bonds, historically low volatility • Poor environment for hedge funds when: • Both stocks and bonds decline (1994, 1998, Q2/3 2004) • Fed liquidity tightens • Commodity AND currency markets range-bound or choppy (2004 except oil) • Low Equity market volatility • Little opportunity for hedge funds • Few investors have been invested in hedge funds long enough to have experienced low hedge fund performance. Periods of negative performance are “normal” events. Happens every 2-3 years: 1994, 1998, 2001, and 2002 all had performances at or below 2004 levels. • Q2/Q3 ’04 didn’t look so difficult for outsiders attribution to AuM inflows. • Volatility and volumes resumed after US elections performance too. Hedge Fund Performance 2004

18. FoF Performance vs Market Behavior 2004 Source: Source Weston Capital Management

19. Long-Short Global 2004 -To-Date • 2005 commenced quite strongly: performances generated in Asia and EU • 2004 performances fairly good; managers on our Approved List returning an average 7.5% (end October) • Most of performances generated in US some in UK • Trend towards fundamental analysis & deep value approach reinforced • Managers favoring concentrated positions • Lessened impact of Macro Overlay; led to decoupling of returns vs intrinsic value of positions • Growing discrepancies between the performances of the EU / Asia and US markets. Outlook 2005 • Markets increasingly attractive on fundamental/value perspective, particularly in Asia and Europe • Managers with real Asia/Japan experience expected to do well • Monitor market reaction to lower USD

20. Long-Short Equity US 2004-To-Date • Good results vs opportunities offered by equity markets. Most of the managers survived the drop in January 05 , and made strong recoveries in February. • Fundamental/deep value approach will continue to outperform. • Concentration in portfolios • Diversified portfolios have underperformed, tracking range-bound market movements • Corporate events or special situations performed well; has attracted lot of assets and arbitrage opportunities are being closed fast, leaving little time to perform detailed fundamental research. Outlook 2005 • Fundamental approach will prime

21. Long-Short Equity Europe 2004-To-Date • European sector L/S Equity strategies’ average 04 returns were 5.96% • As for US, European sector benefited from value plays vs growth stories. Strong cash flows and annuities, visibility of recurring revenues, performed well & present in many funds • Concentration, Themes (e.g. energy) and Sector focus outperformed • Valuations cheaper than US; more liquid and less volatile markets. • Knowledge edge and fundamental research outperformed Outlook 2005 • Careful with macro events; ie USD weakness • Will focus on managers with strong analytical capabilities and concentrated portfolios

22. Long/Short Japan A Cyclical Rally or the Beginning of Sustained Recovery ? 2004 • In the 1st quarter, Japan was foreign investors’ market favourite, on the back of increased signs of an economic recovery and easing deflation. • Since May, Japanese markets have corrected around 14% from peak to trough: this was a necessary adjustment to market frenzy of Q1. • Most Japanese L/S managers were able to capture the Q1 rally. The most profitable themes were “reflation” and consumption-related themes. • Despite being hard-hit by the market correction, the average performance of our L/S Japanese managers was good, with average returns of 9%. Best performers were opportunistic managers, as they were able to quickly adjust their exposure according to their top-down view. Outlook 2005 • Micro picture is still positive: record cash flow after years of corporate restructuring, management likely to be more friendly toward shareholders to guard against hostile takeovers. • Macro: BOJ forecasts nationwide CPI to grow 0.1% in fiscal year 05, signaling an end to deflation. • Major risks: Crude oil price, as Japan is a net importer (each $10 move in crude oil is said to shave off 40bps off of Japanese GDP), strength of Yen which affects Japanese export companies • Will slowing export growth be offset by renewed domestic consumption?

23. Long/Short Asia 2004 A Turbulent Year • Asian managers had a disappointing year compared to 2003, with an average performance of 9% compared to MSCI AP x Japan returning 19%. • Most managers have been hit hard by market collapse in April and May, with China shares losing 30% from their high in Jan’04. • The sell off was substantially wider and affected all Asia Pacific markets • Yet, corporate fundamentals were still strong : strong corporate earnings forecasts, solid cash flow • Therefore, the disconnect between good fundamentals and negative market sentiment hurt Asian L/S managers, given that: • They tend to have a net long bias and are therefore affected by market correction • Cheap valuations did not justify raising short exposure • Significant risks: US & global slowdown, crude oil price, will foreign investors continue to allocate capital to the region ? • China’s buoyant economic growth does not necessarily translate into stock market gains : wave of corporate scandals (China Aviation Oil), reminding investors that corporate governance still not top of priority • Over the long term, structural outlook for the region however remain impressive: strong demographics, Asia’s share of global GDP growth now represent 27% Outlook 2005 Short term cautious, long term bullish

24. Technology Mixed Results 2004-To-Date • The Nasdaq drifted during much of 2004, rallied in Q4 on a series of strong earnings reports; • Investors welcomed the Bush victory • TCS, inherently long-biased, performed extremely well thanks to great stock-picking on both the long and the short sides • Level was the best-performing trading-oriented fund. Seeing no clear trends in the technology sector, they continue to be nimble and operate with low net exposure and high turnover. • Most opportunistic-driven managers were able to profit from the environment. Cantillon made money on short semi-conductor positions. • Long-term outlook for the TMT sector is very positive, based on supposition that PC and Internet migration to wireless will drive the sector. • We believe wireless communications will produce a watershed convergence of voice video and data that will alter the technology landscape. • However, in the medium-term the sector remains volatile. Outlook 2005

25. Healthcare 2004-To-Date • Healthcare industry severely hit due specific events; e.g. Chiron's failure to provide flu vaccines and Merck's Vioxx withdrawal highlighted concerns about vulnerability to lawsuits and increased regulatory scrutiny of drug safety. Outlook 2005 • Even though the long-term outlook remains positive, given the needs of an aging population, the currently low valuation and continued innovation, 2005 presents a very difficult trading environment as regulatory issues persist. • Recommend: caution.

26. Natural Resources 2004-To-Date • Very strong performances from energy-related funds as oil prices rose sharply • Strong performance from Natural Resources funds (RAB, Wessex) as markets remain favourable for the strategy. • China‘s demand for raw material is high • World’s most populous country expands at annual rate of more than 9% • China is building 25 new nuclear plants: the price of Uranium will probably rise • Oil: Geopolitical risk: Insurgent attacks on Iraqi pipelines • Under investments in infrastructure and exploration over 10 years • Recommendation: favor long biased funds and managers active in exploration projects The Bull Case for Natural Resources Outlook 2005

27. Fixed Income 2004-To-Date • Historically low Credit spreads; tightening more pronounced for high yield than investment grade spreads • Tight spreads sustained by: • A low credit default environment • Strong credit fundamentals • Strong demand for yield • Yield curve arbitrage had difficult year due lack of clear trends • Spreads to remain tight and range-bound near term, widening medium/long term • Catalysts may be earnings, lower demand as credit becomes expensive, oil price hikes and geopolitical risks. Companies beginning to use their liquidity: increased M&A • Formation of yield curves trends have started; Flattening of the curve has been an early theme (US & Europe) • 2005 will be challenging for pure credit funds. Any Volatility pick-up and spread widening would mean careful selection of funds • Recommendation: Funds diversified across fixed income strategies and able to implement effective shorts in a credit pullback scenario Outlook 2005

28. Disappointing returns 2004-To-Date Merger Arbitrage/Event-Driven • Increase in announced deals • The spreads are unappealing as closely correlated to interest rates, plus market over-arbitraged • In the US, the average IRR per deal is around 4-5% which is 3 to 4 times below 1999 and 2000 levels • The risk of a deal break and related cost is too high for reward • Spreads in Europe slightly higher since less capital allocated to strategy, rates slightly higher and barriers of entries for arbitrageurs higher due complex and regulatory environment; Favors strong experience • Prudent and not optimistic on Risk/Reward • Increasing pace of announced deals expected – spreads not expected to widen Outlook 2005

29. Convertible Arbitrage 2004-To-Date • Performances ranging from -2% to +2% • Performances in line with market environment and strategies implemented by managers • Constant evolution of strategy and portfolios; today far more sophisticated vs 2000-2001 • Volatility bias strongly penalized as realized volatility continues to drift lower than implied volatility • Credit exposure or special situations posted performances above averages (e.g. Alexandra) • Continuing shift from managers toward a volatility-biased portfolio based on volatility cheapness and credit spreads at historically tight levels • Little issuance and small issue size • Drift toward multi-strategy structure with event-driven and capital structure arbitrage(e.g. Alexandra, K-Street) • Focus on managers with original approach to convertible market, and those able to transform infrastructure into multi-strategy platform with adequate resources • Convertible funds with strong bias to volatility are cheap market hedge to equity markets due historical low level of volatility • Favour those managers with a strong fundamental bias. Outlook 2005

30. Distressed Credit and High Yield 2004-To-Date • Strong year for credit as distressed and high yield managers average +10% - 15% for the year as of November • Main driver is Institutional Investor behavior, not improvement in economic and business fundamentals • Credit-picking is key component today • Spreads tightening and yields declining with higher implied risk (credit deterioration) • Could be sign of credit cycle reaching its peak; lending standards widen and low ratings have tight spreads • Are Investors paid for the risk? • Credit cycles reach peak when optimistic projections of business fundamentals reach unrealistic level that can’t be ignored, the derivative leverage suddenly becomes toxic • Seeking managers with cautious approach in current environment; Best opportunities on long side after credit deterioration • Seeking niche player not involved in main-stream investments subject to swings of inflows and outflows of mutual funds Outlook 2005

31. CTAs and Macro in 2004 2004-To-Date • Both strategies profit from directional moves on Fixed Income, Currency, Equity & Commodity markets • Macro managers seek fundamental factors for strong argument of directional move • CTAs believe once trend has started it is likely to persist • Macro: small positive returns; have kept exposure very low due lack of opportunities • CTAs: lost on strong reversals in Fixed Income, Metals and Softs markets in April; to be seen as profit give backs after successful 2003 (trend reversals) • CTAs suffered following April from “false” breaks - primarily in currencies • Energy markets profitable for CTAs (trend) • Discretionary Macro traders performed well in Fixed Income markets • Short term strategies generally performed well, but is a very small subset • Q4 was very profitable for both Macro and CTA’s, as the weakening dollar move was persistent and agreed on in terms of fundamentals MOST IMPORTANTLY • 2004 has seen most markets apart from Energy stay range bound. Currencies and equities exhibited strong moves in Q4. These traders need directional, not sideways markets

32. CTAs and MACRO Outlook Outlook 2004 • Following factors could cause repricings in Fixed Income, Currency, Equity and Commodity markets: • Higher oil Prices • Growth in US trade deficit • Continued high level of Chinese Growth • Pick up in US Growth • Geopolitical Instability • Markets rarely stay in tight trading ranges over a long period of time, economic and political changes occur that force rebalances • Directional strategies have least risk that inefficiency they profit from is eroded by too many participants Markets move irrespective of CTAs and Macros due to much stronger economic forces CONCLUSION • Directional Markets will return and these managers will once again profit

33. Asset Allocation Strategy

34. Thoughts and Trends on the HF Industry Evolution • From marginal and specialised industry to a professional, mature industry • Focus has moved from “Quest for” absolute performance only to professionally structured organisations and lower volatility – institutionalisation with performance as cost (however risk/reward remains good) • More focus on volatility than performance (Buffet: “I prefer a lumpy 15% over a smooth 12%) • Expanded universe of strategies • Absolute performance towards relative performance and capital preservation • Consolidation: small structures struggle to survive • Regulation is creeping in: Distraction from Trading will cost time and money • Not negative per se: Independent eye • Challenge to avoid conflicting regulations • Careful with complacency (20% of frauds were registered funds) • Structural risk • Conclusion: Distinction between Alternative Investments and Traditional Investments is disappearing. Hedge Funds – Active Management and Passive Management

35. Thoughts and Trends on the HF Industry Leverage • Post 1998 awareness limits excessive leverage at the hedge fund level • Lack of opportunities also limit leverage • Transfer of leverage to FoF level • “Squeeze” more performance out of managers • Low cost of money • Leverage poses a threat at FoF level due to illiquidity • Mitigated through strong portfolio diversification • Additional leverage through structured products and enhanced liquidity through credit lines

36. Thoughts and Trends on the HF Industry Supply/Demand Imbalance • Access and capacity become major issues for FoF’s • HF demand and high margins - new entrants often of lesser quality (low barriers to entry) • New talent is not created at such speed and industry accommodates itself with lesser talent • Need for strong research and due diligence to avoid pitfalls and remain with the best • Bubble? • Hedge Funds are a strategy, not an asset • Symptoms of Bubble: Investors pay the same or more for less returns and ignore the risk • Complacency • Mainstream Mutual Funds are adopting some money management techniques (Risk and Exposure Management) as Hedge Funds, but … at a much lower cost.

37. Thoughts and Trends on the HF Industry Increased Need for Structural Risk • Reasons for failure per EDHEC study • 30% Fraud • 41% Misrepresentation • 14% Trading outside mandate • 6% Poor Process • Structural risk analysis seek to reduce exposure to such risk through review of: • Pricing policies • Independence of NAV calculation • Segregation of duties • Infrastructure, controls and procedures • Staff qualifications and experience

38. Final Quotes “No, this is not the end. Not even the beginning of the end. But it is, perhaps, the end of the beginning …” Churchill “You can’t get absolute returns without taking risk …” William von Muffling Which all results in a saner and tamer Hedge Fund World … but with a few rebellious elements J.Frogg