HEDGE FUNDS “A necessary inclusion in an Investment Portfolio”

Hedge Funds - The Beginning AW Jones in 1949 Long Short Fund Soros Robertson

Hedge Funds - A Simple Definition Use of derivatives integral to investment Management strategy Focus on the quality of return, not just the magnitude of return Ability to go both Short and Long Manager compensation linked to Performance Operate by taking a “hedge position” against a particular event - either an increase or decline in a value situation

Hedge Fund Growth Source : Various ,Hedge Fund Research, Goldman Sachs & Co

Hedge Fund Strategies Hedged Equity Strategies Event Driven Strategies Domestic Hedge Funds Sector Funds Global Hedge Funds Macro Hedge Funds Market Neutral Short Selling Event Driven Strategies Risk Arbitrage Distressed Securities Special Situations Arbitrage Strategies Convertible Arbitrage Fixed income Arbitrage Index Arbitrage Closed End Arbitrage Hedged Equity Strategies Long & Short Adjust ratio to suit market trends Financial leverage used to varying degrees Derivatives often used Domestic Value or Growth Large or small Top Down & Bottom up analysis Long undervalued & Short over valued Allocations made on potential returns and not Index weighting's Sector Technology / Financial / HealthCare /Communications Research Intensive Global Top down approach Tendency to focus on Geographic regions Global view of world markets and individual stock selection Macro Opportunistic approach based on shifts in Global economies Focus on countries economic policies, interest rates & currencies Concentrate on small number of investment themes large bets on relative valuations of two asset classes Profit from widening or narrowing of valuation spreads Market Attempts to eliminate market risk Neutral Balance long & Short Short Selling Maintains a net short exposure to the market Exposed to a “short squeeze” plays

Hedge Fund Performance - asset class Compound Annual Return Hedge Funds vs Traditional Investments (Jan 1990 - Jun 1998) Source : Hedge Fund Research / Managed Accounts Reports

Hedge Fund Performance - asset class Risk Adjusted Performance Hedge Fund vs Traditional Investments (Jan 1990- June 1998) Source : Hedge Fund Research / Managed Accounts Reports

Hedge Fund Performance - by style Risk Adjusted Performance Hedge Fund Investment Styles (1990 - 1997) Source : IMF Report

Hedge Fund Performance - by style Risk Adjusted Performance Equity orientated Hedge Fund Investment Styles (1993 - 1998) Source : Goldman Sachs & Co, FRM report Jan 2000

Adding Hedge Funds to Traditional Portfolios 13 13.5 14 14.5 15 15.5 16 16.5 17 6.5 6.75 7 7.25 7.5 7.75 8 Standard Deviation (%) Investment Return (%) 100% Hedge Funds 10 / 90 30% Traditional / 70% Hedge funds 50 / 50 60 / 40 70 / 30 80 / 20 100% Traditional 90 / 10 Source: Hedge Funds Research

Investment Portfolio Risk Management Optimum Mix 40% ABC Fund 60% Shares 20% Improvement 100% ABC Fund 100% Shares Source: van Eyk Research

A SPECIFIC HEDGE STRATEGY Long Equity & Short Call Option “Increase Yield & Reduce Risk”

Part of an Investment Plan Acts as a Partial Hedge - low growth, neutral & falling markets Increases Yield Lowers Risk Maintains Capital Growth Potential Builds a Downside Buffer

How is it constructed ? Referred to as a “Buy & Write” or a Covered Call Buy ASX Listed Share that also has ETO’s Sell a Call Option over the share Receive cash from selling the call option (“premium”) Hold position or buy back call option if value dictates

Long Physical & Short the Call Option Strike Price Up-side Profit Potential Market Price of Stock Share Purchase Price Downside Protection less Premium Income Share Purchase Cost “Option Period ”

Example Buy 50,000 C&W Optus Shares $ 3.42 per share Sell 50 Call Contracts Strike Price $ 4.00 Option Period 9 weeks Receive cash $ 0.10 per share

Example Market Price of Stock Up-side Profit Potential $4.00 Option Strike Price Up-side Profit Potential Market Price of Stock $3.42 Share Purchase Price Downside Protection less Premium Income $3.32 Share Purchase Cost “9 weeks”

Example a b c d $3.42 then: Gain/loss on shares Income from premium Net position Value $171,000 Cost $171,000 Gain/Loss $0 $5,000 Return 0.00 2.92 2.92% a $3.95 then: Gain/loss on shares Income from premium Net position Value $197,500 Cost $171,000 Gain/Loss $26,500 $5,000 $31,500 Return 15.50 2.92 18.4% b $4.05 then: Gain/loss on shares Income from premium Net position Value $200,000 Cost $171,000 Gain/Loss $29,000 $5,000 $34,000 Return 17.00 2.92 19.9% c $3.30 then: Gain/loss on shares Income from premium Net position Value $165,000 Cost $171,000 Gain/Loss ($6,000) $5,000 ($1,000) Return (0.6%) d

Pay-off Diagram

Investment Returns

Understanding Options (ETO’s)

AUSTRALIAN BLUE CHIP FUND “The high yield – Portfolio Hedge”

Why use a Managed Fund Diversification Risk spread across many shares Option Trading Experience Time to monitor &manage Cost Effective Minimise Transaction Costs Asset Allocation Max. Investor time to manage total portfolio Expertise

HFA-ABC Fund Share & Option Portfolio Companies invested include: Telstra Optus Commonwealth Bank Westpac NAB AMP BHP Lend Lease News Corp “80% of the fund is invested in a selection of Australia’s 50 largest companies” “Maximum exposure to any one stock is limited to 10% of the portfolio or 1.5 times its index weight”

What Does the Fund Invest In…ASX 50

ABC Fund Positioning * * * * * Investment Return % Investment Risk % Australian Shares Property * Bonds Investment Return % 14 12 10 8 6 4 2 Cash * * 2 4 6 8 10 12 14 16 Investment Risk % Source: van Eyk Research

Comparative Performance in Varying Market Conditions 25 Shares Outperform ABC Fund Out Performs 20 15 10 Total Investment Return 5 -15 -10 -5 5 10 15 20 50 Leaders Annual Capital Growth -5 The ABC Fund is designed to outperform in all but strong growth equity markets -10 Note: Returns are gross returns before fees, transaction costs etc Past performance is no guarantee of future performance ABC Fund performance outcomes are estimates only. Actual performance is dependent on actual market conditions Comparative performance outcomes assume the share only fund and the ABC Fund hold identical stocks.

Annual Performance of 50 Leaders For 60% of the periods capital growth was less than 10%p.a For 80% of the periods capital growth was less than 10%p.a For 67% of the periods capital growth was less than 10%p.a Last Five Years 1993 -1998 Last Ten Years 1988 -1998 Last Fifteen Years 1983 -1998 Percentage of Annual Periods where Capital Growth was less than 10% per annum

Comparative Performance - Monthly Source: van Eyk Research

Features No Exit Fees Liquidity No Debt Savings Plan Low Minimum Investment

Disclaimer The following material is for presentation and illustrative purposes only. Material from this presentation is not to be reproduced in any way without the prior and express permission of Hedge Funds Ltd. Any decision to invest in the Hedge Funds of Australia - Australian Blue Chip Fund should only be made after consulting your personal Financial Advisor and reading thoroughly the HFA - Australian Blue Chip Fund Prospectus dated 11th May 1999. Past performance is no indication of future performance. All information and data has been derived from sources deemed reliable but no representation or warranty is made as to the accuracy of completeness thereof and no on offering or solicitation is made hereby.