Medical Schemes: Investing in a new asset class Squaring the Circle Medical Schemes: Investing in a new asset class Theron van Wyk, Managing Director TriAlpha Investment Management (Pty) Ltd 24th July 2007 The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Contents Squaring the Circle Introduction to the Hedge Fund Industry How relevant are Hedge Funds for Medical Schemes? The BHF Southern African Conference 22-25 July’07 Sun City

What are Hedge Funds? Squaring the Circle Fundamentally different Traditional Investments (e.g. equities, bonds) Hedge Funds Investment Objective Outperform a market benchmark Absolute Real Return Primary Source of Returns Market Based Manager Skill Investment Constraints Long Only Flexible Manager Compensation Based on AUM Based on AUM & Performance Fundamentally different The BHF Southern African Conference 22-25 July’07 Sun City

Growth of Emerging Markets Hedge Fund Industry Squaring the Circle Source: Hedgefund.net The BHF Southern African Conference 22-25 July’07 Sun City

Growth of South African Hedge Fund Industry the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Contents Squaring the Circle Introduction to the Hedge Fund Industry How relevant are Hedge Funds for Medical Schemes? The BHF Southern African Conference 22-25 July’07 Sun City

Conundrum for Medical Schemes Squaring the Circle Medical inflation has exceeded general inflation Due to nature of liabilities a significant portion of assets are held in cash-related assets Returns on most cash-related assets are not competitive in inflation-adjusted terms The BHF Southern African Conference 22-25 July’07 Sun City

Can Hedge Funds assist in addressing this challenge? Squaring the Circle NO If Hedge Fund is part of volatile/risky section of Hedge Fund universe If it is a single strategy Hedge Fund If the liquidity is too low YES If Hedge Fund is part of low risk/”cash enhancers” part of hedge fund universe If it is a multi-strategy Fund of Hedge Funds If the liquidity good The BHF Southern African Conference 22-25 July’07 Sun City

Generic Profile of ideal Hedge Fund solution Squaring the Circle Performance Cash + 2% over any rolling 12 months (net of fees) Risk Annualised volatility of 50% of ALBI volatility Maximum drawdown 5% The BHF Southern African Conference 22-25 July’07 Sun City

South African Regulation Squaring the Circle Hedge Funds are structured in various ways Degree to which a Medical Scheme can invest depends on structure Most common structure for local fund of hedge funds: Unlisted Debenture In this case up to 5% of assets can be invested Extract from Annexure B of Reg.30 of the Medical Schemes Act The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Conclusion Squaring the Circle Hedge Fund industry well established and used by institutions internationally SA Hedge Fund industry, although newer, following global growth path Right type of Hedge Fund can be an additional tool for Medical Schemes to enhance cash returns without significantly increasing portfolio risk The BHF Southern African Conference 22-25 July’07 Sun City