KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management Contemporary Perspectives on Hedge Fund Investing CFA Victoria – February 21 st, 2007

Page 2 Agenda Why add hedge funds to a portfolio? Why take a portfolio approach? What are the merits of low volatility hedge funds? Is an equity investing framework useful?

Page 3 What is a Hedge Fund?

Page 4 Description What is a Hedge Fund? Similar to mutual fund  Professionally managed pool of assets  Specified objectives Investors typically must be qualified or accredited Short positions/hedging allowed Leverage Position concentration Lower liquidity Trading strategy ≠ investment strategy

Page 5 Hedge Fund Strategies 1. Equity Long/Short 2. Equity Market Neutral 3. Dedicated Short Bias 4. Emerging Markets 5. Convertible Arbitrage 6. Fixed Income Arbitrage 7. Event Driven Merger Arbitrage Distressed 8. Global Macro 9. Managed Futures / CTA 10. Multi-Strategy What is a Hedge Fund?

Page 6 Hypothetical Convergence/Divergence Pairs Trade Price Asset 1Asset 2 Trade Completed Trade Initiated Trade Completed Trade Initiated What is a Hedge Fund? Typical Hedge Fund Trade

Page 7 Typical Hedge Fund Trading Model What is a Hedge Fund? A convergence hypothesis underlies the trading model of most hedge fund managers Trading models are analogous to business models for private or public companies Evaluation of likelihood of success is similar:  Focus on quality, track record of managers  Ensure strategy is well articulated  Look for sustainable competitive advantages

Page 8 Why add Hedge Funds to a Portfolio?

Page 9 Stability of Returns & Outperformance Why add Hedge Funds to a Portfolio?

Page 10 High Return per Unit of Risk CSFB/Tremont Indices vs. Traditional Assets – Since February % 7.2%7.2% 9.0%9.0% 7.1% 15.2%15.2% 16.3% 0% 5% 10% 15% 20% Tremont Hedge Fund IndexS&P 500TSX Returns Standard Deviation Why add Hedge Funds to a Portfolio?

Page 11 Diversification Benefits Correlations – Since February 1997 CSFB/Tremont S&P 500 TSX S&P TSX Scotia Bond Index Why add Hedge Funds to a Portfolio?

Page 12 Drawdown & Recovery Drawdown  Period of negative returns from peak to trough Hedge Fund Indices  Less severe and faster recovery Other Metrics - Since February 1997 % Positive Months Maximum Drawdown Months to Recover / % Yet to Recover S&P %-46.28%52 / 6.55% TSX 61.3%-45.05%38 / none Scotia Bond Index 69.7%69.7%-11.19%9 / none HFRI Conservative FoF Index (HFRI CFI) 77.3%77.3%-6.62%6 / none CSFB/Tremont Index 71.4%-13.81%12 / none Why add Hedge Funds to a Portfolio?

Page 13 The Need for a Portfolio Approach

Page % 83.18% 55.59% 16.40% BCENortelKinrossTSX Annualized Standard Deviation of Various Equities Benefits of Portfolio Approach Need for a Portfolio Approach

Page 15 Benefits of Portfolio Approach Need for a Portfolio Approach 13.72% 12.44% 7.82% 5.81% 0% 5% 10% 15% 20% 25% 30% 10 Largest Canadian Hedge Funds Annualized Standard Deviations of Hedge Funds 10 Largest Global Hedge Funds CSFB/Tremont Hedge Fund Index HFRI Fund of Funds Index

Page 16 Risk of One Stock vs One Hedge Fund Need for a Portfolio Approach BCE - February 1997 to December % 5% 10% 15% 20% 25% 30% 35% 40% 50%40%30%20%10%0%-10%-20%-30%-40% Representative Canadian Hedge Fund - February 1997 to December % 5% 10% 15% 20% 25% 30% 35% 40% 50%40%30%20%10%0%-10%-20%-30%-40%

Page 17 Risk of non-“Blue Chip” stocks Some extreme returns exceed scale and are lumped at +/- 50% Nortel Networks Corp. - February 1997 to December % 5% 10% 15% 20% 25% 30% 35% 40% 50%40%30%20%10%0%-10%-20%-30%-40% Kinross Gold Corp - February 1997 to December % 5% 10% 15% 20% 25% 30% 35% 40% 50%40%30%20%10%0%-10%-20%-30%-40% Need for a Portfolio Approach

Page 18 Risk of Hedge Fund Index vs Equity Index Need for a Portfolio Approach

Page 19 Risk of Hedge Fund Index vs Equity Index Need for a Portfolio Approach TSX Index - February 1997 to December % 5% 10% 15% 20% 25% 30% 35% 40% 50%40%30%20%10%0%-10%-20%-30%-40% Scotia Capital Universe Bond Total Return Index - February 1997 to December % 5% 10% 15% 20% 25% 30% 35% 40% 50%40%30%20%10%0%-10%-20%-30%-40%

Page 20 The Merits of Low Volatility Hedge Funds

Page 21 Hedge Fund Strategy Risk Profiles Hedge Fund Strategies to the left are less volatile and have higher return per unit of risk (i.e. standard deviation). Merits of Low Volatility Hedge Funds CSFB/Tremont Risk/Return - Since February Annualized 9.9%9.8% 5.4% 9.0% 10.7% 11.9%12.4% 7.1% 9.6% -1.5% 2.7% 3.6% 3.8% 4.8% 5.9% 9.4% 10.7% 11.9% 15.0% 17.8% -5% 0% 5% 10% 15% 20% Equity Market Neutral Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Futures / CTA Emerging Markets Dedicated Short Bias Tremont Returns Tremont Std Deviation

Page 22 Hedge Fund Strategy Betas Hedge Fund Strategies to the left have lower beta (i.e. sensitivity) to the S&P 500. CSFB/Tremont Strategy Betas vs. S&P Since February Equity Market Neutral Multi Strategy Fixed Income Arbitrage Convertible Arbitrage Event Driven Global Macro Long / Short Equity Managed Futures / CTA Emerging Markets Dedicated Short Bias Merits of Low Volatility Hedge Funds

Page 23 Best Diversification includes Global HFs Globally $1.5 Trillion with 8,000 managers Canada approx. $60 Billion with 70+ managers (Canada Hedge Watch) As of December, 2006 Need for a Portfolio Approach

Page 24 Applying an ‘Equity Investing Framework’ to Hedge Funds

Page 25 U.S. Value Stock Selection Process Quantitative Screens Price-to-book Price-to-earnings Dividend-Yield Create ‘Short list’ ‘Short list’ 10,000+ US equities Diversified Mutual Fund Quantitative Screens Bottom Up Analysis Qualitative Analysis Bottom-up company review Core competencies and competitive advantages Industry position Diversified Portfolio Reduces risk Manager monitors holdings Applying an ‘Equity Investing Framework’

Page 26 Hedge Fund Selection Process Quantitative Screens Understand drivers of returns Assessment of risks Consistency of results with stated strategy Quantitative fit with overall portfolio ‘Short list’ 8,000+ US and International hedge funds Diversified Portfolio of Hedge Funds Quantitative Screens Bottom Up Analysis Qualitative Assessment Bottom-up manager review Core competencies and competitive advantages Qualitative fit with overall portfolio Nature and extent of risk controls Diversified Portfolio Reduces risk Manager monitors holdings Applying an ‘Equity Investing Framework’

Page 27 Demands of Hedge Fund Investing Successful hedge fund investing requires:  Expertise in analyzing trading strategies as businesses  Entry and exit discipline  Time commitment  Sufficient size of investment to allow diversification  Need more than a single manager multi-strategy Decide between:  Self manage  Outsource  Custom portfolio  Funds of hedge funds  Combination Applying an ‘Equity Investing Framework’

Page 28 KCS Approach

Page 29 Investment Strategy Based on  10 years Hedge Fund Investing experience  AIMA Award-winning Research  Proprietary Analytics  Focus on risk reduction Objectives  Low volatility  Low correlations with traditional assets  Tax-preferred deferred capital gains  ‘Equity-like’ returns with ‘bond-like’ volatility Strategy  Levered low-volatility KCS Approach

Page 30 HF Strategy Risk Profiles & the ACRF KCS Approach

Page 31 Performance % for 2006 Ranked #1 Fund of Funds in 2006 on Canadian Hedge Watch

Page 32 KCS ACR Fund Performance

Page 33 Questions and comments?

Page 34 This presentation is confidential. The contents are not to be reproduced or distributed to the public or the press. Securities legislation may prohibit such distribution. This presentation is a summary only and should be used in conjunction with the detailed information in the Confidential Offering Memorandum. The information contained in this presentation is believed to be reliable, but is not guaranteed as to its accuracy or completeness. This presentation is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. No securities commission or similar regulatory authority has reviewed this document or has in any way passed on the merits of the securities describe and any representation to the contrary is an offence. Historical performance is not a guarantee future results. KCS Fund Strategies Inc. recommends consulting appropriate investment and financial advisors when considering any investment decision. KCS Fund Strategies Inc – 555 West Hastings Street Vancouver, British Columbia V6B 4N6 Ph: x 225