1. HEDGE FUNDS
“A necessary inclusion in an Investment Portfolio”

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

3. 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

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

5. 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

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

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

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

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

10. Adding Hedge Funds to Traditional Portfolios13
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

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

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

13. 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

14. 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

15. 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 ”

16. 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

17. 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”

18. 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

19. Pay-off Diagram

20. Investment Returns

21. Understanding Options (ETO’s)

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

23. 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

24. 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”

25. What Does the Fund Invest In…ASX 50

26. 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

27. Comparative Performance in Varying Market Conditions25
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.

28. 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
Last Ten Years
Last Fifteen Years
Percentage of Annual Periods where Capital Growth was less than 10% per annum

29. Comparative Performance - Monthly
Source: van Eyk Research

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

31. 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.