1. Alternative Investments in Down-Cycle Markets LEHMNABROTHER S Ron Lubash Februrary 4, 2001

2. LEHMNABROTHER S “The economic landscape has changed dramatically over the last few months and the local market now faces a new reality of significantly diminished prospects for future growth.” (Jerusalem Post, 01/03/2001) Executive Summary Decreasing capital market growth Decreasing capital market growth Decline in Israeli high-tech growth Decline in Israeli high-tech growth Consumer slowdown in the U.S Consumer slowdown in the U.S Geo-Political instability Geo-Political instability Can investors increase their capital gains in such a down-cycle market?

3. LEHMNABROTHER S Year 2000 - Global Market Overview

4. LEHMNABROTHER S Year 2000 – Highlights Total of 384 IPOs with average first day return of 55.6%, compared to 466 IPOs in 1999 with first day return of 69.9% Total of 384 IPOs with average first day return of 55.6%, compared to 466 IPOs in 1999 with first day return of 69.9% Total capital raising in IPOs was $66 billion compared to $64.7 billion in 1999 Total capital raising in IPOs was $66 billion compared to $64.7 billion in 1999 Major investments in telecom and computer software sectors Major investments in telecom and computer software sectors Scientific breakthroughs encouraged investment in the biotechnology sector Scientific breakthroughs encouraged investment in the biotechnology sector High returns on NIS investments High returns on NIS investments Source: SDC

5. LEHMNABROTHER S Year 2000 - Capital Markets 0 50 100 150 200 250 NASDAQNYSELSETOKYO 19992000 Data in $ millions except numbers of IPOs Source: Autex $ Amount RaisedNumber of IPOs

6. LEHMNABROTHER S Dow Jones Historical Index 0 2,000 4,000 6,000 8,000 10,000 12,000 1928194019521964197619882000 Source: Dow Jones web Site Down-cycle Period 1929 Down-cycle 1987 Down-cycle 2000 Down-cycle

7. LEHMNABROTHER S Year 2000 Wake Up Call Decreasing expectations in the global high-tech industry lead to a decline in most major capital markets Decreasing expectations in the global high-tech industry lead to a decline in most major capital markets Indications of slower growth in the U.S Indications of slower growth in the U.S Political turmoil and security concerns in Israel Political turmoil and security concerns in Israel Deceleration in Israeli economy’s growth rate Deceleration in Israeli economy’s growth rate

8. LEHMNABROTHER S Year 2000 Decline in Major U.S Indices On December 31, the NASDAQ was down 39.3% year-to-date, and Israeli technology stocks showed a 26% average drop On December 31, the NASDAQ was down 39.3% year-to-date, and Israeli technology stocks showed a 26% average drop 2000 was a record year for Israeli high-tech’s public and private funding, but a poor period on a return on investment basis 2000 was a record year for Israeli high-tech’s public and private funding, but a poor period on a return on investment basis -10% -6% -39% 16% 11% -4% 6% 2% 21% 7% 9% 10% -50% -40% -30% -20% -10% 0% 10% 20% 30% S&P 500 DJIA NASDAQ S&P MidCap 400 S&P SmallCap 600 Russell 2000 Jan 2001

9. LEHMNABROTHER S Lehman Brothers’ 2001 Forecast

10. LEHMNABROTHER S Lehman Brothers’ forecast for 2001 Global growth will decrease from 3.9% to 3.4% Global growth will decrease from 3.9% to 3.4% Deceleration of U.S growth Deceleration of U.S growth Expected drop in U.S consumer prices Expected drop in U.S consumer prices Price targets for the S&P 500 and DJIA are 1,675 and 13,000 respectively Price targets for the S&P 500 and DJIA are 1,675 and 13,000 respectively Expected returns are 21% for stocks, 8% for Lehman’s bond portfolio and 6% for cash Expected returns are 21% for stocks, 8% for Lehman’s bond portfolio and 6% for cash Technology sector should outperform the market over the next several years Technology sector should outperform the market over the next several years Expected devaluation of up to 5% in NIS/$ - ($1= 4.22NIS) Expected devaluation of up to 5% in NIS/$ - ($1= 4.22NIS) Source: Lehman Brothers` Research Reports

11. LEHMNABROTHER S Asset Allocation for Year 2001 Global asset allocation should consist of 60% Equities, 35% Bonds and 5% cash Global asset allocation should consist of 60% Equities, 35% Bonds and 5% cash Increasing exposure to Cyclical Stocks (Oil, Gas and Healthcare) Increasing exposure to Cyclical Stocks (Oil, Gas and Healthcare) Though still underweight, increasing technology exposure, mainly in the under-valued telecom sector Though still underweight, increasing technology exposure, mainly in the under-valued telecom sector Prospects of a stronger EURO hence, increasing exposure in continental Europe Prospects of a stronger EURO hence, increasing exposure in continental Europe Source: Lehman Brothers` Research Reports

12. LEHMNABROTHER S Down-Cycle Historical Perspective

13. LEHMNABROTHER S Dow Jones - 1929 Down-Cycle Source: Dow Jones web Site 0 50 100 150 200 250 300 350 1896190919221935 1929 Down-cycle

14. LEHMNABROTHER S Dow Jones – 1987 and 2000 Down-Cycles Source: Dow Jones web Site 1987 Down-cycle 2000 Down-cycle

15. LEHMNABROTHER S General Trends in Down-Cycle Behaviour Total of 14 down-cycles between the years 1944-1995 with an average downturn duration of 14 months and index decrease of 19.5% Total of 14 down-cycles between the years 1944-1995 with an average downturn duration of 14 months and index decrease of 19.5% An estimated 5% of stock assets were redeemed 6 weeks after the beginning of down-cycles An estimated 5% of stock assets were redeemed 6 weeks after the beginning of down-cycles Shareholders’ response to a down-cycle period tend to be spread over time Shareholders’ response to a down-cycle period tend to be spread over time Shareholders react moderately, enhancing their long-term investment objectives and horizons Shareholders react moderately, enhancing their long-term investment objectives and horizons Source: Investment Company Institute -(Mutual Fund Shareholders Activity During U.S Stock Market Cycles 1944-1995) Note: Information includes 30 large Mutual funds which at that time held 80% of equity fund assets

16. LEHMNABROTHER S Case Study - October 1987 On average, monthly basis outflow was $7.5 billion On average, monthly basis outflow was $7.5 billion Approximately 70% of the outflow occurred on the first 3 days of down-cycle Approximately 70% of the outflow occurred on the first 3 days of down-cycle Share redemption was mainly in the second half of October, representing an approximately $8.2 billion outflow Share redemption was mainly in the second half of October, representing an approximately $8.2 billion outflow Only 5% of the stock-fund shareholders had redeemed shares during and since the market break Only 5% of the stock-fund shareholders had redeemed shares during and since the market break Net outflow moderated and tapered off in November and December 1987 Net outflow moderated and tapered off in November and December 1987 Note: Information includes 30 large Mutual funds which at that time held 80% of equity fund assets Source:Investment Company Institute -(Mutual Fund Shareholders Activity During U.S Stock Market Cycles 1944-1995)

17. LEHMNABROTHER S “Alternative Investment Opportunities”

18. LEHMNABROTHER S Return Per Asset Class (1926-1998) Annual Ranges of Return -100% Highest Annual Return Lowest Annual Return Average Return 14.7% 29.1% 142.9% 54.0% 40.4% -5.1% -43.3% -9.2% -58.0% 0.0% -50% 0% 50% 100% 150% Small Company Stocks Large Company Stocks Long-Term Government Bonds Medium Term Government Bonds Cash 12.4%11.2%5.3% 3.8% Source: Ibbotson Associates. Note: Each bar shows the range of annual total returns for each asset class over the period 1926-1998.

19. LEHMNABROTHER S Annual Returns By Region (1970-1998) Annual Ranges of Returns -40% -20% 0% 20% 40% 60% 80% 100% 120% United States Internation al Europ e 37.4% 69.9% 79.8% 107.5% -26.5% -23.2%-22.8% -34.3% Pacifi c 13.5% 12.7%13.7% 12.1% Average Return Source: Ibbotson Associates (Highs and Low. From 1970- 1998)

20. LEHMNABROTHER S Contributing Factors of Portfolio Performance

21. LEHMNABROTHER S Lehman Brothers’ Investing Synergies An additional 5-10% of non-correlated alternative investments to the portfolio can substantially reduce the standard deviation on the expected return The goal of modern Portfolio theory is to maximize return at a given risk An efficient portfolio will always have the highest expected return for a given level of risk

22. LEHMNABROTHER S Alternative Investments’ Opportunities Growth

23. LEHMNABROTHER S Alternative Assets - Sector Overview   Alternative investments implement various financial instruments (such as: Hedging tools, Bonds, Options)   Over $12 billion were invested in European hedge funds in 1999 by European and US Institutions and high net worth individuals, bringing total assets to $28 billion   Close to 60 new European hedge funds were launched in 1999, bringing the total number of hedge funds to approximately 200   The US market has over 2000 hedge funds. It is expected that over 300 funds will be launched in Europe over the next 3 years

24. LEHMNABROTHER S Alternative Assets - A Growing Asset Class Alternative Assets - Industry Overview Source: Hedge Fund Research, LLC * - estimates

25. LEHMNABROTHER S Alternative investment example: Lehman Brothers’ Offshore Multi-strategy Fund II

26. LEHMNABROTHER S Major Financial Objectives Take advantage of investment opportunities around the world Take advantage of investment opportunities around the world Implement a variety of financial instruments (such as: beta hedging, convertible arbitrage and event oriented analysis), in order to achieve a superior total return with moderate volatility over the long term Implement a variety of financial instruments (such as: beta hedging, convertible arbitrage and event oriented analysis), in order to achieve a superior total return with moderate volatility over the long term Employ a multi-manager investment approach Employ a multi-manager investment approach Leverage the capabilities of a global investment bank Leverage the capabilities of a global investment bank

27. LEHMNABROTHER S Risk vs. Return Profile Lehman’s Offshore Multi-Strategy Fund II provides a substantially higher return compared to traditional fixed income investments at a given risk level Multi Strategy Fund II S&P 500 Aggregate Lehman Bond Index

28. LEHMNABROTHER S Fund Performance

29. LEHMNABROTHER S Conclusions In a down-cycle market, an investor should strive for a diversified portfolio with a world wide perspective In a down-cycle market, an investor should strive for a diversified portfolio with a world wide perspective Alternative investments opportunities are designed to outperform the market utilising various financial instruments Alternative investments opportunities are designed to outperform the market utilising various financial instruments Today, more and more investors consider alternative investment opportunities as a material part in their portfolio Today, more and more investors consider alternative investment opportunities as a material part in their portfolio

30. LEHMNABROTHER S Thank You