1. Hedge Funds 101 Texas Investment Portfolio Symposium March 24, 2007 Bernay Box Bonanza Capital, Ltd.

2. What is a Hedge Fund  A structure, not a strategy  Originally pioneered by A.W. Jones in 1949 Combination of two techniques – short-selling and leverage, to reduce risk in case of market down turns  Today the structure is used to pursue the most aggressive to most conservative strategies

3. Hedge Fund Structure  Primarily a Limited Partnership, where the fund manager acts as the General Partner  Most/all of the fund manager’s assets are invested along with outside Limited Partners  Fund manager has flexibility in managing the fund (stocks, bonds, options, and commodities)  Only accredited investors and qualified investors are permitted to invest  Profits are allocated between investors (typically 80%) and the fund manager (typically 20%) with a “high water mark”

4. Hedge Fund Composition  How does short-selling and leverage lower market risk? Mutual FundHedge Fund - AHedge Fund - B 95%Long Positions (%)100%60% 0%Short Positions75%35% 95%Gross Exposure175%95% Net Exposure25%  The Typical long/short hedge fund is dependent on stock selection, not the market, to make money  Gross and net exposures vary significantly from fund to fund, depending on what the manager is pursuing

5. Business Model Attributes TRADITIONAL  Institutional  Asset gathering  Relative performance (to a market index)  Passive investors HEDGE FUND  Entrepreneurial  High rate of returns  Absolute performance (regardless of market)  Active, Proactive

6. Hedge Fund Strategies  Market Neutral: 50% long / 50% short  Convertible Arbitrage: Long converts / Short underlying equity  Global Macro: Strategy George Soros made famous  Long/Short: Various exposures and concentrations Growth Value Sector Emerging Market  Distressed: Securities of bankruptcies / re-orgs  Short Only: Negative net exposure  Fund of Funds: A portfolio of hedge funds

7. Hedge Fund Strategies Cont’d Bottom Line:  There are as many different strategies as there are managers. The structure is what they have in common.  Each strategy has its strengths and weaknesses. The key differentiator is the manager.

8. Building a Business  Understand, develop and master your “Game”  Create a flexible and realistic business plan  Have very supportive family and friends (not just financially)  Great relationship with all your service providers Prime Broker Auditor Legal Counsel Administrator  W hen appropriate, find the right people for your business

9. Current Events  Historically hedge funds have had less regulation and therefore a more entrepreneurial environment.  Institutionalization - “Growth in assets” Source: Freeman & Co.

10. Hedge Fund Careers  Portfolio Manager  Analyst (Sector specific or Generalist)  Trader  Back Office Accounting Administrative Compliance/Legal Investor Relations

11. Bonanza – “Our Game”  Small cap  Diversified  Consistent Exposure  Long-term orientation  Focused on research

12. Deal or No Deal?  Why do investors pay hedge fund managers higher fees than other traditional money mangers? *Inception date 3/1/99 Annual ROR Growth of $100

13. My advice to you  Look at the business from a long-term perspective. Don’t cut corners for short-term gain.  Run to where the ball is going, not where it is.  Most importantly - Play YOUR game!