1. Den Danske Finansanalytikerforening Investing in Hedge Funds – The Investor‘s Perspective March 18 2004 Representative in Denmark Representative in Denmark:

2. 2 About Harcourt Mission:Deliver superior investment solutions and products within the context of hedge funds to institutional investors Locations:Zurich (Head office), New York, Geneva, Stockholm Representative in DK:Privestor Fondsmægerlerselskab A/S Founded:April 1997 Staff:39 AUM:USD 1,57 Bln Ownership:NIB Capital N.V. Management & Staff Major Clients:Swiss Re Novartis Pension Fund Hagströmer & Qviberg

3. 3 Agenda 1. Hedge funds – structural differences to traditional investing 2. Hedge fund investing – what is the value added for the investor? 3. How to construct a hedge fund investment – single manager or fund of hedge fund approach? 4. Hedge funds as Alpha generators – what does that really mean? 5. Conclusions 1.

4. 4 The ambition to generate absolute returns Absolute returns means the focus to strive for positive returns in all market conditions and therefore to disregard from beating any index Hedge funds have less restrictions than traditional asset managers More flexibility in what they invest in (such as asset classes) as well as in investment techniques (e.g. usage of derivatives/leverage) Due to less restrictions – hedge funds are very heterogeneous 1.1. What is a hedge fund? Common for all hedge funds is:

5. 5 1.2. Hedge funds from the portfolio manager perspective Hedge fund ManagementTraditional Management Inv. Restrictions Return Objective Investment method Incentive Fee structure Own assets invested NoneNumerous Absolute returnRelative return View on riskLoss of capitalDeviation from index Buy long, sell shortBuy long Reach return targetBeat index Mgmt + Perf FeesManagement Fee Very commonVery uncommon

6. 6 1.3. Hedge funds from the investor perspective Hedge FundsTraditional funds Subscription terms Legal structure NAV Reporting Transparency Fee structure Main risk Monthly/QuarterlyDaily Offshore / unregulatedOnshore / regulated Min. investmentUSD 1 mln / 5 mlnLow (Weekly)/Monthly Daily LowHigh 1-2% Mgmt; 20% Perf1.5% Mgmt Manager RiskMarket Risk

7. 7 1.4.Hedge fund strategies classification used by Harcourt Fixed IncomeEquities Futures, Currencies and Commodities Relative Value Relative Value Fixed Income Strategies: 1. Fixed Income Arbitrage 2. Mortgage-Backed Securities Arbitrage 3. Capital Structure Arbitrage Relative Value Equity Strategies: 7. Convertible Arbitrage 8. Reg D Private Convertibles 9. Merger Arbitrage 10. Index and Options Arbitrage 11. Statistical Equity Arbitrage 12. Fundamental Market Neutral Equity Relative Value Futures and Commodities Strategies: 20.Commodities Arbitrage Directional Directional Fixed Income Strategies: 4. High Yield 5. Distressed Securities 6. Emerging Markets Debt Directional Equity Strategies: 13. Long/Short US Equities 14. Long/Short European Equities 15. Long/Short Japanese Equities 16. Long/Short Emerging Markets 17. Long/Short Sectors 18. Short-Biased Equities 19. Mutual Fund Timers Directional Managed Futures and Currency Strategies: 21.Long Term Systematic Trading 22.Short Term Systematic Trading 23.Currency Trading 24.Discretionary Trading Multiple Multiple Strategies: 25.Macro Hedge Funds 26.Multi-Strategy Funds 27.Funds of Funds

8. 8 RV Equity 23% Directional FI 6% CTA 12% Relative Value FI 4% Long/Short Equity 55% Evolution of assets invested into Hedge Funds In USD Bln Hedge Fund Strategies Globally Hedge Fund Manager Locations Hedge Fund Domiciles Globally Evolution of assets invested in HF’s Source: CSFB / TASS CAGR 25% p.a. since 1980

9. 9 Agenda 1. Hedge funds – structural differences to traditional investing 2. Hedge fund investing – what is the value added for the investor? 3. How to construct a hedge fund investment – single manager or fund of hedge fund approach? 4. Hedge funds as Alpha generators – what does that really mean? 5. Conclusions 2.

10. 10 Higher risk adjusted returns Low correlation Capital preservation in falling markets 2.1. Why investing in hedge funds? Compared with traditional investment alternatives, hedge funds can offer three unique benefits for the investor:

11. 11 2.2.Why Hedge Funds? Hedge fund return vs stocks & bonds MSCI World HFR FoHF JPM Global Bonds Source: HFR, JPM, MSCI 1994-2004

12. 12 2.3. Historical risk adjusted returns – hedge funds vs bonds & stocks Source: HFR, JPM, MSCI 1994-2003

13. 13 2.4. Why hedge funds? The Portfolio Perspective HFR Hedge Funds JPM Global Bonds MSCI World Equities Source: HFR, JPM, MSCI 1994-2003 Aunnualized Return Standard Deviation

14. 14 2.4. Why hedge funds? The Portfolio Perspective HFR Hedge Funds JPM Global Bonds MSCI World Equities Source: HFR, JPM, MSCI 1994-2003 Aunnualized Return Standard Deviation Long/Short Equities L/S Emerging Markets L/S Sector Specialists Merger Arbitrage Convertible Arbitrage MBS Arbitrage MN Equity Statistical Arbitrage High Yield FI Arbitrage Distressed Debt Macro Short Sellers CTAs

15. 15 1.6. Low correlation – Benefits from a portfolio perspective JPM Global Bonds MSCI World Equities HFR Hedge Funds Portfolio without hedge funds Aunnualized Return Source: HFR, JPM, MSCI 1994-2003 Standard Deviation

16. 16 1.6. Low correlation – Benefits from a portfolio perspective JPM Global Bonds Aunnualized Return Source: HFR, JPM, MSCI 1994-2003 Standard Deviation JPM Global Bonds MSCI World Equities HFR Hedge Funds Portfolio with hedge funds

17. 17 1.8. Preservation of capital – Bull vs Bear Markets Source: HFR, JPM, MSCI 1994-2002

18. 18 Agenda 1. Hedge funds – structural differences to traditional investing 2. Hedge fund investing – what is the value added for the investor? 3. How to construct a hedge fund investment – single manager or fund of hedge fund approach? 4. Hedge funds as Alpha generators – what does that really mean? 5. Conclusions 3.

19. 19 3.1.Be aware of the pitfalls of hedge funds! Substantial manager risk due to less investment restrictions Style and strategy shifts Hedge funds may employ high degree of leverage Capacity issues Manager skill can vary in different types of markets More complex investment conditions Higher fees Worse liquidity conditions Regulatory framework varies Low transparency Reporting frequency Degree of portfolio transparency? Challanges in finding and getting access to the best managers Global and intransparent industry Funds can be closed to new investors Minimum investments may be very high

20. 20 3.2.Due to the high Manager Risk Due Diligence is key Qualitative due diligence Competitive edge Background and experience Investment process Risk management Quantitative due diligence Peer group comparison Consistency of track record Rolling correlation Portfolio fit and style analysis Organizational due diligence Organization and legislative framework Infrastructure Primebroker(s), administrator and auditors Reference checks

21. 21 3.3.Single Managers or Fund of Hedge Funds? Benefits of single manager investments No extra layer of fees Hedge fund selection at the investor’s own discretion No potential conflicts of interest Full transparency in the manager selection process Benefits of fund of hedge fund investments Lower manager risk through diversification Professional selection of managers in each hedge fund category Professional active portfolio management Professional monitoring of managers Broad access to global supply of hedge funds May have prioritized access / transparency to otherwise closed funds Lower minimum investment requirement Completely based on the investor’s investment objective:

22. 22  Active vs passive money management Active money management = hedge funds Passive money management = index products  Hedge Fund Overlay – Core / Satellite approach Core portfolio= traditional investments Satellite portfolio= A) Single hedge funds B) Fund of hedge funds C) Core-Satellite with single & fund of funds 3.3.Different investment approaches into hedge funds

23. 23 Agenda 1. Hedge funds – structural differences to traditional investing 2. Hedge fund investing – what is the value added for the investor? 3. How to construct a hedge fund investment – single manager och multi-manager approach? 4. Hedge funds as Alpha generators – what does that really mean? 5. Conclusions 4.

24. 24 Hedge Funds – Alpha or beta? Hedge fund returns = Traditional betas + alternative betas + structural alpha + skill alpha Traditional betas = directional risk premia: -Stock market beta -Interest rate duration -Currencies -BARRA factors -Credit spreads Alternative betas = demand/supply premia: -Liquidity -Volatility -Correlations -Merger deal failure -Complexity -FI spread conversion Structural alpha = free option due to less restrictions: -Regulatory constraints -Speed -Size -Market timing -Flow -Trend-following Skill alpha = Only few really skilled managers Source: Harcourt Be educated in how hedge funds make their returns!

25. 25 Agenda 1. Hedge funds – structural differences to traditional investing 2. Hedge fund investing – what is the value added for the investor? 3. How to construct a hedge fund investment – single manager och multi-manager approach? 4. Hedge funds as Alpha generators – what does that really mean? 5. Conclusions 5.

26. 26 4.Conclusions Hedge funds has an absolute return objective therefore hedge funds are very heterogeneous Hedge funds offers an attractive return profile: High risk adjusted returns Low correlation Capital preservation in falling markets Since hedge funds are heterogeneous, the investor must perform a thourough due diligence prior to, and during the life of the investment The investor can look at hedge funds as: Active vs passive capital management Hedge funds as overlay Hedge fund returns are a function of not only alpha, but also to non- traditional investment risks.

27. Den Danske Finansanalytikerforening Thank you for your time and attention Contact: Pernille Gangsted-Rasmussen pgr@privestor.dk Niels Kayser nk@privestor.dk Pho. +45 45 82 45 87