Overview of Key Findings

1. Global Pension & Sovereign Wealth Fund Investment in Hedge Funds: The Growth & Impact of Direct Investing Overview of Key Findings November 2011

2. Survey Overview The 2011 Survey focused on pension & sovereign wealth funds that directly allocate to hedge fund managers & on hedge funds receiving such allocations • We interviewed the individual responsible for hedge fund allocations from 24 public & private pension funds and sovereign wealth funds, ~$1.7 trillion of assets (~5% of global total) • We additionally interviewed the chief marketing officer &/or the COO from 31 hedge funds managing pension and sovereign wealth fund money representing assets of ~$186 billion (7% of industry) • Interviews were done globally across the Americas, EMEA & APAC

3. Rising Institutional Influence Institutional investors overall, and pension and sovereign wealth fund investors in particular, have become the dominant share of hedge fund industry assets, particularly post-2008 • Institutional investors now represent 52% of global hedge fund industry AUM • Of this total, our analysis shows that pension funds now account for $594 billion of investment in hedge funds – 53.5% of the institutional total • Sovereign wealth fund investment has risen to $220 billion, 19.8% of the institutional total Hedge Fund Industry Assets by Type $1.1 T $990 B $878 B HNW, Family Office & Other Allocations $806 B Billions of U.S. Dollars $500 B Institutional Allocations (Foundations & Endowments, Pension Funds & Sovereign Wealth Funds) $125 B Sources: Citi Prime Finance Analysis based on HFR Q4 2010 Global Data , McKinsey & Company, Prequin & Greenwich Associates data

4. Shift to Direct Investing Early institutional allocations were channeled to hedge funds via fund-of-funds, but by the mid-2000s, this approach shifted with the financial crisis accelerating the trend to direct investing Types of Allocations Being Made to Hedge Funds • As investors’ comfort with hedge funds increased, the economics of the fund-of-fund model prompted many larger organizations to develop their own ability to allocate • Liquidity problems uncovered with the fund-of-fund model in the crisis period accelerated this trend Source: Citi Prime Finance Analysis based on HFR Q4 2010 Global Data

5. Smaller, More Targeted Portfolios Direct investors are building small, targeted portfolios that seek to provide resiliency across rather than “time” market cycles—earning them a reputation as offering “sticky money” Profile of Direct Allocator Portfolios • Most of the pension and sovereign wealth fund investors contacted for the survey had small teams of only one to five individuals focused on their hedge fund allocations • This constrained their ability to evaluate broad numbers of managers and increased their reliance on consultants as intermediaries to help them navigate the hedge fund space • Extensive time is put into considering the right portfolio mix and very few allocations are done in any given year • Interviewees stressed the importance of their “relationship” with managers in their portfolio. Source: Citi Prime Finance Analysis based on primary research

6. Expanded Institutional Threshold Fewer factors mattered in determining institutional quality pre-2008, but since the crisis, the footprint a manager must offer to address investor requirements has expanded dramatically • From 2001 to 2007, the number of hedge funds nearly doubled • In this environment, a manager’s pedigree was seen as a key measure in understanding what to expect in terms of returns • Post-2008, capacity is not seen as constrained. Investors are demanding more. Non-financial performance of the fund now weighs equally with returns Institutional Qualifications Pre & Post 2008 Pre Source: Citi Prime Finance Analysis based on primary research

7. Bifurcation of Larger Managers Direct investors noted a bifurcation in the industry toward the AUM $5.0 billion threshold as managers split in terms of their appetite to continue building their pool of assets Industry Bifurcation Toward $5.0 Billion • Largest managers with AUM toward & above $10 billion are favored by newer pension and sovereign wealth fund entrants • More experienced direct allocators expressed concern that many of these largest managers are constrained in their ability to deploy capital—the size of their positions force them to rely on just 2-3 “big bets” or causes them to correlate too highly to beta • Another category of managers limit their AUM & close their fund as they near $5.0 billion—citing concerns about “strategy saturation”, comfort with a more entrepreneurial management culture & satisfaction with the economic model Source: Citi Prime Finance Analysis based on primary research