Alternative Fund Linked Derivatives

1. AlternativeFund Linked Derivatives Portable Alpha, Absolute Return Strategies & Capital Preservation Techniques VIII ALMATY INTERBANKING CONFERENCE 27th September 2007

2. Agenda • What do we mean by Alphaα • Absolute Return Strategies • Capital Preservation Techniques

3. What do we mean by Alpha? 1

4. What do we mean by Alpha? An actively managed traditional long only fund (or portfolio’s) return is broadly based on two constituents: • The first is beta, i.e. the extent to which such fund moves with the market - thus representing the passive return or increase in the fund’s value along with the overall market; and • The second is alpha, i.e. a measure of a manager’s ability to generate returns by choosing investments that out perform the market. “Alpha” can be considered the “excess return” generated by an actively managed fund vis-à-vis a particular market index (or risk free rate) and is increasingly a common way of assessing such manager’s performance. In simple terms, “manager skill” can be expressed as follows: Fund Alphaα = Fund Performance – Market Beta β

5. Fund Return 100% Out-performance / Under-performance + Benchmark Return (i.e. Asset Class Performance) = alpha = beta Total Return What do we mean by Alpha? The following example demonstrates how a relatively small amount of alpha can accumulate over time to make a meaningful impact on overall performance. However, since alpha can be both positive or negative, an active manager that fails to generate returns in excess of the market - but instead under-performs the market - can be thought to generate negative alpha. Accordingly, manager selection is crucial to the success of an alpha strategy. alpha = Out-performance over benchmark Jan-01

6. Fund Return Asset Class Return (beta) Out-Performance (alpha) What do we mean by Alpha? Positive alpha can be generated in different market conditions: Fund delivers less negative return than benchmark in down markets. Fund delivers positive return when benchmark delivers negative returns. Fund delivers higher return than benchmark in up markets. Performance Performance Performance In this example, alpha represents the out-performance of a fund relative to the market and may be positive in both up and down markets as long as the manager is able to out-perform its benchmark. Manager Skill can generate alpha in rising, falling & side-ways markets

7. Case Study #1: Isolating Alphaα Insight EM Fund USD EM Bond Alphaα • Alphaα seeks to capture the “manager skill” or out- performance of the Insight Emerging Market Bond Fund USD (EM Bond) over the JP Morgan EMBI Global • A long notional position in EM Bond coupled with a short notional position in the EMBI Global powers the Alphaαengine. Alphaα JP Morgan EMBI Global N.B. Graphs are for illustrative purposes only and are gross of any fees. Past performance is not indicative of future results. Source: ABN AMRO

8. Case Study #1: Insight Investment Management Monthly Returns Insight Alphaα • The Insight Fund has consistently delivered significantly more positive than negative alpha vis-à-vis the Index. • For the period observed, the Alphaα has on average yielded 0.4% a month. Cumulative Outperformance N.B. Graphs are for illustrative purposes only and are gross of any fees. Past performance is not indicative of future results. Source: ABN AMRO

9. Absolute Return Strategies 2

10. Absolute Return Strategies • Absolute Return Strategies differ from traditional relative return strategies in that they are concerned with the actual return of a particular asset and do not generally compare to any other measure or benchmark. • A mutual fund typically seeks to produce returns that are better that its peers, its fund category, and/or the market as a whole. This type of fund management approach is referred to as relative return. An Absolute Return Strategy seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. • Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets. • Alfred Winslow Jones is credited with establishing the first absolute return fund in New York in 1949. More recently, approach to absolute return fund investing has become one of the fastest growing investment products in the world and is more commonly known today as Hedge Funds! • .

11. Absolute Return Strategies Why invest in Absolute Return Strategies • Superior and Sustainable Risk Adjusted Returns • Uncorrelated to Traditional Asset Classes (Zero Beta) • Market Neutral Investment Strategies • Access to alternative and sophisticated investment techniques: Absolute return investment techniques include short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.

12. Variety of Absolute Return Styles Hedge Fund Strategies • Certain strategies within the Hedge Fund space have tended to outperform others over time • Diversification enables consistent outperformance through time and lower volatility than pure single strategy exposure Diversification

13. Case Study #2: Diversified Fund of Hedge Funds Why choose a large diversified Fund of Hedge Funds? • Cover a wide range of strategies, regions, sectors and investment objectives in order to create stable returns. • Allocate assets to established and new independent investment managers to diversify risk and gain exposure to a range of investment opportunities. • Fund updates including asset allocation and top managers are made available on a monthly basis. • Typically no leverage on fund of funds level. • Diversification by inclusion of up to 100 underlying funds, 11 different strategies and four investment regions both developed and emerging over all asset classes. • Superior historical returns compared to traditional asset classes with relatively lower associated volatility as measured by standard deviation.

14. Case Study #2: Permal Investment Management Multi-Manager Multi-Strategy Multi-Style Global diversification Balanced, diversified exposure to U.S. and global financial markets employing long/short and global macro strategies. Returns shown are net after fees. Past or projected performance is not necessarily a guide to future results. The value of the investment may go down as well as up. Data as of July ’07.

15. 2.5% 2.0% 1.5% Average Monthly Return 1.0% 0.5% 10 50 100 500 1000 AUM（US$1 Million） Case Study #3: Thematic Fund of Hedge Funds Why focus on emerging managers? Emerging Hedge Fund Mangers have demonstrated an ability to outperform: • Easier to deploy capital in profitable trades - Eager and hungry • More agile and faster with their investments - Investing in future capacity • Significant personal net worth in their fund - Non-correlated to established managers Source: Infiniti Capital AG

16. Case Study #3: Infiniti Capital Simulated Historical Returns (Jan-00 to May-07) Risk / Return Profile Source: ABN AMRO, Infiniti Capital AG, Bloomberg, as of July 07 Source: ABN AMRO, Infiniti Capital AG, Bloomberg, Data as of July 07 • The Conquistador II Fund has outperformed both the Credit Suisse Tremont Investable Hedge Fund Index and the S&P 500 Index • The Fund also offers low volatility… • Please note all data referring to the Conquistador Fund II is simulated prior to January 2007, and is provided by Infiniti Capital AG. Simulated past performance is not indicative of future results

17. Capital Preservation Techniques 3

18. Capital Preservation Techniques • Static guarantee with fund exposure • Static guarantee with call option exposure • Vanilla dynamic guarantee (CPPI) • Continuous dynamic guarantee (PCPI) • Dynamic versus Static comparison

19. Investor Notes Cash Issuer X% 100% - X% Fund Component Guarantee Component Static guarantee with fund exposure Structure Overview: • Investor purchases Medium Term Note (MTN) • Issuer allocates X% of the issuance proceeds to Zero Coupon Notes priced to mature at Par • 100% Issue price less X% ZCN is allocated/committed to the Fund Component (or “risky asset”) • Investor receives 100% + value of the Fund Component at maturity Why choose Bond & Fund Structure? • Cost effective guaranteed structure for illiquid or hard to mark assets • Medium Term Notes can be rated (per Issuer), listed, transferable, marked to market, pledged as collateral, repo’d – but can not be typically unwound prior to intended maturity

20. Investor Notes Cash Issuer X% 100% - X% Call Option Guarantee Component Static guarantee with call option exposure Structure Overview: • Investor purchases Medium Term Note (MTN) • Issuer allocates X% of the issuance proceeds to Zero Coupon Notes priced to mature at Par • 100% Issue price less X% ZCN is used to purchase Call Options on the risky asset • Investor receives 100% + value of the Fund Component at maturity Why choose Bond & Call Structure? • Higher (geared) exposure to risky assets & certainty of payout (vis-à-vis dynamic structures) • Medium Term Notes can be rated (per Issuer), listed, transferable, marked to market, pledged as collateral, repo’d – and offer improved liquidity, typically with associated break costs

21. Vanilla dynamic guarantee (CPPI) Structure Overview: • Investor purchases Medium Term Note (MTN) • Issuer employs Constant Proportion Portfolio Insurance (CPPI) technique to allocate Note’s issuance proceeds amongst the three components that typically comprise the “CPPI Index”: • The Fund Component (FC) consists of a notional investment in the risky assets • The Cash Component (CC) consists of a notional loan extended by the Issuer to provide leveraged exposure to the FC or a cash deposit (e.g. when de-leverage has occurred) • The Bond Component (BC) consists of a notional investment in Zero Coupon Notes to ensure that in a “cash-out” event a minimum of 100% is repaid at maturity Investor Notes Cash Issuer Cash Component (CC) Fund Component (FC) Bond Component (BC)

22. Vanilla dynamic guarantee (CPPI) If the ratio of the FC (or Participation) over the Equity Gap (EG) decreases below pre-defined trigger levels (e.g. 4.5) a reallocation from CC to FC will occur. If the ratio of the FC (or Participation) over the Equity Gap increases above pre-defined trigger levels (e.g. 5.5) an allocation (or “de-allocation”) from the FC to the CC will follow. The Issuer guarantees against Gap Risk, thus ensuring that, at the very least, a Client’s initial principal investment is returned at maturity. Positive returns above the principal amount protected by the Note are paid to Note holders at maturity. Participation typically = Min ( CAP , (EGxM) ) where EG = Equity Gap between the CPPI Index and the price of the implied bond floor (or“zero”), M = Multiplier (e.g. 5), & CAP = Leverage Cap (typically 150%) N.b. the maximum leverage cap for fund-linked CPPI is dependant on the volatility of the underlying investments Participation At Inception, if = M, where M = 5. G Then rebalancing would typically be triggered if M = (<4.5, >5.5)

23. 200% Note NAV (Scenario 1) Fund NAV (Scenario 1) NAV Protected Amount Note NAV (Scenario 2) 100% Gap Risk Equity Gap Implied Bond Floor Fund NAV (Scenario 2) 0% 0 1 2 3 4 5 6 7 Sample simulation Time (in Years) Maturity This graph is for illustration purposes only. Vanilla dynamic guarantee (CPPI) Why choose vanilla CPPI? • Controlled leverage: typically more than 100% of the Note’s issuance proceeds are invested in FC at inception • Soft landing: should Note NAV decline, exposure to the risky asset is reduced via the CPPI’s de-leveraging strategy • Gap risk protection: should the Fund NAV decline sharply, a full allocation to BC may occur (i.e. a “cash-out” will be called) and the Issuer will cover any “short-fall” to ensure full 100% protection at maturity (Scenario 2) • CPPI rewards good performance: embedded dynamic Leverage can help boost the Note NAV to out perform the Fund NAV (Scenario 1)

24. Continuous dynamic guarantee (PCPI) Structure Overview: • Investor purchases Medium Term Note (MTN) • Issuer employs Partial Continuous Portfolio Insurance (PCPI) technique to allocate Note’s issuance proceeds amongst the two components that typically comprise the “PCPI Index”: • The Fund Component (FC) consists of a notional investment in the risky assets • The Cash Component (CC) consists of a notional loan extended by the Issuer to provide leveraged exposure to the FC or a cash deposit (e.g. when de-leverage has occurred). Investor Notes Cash Issuer Cash Component (CC) Fund Component (FC)

25. Continuous dynamic guarantee (PCPI) If the ratio of the FC (or Participation) over the “Partial” Equity Gap (EGadj) decreases below pre-defined trigger levels a reallocation from CC to FC will occur. If the ratio of the FC (or Participation) over EGadj increases above pre-defined trigger levels (e.g. 5.5) an allocation (or “de-allocation”) from the FC to the CC will follow. The Issuer guarantees against Gap Risk, thus ensuring that, at the very least, a certain minimum percentage of highest NAV is available to the Client on an ongoing basis. Participation typically = Min ( CAP , (EGadjxM) ) where EGadj = “Partial” Equity Gap between the adjusted CPPI Index and an agreed percentage of highest NAV, M = Multiplier, & CAP = Leverage Cap (typically 150%) N.b. the maximum leverage cap for fund-linked CPPI is dependant on the volatility of the underlying investments Participation At Inception, if = M, where M = 5. Gadj rebalancing would typically be triggered if M = (<90% x M, >110% x M)

26. 200% Equity NAV Fund NAV NAV Equity Gap 100% Minimum Protected Amount 80% 0% 0 1 2 3 4 5 6 7 Sample simulation Time (in Years) Maturity This graph is for illustration purposes only and assumes a continuous protection level of 80% Continuous dynamic guarantee (PCPI) Why choose vanilla PCPI? In addition to the typical benefits of CPPI, the PCPI offers: • Flexibility: • Open ended structure • Continuous Offering • Immunity: • No ‘pull-to-par’ effect of the Bond Floor • No Interest Rate Sensitivity • No permanent cash-out event • Protection:protects a certain percentage of the highest investment value achieved since inception • Funding: when issued as a Fund issuance proceeds can remain with the Issuer of the Fund

27. Path-dependant Participation variable Initial participation usually >100% Participation increases with performance and/or tenor Interest rates relevant over lifetime Leverage & Participation variable Greater flexibility to incorporate coupons & distribution fees Pay-out at maturity is the greater of par and Note NAV Path-independent Participation fixed Initial participation usually <100% Participation increases with the tenor of the Note Interest rates relevant at inception Leverage & Participation fixed Pay-out at maturity is equal to Par plus a pre-defined percentage of any out-performance of the underlying asset Dynamic versus Static Comparison Static Structures Dynamic CPPI Structures The vast majority of Fund Linked Structured Products comprise of ”CPPI” style Principal Protected Notes.

28. Summary Overview • Protected Products • Securities, Derivatives or Funds providing participation to the performance of an underlying Fund, whilst protecting part or all of initial investment • Leveraged Products • Securities, Derivatives or Funds providing leveraged participation to the performance of underlying Funds (or Fund-of-funds) • Maximum loss is limited to the initial investment (limited liability) • Pass-Through Products • Securities linked to the performance of underlying Fund (or Fund-of-funds) • No principal protection or leverage – mirrors performance of underlying Fund 1:1 (gross of fees) • Delivered in: • MTN • SPV • Certificate • Schuldschein • TRS • Potential Benefits • Operationally easy access to fund investments – especially alternative investments • Increased liquidity • Possibility of hedging currency risk • Regulatory treatment • Tax treatment • Mitigation of reputation risk • Potential Benefits • Limited downside on actively managed investments • Lowers the barrier of entry into new asset classes • Regulatory treatment • Reduces reputation risk • Tax treatment • Flexibility – possibility to include leverage and modify cash flow profile • Potential Benefits • Yield enhancement • Limited recourse leverage • Efficient use of capital • Efficient risk budgeting – between asset classes and within a fund of funds portfolio • Cost of leverage is still low – but increasing!!

29. Jackie Lin Vice President Hong Kong (852) 2700-3165 jackie.lin@hk.abnamro.com Stephen Kingham Global Head London +44 207 678 5449 stephen.kingham@uk.abnamro.com Pieter Oyens Head of Asia Hong Kong (852) 2700-3170 pieter.oyens@hk.abnamro.com Thomas Jamet Vice President Hong Kong (852) 2700-3026 thomas.jamet@hk.abnamro.com Richard Patey Director London +44 207 678 6137 richard.patey@uk.abnamro.com James Galvin Assistant Director London +44 207 678 5851 james.galvin@uk.abnamro.com Contacts Fund Linked Derivatives Marketing Team (Europe) Fund Linked Derivatives Marketing Team (Asia)

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