Structured Products Canadian Annual Derivatives Conference August 17 th -19 th 2005

1. Structured Products Canadian Annual Derivatives Conference August 17th -19th 2005

2. Why Structured Products? • Access to strategies unavailable to Mutual Funds • Repackaging of securities • Tax benefits • Access to offshore securities and funds • Access to enhanced manager ‘tool kit’ • short selling • options • derivatives • Leverage • Exposure to previously unattainable investments • Offshore property • Hedge Funds

3. Forms of Structured Products Listed: • Income Trusts • Split Share Corporations • Closed End Funds • Flow through LP’s • Exchange Traded Funds (ETF’s) Unlisted: • Market linked instruments

4. Listed Structured ProductsEnding Dec 2004: -$41.5 Billion-3% of TSX -228 products Source: TSX Group Inc.

5. Listed Structured ProductsEnding Dec 2004: -SP’s: $9.5B-Corp: $3.2B -IT’s: $2.9B Source: TSX Group Inc.

6. Unlisted Structured ProductsGrowth yr/yr: ML GICs: -0.5%Linked Notes: 29% Source: Investor Economics

7. UnlistedStructured Products Source: Investor Economics

8. Unlisted Structured Products Source: Investor Economics

9. Principal Protectednotes • A debt security issued by an agent (Investment manager and backed by a guarantor (usually Schedule I or II bank) • Guarantees 100% of principal if held to maturity (a range of 6 to 10 years) • At maturity, pays original principal plus appreciation from the underlying ‘linked’ asset. • May pay a coupon (variable or fixed) with no correlation between value of this coupon and return of the underlying asset

10. PPN underlyingassets Underlying assets that are ‘linked’ to notes include: • Mutual funds • Group of funds • An index • Basket of equities • Pools of income trusts • Hedge funds • Funds of funds • Emerging markets • Currencies • Commodities • etc

11. Growth in PPN’sCAGR since Dec 1999: 70.3% Source: Investor Economics

12. PPN’s: two approaches1.Zero Coupon Bond • Strip bond with option: (example $100 note) • $70 into zero coupon or strip bond • $30 into long term option on underlying asset • Leverage x option ≈ $100 notional exposure to asset • Issues: • A Low interest environment requires large portion of the investment to be applied to zero coupon bond • May not get leverage on call option to get $100 notional exposure • Call option tied to expected volatility of asset (conservative but can be costly) • Selling before maturity can be costly as the strip bond is heavily discounted to start.

13. PPN’s: two approaches2.Constant proportion portfolio insurance (CPPI) CPPI (a monitoring approach) • Two components • Underlying investment • A guarantee, notionally related to a zero coupon bond that matures at 100% • Formula monitors the NAV of the underlying asset against a reference curve or ‘floor’ that increases over time. • Starting floor value = cost of zero coupon bond calculated to yield 100 at maturity. Over time, zero coupon bond cost increases. • As long as the investment NAV remains a specific distance above this floor (delta), all cash is kept in the investment. • Allows for leverage to be applied if NAV gains in value and removed if NAV falls below the delta (dynamic leverage)

14. CPPI Example: 8 yr term, $100 note At Time 0: Annual yield on 8yr zero coupon bond = 3.0625% Over 8 years this = 24.5% Cost of zero coupon = $75.50 (floor) rises over time Starting delta (distance between zero coupon cost and 100) 100-75.50 = 24.5 To keep $100 in the investment, the NAV of the investment must not fall below 24.5% above the floor.

15. CPPI De-leveraging begins Knock out delta guarantee Asset return

16. CPPI:enhancements • Some enhancements to the CPPI structure: • Lock-ins to periodically crystallize gains above the delta • Payouts or coupon payments (return of capital until initial capital amount met) • Options on CPPI for offshore exposure within FIE constraints • Conversion of income to capital gains through derivatives

17. Risks • Credit rating of guarantor • Mitigated by using rated schedule I and II banks • Level of participation in underlying asset • CPPI investment can be reduced by poor initial performance (de-levered). Harder to get back returns due to lower investment base • locked out early (end up sitting in a bond for a few years) (assessment of underlying asset is very important !) • Cost of guarantee • Driven by interest rates • lower interest rates = lower yield = higher cost of guarantee • In unlisted PPN’s, the secondary market is at the mercy of guarantor (availability, gates, discount)

18. Structured Product:Fees • Strategy dependant on value of CPPI structure to an investment • Fees for guarantee (discounted to pay guarantor) • Fees for option • Plus trailers, expenses, management fees, front end fees and commissions to investment manager and advisor etc

19. More information & Acknowledgements • TSX Group (www.tse.com) • Investor Economics (www.investoreconomics.ca) • Fund Library (www.fundlibrary.com) • Investment executive (www.investmentexecutive.com) • AIMA (www.aima.org) • Various regulators

20. Thank you Contact details: Andrew Doman Chief Operating Officer Abria Alternative Investments Inc. 20 Adelaide Street East, Suite 300 Toronto, Ontario, Canada M5C 2T6 Tel: 1-416 367-9993 Fax: 1-416 367-4555 website: www.abriafunds.com