Hedge Funds 101

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? • 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. 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 Business Model Attributes

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 • When 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? Growth of $100 Annual ROR *Inception date 3/1/99

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!