DEALING WITH TRANSPARENCY IN HEDGE FUNDS

1. DEALING WITH TRANSPARENCY IN HEDGE FUNDS Omar Kodmani, Permal Group HKRSA Hedge Funds Education Seminar Hong Kong, 18 October 2005

2. PERMAL GROUP OVERVIEW • A 31 year history managing funds of hedge funds • Over $20 billion in AUM • Principal offices in New York, London, Singapore • SEC registered and FSA authorized and regulated subsidiaries • Legg Mason, Inc. to acquire Permal in 4th quarter 2005 THE ORGANIZATION • Access to established and new hedge fund managers • Diversification across a broad spectrum of alternative strategies • Disciplined investment and monitoring process • Integrated risk management function INVESTMENT APPROACH PERFORMANCE • Solid long term performance record since 1973 • Capital preservation • Reduced downside risk and volatility; funds have achieved asymmetric returns • Multi-manager funds (including HK SFC-authorized funds) • Customized separate accounts • Structured products INVESTMENT OFFERINGS Solid track record for over 30 years

3. AGENDA • THE TRANSPARENCY DEBATE • THE TRANSPARENCY TRADE-OFF • SOLUTIONS & COMPROMISES

4. THE TRANSPARENCY DEBATE

5. INSTITUTIONAL PERSPECTIVE ON HEDGE FUNDS • TRANSPARENCY IS HIGH ON THE LIST OF OBJECTIONS TO INVESTING IN HEDGE FUNDS • Fees • Leverage • Complexity • Transparency • Absolute return • Low volatility • Diversification/low correlation • Investment talent The caseagainst The casefor Good transparency could help overcome some of the other objections as well

6. THE NUMBER OF HEDGE FUNDS IS GROWING… • HOW CAN INVESTORS CHOOSE ? Estimated Number of Global Hedge Funds (1990 – 1 Q 2005) Source: Hedge Fund Research, 2004 Industry Report

7. TENSION BETWEEN MANAGER & INVESTOR • MANAGER IS RELUCTANT TO OFFER TRANSPARENCY • sensitive information • preferential treatment of investors • impractical • positions may not be understood in context • RECENT SURVEY REVEALS TRANSPARENCY NOT SO KEY: Deutsche Bank 2005 Alternative Investment Survey • 67% of investors look for limited transparency, whereas only 14% require full transparency • Some investors had voiced concerns that full transparency might open up a different degree of liability • “If you tell people you have full transparency, you might be giving them a sense of comfort that you are doing something with the information, evaluating in some capacity or monitoring the information on a regular basis,” “But if you aren’t, does that open you up to a different degree of liability?”

8. VARIED QUALITY OF HEDGE FUND MANAGERS • THE HEDGE FUND UNIVERSE IS PERCEIVED AS HAVING THREE DISTINCT GROUPS • Around 15% of managers are clear stars: they provide the prime capacity that is capable of generating risk-return characteristics in line with client expectations. The majority are based in the US • A further 55% are wannabees who aspire to be stars before long. Many are based in Europe and also Asia/Pacific • The remaining 30% are has-beens Source: CREATE and KPMG International, 2005

9. TRANSPARENCY TRADE-OFF

10. VARYING DEGREES OF TRANSPARENCY • WHAT KIND OF DATA/INFORMATION CAN YOU EXPECT? Monthly NAV Returns Anecdotal 3rd Party Risk Reports Full positions OTC details Guidelines & Limits Sector Exposures Manager Accounts • How useful is transparency without adequate liquidity?

11. TRANSPARENCY TRADE-OFF: INVESTIBLE INDICES Comments “Coalition of the willing versus coalition of the talented!” Investible indices are very different from the original Hedge Fund indices. Investible indices do not come cheap You lose the benefit of manager selection, asset allocation and risk management The indices have not been selected to represent benchmarks for the Funds, but rather allow for comparison of a Fund’s performance to that of a widely recognized index See Disclaimer on last page and index descriptions on page 25

12. IS BIGGER BETTER? • Manager of bigger funds may be more skilled on average • Similar findings for Fund of Funds Source: Ibbotson Associates, June 2004; based on data from CSFB/Tremont TASS databaseSee statement on the last page for further information.

13. DISPERSION OF MANAGER RETURNS • UNDERLYING MANAGER RISK IS GREATER THAN UNDERLYING POSITIONS Analysis of Returns in 2004 Source: CSFB Tremont /TASS Indexes. . The CSFB/Tremont database, which tracks more than 3000 funds, is used to determine the Index Universe. This selection universe is defined as only the funds with a minimum of US $10 million under management, a minimum one-year track record, and current audited financial statements. Currently there are more than 900 funds in the Index Universe. Performance data used in the Index is net of all fees. See disclaimer page for further information.

14. TRANSPARENCY VARIES GREATLY BY STRATEGY • HEDGE FUND ASSETS BY STRATEGY As of December 31, 1990 As of March 31, 2005 “Other” includes strategies which represent less than or equal to 3% of the hedge fund universe. Source: Hedge Fund Research. See disclaimer page for further information.

15. SOLUTIONS & COMPROMISES

16. SOLUTIONS & COMPROMISE • Accept lower returns • OR • recognize that hedge fund allocation is a small percentage of overall portfolio • have confidence in a fund of fund manger – benefits of access and strategy allocation • independent valuations require full transparency (to 3rd party administrator)

17. SYNTHETIC TRANSPARENCY • PICKING A BASKET OF LIQUID SECURITIES THAT MIMICS THE NON-TRANSPARENT FUND? returnfund=+1·returnindex1+2·returnindex2+… Synthetic version: $X in European Equities $Y in US High-Yield $Z in Asian Gov Debt Source: Investor Analytics

18. MARKET FACTORS - HISTORIC IMPACT ON HEDGE FUND STRATEGIES • The table presents the historical pattern of performance of hedge fund strategies relative to the performance of the factors three-month-ahead. For example, when Small Cap returns have been low - three months later Equity Hedge strategies have had been above average returns (H) as well, while Convertible Arbitrage strategies have had below average (L) returns Source: CISDM, Center for International Securities and Derivatives Markets, Isenberg School of Management, The University of Massachusetts, Amherst. HFR Indices use in the research

19. The above graph shows the contemporaneous hedge fund performance indicated by the historical relationship between factors and hedge fund returns It also reports the projected return (September 2005) for various strategies. e.g. the current value of the Slope of the Yield Curve indicates average September 2005 performance for Global Macro strategies and below average September 2005 performance for Convertible Arbitrage strategies Last column shows projected return on each strategy taking into account the total information provided by the factors. Overall, Fixed Income Arbitrage strategies are expected to perform below average in September 2005 MARKET FACTORS - FUTURE IMPACT ON HEDGE FUND STRATEGIES Source: CISDM, Center for International Securities and Derivatives Markets, Isenberg School of Management, The University of Massachusetts, Amherst. HFR Indices use in the research

20. NEW FRONTIERS • HEDGE FUND MANAGERS ARE ENTERING NEW INVESTMENT SECTORS Source: Van Hedge Fund Advisors International, LLC – Hedge Fund Demand and Capacity 2005 – 20015. Is worldwide Hedge Fund Demand outstripping Capacity?, Permal

21. SUMMARY • Unfortunately, you can’t take different managers’ measures of risk and aggregate those • But, there’s lots you can do with limited transparency for risk: • Getting varying degrees of transparency is where to start • Regressions provide a reasonable method of proxying the portfolio for risk purposes • Focus on quality managers • Focus on broad liquid strategies

22. STATEMENT • The indexes listed have not been selected to represent benchmarks for the Funds, but rather allow for comparison of a Fund’s performance to that of a widely recognized index. An investor cannot invest directly in an index. Index performance does not reflect fees and expenses of investing. Past performance is not a guide to future performance. Performance figures are for Class A shares, reflect the reinvestment of dividends, distributions and other earnings and are net of Fund level expenses but not sales charges which may be up to 5.5% or taxes which would reduce the return. Fees and expenses are payable at the Fund level in addition to those of third party portfolio managers or their funds. The Fund may have high fees and expenses that would reduce gross returns. Performance may be volatile and the Fund’s NAV will fluctuate. Hedge Funds are speculative and involve a number of risks including those associated with the use of leverage, options, derivative instruments, distressed securities, futures, illiquid investments and short sales. In addition, alternative investment funds with an emphasis on specific industry sector and/or public and private companies present certain risks that may not exist in a more diversified portfolio. Multi-manager funds are dependent not only on the investment performance of individual managers but also on the ability of the investment manager to effectively allocate the fund's assets. Investors may not receive the full amount invested upon redemption or withdrawal. Exchange rate fluctuations may affect Fund returns. Fund allocations and holdings are subject to change. There is no assurance that the Fund’s objective will be attained. This material is not an offer or solicitation to subscribe for shares in the Fund and is by way of information only. Sales of shares are made on the basis of the offering circular only and cannot be offered in any jurisdiction in which such offer is not authorized. The Fund is not for sale in the US or to US persons, including US citizens and residents, and its sale is restricted in certain other jurisdictions. There are restrictions on transferring Fund shares. Investment in the Fund may not be suitable for all investors and prospective investors should consult their professional advisers as to suitability, legal, tax and economic consequences of an investment in the Fund. Permal believes that the information contained herein is accurate as of the date of the materials. No entity of the Permal Group makes any warranties of accuracy of the information and they shall not be liable for any losses or damages relating to it. To UK investors: This material is approved for issue in the UK by Permal Investment Management Services Limited ("PIMS") which is authorized and regulated by the Financial Services Authority (“FSA”). The Fund is not regulated under the Financial Services and Markets Act 2000 ("the Act") and consequently no protection is provided by the UK regulatory system.. Similarly, benefits available under the UK Financial Services Compensation Scheme do not apply. This document is only intended for distribution to persons permitted to receive it by the Financial Services and Markets Act (Promotion of Collective Investment Schemes) (Exemption) Order 2001 and the rules of the FSA, any investment to which this material may relate will not be made available to private customers. If you are in any doubt as to whether or not you may receive this material, please contact PIMS at 44 (0) 20 7389 1300. To Singapore investors: This material is distributed in Singapore by PIMS, Singapore branch, which is regulated by the Monetary Authority of Singapore. To Dubai investors: This information has been distributed by Permal Investment Management Services Limited, Dubai U.A.E. Related financial products or services are only available to wholesale customers with liquid assets of over $1 million, and who have sufficient financial experience and understanding, to participate in financial markets in a wholesale jurisdiction. Permal Investment Management Services Limited is duly licensed and regulated by Dubai Financial Services Authority (DFSA).