Portable Alpha: The Next Evolution in Pension Risk Management

1. Pension and Investments Pension Risk Management ConferenceWednesday, December 6, 2006Portable Alpha Presentation David A. Russell, CFAAttalus Capital This confidential document is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities or partnership interests described herein. No solicitation, offer, trading, or management would take place until all regulatory certifications have been approved and a private placement memorandum has been delivered. For additional information, log on to www.AttalusCapital.com

2. Historical Investment Perspective “Best Investment Practices” for Pension Funds change over time: 1950”s – Bonds only 1960’s – Small allocations to large cap stocks from “Approved Lists” 1970’s – Stocks dominate portfolios: 60% stocks - 40% bonds becomes the norm 1980’s – Funds add small cap stocks, international stocks, high yield bonds, real estate 1990’s – Style boxes, venture capital, IPO’s, emerging markets, derivatives • Funds are still predominantly “long” only • 95% of the fund’s return comes from “market” returns • Most active mangers do not beat the market - focus is on manager selection 2000’s – Hedge Funds become significant part of portfolio allocations Pension fund’s get burned by high equity allocations during tech “bust” of 2000-2003 Future return expectations of long-only allocations do not meet actuarial assumptions The next evolution in “Best Practices” is Portable Alpha

3. Why Plan Sponsors use Hedge Funds Pension allocations to Hedge Funds are a logical decision: • Investors Own Stocks for the Returns – but the price volatility drives them crazy Tech Boom (1990’s) then Bust ( 2000-2003) Pension contributions and funded status have wild swings. • Investors Own Bonds for the Stability – but the low returns drive them crazy Forecasted bond returns are well below “assumed returns” Bonds have a low correlation to stocks – a low-risk diversifier • Investors Own Hedge Funds for Stability Plus Returns Low volatility with returns at or above “assumed returns” Very low correlations to both stocks and bonds Adding Hedge Funds lowers fund volatility without the return give-up.

4. Why Plan Sponsors use Hedge Funds Compelling Risk-Adjusted Returns Risk/Return Characteristics (10-Year: Jan 1994-Dec 2003) Risk/Return Characteristics (1995-2005) Past performance is not necessarily indicative of future returns

5. Diversification benefits Non-correlated return streams Why Plan Sponsors Use Hedge Funds • Lower volatility • Increased opportunity

6. Portable Alpha – The Next Investment Evolution in “Best Practices” • Within an asset class, separate the alpha and beta • Replicate the Beta (market returns) with futures or swaps • Find alpha in inefficient markets • Combine the two returns Expensive, hard to replicate Alpha Returns = Returns Inexpensive Beta Large Cap Portfolio

7. Portable Alpha Components Beta (market return) Alpha (skill) Total Return Futures LIBOR Hedge Fund of Funds Return of Index plus Alpha + + =

8. Greater Return Opportunity With Portable Alpha • Alpha is a larger component of returns in less efficient markets Per portion of return Alpha (skill) Beta (market return) LIBOR Bonds Stocks Hedge Funds Portable Alpha

9. Growth of Initial Investment, Enhanced R1000 ($1,000)February 2000 – October 2006 (Est.)

10. Growth of Initial Investment, Enhanced Lehman ($1,000)February 2000 – October 2006 (Est.)

11. Enhanced Index Fund Structure INVESTOR Reporting/NAV ADMINISTRATOR Enhanced Return Cost: 1% mgmt fee, 10% on out-performance FINANCIAL INSTITUTION Revolver ATTALUS ENHANCED INDEX FUND, LTD. Information reporting, third—party monitoring Futures only return + interest on margin Return of Attalus Fund of Hedge Funds 96% of capital (R1000) 6% of capital (R1000) FUTURES PROGRAM 100% notional exposure ATTALUS FUND OF HEDGE FUNDS Rebalancing (3-month futures contracts, with monthly rebalancing)

12. Attalus Enhanced Russell 1000 Risk / Return Characteristics Since inception (through October 31, 2006 Est.)

13. 13.0% 10.0% Attalus Enhanced LBA Sharpe = 1.80 7.0% 4.0% LBA Sharpe = 0.98 1.0% -2.0% 0% 5% 10% 15% 20% 25% Annualized Standard Deviation (Risk) Attalus Enhanced Lehman Risk / Return Characteristics Since inception (through October 31, 2006 Est.)

14. Monthly Rebalancing Initial Investment $100 R1000 Up 10%; Attalus 0% Rebalance Ending Investment Margin Attalus $6 $94 16 94 -9.40 +9.40 6.60 103.40 = $110.00 Initial Investment $100 R1000 Down 10%; Attalus 0% Rebalance Ending Investment Margin Attalus $6 $94 -4.00 94 +9.40 -9.40 5.40 84.60 = $90.00 Initial Investment $100 R1000 0%; Attalus Up 5% Rebalance Ending Investment Margin Attalus $6 $94 6 99 +0.30 -0.30 6.30 98.70 = $105.00 Initial Investment $100 R1000 0%; Attalus Down 5% Rebalance Ending Investment Margin Attalus $6 $94 6 89.00 -0.30 +0.30 5.70 89.30 = $95.00

15. Firm Profile Attalus Capital is a Philadelphia based investment management firm. We specialize in creating and actively managing portfolios of hedge funds aimed at consistent positive returns that are uncorrelated to equity and fixed income markets. Attalus manages top-performing fund of funds and custom separate portfolios to meet the specific objectives of our clients. Organization • Founded in 1998 to meet the needs of institutional investors • Employee owned firm with no conflicts of interest • 19 member team with approximately $1.5 billion in managed assets and 80+ clients Oversight • Registered Investment Advisor under the SEC’s US Investment Advisors Act of 1940 • Qualified Professional Asset Manager under ERISA Products • Attalus Multi-Strategy Fund, Ltd. • Attalus Long-Short Equity Fund, Ltd. • Attalus Enhanced Index Fund, Ltd. • Attalus Alternative Equity Fund, L.P.