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June 2009 Lisa Preudhomme Vice President, U.S. Business Development lisapcadoganmanagement 212-650-4655

2. Agenda. An Analysis of the CrisisWhat are Hedge Funds?How Have Hedge Funds Fared?Where do Hedge Funds Fit in a Portfolio?Why Use a Fund of Hedge Funds?. 3. An Analysis of the Crisis. More than two decades of increasing systemic leverage

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June 2009 Lisa Preudhomme Vice President, U.S. Business Development lisapcadoganmanagement 212-650-4655

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    1. June 2009 Lisa Preudhomme Vice President, U.S. Business Development lisap@cadoganmanagement.com 212-650-4655

    2. 2 Agenda An Analysis of the Crisis What are Hedge Funds? How Have Hedge Funds Fared? Where do Hedge Funds Fit in a Portfolio? Why Use a Fund of Hedge Funds?

    3. 3 An Analysis of the Crisis More than two decades of increasing systemic leverage – complicity among policy makers, the private sector and the consumer Increasingly lax underwriting standards: Decreasing quality of borrowers Artificially low volatility and defaults Increasingly complex structures and decreased accountability Greed Current need for price adjustments Ongoing shocks to the system: Uncertain future of the global financial system Decreasing asset values/inverse wealth effect Increasing unemployment Increased taxation Social instability?

    4. 4 What are Hedge Funds? A hedge fund constitutes an investment program whereby the managers or partners seek absolute returns by exploiting investment opportunities while protecting principal from potential financial loss. Source: Ineichen, Alexanger M. (2003a) “Absolute Returns – Risk and Opportunities of Hedge Fund Investing”, New York: John Wiley & Sons

    5. 5 How Have Hedge Funds Fared? As with any question, it depends on the context! As an equity substitute, they were acceptable; as a cash or short-term fixed income substitute, they were very disappointing; as an asset class billed as always being up, they were very disappointing The key is to use hedge funds in the most effective way possible

    6. 6 Where do Hedge Funds Fit in a Portfolio? Portfolios of hedge funds are best used to protect capital and provide diversification Are hedge funds a substitute for equities, fixed income or a completely independent category? How should one measure the success of a hedge fund? Return Risk Diversification/Beta How should one size an allocation to hedge funds?

    7. 7 Why Use a Fund of Hedge Funds? It isn’t as easy at it looks? Research Due Diligence Negotiation Portfolio Management Monitoring Appropriate Diversification

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