Managing Risk in a Fund of Hedge Funds post 2008 – A personal perspective two years on

1. Managing Risk in a Fund of Hedge Funds post 2008– A personal perspective two years on Bernard Minsky Head of Portfolio Analysis and Risk Management June 2010

2. Agenda • A chronology – 2006 to 2010 • Risk management before 2008 • Our view in December 2008 • Fifteen minutes of fame • Brave New World or Animal Farm • Not just about risk management • Concluding thoughts 2

3. A chronology – 2006 to 2010 3

4. IAM risk management before 2008    4

5. Our view in December 2008: Macro events 5

6. Our view in December 2008: Industry issues 6

7. Our view in December 2008: IAM challenges 7

8. Our view in December 2008: A changed industry 8

9. Our view in December 2008 – IAM Response 9

10. Fifteen minutes of fame 10

11. Brave New World or Animal Farm • Rewrote Risk Policy for new board to approve • Founded Risk and Compliance Committee as sub-committee of the Board • Changed reporting line for Head of Due Diligence • Introduced quantitative risk budgeting process • Subscribe to risk aggregation service, and background checking service • Revamped monitoring of existing managers to align with governance change • Overcoming scepticism within the firm • Finding resources to produce the analyses • Gaining manager support to increase portfolio transparency • Allowing portfolio managers to manage, yet • Justifying the controls as markets ease and avoiding pro-cyclicality 11

12. New risk budgeting process 12

13. Risk budgets Portfolio Construction Optimal strategy weights Approved manager suitability Rigorous testing through IAM Software Portfolio Management Committee approval 13 Source: IAM.

14. Correlation Co-Drawdown Downside risk measurement rather than dispersion measurement Co-drawdown is the probability of the column fund suffering a loss at the same time a row fund suffers a loss. Source: IAM. 14

15. Not just about risk management 15

16. Enhancing portfolio construction Portfolio Construction Optimal strategy weights Approved manager suitability Rigorous testing through IAM Software Portfolio Management Committee approval Rigorous Testing Process 16

17. Historical backtest Simulated forecast Stress test Future views and confidence Manager contribution All-weather manager Bell-weathermanager Negative Positive Neutral Mixed Contribution to Negative Months Contribution to Positive Months Backtests and forecasts 17

18. Concluding thoughts • Was this an Ancient Greek Tragedy? • Hubris, Nemesis and Catharsis • Or a painful learning experience? • Bespoke portfolios work • Keynes was right about the long term • Liquidity, transparency and simplicity • Process, process and process • Maintain your own equilibrium • Have a thick skin, but admit your failings • Be part of the solution not the problem • Stand up for what you believe 18

19. International Asset Management Limited (IAM) – Legal Disclaimer This document was prepared by IAM, a company authorised and regulated by the Financial Services Authority (FSA). The information contained herein is not for distribution and does not constitute or form part of any offer, recommendation or invitation to participate in any product. It does not take into account the investment objectives, financial situation and particular needs of any investor. Any investor or prospective investor should consider whether such investment is appropriate to their particular investment needs and financial circumstances and consult the offering memoranda of the product which are available upon request. Past performance is no indication or guarantee of future performance. The value of investments may fluctuate and prospective investors may not recover the full amount initially invested. The products described herein are not subject to approval or regulation by the FSA and as such the Financial Services Compensation Scheme will generally not apply. This document has been prepared by IAM on information available to them and has not been independently verified. Accordingly, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information contained in this document. No liability whatsoever is accepted for any loss arising from any use of this document or its contents. This document is being supplied to you on the basis that you are an entity of a type falling within one of the approved categories described in the Financial Services and Markets Act 2000 and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose. By accepting receipt of this document, you agree to be bound by the limitations set out above. IAM uses data from the following sources: Bloomberg, EurekaHedge, Hedge Fund Research Inc., Morgan Stanley Capital International Inc., Morningstar, IAM and the relevant Administrators. International Asset Management Ltd, 7 Clifford Street, London, W1S 2FT Tel: +44 (0) 20 7734 8488 Fax: +44 (0) 20 7287 7129 Please contact: Jamison Skelli-Cohen (jskelli-cohen@iam.uk.com) or Sue Kim (skim@iam.uk.com) IAM Research (LLC), 540 Madison Avenue, Suite 18B, New York, NY 10022 Tel: +1 (212) 826 1845 Fax: +1 (212) 980 2708 Please contact: Amanda Dippel (adippel@iam.uk.com) International Asset Management Ltd (UK) Norden Filial, Strandvägen 7A, 4tr, S-114 56 Stockholm Tel: +46 (0) 8 586 334 70 Fax: +46 (0) 8 660 65 89 Please contact: Henric Malmqvist (hmalmqvist@iam.uk.com) International Asset Management Ltd, Sucursal en España, c/ Almagro, 25 (2 izq), 28010 Madrid Tel: +34 (91) 391 5096 Fax: +44 (0) 20 7287 7129 (London Office) Please contact: Marivi Lorente (mlorente@iam.uk.com) 19