Cheyne Capital Overview – January 2010 Cheyne Capital Management (UK) LLP

2010 Newsletter

Dear Fellow InvestorsWelcome to the first Cheyne Newsletter, providing a summary of key events from 2009 and our thoughts on 2010.After the traumatic economic dislocation in 2008, which resulted in an almost unprecedented destruction in value for investors worldwide, 2009 saw some return tonormality in valuations and returns. We are pleased to report that Cheyne had a very busy and successful year in terms of repositioning to better reflect currentmarket opportunities,

adding new management, new fund managers, new investment vehicles, and helping our investors achieve attractive returns. Today Cheynemanages net assets of approximately US$ 5.5 billion across corporate credit, real estate and asset-backed strategies, event driven, convertible bonds, equity long-short, equity macro, and fund of funds.

Highlights of 2009

In April, we were pleased to announce the appointment of

Chris Goekjian

as Chief Investment Officer (“CIO”). As CIO, Chris has taken overallresponsibility for the risk management of all Cheyne-managed funds and investment products, the oversight of portfolio management teams, and thedevelopment of new investment products. Prior to joining Cheyne, Chris was Founder and CIO of Altedge Capital (UK) Ltd, and previously spent 10years at Credit Suisse, where he was head of the Global Fixed Income Division, a member of the Executive Board, and had overall responsibility for over US$ 300 billion of trading positions and over 100 traders worldwide. Chris’s appointment is an important strategic addition to our investment andrisk management capabilities.We are proud of our fixed income expertise, investing across the full credit spectrum from investment grade to distressed and high yield. A big themefor 2009 was riding the recovery of the dislocated credit markets, which Cheyne took advantage of with the launch of the

Cheyne Real Estate DebtFund

. This fund invests in unleveraged European real estate debt markets (CMBS/RMBS/loans), and tailors fund investment criteria with target returnsof 10-30% depending on investors' risk/return preferences. The initial share class launched in August 2009 and has had uninterrupted monthlyprofitability since, returning

12.73%**

since inception

Our award-winning Credit team manages the

Cheyne Long/Short Credit Fund

, which has recently been nominated for the

Eurohedge Credit Fund

of the Year 2009

award. The fund has directional and relative value sub-strategies, positioning individual credits long or short based on our fundamental analysis and market view. The fund has a five-year track record and was up

24.90%*

* in 2009, having fallen only -4.95% in 2008. Inaddition, the long only, unlevered Corporate Bond portfolio of the

Cheyne Total Return Credit Fund

takes selective exposure to predominantlyinvestment-grade corporate bonds, aiming to secure high returns with relatively low default risk. Since its launch in May, this product is up

10.9%

**.Recently, the Credit team’s success has been recognised by institutional investors who have selected them to take over the management andrestructuring of significant credit portfolios.In September, Cheyne hired arguably the most successful equity trading team ever to emerge from Morgan Stanley Europe to form the

CheyneEquity Macro Fund

. Led by

Jorge Giampaoli

and

Paul Ruddleston

, this fund follows a short-term, liquid, macro-based equity trading strategy. Theappointment of the team allows Cheyne to broaden our equities offerings in line with investor demand. Previously, Jorge was responsible for Proprietary Trading for the Morgan Stanley European Equity division, and Paul was Managing Director and Head of Global Market Trading Strategy,and as such he was responsible for the equity strategy for all proprietary equity groups at the firm.In September we also announced the launch of our first

UCITS III

compliant vehicle, the

Cheyne Select UCITS Fund Plc

. With an absolute returnstrategy, the first class of the fund aims to generate long-term absolute capital appreciation by investing in global convertible bonds. With Cheyne’sorigins deeply rooted in converts, the Cheyne Select Convertibles Fund builds on a 10-year track record and expertise in long-only and hedge fundconvertible bond management.

Cheyne’s Long Only Convertible Bond Programmme

has seen a strong rebound in 2009 and was up

37.4%**

for the year.

Cheyne’s European Event Driven Fund

, which launched at the start of October, invests in liquid European credit and equity situations, seeking netreturns of 15-20%. The Event Driven team, one of the largest and most experienced groups of Event Driven specialists in Europe today, seeks toidentify the most attractive opportunities across the entire capital structure. The current positioning of the fund favours high yield and creditrestructuring situations over equity opportunities. The fund got off to a very strong start in its first three months, producing positive returns each month.Cheyne also welcomes

Altedge

to our family of managed products. In August we assumed the management responsibilities of

US$ 200 million

fundof fund assets. With a six-year track record, the two Altedge flagship funds have added an extra dimension to Cheyne’s investment activities. TheFund of Funds team, led by

Cem Habib

, won two nominations for best multi-strategy funds in 2006 and 2007, and the best newcomer fund of hedgefunds award for the

CTA fund of funds in 2008

.Finally, over the last year Cheyne has placed even greater importance on broadening and expanding our excellent client relationships. To this end,

Max Nardulli

was appointed as

Head of International Sales and Distribution

in October. Max is responsible for marketing Cheyne’s range of

Cheyne Capital Annual Newsletter

January 2010

Cheyne Capital Overview – January 2010 Cheyne Capital Management (UK) LLP

products globally, excluding the United Kingdom. He joins from Goldman Sachs Asset Management, where he was head of the alternative capitalmarkets team, responsible for EMEA and Asia ex-Japan.

Tom Wiggin

joined as

Head of UK Marketing

in November. Tom has long beenacquainted with Cheyne and joins us from Deutsche Bank in London where he worked since 1998, most recently as Managing Director, responsible for hedge fund relationships in Europe.

All performance stated above is net of fees. **Performance as at 31.12.09 is based on Cheyne’s internal preliminary figures. Please see Disclaimer detailed below.

Outlook for 2010

Most major

equity

indices were up over 20% in 2009 and over 65% from the March 2009 lows. To put this rally in context, despite a solid 2009,equities will exit the noughties with their worst 10-year performance history on record (eg MSCI World Index is down -17% since 1999). Equities aremore reasonably valued today on several key metrics, for example, the forward P/E ratio is 50% lower than it was 10 years ago, the dividend yield is2x higher, and the risk-free rate of return is 40% lower. Prior to the last decade, there have been thirteen 10-year periods with negative stock returns.In every subsequent 10-year period, the annual returns have exceeded 10% and doubled the return of government bonds. Improving corporate profits,the re-emergence of M&A, reasonable valuations and, eventually, positive fund flows should be supportive for equities in 2010, but greater selectivitywill be required. In 2009 smaller cap equities rallied the most as illustrated by the equally-weighted S&P 500 index which outperformed the S&P 500 bya whopping 20%. As a firm we believe the best risk-reward in equities today is in large cap equities with iconic brands, strong balance sheets, foreign-sourced earnings, and pricing power.Meanwhile, strong funds flows into credit should ensure a continuation of the robust performance enjoyed by

investment grade credit

in 2009 andfuel ongoing compression between crossover and investment-grade spreads. Even at current levels, investment-grade is pricing in Depression-eradefault rates, which Cheyne feels are unlikely to be realised, given the healthy liquidity profiles and access to capital that most investment-gradecredits continue to enjoy. Nonetheless, individual credit selection remains key both to avoiding defaults and maximising returns from trading nameswithin the funds. Cheyne's rigorous research capability positions us to identify trading opportunities, and should renewed deterioration in economicconditions or a cessation of the global carry trade precipitate a new round of spread widening, we will be well placed to avoid the problematic names inour long-only portfolios and position them for trading gains in our long-short funds.

European high yield

performed extremely well in 2009 and yields continue to look attractive for institutional and retail investors seeking good yield ina lower interest rate environment from an asset class where default rate expectations, although still higher than long run averages, are coming downfast. On the supply side, LBO/fallen angel borrowers needing to refinance shorter term debts and extend past the big wall of 2014/2015 maturities willfocus on the high yield market, given loan market new issuance remains relatively sluggish. Forecasts of supply into Europe suggest EUR 40-45bn+ of new issuance for 2010. This should lead to a transformation of the European high yield market in terms of breadth and depth. Moving into 2010, thereis a much smaller distressed bond market focused on actual distressed assets, as opposed to good companies with distressed bond prices. This ishighlighted by the proportion of European high yield bonds trading under 60 which fell from 51% at the end of 2008 to 3.9% at the end of 2009.Nonetheless, Cheyne believes that 2010 will be another positive year for European high yield, although not to the extent of 2009, and expects to seemany trade opportunities around the refinancing wall event that Cheyne is well placed to take advantage of, including inter alia bond tenders,distressed exchanges, debt-for-equity offers, and bond calls.Following the extraordinary dislocation of the European

asset backed

market in 2008, the market recovered substantially in 2009. Over the course of 2010, we expect continued strength for first pay, good quality, highly rated asset backed bonds (RMBS or single loan CMBS), as real money accountsand hedge funds continue to enter the space. Spreads in this sector will, we believe, continue to tighten over the course of the year promptinginvestors to look for yield further down the capital structure. Cheyne believes the asset backed market offers substantial value against other fixedincome asset classes. This will be a key opportunity for investors with the ability to analyse the underlying properties and related capital structures.With a focus on those specific market segments that continue to amply discount a reversal of the burgeoning global economic and financial marketsrecovery, we approach 2010 with fresh optimism.Wishing you the very best for 2010,Jonathan LourieCEO

Hedge Fund Standards (HFS)

Cheyne Capital is one of the initial signatories to the Hedge Fund Working Group and is proud to have its Funds operate in accordancewith the Best Practice Standards of the Hedge Fund Standards Board.

Cheyne Investor Relations

Please contact the Cheyne Investor Relations Team for more information:

Phone

: +44 20 7968 7380

Fax

: +44 20 7968 7682

: CheyneInvestor.Relations@cheynecapital.com / info@cheynecapital.com

Website

:www.cheynecapital.com