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Table of Hedge Fund Returns by Style Investment Facts

Annual Returns — Net of Fees and Expenses (1993-2008)

RANK 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Non-U.S. Sector Sector U.S./Global Sector Sector Sector Non-U.S.
1 Long/Short Short Long/Short Long/Short Long/Short Long/Short Long/Short Short Distressed Short Long/Short Distressed Long/Short Distressed Macro Short
47.08% 16.53% 33.81% 23.95% 20.21% 15.66% 71.24% 17.97% 12.50% 23.56% 26.15% 16.09% 17.54% 14.00% 15.35% 23.57%

Sector Merger Special Sector Equity Mrkt U.S./Global Merger Fixed Managed Special Sector Non-U.S. Managed
2 Macro Long/Short Arbitrage Situations Long/Short Neutral Long/Short Arbitrage Income Futures Distressed Situations Distressed Long/Short Long/Short Futures
38.64% 6.70% 30.18% 23.85% 19.50% 14.07% 46.32% 16.43% 10.01% 13.19% 23.61% 11.64% 9.23% 13.30% 12.11% 8.10%

Special Multi U.S./Global U.S./Global Special U.S./Global Non-U.S. Special Special Special Fixed Special Sector
3 Situations Arbitrage Long/Short Long/Short Situations Long/Short Long/Short Situations Situations FX Situations Income Macro Situations Long/Short FX
34.98% 6.58% 29.01% 23.31% 19.32% 13.94% 45.90% 12.65% 8.38% 9.58% 20.91% 9.56% 9.06% 13.14% 11.19% 5.12%

Multi Managed Managed Multi Multi Managed Special Multi Convertible Fixed Non-U.S. Non-U.S. Sector Non-U.S. Special
4 Arbitrage Futures Futures Arbitrage Arbitrage Futures Situations Arbitrage Arbitrage Income Long/Short Long/Short Long/Short Long/Short Situations Macro
28.27% 5.80% 20.33% 22.39% 18.52% 10.90% 32.94% 12.65% 8.14% 7.42% 20.65% 9.06% 8.98% 13.11% 10.73% 0.00%

Merger Merger Convertible Merger Sector Equity Mrkt Convertible U.S./Global Merger Fixed Merger Equity Mrkt
5 Arbitrage Arbitrage Arbitrage Distressed Macro Arbitrage Macro Long/Short Neutral Arbitrage Long/Short Arbitrage Income Arbitrage Short Neutral
28.22% 4.50% 19.68% 20.74% 17.53% 6.96% 26.32% 12.46% 8.11% 6.68% 20.33% 7.93% 7.56% 12.55% 10.62% -6.74%

U.S./Global Equity Mrkt Managed Multi Managed Sector Special Convertible Managed Merger
6 Distressed Long/Short Neutral Macro Futures FX Arbitrage Futures Short Distressed Macro Long/Short Situations Arbitrage Futures Arbitrage
27.28% 3.81% 18.71% 19.56% 16.36% 5.48% 19.66% 11.38% 7.51% 6.30% 17.42% 7.65% 7.41% 11.65% 9.90% -8.76%

Managed Equity Mrkt Non-U.S. Non-U.S. Convertible Equity Mrkt Managed Fixed U.S./Global U.S./Global U.S./Global U.S./Global Multi
7 Futures Neutral Macro Long/Short Long/Short Macro Arbitrage Neutral Futures Macro Income Long/Short Long/Short Long/Short Long/Short Arbitrage
24.48% 3.68% 18.52% 19.35% 15.64% 5.38% 19.57% 11.09% 6.83% 5.89% 14.11% 7.59% 7.37% 11.34% 9.88% -10.32%

U.S./Global Special Fixed Equity Mrkt Convertible Equity Mrkt U.S./Global Multi Multi Managed Managed Equity Mrkt Sector
Fixed Fixed
8 Long/Short Distressed Situations Income Neutral Arbitrage Neutral Long/Short Arbitrage Arbitrage Futures Futures Neutral Long/Short
Income Distressed Income
23.85% 3.58% 18.32% 18.92% 15.39% 5.06% 17.45% 11.01% 6.36% 4.16% 14.11% 6.78% 6.26% 10.41%
5.52% 9.47% -14.30%

Convertible Fixed Equity Mrkt Multi Convertible Non-U.S. Equity Mrkt Convertible Multi Multi Merger Special
9 Arbitrage Income FX Neutral Distressed Arbitrage Distressed Arbitrage Long/Short Neutral Arbitrage Macro Arbitrage Arbitrage Arbitrage Situations
21.34% 3.57% 18.02% 17.93% 14.99% 4.02% 17.34% 8.90% 5.83% 3.38% 13.67% 6.15% 6.00% 10.04% 8.78% -16.92%

Fixed Special Merger Convertible Special Merger Non-U.S. Merger Multi Managed Multi
10 Income Situations Distressed Arbitrage Arbitrage Situations Arbitrage Macro Macro Long/Short Arbitrage Arbitrage Futures Macro Arbitrage Distressed
19.70% 2.19% 17.00% 17.80% 14.78% 2.84% 16.65% 7.16% 5.64% 1.70% 12.23% 5.97% 5.56% 8.10% 7.86% -17.03%

Sector Multi Managed Merger Non-U.S. Fixed Fixed U.S./Global Merger Multi Equity Mrkt Merger Equity Mrkt Equity Mrkt U.S./Global
11 Long/Short FX Arbitrage Futures Arbitrage Long/Short Income Income Long/Short Arbitrage Arbitrage Neutral Arbitrage Neutral Neutral Long/Short
18.15% 1.07% 14.32% 15.84% 14.67% -1.68% 14.79% 6.50% 5.06% 0.97% 11.93% 4.04% 4.30% 7.41% 6.17% -18.37%

Equity Mrkt Non-U.S. Fixed Convertible Fixed Managed Merger Special Equity Mrkt Convertible Managed Fixed Non-U.S.
12 Neutral Long/Short Income Arbitrage Income Distressed Futures Distressed Arbitrage Situations Neutral Arbitrage FX Futures Income Long/Short
15.13% -0.47% 13.03% 14.54% 14.46% -2.00% 9.56% 4.89% 4.57% -0.78% 8.48% 3.05% 2.56% 7.05% 6.11% -20.53%

Convertible Non-U.S. U.S./Global Convertible Convertible Sector

13 FX Arbitrage Long/Short FX FX Short FX FX FX Long/Short FX FX Arbitrage FX Arbitrage Long/Short
5.63% -1.20% 8.22% 13.95% 12.20% -3.37% 4.47% 4.89% 4.49% -2.67% 7.12% 0.54% 1.51% 2.65% 2.18% -21.58%

Fixed Non-U.S. Sector Sector Convertible

14 Short Macro Short Short Short Income Short Long/Short Long/Short Long/Short Short Short Short Short FX Arbitrage
-11.78% -1.36% -3.65% 0.17% 11.80% -3.98% -8.77% -0.69% 0.79% -2.83% -12.52% -7.53% 0.86% -5.47% 1.71% -27.17%

Returns are presented net of fees and expenses. See reverse side for descriptions
Style and Strategy Descriptions
R E L AT I V E VA L U E can be closely correlated to the performance of benchmark indices (includes Sector Long/Short [399 funds],
Investment funds employing this style seek to invest in securities, which their investment managers perceive U.S./Global Long/Short [1,290 funds], and Non-U.S. Long/Short [506 funds]).
to be selling at a discount or premium to their intrinsic or potential worth. These securities may be out of favor Short – Short selling is used by investment funds attempting to profit from declining security prices. To
or not closely followed by analysts. Long-term holding, patience, and strong discipline often are required implement the strategy, investment funds generally will seek to identify securities of companies that their
before the market recognizes the ultimate value of the discounted or over valued securities. Positions generally investment managers deem overvalued. This strategy is not the opposite of purchasing long securities. A short
are hedged using short sales and options. It is broadly opportunistic and, as such, generally uncorrelated with sale does not require any investment or borrowed money, but it does require collateral. Unlike the holder of a
benchmark indices. Some relative value strategies include convertible arbitrage, equity/market neutral, fixed- long position, which may enjoy dividend income, the short seller pays the dividend as a cost. On the other
income arbitrage, and multi arbitrage. hand, the proceeds of the short sale earn interest, known as a short credit rebate, which floats with short-term
Convertible Arbitrage – This strategy involves investing in convertible bonds that appear incorrectly interest rates. Unlike a long investor, a short seller can lose his or her total net worth, as there is no upper limit
valued relative to their theoretical value. The strategy consists of the purchase (or short sale) of a convertible on how high the price of a stock can potentially rise (38 funds).
security coupled with the simultaneous short sale (or purchase) of the underlying security for which the con- TA C T I C A L T R A D I N G
vertible can be exchanged. These transactions seek to hedge out the risk inherent in the stock. The remaining
interest rate risk may or may not be hedged. This strategy may include buying an undervalued warrant and Investment funds whose investment programs are characterized by this style tend to speculate on the direction
selling short an appropriate amount of the warrant issuer’s stock (181 funds). of the market. Some tactical trading strategies include macro trading, FX, managed futures, trend following,
and systematic trading.
Fixed-Income Arbitrage – This strategy consists of taking advantage of pricing differentials between
Macro Trading – Investment funds employing this strategy aim to profit from changes in global
related fixed-income securities. The strategy consists of investing in one fixed-income security while seeking
to hedge the market risk with an offsetting investment in another related security (491 funds). economies; these are typically caused by shifts in government policy that affect interest rates and, in turn,
affect currency, stock, and bond markets. These investment funds may participate in all major markets, finan-
E q u i t y / M a r k e t N e u t r a l – Market neutral long/short equity investing refers to strategies that avoid cial instruments, currencies, and commodities, though not always at the same time. Leverage and derivatives
taking systematic exposure. Funds may be dollar, beta, market cap, or sector neutral, or a combination of all or may be used to accentuate the impact of market moves. Hedging may be used, but leveraged directional
any of these. Positions may be, but do not have to be, paired with offsetting positions (335 funds). positions tend to make the largest impact on performance (480 funds).
Multi Arbitrage – This strategy includes hedge funds that employ more than one arbitrage strategy in Managed Futures, Trend Following, and Systematic Trading – This strategy involves
their fund. Merger arbitrage, convertible arbitrage, fixed-income arbitrage, volatility arbitrage, and market using a computerized trading system to generate buy and sell signals in the direction of a defined trend, based
neutral investing are common strategies used by multi-arbitrage funds (158 funds). on the assumption that a trend, once established, will tend to continue. Little or no personal judgment is
involved in the investment process (2,232 funds).
E V E N T- D R I V E N
This style is based on the actual or anticipated occurrence of an event, such as a merger transaction or a bank- FX (Foreign Exchange) – Strategy involves trading currencies and derivatives on currencies to exploit
ruptcy. Investment returns are relatively unaffected by the direction of the equity and fixed-income markets. mispricings in the market (113 funds).
Some event-driven investment strategies include merger arbitrage, distressed investing, and special situations.
Source: Lazard Alternatives LLC, TASS,, HFR, Stark, and Lazard proprietary funds.
Merger Arbitrage – This strategy, sometimes also called “risk arbitrage,” consists of investing in event-
The performance shown in the enclosed table is not that of Lazard Asset Management LLC and is for compara-
driven situations of issuers in the process of a corporate transaction, such as leveraged buyouts, mergers, and tive purposes only. Information and data presented have been obtained or derived from sources believed by
hostile takeovers. Investors purchase stocks of the issuer that is being taken over and sell short the stock of the Lazard to be reliable, but Lazard makes no representation as to their accuracy or completeness. The perform-
acquiring company (112 funds). ance quoted represents past performance. Past performance is not a reliable indicator of future results.
Distressed Investing – Investors buy, at discounts, equities, debt, or trade claims of companies that The 14 substyle categories were developed by Lazard to encompass the hedge fund universe. Lazard’s Fund of
face financial difficulties. Often, these companies are involved in bankruptcy proceedings, with payment to Funds team classified, based upon fund descriptions, each of the 6,700+ funds (see description for number of
debt holders and other claims under control of the bankruptcy court. After the bankruptcy process, these funds in each category) into these substyle categories. Monthly data from all of the funds was then used to
investors may hold the equity securities of the newly reorganized company. Profits are expected from the determine the annual return by substyle.
market’s lack of understanding of the intrinsic value of the discounted securities, and because many institu- Hedge funds are periodically reclassified for various reasons including the evolution of their strategy or a merger
tional investors cannot own below-investment-grade securities (204 funds). with another fund. Year on year, this can result in different outcomes for the previously published style category
S p e c i a l S i t u a t i o n s – This strategy refers to event-driven investments that fall outside of merger returns in the Table of Hedge Fund Returns by Style.
arbitrage. For example, investment situations could include index-rebalancing arbitrage, bankruptcy workouts, An investment in any alternative investment is speculative, involves a high degree of risk, and may lose value at
or spinoffs (221 funds). an accelerated rate. Privately offered investment vehicles (“hedge funds,” which includes “funds of funds”) are
unregistered private investment funds or pools that invest and trade in many different markets, strategies, and
instruments. Hedge funds generally are not subject to regulatory restrictions or oversight. Opportunities for
This style combines long investments with short sales and the pursuit of opportunities in rising or declining redemptions and transferability of interests in hedge funds are often restricted so investors may not have access
markets. Unlike relative value strategies, long/short strategies generally may reduce, but do not eliminate, to their capital if and when it is needed. Typically, there is no secondary market for an investor’s interest in a
market exposure and risk. Some long/short strategies include equity long/short and short selling. hedge fund. The fees imposed on hedge fund investments, including management and incentive
fees/allocations and expenses, may offset trading profits. An investor should not invest in any hedge fund unless
Equity Long/Short – Investment funds employing this strategy buy undervalued stocks and sell
he or she is prepared to lose all or a substantial portion of his or her investment. These and any other risks
overvalued stocks to both generate alpha and hedge out some portion of the general market risk. The stocks
involved in an investment in any hedge fund should be considered carefully before an investment is made.
bought or sold short typically are selected using quantitative and/or value-based models. The investment man-
agers of these investment funds may differ in the methods used (and degree to which they seek) to eliminate Credit: Callan Associates Inc. and the Callan Periodic Table of Investment Returns depicting annual returns.
market risk. Unlike equity pairs trading, long and short positions may be completely unrelated. This strategy © 2009 Lazard Asset Management LLC

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