GLOBAL INVESTMENT INSIGHT REPORT MAY 2012

“Knowledge is virtue and virtue is especially an advantage for the individual who uses it” Plato (427 BC-347 BC) - The Republic
AURELIANO GENTILINI aureliano.gentilini@mathema.co MASSIMO MAURELLI massimo.maurelli@mathema.co Leading Intelligence & Independent Insight

List of Contents
• • • • • • • • • • • • Pag. 4 – Executive Summary Pag. 8 – Global Stock Markets Pag. 10 – Market Volatility Pag. 12 – Emerging Markets Pag. 14 – Safe Haven Assets Pag. 16 – Tail Risk – Market Expectations Pag. 17 – Tail Risk – Stock Market Positioning Pag. 19 – Credit Spreads Pag. 21 – Financials Pag. 23 – Commodities Pag. 26 –Eurozone Sovereign Debt Market Pag. 27 – Yield Curves

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Leading Intelligence & Independent Insight

List of Contents
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Pag. 30 – Money & Interbanking Markets Pag. 31 – Sovereign Benchmark Yields Pag. 32 – Sovereign Benchmark Spreads Pag. 33 – Hedge Fund Strategy Performance Pag. 34 – Hedge Fund Strategy Performance Dispersion Pag. 35 – Hedge Fund Strategy Correlations Pag. 37 – Investment Risk Assessment: Debt Pag. 39 – Investment Risk Assessment: Equities Pag. 40 – Investment Risk Assessment: Currencies & Commodities Pag. 41 – Hedge Fund Strategies Risk Assessment & Outlook Pag. 45 – Mathema’s Hedge Fund Strategies Forecast
Pag. 46 – Disclaimer

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Leading Intelligence & Independent Insight

Executive Summary
AFTER AWAKENING TO A RISK-ON /RISK-OFF TRADE SCENARIO AS THE EASTER LULL CAME TO AN END, MARKET TURBULENCE GETS THE UPPER HAND OVER RISK APPETITE AS THE EUROZONE WORSENING DEBT CRISIS AND SPANISH BANKING SYSTEM TROUBLES TAKE ITS TOLL. THE OLD ADAGE “SELL IN MAY AND GO AWAY” SOUNDED LIKE SAVVY ADVICE THIS YEAR

Global Markets
• As we predicted in an earlier analysis a post-election (Greece and France) scenario materialized. The usual risk-on riskoff phenomenon broadly infected investment themes as high correlations across asset classes and geographies continued to dominate global markets G20 leaders found common agreement that Europe must intensify its efforts to stabilize highly indebted Eurozone countries while establishing the ground for financial, fiscal and political union as the path to save monetary union. At the same time Europe committed "to consider concrete steps towards a more integrated financial architecture" In Greece Samaras's conservative New Democracy party narrow victory in June 17’s new round of election highlighted the controversy of a country deeply divided over whether to implement a harsh austerity package to save its nearbankrupt economy In an attempt to regain its economic credibility Spain requested and obtained from EU on June 10 a financial lifeline of up to €100 billion to shore up its troubled banking system. The bailout will not impose any new economic reform conditions on Spanish government. The financial lifeline will take the form of an access to temporary fund of European Financial Stability Facility (EFSF) rather than to the permanent mechanism of ESM, as to avoid investors’ concerns about the preferred creditor status of ESM. The dramatic development came after Fitch Ratings cut Madrid's sovereign credit rating by three notches to BBB on June 7, just highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis In the global macro picture a recessionary pattern in Europe couples with a softening path of recovery in the U.S. and slowing growth in many emerging markets Leading Intelligence & Independent Insight 4

Executive Summary
Global Risks
• The economy in the U.S. is still a major concern in the run-up to the Presidential election. Everything else unchanged at the end of 2012 about 42 tax benefits will expire at the end of 2012. Also, additional pressures on the U.S. economy comes from excess unemployment and its deflationary impact China has continued and is expected to continue capturing investors’ attention as recent macro data support both a hard- and soft-landing Eurozone ten-year swap spread appears to incorporate less-clear information regarding changes in expectations of future economic activity. At the same time, the annualized ten-day rolling window volatility of the U.S. dollar swap spread that climbed at the end of May, tripling from March month-end lows, appears to reflect morenegative expectations about the aggregated likelihood of default prevailing among market participants Despite first-quarter 2012 operating earnings posted their third best quarter in the S&P 500’s history, the current macro environment and U.S. government fiscal and economic policies undermine investors’ confidence in forward earnings Phenomenon of “de-euroisation”. Cross-border holdings of government bonds by euro area Monetary Financial Institutions (MFIs), as a ratio to total holdings, has been on a declining trend since 2006 and has now returned to the levels observed before the beginning of the third stage of Economic and Monetary Union (EMU)

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Leading Intelligence & Independent Insight

Executive Summary (cont’d)
Investment: risk assessment
• Debt
o In Europe debates focus on the fiscal compact vs. growth policy, banking crisis in Spain, rising borrowing cost in Spain, Italy & France. In the U.S. the current inflationary pattern and the pace of economic growth are not consistent with negative real rates. Recent prices of Treasuries and negative yields in real terms are justified only by flight-to-quality drivers USA: Loose monetary policy supports liquidity, bond yields at historic lows favor equity investment, global risks, macroeconomic data and inflation may affect volatility in the short- to medium-term Europe: the macro scenario remains uncertain in perspective. Nevertheless, the resolution of uncertainties in Greece and Spain could trigger a market rally, potentially sustained by a new round of LTRO. On the other hand, it is expected that recent markets rise which followed the granting of the financial lifeline to Spain to shore up its banking sector will be short lived. A series of questions await further clarification: first of all, where, i.e. from where the promised funds will come; secondly, how, i.e. how the country will manage the lifeline in order to avoid the impact on the growth of the debt-to-GDP ratio; and finally, how much, given the fact market participants wonder whether the measure will be sufficient for the full rescue of the Spanish banking system, or, rather, additional funding will be required Emerging countries: the scenario is still uncertain as geopolitical disturbances are at play. There are creeping risks of severe slowdown in the Chinese economy as a result of lack of monetary stimulus The macro context backs an appreciation pattern of the U.S. dollar. Flight-to-quality drivers also favor JPY, NOK, and GBP. Opportunities exist on AUD following Government's plans to achieve a budget surplus within 12 months

Equity
o o

o

Currency
o

Commodities o A recessionary pattern in Europe and a slowdown in China and Brazil, the never-ending debt crisis in the Eurozone with increased market volatility, oversupply in the market for many commodities, and the strength of the U.S. dollar are all factors compatible with a scenario of prolonged weak commodity prices
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Leading Intelligence & Independent Insight

Executive Summary (cont’d)
Hedge Fund strategies: analysis
• Year-to-date performance dispersion within hedge fund strategies resemble the pattern to tightening observed across Dow Jones Credit Suisse hedge fund strategy indices at the end of April. Monthly performance dispersion among the Dow Jones Credit Suisse hedge fund strategy indices at the end of April declined significantly at readings close to pre2008 crisis levels As sovereign risk continue to rage in Europe, despite mitigating in the first quarter, asset classes are becoming again increasingly correlated, as it was in the post-summer period of last year April confirmed the steady and significant correlation pattern of most of the hedge fund strategies with the MSCI World TR Index, similarly to what has been evidenced throughout 2010 and 2011

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Hedge Fund strategies: risk assessment
• • • • Equity Strategies: macro and geopolitical drivers are expected to continue prevailing on fundamental factors in the short run Relative Value Strategies: Unconventional intervention on secondary market. Credit crunch due to banks’ default or interbanking market failure (tail-risk signaled by the LIBOR-OIS spread) Credit Strategies : bankruptcy in Europe, increase in the number and volume of “fallen angels”, and widening corporate spreads globally due to cost of borrowing Discretionary & Quantitative Trading Strategies: FX markets’ distortions and carry trades unwinding. Choppy markets due to short-term patterns of volatility clustering

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Leading Intelligence & Independent Insight

Global Stock Markets
• The usual risk-on risk-off phenomenon broadly infected investment themes as high correlations across asset classes and geographies continued to dominate global markets. Global investors lived a déjà vu as headlines about Eurozone’s debt crisis continued to trigger a deterioration in market sentiment and impact on investors’ risk aversion As we predicted in an earlier analysis a post-election (Greece and France) scenario materialized. The scenario of high volatility and uncertainty that characterized part of last year’s summer and fall made a comeback, weighing on market sentiment. Global markets eroded gains posted in the first quarter market rally as they lost U.S.$483 billion of market capitalization in April, according to S&P Risk indicators in the equity and currency options market suggest increased concerns. Implied volatility of one-month at-the-money options in euro-dollar jumped to a more than one-month high in a sign of increased anxiety and concerns the euro may depreciate further. In the stock market, the CBOE Volatility Index VIX on May 31 increased more than 40% since the end of April, having risen above the 20-mark for the first time in almost three weeks on May 9


S&P 500 - Index Sector Price Return
April & May 2012
S&P 500 Consumer Discretionary Consumer Stables Energy Financials May; -9,32% Health Care Industials Information Technology Materials Telecommunication Services Utilities -12,00% -10,00% -8,00% -6,00% -4,00% May; -6,36% May; -7,85% May; -7,99% May; -3,89% -2,49% -0,34% -1,15% -1,92% -1,02% May; -0,13% -2,00% 0,00% May; 2,60% 4,19% 1,77% 2,00% 4,00% 6,00% May; -6,27% May; -5,87% May; -10,62% -0,75% 1,24% May; -1,28% -0,98% 0,10%

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Leading Intelligence & Independent Insight

Global Stock Markets (cont’d)
• In Greece, after a fractured parliament struggled to form a coalition as candidates who rejected bailout pledges and austerity measures imposed by the troika to tackle with country’s debt crisis were elected, Samaras's conservative New Democracy party narrow victory in June 17’s new round of election highlighted the controversy of a country deeply divided over whether to implement a harsh austerity package to save its near-bankrupt economy In the global macro picture a recessionary pattern in Europe couples with a softening path of recovery in the U.S. and slowing growth in many emerging markets. Still the macro picture remains bleak in the short run and investment themes remain sensitive to changes in economic policies and sovereign risk

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Leading Intelligence & Independent Insight

Market Volatility
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After being subdued in March, except for a spike on March 6, implied volatility as measured by the CBOE VIX rose 10.65% month on month in April 2012 to 17.15 at the end of April, indicating renewed fears of a Eurozone sovereign debt crisis spreading globally. CBOE VIX surged 40.29% in May, spiking above the 20-mark on May 9 (as it was on April 10 and April 11) After two full quarters of strong market gains (up 24.49%), the S&P 500 was expected to consolidate its gains in April. Major consolidation never happened, with the worst point of the month being off only 3.6% and the index closing off just 0.75% Supporting the market were first-quarter earnings, which were coming in as the third best in the S&P 500’s history. While concern continues over large-cap earnings, and their slower rate of growth, strong earnings with high operating margins (9.18%; the historical average is 7.19%) continue to be the trend

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-250 Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr 07 08 09 10 11 12 Standard & Poors, 500 Composite, Index, Price Return CBOE, Volatility Index (VIX) S&P 500 5-day Rolling Window Annualised Volatility

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Leading Intelligence & Independent Insight

Market Volatility (cont’d)
• The economy in the U.S. is still a major concern in the run-up to the Presidential election. Everything else unchanged at the end of 2012 about 42 tax benefits will expire at the end of 2012. At that point there will be record drag (roughly 4%) on GDP from reduction of those tax benefits to spending. At the same time, US government spending runs at approximately $1.50 for every $1.00 raised. This level of spending is only comparable to levels observed during World War II and is unsustainable beyond the short term. Also, additional pressures on the economy comes from excess unemployment and its deflationary impact. According to the U-6 employment report there are about 20 million still unemployed versus the long term average of about 13 million (the effective unemployment rate stands at 14.5%, well above the official 8.1%)

• Despite positioning flipped to net-short in the second and third week of May, large speculators added net-long positions in the S&P 500 delta-adjusted options and futures combined to the tune of about US$724.27 million notional value (as reported in the readings of the Commitment of Traders Report on the Chicago Mercantile Exchange for the five-week period ended May 29). As a result, “large” speculators’ outstanding notional amount on May 29 increased from April 24 reading to the tune of US$1.34 billion net long. “Large” speculators’ net position as a percentage of total open interest on May 29 got close to the zero-mark that separates long and short regions

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Leading Intelligence & Independent Insight

Emerging Markets
• China continued to capture investors’ attention as recent macro data supported both a hard- and soft-landing. Weaker–than-expected exports and stalling headline import growth signal that government spending is the key factor sustaining the economy. The country remains exposed to risks of a fresh downturn in demand for goods from its massive factory sector. Recent trade readings show how annual growth in imports in April was just 0.3%, far below forecasts of an 11% increase, while exports managed growth of just 4.9% versus expectations of 8.5% Emerging markets eased 1.83% in April according to the S&P BMI Emerging Index with 12 of the 20 markets closing in the red. Notably, while the soft- vs. hard-landing debate continued, China rose 2.38% in April, as consumption data were buoyed by Apple’s sales in that country. Columbia (+5.40%) held the top spot in April while Morocco (-6.84%) ranked at the bottom of the performance league table for April, according to the S&P BMI Emerging Index. Emerging countries underperformed their developed peers in May as they amplified April’s loss

The S&P BMI Emerging Index plunged 11.42% month on month in May. Morocco, which tried to rebound (-4.35%) from April’s decline, held the top spot in May while Hungary (-23.20%) ranked at the bottom of the performance league table for May, according to the S&P BMI Emerging Index. China (-11.05%) outperformed the aggregate index by 37 bps, making it the best of the BRIC countries. Russia was the worst BRIC member in May, dropping 21.73%. At the same time, India dropped 11.57% and Brazil plunged 14.55%

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Leading Intelligence & Independent Insight

Emerging Markets (cont’d)
• Emerging markets sovereigns returned a healthy 1.48% in April according to the BofA Merrill Lynch Emerging Markets Sovereign Plus Index. The positive return was mainly due to a duration effect as the excess return over a comparable benchmark was negative (-0.47%). Despite emerging sovereign debt spreads widened 7 bps in April the yield is on declining path and is approaching the 4.85% all-time low. A breakdown by currency highlights how US$-denominated emerging sovereigns widened for the first time in 2012 (+10 bps), while EURdenominated emerging sovereign index tightened 10 bps

• •

There was a clear Eastern Europe trend in April in the BofA Merrill Lynch Emerging Markets Sovereign Plus Index as Ukraine (+5.15%) top ranked and Hungary (+3.77%)—which recovered from March after the EU agreed to begin negotiating a bail-out package—along with Georgia (+3.53) and Belarus (+2.83%) were among the best performers. Argentina bottom ranked in April (-3.98% month on month; +0.49% year-to-date) as the country faced heavy selloffs after the government announced its nationalization plans regarding YPF, the country’s largest oil company In the local debt markets, Brazil was among the best performers in April (+2.36%) as the Central Bank cut rates by another 75bps and fueled expectations about additional incremental cuts According to data from Nomura, resembling the pattern observed since the start of the year, foreign investors favored Japan, India and South-Korea among Asian markets in the 19-week period until May 11. They bought US$18.51 billion of Japanese equities and US$8.55 and US$8.33 billion of Indian and South-Korean stocks in 2012 up to May 11, respectively. Foreign net investment in Indian and South-Korean stocks up to May 11 accounted, respectively, for 34,27% and 33.40% of year-to-date net investments into an aggregate region that includes seven Asia ex-Japan markets. In an attempt to attract new capital flows into Indian debt India’s finance ministry announced before the end of May that foreign retail investors can invest in Indian corporate bonds as well as debt schemes for up to US$1 billion, in addition to the existing US$20 billion limit
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Leading Intelligence & Independent Insight

Safe Haven Assets

• Flight to quality drivers that led appreciation of the Swiss franc prompted the Swiss National Bank to set a cap last September, citing the risk of deflation and recession. Swiss franc faced significant appreciation pressure in recent weeks as the Eurozone crisis had deepened and Spain banks’ crisis triggered additional safe haven flows, prompting a temporary breach of the cap in April. Switzerland’s strong growth in the first quarter raises questions on the currency cap, as the measure was originally set to prevent a recession. Quarter on quarter, Switzerland’s GDP rose 0.7%, beating a Reuters forecast for flat quarterly growth. Year-on-year, Switzerland’s GDP rose a better-than-expected 2.0 % (expectations were set for a rise of just 0.9%). A strong franc as well as slowing economic growth in trading partners hit Switzerland’s foreign trade. In the first quarter exports of goods and services declined 0.4% quarter on quarter, although were up 0.7% year on year. Nonetheless, partly because of strong consumption—skilled immigration is high and unemployment rate is just 3.1% —the economy gained momentum despite the overvalued franc

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Leading Intelligence & Independent Insight

Safe Haven Assets (cont’d)

• U.S. dollar strength coupled with flight to safety that pushed the U.S. 10-year Treasury yield to an all-time low of 1.575% in May continued to feature a weakening pattern for gold. Despite flipping net exposure to long in the two weeks ending May 1 and May 22, according to the Commitment of Traders Report on the Commodity Exchange Inc., in the five-week period ended on May 29 large speculators’ sentiment on gold stayed bearish (for the same period net-short exposure amounted to approximately US$5.93 billion notional value). Decreasing since April 24 close, outstanding net long exposure to gold for the overall five-week period ended May 29 decreased to the tune of about US$15.78 billion notional value. “Large” speculators’ net position in gold delta-adjusted options and futures combined as a percentage of total open interest stayed deeply further in the buy zone at the end of May

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Leading Intelligence & Independent Insight

Tail Risk – Market Expectations
• After edging downward in the first quarter from December 2011 highs the Eurozone ten-year swap spread stayed on an upward pattern in April and May with increased volatility, appearing to incorporate lessclear information regarding changes in expectations of future economic activity

After tapering off at the end of January and staying on a declining pattern for the rest of first quarter, the annualized ten-day rolling window volatility of the U.S. dollar swap spread climbed at the end of May, tripling from March month-end lows, appearing to reflect morenegative expectations about the aggregated likelihood of default prevailing among market participants. Markets factored in concerns about a contagion effect in the Eurozone, triggered by the banking crisis worsening in Spain and peripheral countries’ debt sustainability. An early propensity to risky assets investing that dominated investors’ agenda in the first quarter reversed to a riskoff mode in April and May

Basis Points

Percentage

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Leading Intelligence & Independent Insight

Tail Risk – Stock Market Positioning

After the preliminary Q1,’12 U.S. GDP value came in at a lower-than-expected 2.2%, (against a forecast of 2.4%), the reading was later revised down to 1.9%. Businesses restocked shelves at a moderate pace and government spending plunged. Nonetheless, the Q1 2012 U.S. EPS value came in strong, and could render the year’s first quarter the third best quarter in history. Housing news were mixed, but the housing market was buoyed by lower inventory and willingness to buy. Existing home sales were up, along with their prices (but inventories were also up). New homes also recorded better (but not as good as existing home sales) readings and their inventories ticked down Despite operating earnings are set to post their third best quarter (behind Q3,’11 which is first, and Q2,’11, which is second) in the S&P 500’s history, the current macro environment and U.S. government fiscal and economic policies undermine investors’ confidence in forward earnings. Other things equal, if the current market was selling at the historical average 19.1 operating P/E, the S&P 500 would be at 1817.52 and not 1310 (on May 31). Is it just a matter of confidence? Or, does it imply the market is adjusting to a “new normal” in valuation by multiples? In real P/E ratio terms U.S. equities still are valued as unappealing
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Leading Intelligence & Independent Insight

Tail Risk – Stock Market Positioning (cont’d)
• Large-cap U.S. equity names continue to show a better resilience than small- and mid-cap stocks in a very difficult environment May S&P 500 dividend payments were 23.3% higher than in May 2011, and the YTD payment is up 17.8%; the indicated dividend rate is now at an all-time high, up 11.4% YTD. The U.S. Congressional Budget Office forecast that the first half of 2013 could see the return of a recession if Congress doesn’t do something to counter (or prevent) the scheduled tax increase and stimulus programs that are ending. Amongst the measures that are scheduled to begin in 2013 there is also the 59% increase in capital gains and the almost tripling of the dividend tax The ten-day exponential moving average of the CBOE Equity Put/Call Ratio, a gauge of the sentiment of speculative traders (which hit a multi-year record low of 0.472 on April 15, 2010 and a 2012 low on March 21) continues to move along a pattern to the downside within the bullish-bearish range

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Leading Intelligence & Independent Insight

Credit Spreads
• As flight-to-quality dominated global debt markets in April and May spreads in the corporate sector were on the rise again after a three-month tightening run. Nevertheless, spread widening was of modest magnitude in April almost canceling out the previous month’s tightening According to BofA Merrill Lynch the total face amount of rating migrations declined by a small amount in April (U.S.$203bn vs. U.S.$216bn the prior month), with the amount of upgrades continuing to rise. Compared to the amount of downgrades (U.S.$166bn) the upgrade total was still fairly small (U.S.$37bn), but April was the third consecutive month in which the face amount of upgrades increased month on month. At the same time, for both March and April the amounts of downgrades and fallen angels have also decreased After a one-month setback in March the BofA Merrill Lynch US High Yield Index came back strong with a 1% return in April. For a sixth consecutive month the performance differential between the BB- and B-rated segments of the index was inside 0.5%, which is below the 0.69% 10-year average

Basis point

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Leading Intelligence & Independent Insight

Credit Spreads (cont’d)
• Interestingly, as highlighted by BofA Merrill Lynch research, the spread gap between BBs and Bs is higher than average, as is typical in periods of uncertainty. Even more interesting about the current B-BB spread gap is that it comes along with a strong flattening in the B-rated credit. The spread of the 2-year and 5year points on the B-rated curve is now almost flat. That is much lower than in the previously mentioned periods of uncertainty Europe and US high yield seem to be at polar opposites. While the US rebounded from a modest loss in March to a solid 1+% gain in April, European high yield did the reverse. As expected, given the Euro sovereign debt crisis continues to dampen the performance of banks in the region, Europe lags the US by more than 1% in the Banking sector Given the rising pattern of the monthly variability between US and European high yield, which only represents a return to the mean, and in light of fundamental divergences in the respective patterns to economic recovery, we may expect a decoupling between European and US high yield indices, with lower correlation in the two indices than that observed in the last two years

Basis point

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Leading Intelligence & Independent Insight

Financials
European Banks CDS Spreads (bps) ‐ 11 May 2012
Source: Mathem a's elaboration on  Thom son R euters data

• Aiming at ending a four-year banking
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crisis, on May 10 Spain took over Bankia SA, one of the country's biggest banks, 2.648 2.587 NATIONAL BANK OF GREECE  1814 1.876 holding 10% of deposits in Spain's banking ALPHA BANK A.E.  1661 3.703 BANCO COM ERCIAL PORTUGUES, S.A.  1049 1.285 IRISH BANK RESOLUTION CORPORATION LTD .  977 system. Bankia was formed in 2010 when 2.299 BANCO ESPIRITO SANTO, S.A.  858 766 BANK OF IRELAND   769 892 BANKIA  705 the government forced a number of weak 941 DEXIA CREDIT LOCAL SA  673 693 BANCO POPOLARE   624 savings banks into a merger to try to 678 BANCA M ONTE DEI PASCH I D I SIENA S.P.A.   557 618 UNICRED IT  488 526 INTESA SANPAOLO SPA  463 rescue them. At the same time, the 661 IKB D EUTSCHE INDUSTRIEBANK AKTIENGESELLSCHAFT  453 476 UNIONE DI BANCHE ITALIANE   434 CDS 5y 599 BANCO BILBAO VIZCAYA  ARGENTARIA, SA  433 government in Spain is expected to 462 M ED IOBANCA  410 435 BANCO SANTANDER  403 approve a plan to force banks to park their 364 SOCIETE GENERALE  330 52‐W  High 491 CRED IT AGRICOLE  328 407 BANCA ITALEASE S.P.A.   313 toxic real estate assets in holding 384 ROYAL BANK OF SCOTLAND   299 400 LLOYDS TSB BANK PLC  297 417 companies that would later sell them off. BAYERISCH E H YPO‐UND VEREINSBANK AG  288 361 BAWAG PSK  279 371 BNP PARIBAS  265 Toxic assets sum up to the tune of €184 361 BANCA NAZIONALE DEL LAVORO  S.P.A.  264 295 COM M ERZBANK  263 323 NATIXIS  253 billion—although there are growing 283 RAIFFEISEN ZENTRALBANK OESTERREICH  AG232 451 BARCLAYS BANK PLC   200 245 concerns that the magnitude of troubled WESTLB AG  192 313 UBS AG  182 308 BAYERISCH E LAND ESBANK  181 assets might be even bigger—including 213 DEUTSCH E BANK AKTIENGESELLSCHAFT  180 288 CREDIT SUISSE GROUP LTD   168 205 H BOS  160 repossessed housing complexes that stand 183 STANDARD  CH ARTERED  BANK  133 HSBC BANK PLC  123 empty. Additional provisions to the tune of €35 billion are expected to be demanded by Spanish cabinet to banks to cover sound loans in their real estate portfolios. The government has already forced banks to make provisions of €54 billion to cover bad assets
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•According to the BofA Merrill Lynch Euro Corporate Bond Index, Financials (-0.35%) were the laggard after Technology and Electronics (-2.79%) in the ranking of bottom performing sectors by excess return in April

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Leading Intelligence & Independent Insight

Financials (cont’d)
Eu ro p ean  Ban k s C D S  S p read s (b p s) ‐ 11 M ay  2012
S ource: M a them a 's ela bora tion on  T hom s on R euters  da ta

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N ATIO N AL B AN K  O F  G R E E CE  1814 ALPH A B AN K  A.E .  1661 B AN CO  CO M E R CIAL PO R TU G U E S , S .A.  1049 IR IS H  B AN K  R ES O LU TIO N  CO R PO R ATIO N  LTD .  977 B AN CO  E S PIR ITO S AN TO , S .A.  858 B AN K  O F  IR E LAN D   769 B AN K IA  705 D E X IA CR ED IT LO CAL S A  673 B AN CO  PO PO LAR E    624 B AN CA M O N TE D E I PAS CH I D I S IE N A S .P.A.   557 U N ICR ED IT  488 IN TES A S AN PAO LO  S PA  463 IK B  D EU TS CH E IN D U S TR IEB AN K  AK TIE N G E S ELLS CH AF T  453 U N IO N E D I B AN CH E ITALIAN E   434 B AN CO  B ILB AO VIZ CAYA  AR G EN TAR IA, S A  433 M E D IO B AN CA  410 B AN CO  S AN TAN D E R   403 S O CIETE G E N E R ALE  330 CR ED IT AG R ICO LE   328 B AN CA ITALE AS E S .P.A.   313 R O YAL B AN K  O F  S CO TLAN D   299 LLO YD S  TS B  B AN K  PLC  297 B AYE R IS CH E H YPO ‐U N D  VE R E IN S B AN K  AG   288 B AW AG  PS K   279 B N P PAR IB AS   265 B AN CA N AZIO N ALE D E L LAVO R O   S .P.A.  264 CO M M E R Z B AN K   263 N ATIX IS   253 R AIF F EIS E N  Z EN TR ALB AN K  O E S TE R R E ICH  AG 232 B AR CLAYS  B AN K  PLC   200 W E S TLB  AG   192 U B S  AG   182 B AYER IS CH E LAN D E S B AN K   181 D EU TS CH E B AN K  AK TIE N G ES E LLS CH AF T  180 CR ED IT S U IS S E G R O U P LTD   168 H B O S   160 S TAN D AR D  CH AR TE R E D  B AN K   133 H S B C B AN K  PLC  123

1.876 1.285 2.299 766 892 941 693 678 618 526 661 476 599 462 435 364 491 407 384 400 417 361 371 361 295 323 283 451 245 313 308 213 288 205 183

3.703

CD S 5 y

5 2 ‐W  High

• Reflecting concerns triggered by troubled Spanish banking sector, CDS spreads of European banks considered in the sample plotted in the chart edged upward 7.06% on average in the week ending May 11, with Italian Banco Popolare posting the large weekly increase at 14.85%. Year on year CDS spreads of European banks posted two- and three-digit increases with an average 108.70% rise. Irish banks, which featured a tightening pattern , were an exception to the scenario above

On the other side of the Atlantic, full details have yet to emerge about how JPMorgan Chase & Co. lost at least U.S.$2 billion from a failed hedging strategy. As a consequence much of the U.S. banking stocks declined on May 11 (with JPMorgan losing U.S.$15 billion in market value and a notch in its credit ratings). JPMorgan’s loss prompted Dallas Federal Reserve Bank President Richard Fisher, who has called for the breakup of the top five U.S. banks, to question whether biggest banks have adequate risk management. At the same time, the debacle is expected to provide more arguments to Volcker rule supporters (against proprietary trading by banks) at a critical time in the rule-making process. Alternatively, according to more intransigent viewers, questions will be raised about whether or not U.S. need to return to the GlassSteagall Act separating the commercial and speculative activities of a bank and those provisions of the Banking Act of 1933 that restricted affiliations between commercial banks and securities firms
22

Leading Intelligence & Independent Insight

Commodities

Reflecting concerns about the global macro picture and mimicking equity markets decline, the S&P GSCI decreased 0.51% in April (+5,34% year-to-date), mainly driven by weak agriculture and livestock sectors. Factoring in cautious optimism about global macro prospects, despite continuing nervousness about China’s growth prospects, the S&P GSCI Industrial Metals index held the top spot for April with a 0.19% increase (+6,52% year-to-date). The industrial metals was the only sector to post gains in April • Year to date at the end of April energy has continued to be the main driver of commodity gains, as measured by the 7.04% increase in the S&P GSCI Energy index. In April, the Energy index was almost flat as gains in crude oil (+1.31%) were offset by declines in Brent crude (2.02%) and unleaded gas (-3.35%). Easing tensions with Iran, increasing recession risk in Europe, increasing economic optimism in North America, and the potential for an earlier-than-anticipated reversal of the U.S. Seaway pipeline to move crude out of the Cushing Oklahoma storage area toward the sea for export all contributed to narrow the Brent crude versus WTI crude oil spread. Brent crude’s premium over WTI crude oil declined to $14.60/bbl at the end of April from $19.86/bbl at the end of March. Reflecting tightening supply and demand conditions, the petroleum futures curves as depicted by the S&P GSCI Energy subindices generally moved toward backwardation in April, except heating oil that ended the month in contango

23

Leading Intelligence & Independent Insight

Commodities (cont’d)

The S&P GSCI Soybean Index top performed among all the S&P GSCI commodities in April (+7.09% month on month), also ending the month as the best-performing year-to-date single-commodity index, with a gain of 23.57%. Price tensions on soybeans were sparked off by Chinese Vice President Xi Jinping’s visit to the U.S. grain belt in February, signaling increased purchases of U.S. grain. Under strong global demand poor weather conditions in South America have added support to the bean market in April. Future prices continue to depict an extreme backward shaped futures curve for soybean (the percentage of backwardation stood at 11.1% at the end of April)

• The S&P GSCI Livestock Index was the bottom performing sector index in April with a negative 2.52% decrease (-7.26% YTD). Abundant supplies, supported by mild North American weather and moderating feed costs have sustained a boost in carcass weights along with increased global production, mainly from China. Livestock investors continued to face negative roll returns mainly due to the high costs of storage as all three livestock commodities (live cattle, feeder cattle, and lean hogs) were at the upper end of the futures curve range, in the contango section •

The S&P GSCI Softs index was the worst-performing subsector index in April (-6,79% month on month; -6.70% year to date), detracting the most from performance of the agriculture sector. Sugar was the biggest drag on Softs index returns, as reflected by the 11.94% decline in the S&P GSCI Sugar index in April. More balanced supply/demand conditions pushed all of the softs in contango at the end of April Leading Intelligence & Independent Insight 24

Commodities (cont’d)
D a ily Q C H K.N Lin e ; Q C HK. N ; 1 1 /0 5 /2 0 1 2 ; 1 4 , 8 1 0 0 ; -2 , 3 7 0 0 ; (-1 3 , 8 0 % ); 0 3 /0 1 /2 0 1 2 - 1 1 /0 5 /2 0 1 2 (N YC ) S M A ; Q C HK. N ; 1 1 /0 5 /2 0 1 2 ; 1 7 , 6 9 4 0 P r ic e USD 23 22 21 20 19 18 17 16 .1 2 3 4 Vo l; Q C HK. N ; 1 1 /0 5 /2 0 1 2 ; 1 3 , 3 3 0 M Vo lu m e 10M .1 2 3 4 03 09 17 23 ge n 12 30 06 13 21 fe b 1 2 27 05 12 19 m ar 12 26 02 09 16 23 apr 12 30 07 m a g 12

• Despite natural gas prices recently benefited from the aftermath of the Fukushima nuclear accident in Japan, the front natural gas future closed April 2012 at $2.29/MMBtu with the one year out future trading at a contango of about 48% as oversupply and sluggish North American demand due to the mild winter weighed

Chesapeake (CHK.N), the second-largest U.S. natural gas producer, confronts a funding gap that Fitch Ratings estimated at $10 billion this year. On May 9 Moody’s Investors Service changed its outlook for Chesapeake’s debt to negative from stable, citing “an even-larger capital spending funding gap for 2012,” due both to lower energy prices and higher spending. Despite posting its first monthly gain in a year in April and bouncing further in the past few weeks, U.S. natural gas prices remain close to their lowest levels in a decade. Low prices of natural gas compress cash flows for energy producers and raise concerns that companies may need to take impairment charges on the value of their properties

• According to Markit data the price of credit protection on Chesapeake debt in the credit default swap market rose 24.12 percentage points to 10.13% upfront on May 11. This means investors seeking five-year protection against default on a $10 million bond have to pay $1,013,000 initially

25

Leading Intelligence & Independent Insight

Eurozone Sovereign Debt Market

• The latest European Central Bank ‘s report on financial integration in the Eurozone highlights how “cross-border holdings of

government bonds by euro area Monetary financial institutions (MFIs), as a ratio to total holdings, has been on a declining trend since 2006 and has now returned to the levels observed before the beginning of the third stage of Economic and Monetary Union (EMU).” Initially, portfolio reallocation to corporate bonds and international assets might have contributed to the
phenomenon of de-euroisation. Recent declines are most probably ascribable to banks’ increased propensity to hold domestic government bonds, which accelerated as a result of recent LTRO policies by the European Central Bank • A recent analysis by Rabobank, which extrapolated the average rate of decline in foreign holdings of sovereign debt over the last six months, forecast that foreign holdings in the Italian sovereign debt market will hit 1998 levels by July 2013, while international holdings of Spanish government debt will decline to1998 levels by 2013 year end
26

Leading Intelligence & Independent Insight

Yield Curves
U.S. Yield Curve, March 30, 2012, April 30, 2012, and May 31, 2012 (source: Mαthεmα calculations on market data)
4 3
Yield

2
30-mar-2012 30-apr-2012 31-mag-2012

1

• In global debt markets renewed concerns about Eurozone debt led government rally with flight-toquality driving performance throughout April and May. Thanks to an impressive Treasury rally, the BofA Merrill Lynch US Large Cap Index (1.12%) recorded in April its best monthly return since last August • A sell-off in the debt of larger members of the “periphery” (Spain and Italy) led eventually to France as well •Australia (2.21%) held the top spot within the BofA Global Government Index in April while US Treasuries (1.53%) were the runner-up. As inflation reached its lowest level since the 1990s expectations of rate cuts drove the rally in Australian government debt. Australia’s central bank delivered a 50bp rate cut on May 1 and a further 25bp easing in the first week of June • Steepening trades on the Eurozone yield curve were profitable in April

0

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Maturity

3,0 2,5 2,0
Yield

Eurozone Yield Curve, March 30, 2012, April 30, 2012, and May 31, 2012 (source: Mαthεmα calculations on market data)

1,5 1,0 0,5 0,0 -0,5
30-mar-2012 30-apr-2012 31-mag-2012

1 month

3 month

6 month

1 year

2 year

3 year

5 year

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• US 30yr-2yr yield curve spread – 17 bps yield curve bull flattening and a negative 10-bp average shift month on month at the end of April - 47 bps yield curve bull flattening and a negative 12-bp average shift for the period April 30-May 31 • Eurozone 30yr-2yr yield curve spread – 5 bps yield curve bull steepening and a negative 10-bp average shift month on month at the end of April - 55 bps yield curve bull flattening and a negative 21-bps average shift for the period April 30-May 31
27

Leading Intelligence & Independent Insight

Yield Curves (cont’d)
UK Yield Curve April 30, 2012, March 30, 2012, and May 31, 2012 (source: Mαthεmα calculations on market data)
4
2,5 2,0 1,5 1,0 0,5 0,0
30-mar-2012 27-apr-2012 31-mag-2012

Japan Yield Curve, March 30, 2012, April 27, 2012, and May 31, 2012 (source: Mαthεmα calculations on market data)

3

Yield

2

30-mar-2012 30-apr-2012 31-mag-2012

1

0

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Maturity

Maturity

• UK 30yr-2yr yield curve spread – 6 bps yield curve bull flattening and a negative 1-bp average shift month on month at the end of April 17 bps yield curve bull flattening and a negative 25-bp average shift for the period April 30-May 31. On Thursday May 10’s Monetary Policy Committee of the Bank of England (BoE) weighed the latest signs of economic weakness—as well as renewed turmoil in the Eurozone—against creeping inflation in order to decide whether to give Britain another dose of monetary stimulus to counter the recession. British retail sales fell at their fastest rate in more than a year in April and jobs grew at a slower pace, with the UK Recruitment and Employment Confederation (REC) Index declining to 51.9 in April from 52.4 in March. Inflation, which unexpectedly rose at 3.5% for the first time in six months in March, left first-quarter inflation above the 3.35% forecast in February, thus making the expected fall to an average 3% in the second quarter a challenging target. After buying £325 billion of government debt with newly created money—50 billion pounds of which was purchased in the last three months—the BoE judged that its policy stance was already supportive enough. On the same day Gilt futures reversed the previous two days’ gains dropping 82 ticks. At the same time, the yield on 10-year gilts rebounded from record lows ending up 8 basis points at 1.990% • Japan 30yr-2yr yield curve spread – as global risk sentiment resumed Japan’s yield curve was almost flat month on month amid resumed flight-to-quality drivers that buoyed appeal of yen and yen-funded carry trades— 4 bps yield curve bull flattening and a negative 3-bp average shift month on month at the end of April - 10 bps yield curve bull flattening and a negative 4-bp average shift for the period April 30-May 31. JGB’s prices tracked closely U.S. Treasuries in early May with long-term yields hitting almost two-year lows as flight-to-quality drivers resumed after Greek and French election results raised concerns about the viability of Eurozone austerity measures . At its April’s meeting, the BOJ expanded JGB purchases by ¥10 trillion, confirming its determination to achieve its new 1% inflation target. The BOJ also extended the remaining maturity of the JGBs it buys under its asset buying programme to up to three years from two. But the central bank reduced by 5 trillion yen a pool of funds set aside for fixed-rate market operations, reducing it to ¥30 trillion yen. Combined with the increase in a separate fund for asset purchases, the total size of the BOJ's asset buying and loan programme was increased by ¥5 trillion to ¥70 trillion Leading Intelligence & Independent Insight 28

Yield Curves (cont’d)
35,0 30,0 25,0
Yield

Greece Yield Curve, April 30, 2012, March 30, 2012, and May 31, 2012 (source: Mαthεmα calculations on market data)
30-mar-2012 30-apr-2012 31-mag-2012

20,0 15,0 10,0 5,0 0,0

3 month

6 month

1 year

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3 year
Maturity

5 year

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30 year

Italy Yield Curve, April 30, 2012, March 30, 2012, and May 31, 2012 (source: Mαthεmα calculations on market data)
7 6 5
Yield

4 3 2 1 0

• Despite February’s accord on Greece’s sovereign debt, which enabled Athens to launch a bond swap with private investors who took losses of 53.5% on the nominal value of their bonds, equivalent to about 70% loss on the net present value of the debt, Greece’s yield curve continued to stay slightly inverted, with 10-year government benchmark yield peaking at 29.941% on May 31. Greece’s yield curve featured a steepening bias in both April and May. Nonetheless, steepening trades were only profitable in April as Greece’s 30yr-10yr yield curve spread recorded a 15-bps yield curve bullish steepener and a negative 62-bps average shift month on month. Conversely, in May Greece’s 30yr10yr yield curve spread featured a 9-bps yield curve bearish steepener and a positive 637-bps average shift month on month • Italy 30yr-2yr yield curve spread – 11 bps yield curve bear flatteners and a positive 32-bps average shift month on month at the end of April 2012. Italy’s yield curve featured a similar pattern in May as it recorded a 131 bps yield curve bear flatteners and a positive 85bps average shift month on month at the end of May 2012. Steepener trades on Italy’s yield curve detracted from performance of fixed income arbitrage strategies in both April and May
29

30-mar-2012 30-apr-2012 31-mag-2012

3 month

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Leading Intelligence & Independent Insight

Money & Interbanking Markets

• After surging in the second half of April, Euro three-month Ted spread (the difference between three-month Libor interbank rates and Treasury Bill yields) as a measure of stress in the Eurozone, just as it anticipated the credit crisis in 2007, declined 9.72% month on month in May, staying on a declining pattern from multi-year record level posted on December 29 last year at 148.229 • Despite continuing to ease from 2011 record levels, a relatively wide three-month euro LIBOR-OIS spread, which is the difference between the rate banks charge for loans in the interbank market and the overnight index swap rate—which captures central bank interest-rate risk—continues to highlight a decreased banks’ propensity to lend to each other
30

Leading Intelligence & Independent Insight

Sovereign Benchmark Yields

• Debt markets in April and May factored in the potential deterioration of

financial conditions in peripheral Eurozone countries and sustainability of fiscal measures agreed under the so-called fiscal compact • Among Eurozone peripherals Spain and Italy mimicked each other. Both Spain’s and Italy’s GDPs fell in first quarter for a second consecutive quarter and both countries entered their second recession since 2009. At the same time unemployment in Spain reached an 18-year high and the country, together with 16 banks, was downgraded by S&P for the second time this year. • Italy also recorded an increase in its borrowing costs after the government moved back its balanced-budget target to 2014. At the same time, the deterioration of the Spanish banking sector and a potential lack of confidence on Spain’s economy appear to have triggered at the end of May an early inversion of the short-end segment of Spanish yield curve
31

Leading Intelligence & Independent Insight

Sovereign Benchmark Spreads

• The sentiment only increases the potential of a market correction.

Should economic and financial conditions either worsen or become unsustainable the impact on opening positions would be dramatic • In the sovereign debt market U.S. , Germany’s, and Japan’s sovereigns continued to benefit from flight-to-quality drivers, with yields bottoming out at historical record lows. Real yields further deepened in the negative region at the end of May • Results of Ireland’s referendum on fiscal compact on May 31 removed an additional source of volatility clustering on Eurozone peripheral debt in view of the next round of elections in Greece. Ireland’s sovereign debt continued to show recently some resilience in global debt markets as 10-year yield spreads decoupled from a generalized widening pattern observed among Eurozone peripheral countries
32

U.S. Nominal Yield Curves

U.S. Real Yield Curves

Source: U.S. Department of the Treasury

Leading Intelligence & Independent Insight

Hedge Fund Strategy Performance
Comparative Hedge Fund Index Performance: Dow Jones Credit Suisse Indices
410

Asian Crisis Aug-Oct '97

Bull Market Rally - April '03August '07

Greece's Fiscal Position Crisis - December '09

Post-LTRO Market Rally - Jan-Mar '12

Convertible Arbitrage Dedicated Short Bias ED Distressed Securities ED MultiStrategies ED RiskArbitrage Emerging Markets Equity Market Neutral Event Driven Fixed Income Arbitrage

370

330

Russian Financial Crisis & LTCM Collapse - Jul-Sep '98 Tech Stocks Bubble Collapse Feb'00-Mar'03

Post Credit Crisis March '09 Credit Crisis August '07-Feb '09

290

250

210

170

130

Political Unrest in MENA & Earthquake in Japan Jan-March '11

Global Macro Eurozone Debt Crisis - MayJune '11 Long/Short Equity Multi-Strategies Managed Futures

90

50
ug -9 7 Fe b98 A ug -9 8 Fe b99 A ug -9 9 Fe b00 A ug -0 0 Fe b01 A ug -0 1 Fe b02 A ug -0 2 Fe b03 A ug -0 3 Fe b04 A ug -0 4 Fe b05 A ug -0 5 Fe b06 A ug -0 6 Fe b07 A ug -0 7 Fe b08 A ug -0 8 Fe b09 A ug -0 9 Fe b10 A ug -1 0 Fe b11 A ug -1 1 Fe b12

Comparative Hedge Fund Index Performance:Dow Jones Credit Suisse Indices
175 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Convertible Arbitrage Dedicated Short Bias Event Driven Distressed Securities Event Driven MultiStrategy Event Driven Risk Arbitrage Emerging Markets Equity Market Neutral Event Driven Fixed Income Arbitrage Global Macro Long/Short Equity Multi-Strategies

Fixed Income Arbitrage outperformed in April (+0,69%, returning 3.65% for 2012 year to date). Despite steepening trades detracted from monthly performance as U.S. yield curve flattened in April the strategy benefited from tightening vs. widening spreads tactical trades around bond auctions in Eurozone peripheral countries. Long/Short Equity (-0,46% month on month in April, +6,69% for 2012 year to date at the end of April) held the top spot in the performance league table year to date. The strategy rallied in the first quarter of the year (+7.19%) as beta-driven momentum and decreasing correlation buoyed exposure to technology and financial stocks. Thereafter, kick-off of the earnings season offered a silver lining as stock markets rolled over finishing April and May in negative territory Dedicated Short Bias (-2,53% month on month in April, -15,27% for 2012 year to date at the end of April), bettered by Managed Futures (+0,43% month on month on April 30, -0,24% year on year at the end of April), ranked at the bottom of the performance league table of the various hedge fund substrategies year to date
Leading Intelligence & Independent Insight

A

33

Hedge Fund Strategy Performance Dispersion
Dispersion of Hedge Fund Strategy Returns (Dow Jones Credit Suisse HF Indices January 1994-April 2012)
12

10

8

6

After peaking in January below record levels observed in August and September last year, monthly performance dispersion among the Dow Jones Credit Suisse hedge fund strategy indices at the end of April declined significantly at readings close to pre-2008 crisis levels. It decreased 34 bps month on month in April (333 bps below 2010’s lifetime record level in September) and ended at 322 bps, signaling the “market” of hedge fund strategies was more crowded Generally speaking, year-to-date performance dispersion within hedge fund strategies resemble the pattern to tightening observed across Dow Jones Credit Suisse hedge fund strategy indices at the end of April (in the chart on the left, which details performance dispersion across hedge fund strategies for the period January-April 2012, positive returns are in sky blue on the right bar; negative returns are in blue on the left bar; red lines on the bars indicate median return values). An increased dispersion of returns generally determines a lower intracorrelation, i.e., a lower correlation among managers and strategies. Generally, lower intracorrelation among managers and hedge fund strategies leads to higher levels of diversification for investors—a desirable feature—as well as higher expected risk-adjusted returns. Notably, in the Long/Short Equity sector—the top-performing strategy for 2012 year-to-date—more than 79% of the funds tracked in the analysis posted positive returns for the period, with about 23% of the funds recording performance equal to or above the 10% threshold. About 87% of the funds classified in the runner-up strategy in the performance league table for 2012 year-to-date—Emerging Markets—delivered an annual performance in positive territory, with 30% recording monthly returns equal to or above the 10% threshold
34

4

2

0
31 /0 31 1 /1 /0 99 31 7 /1 4 /0 99 31 1 /1 4 /0 99 31 7 /1 5 /0 99 31 1 /1 5 /0 99 31 7 /1 6 /0 99 31 1 /1 6 /0 99 31 7 /1 7 /0 99 31 1 /1 7 /0 99 31 7 /1 8 /0 99 31 1 /1 8 /0 99 31 7 /1 9 /0 99 31 1 /2 9 /0 00 31 7 /2 0 /0 00 31 1 /2 0 /0 00 31 7 /2 1 /0 00 31 1 /2 1 /0 00 31 7 /2 2 /0 00 31 1 /2 2 /0 00 31 7 /2 3 /0 00 31 1 /2 3 /0 00 31 7 /2 4 /0 00 31 1 /2 4 /0 00 31 7 /2 5 /0 00 31 1 /2 5 /0 00 31 7 /2 6 /0 00 31 1 /2 6 /0 00 31 7 /2 7 /0 00 31 1 /2 7 /0 00 31 7 /2 8 /0 00 31 1 /2 8 /0 00 31 7 /2 9 /0 00 31 1 /2 9 /0 01 31 7 /2 0 /0 01 31 1 /2 0 /0 01 31 7 /2 1 /0 01 1/ 1 20 12

+2.62%

Multi-Strategy Managed Futures Long/Short Equity Global Macro Fixed Income Arbitrage Event Driven Equity Market Neutral Emerging Markets Dedicated Short Bias Credit Focus Convertible Arbitrage
-50% -40% -30%

-14%
-0.76%

25% 39%
+4.59%

-37% -19%
+0.3%

56% -11%
+2.47%

25% -3%
+3.57%

23% 26%
+2.63%

-15% -12%
+6.0%

27% 51%

-22%
-17.45%

-22% -3%
+3.98%

7%
+4.63%

25% 36%
0% 10% 20% 30% 40% 50% 60% 70%

-3%
-20% -10%

Leading Intelligence & Independent Insight

Hedge Fund Strategy Correlations
Correlation of Credit Suisse Dow Jones HF Strategy Indices Vs. MSCI World TR Index April 30, 2012
Correlation 6 Months
1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1

Correlation 1 Year

Correlation 3 Years

• As

Correlation of Credit Suisse Dow Jones HF Strategy Indices Vs. Reuters/Jefferies CRB Index April 30, 2012
Correlation 6 Months 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 Correlation 1 Year Correlation 3 Years

sovereign risk continue to rage in Europe, despite mitigating in the first quarter, asset classes are becoming again increasingly correlated, as it was in the post-summer period of last year. As a result, the riskon/risk-off paradigm creates an investment environment where correlation across asset classes zeroes out the benefit of diversification. Correlation across various asset classes and markets at the end of April remained close to historical highs. Among other factors, the one-year rolling correlation between the S&P GSCI and the S&P 500 on April 30 stood at 0.79, eight notches below the highest reading since October 1980 recorded at the end of November 2010. A similar reading (0.80) was observed for the one-year correlation between the S&P GSCI and the MSCI World TR

35

Leading Intelligence & Independent Insight

Hedge Fund Strategy Correlations (cont’d)
Correlation of Credit Suisse Dow Jones HF Strategy Indices Vs. MSCI World TR Index April 30, 2012
Correlation 6 Months
1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1

Correlation 1 Year

Correlation 3 Years

Correlation of Credit Suisse Dow Jones HF Strategy Indices Vs. Reuters/Jefferies CRB Index April 30, 2012
Correlation 6 Months 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 Correlation 1 Year Correlation 3 Years

• April confirmed the steady and significant correlation pattern of most of the hedge fund strategies with the MSCI World TR Index, similarly to what has been evidenced throughout 2010 and 2011. For a number of hedge fund strategies the six-month rolling correlation against the MSCI World Index increased significantly at the end of April. Dedicated Short-Bias and, although of a lower magnitude, Managed Futures and Global Macro, continued to show a negative correlation against the index (-0.95, -0.23, and -0.03 for the one-year period at the end of April, respectively). The Credit Suisse Dow Jones Hedge Fund Composite Index recorded a firm level of positive correlation with the global stock market index at 0.95 for the six-month and 0.91 for the one-year periods. Equity hedge strategies, namely Long/Short Equity, along with Event-Driven and, to a minor extent, Equity Market-Neutral, continued to be somewhat longbiased; in other words, the strategies maintained a significantly high positive correlation to equities (a correlation between 0.65 and 0.97 for the six-month period) despite macroeconomic themes, sovereign risks, and macro information flow arrival started to dent again on stock picking allocation models. Interestingly, the six-month rolling correlation against the MSCI World Index of relative value strategies (Convertible Arbitrage and Fixed Income Arbitrage) peaked at critical positive levels at the end of April (0,98 and 0,87, respectively)
36

Leading Intelligence & Independent Insight

Investment Risk Assessment: Debt
INVESTMENT RISK TYPE RISK LEVEL COMMENTARY

EUROPE: fiscal compact vs. growth policy, banking crisis in Spain, rising borrowing cost in Spain, Italy & France SOVEREIGN DEBT EURO & USA USA: increase of longterm rates

VERY HIGH

Europe: in the coming months we will observe whether the concerted strategy from Brussels will be successful, or whether the international community will lose confidence in the Euro (EURUSD exchange rate at 1.24-1.26 is not consistent with the Eurozone recessionary pattern). Greece is no longer a problem for the banking system and probably a NON-issue for the stability of the Euro. The instability in the Hellenic country is a warning for other countries (Ireland, Portugal, Spain, etc.) which would consider restructuring debt and return to the local currency. The real problem has always been and remains in Spain: the banking system is near collapse and the Spanish Government has finally admitted the need to recapitalize USA: current inflationary pattern and the pace of economic growth are not consistent with negative real rates. Recent prices of Treasuries and negative yields in real terms are justified only by flight-to-quality drivers. A scenario of recession appears to be unlikely for the U.S. economy USA: The liquidity injected into the global system favors purchase of higher-yielding securities. Nonetheless, investors' preferences will unfold along a diverging trend between the U.S. and Europe because of problems related to the Eurozone debt crisis that impacts on the banking sector. We expect an increase of this difference over time, fueled by recessionary pressures that will also affect non-financial related sectors Europe: A risk of insolvency in the banking sector (exacerbated by the problems in Spain) remains. A new round of LTRO by the ECB may come this summer
37

VERY HIGH

Spread widening CORPORATE DEBT EURO & USA Default rate increase

USA: LOW

EU: MODERATE

Leading Intelligence & Independent Insight

Investment Risk Assessment: Debt (cont’d)
INVESTMENT RISK TYPE RISK LEVEL COMMENTARY

SOVEREIGN

LOW

EMERGING DEBT CORPORATE MODERATE

Sovereign debt in local currency will be left at the post, held back by the nature of the rally driven by investment flows into safe-haven assets, which will continue to favor liquid developed market sovereign debt. Trade surpluses, higher consumer demand and currency appreciation support valuations in the long-term: a slower pace of growth in China, inflation in India and contraction in Brazil does not affect the quality of debt; on the contrary, short-term uncertainties represent an investment opportunity to buy. A confirmation of the investment opportunity above comes from the observation of the sovereign debt spread: despite a slight increase of 7 bps in April and further 70 bps and in May, mainly driven by a sizable rally in the underlying benchmark curves, the trend to narrowing interest rate continues to historic lows as yields have increased only fractionally compared to the spread USA: The scenario highlights a continuous improvement. Data confirm low levels of prices, dynamic acceleration of purchases in value areas and signs of recovery in new construction. Strong improvement in credit availability and the quality of loans financed Europe: When compared to previous months the scenario is unchanged. Germany (no housing bubble), Ireland, and United Kingdom (bank debt absorbed by the government) do not present remarkable risks. Valuations of both real estate and mortgage securitizations do not reflect economic fundamentals and financial situation in Italy, Spain and France. The major problem is in Spain

PREPAYMENT RISK

LOW

MBS

INTEREST RATE RISK

LOW

38

Leading Intelligence & Independent Insight

Investment Risk Assessment: Equities
INVESTMENT RISK TYPE RISK LEVEL COMMENTARY

LIQUIDITY EQUITY US VOLATILITY LEVERAGE

LOW MEDIUM LOW

Previous months' scenario appears to be confirmed: loose monetary policy supports liquidity, bond yields at historic lows favor equity investment (risk premium and dividends), global risks, macroeconomic data and inflation may affect volatility in the short- to medium-term. Rosier readings related to consumer demand and real estate, along with the "presidential elections" factor, are a further support As shown in previous months, rally started in January was not sustainable. With the exception of Belgium and Denmark, European stock indexes are negative year- to-date. German ten-year yields (which hit a record low of 1.173% on June 1) confirm the flight to quality. In opportunistic terms, the growth of consumer demand in Germany (sustained by the deal in the industrial sector for an average salary increase of 4%) and the resolution of uncertainties in Greece and Spain could trigger a market rise, perhaps supported by a new round of LTRO. The flight to quality has decreased the leverage risk Risks: severe slowdown in the Chinese economy as a result of lack of monetary stimulus, which is not realistic as inflation readings continue to rise. The recent rate cut in China, which caught market participants by surprise, seems to signal a pre-emptive action by Chinese authorities with respect to something already known or an expected risk. It is worth noting rising inflation and political uncertainty in India, where, however, the scenario of economic growth (consumption and investment in infrastructure) remains positive. Brazil is ready to enforce maneuvers of monetary stimulus
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LIQUIDITY EQUITY EUROPE VOLATILITY LEVERAGE

MEDIUM HIGH MEDIUM

EQUITY EMERGING MARKETS

LIQUIDITY VOLATILITY LEVERAGE

MEDIUM HIGH LOW

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Investment Risk Assessment: Currencies and Commodities
INVESTMENT RISK TYPE RISK LEVEL COMMENTARY

VOLATILITY FX RATES

VERY HIGH

GOVERNMENT RESTRICTIONS

MODERATE

Appreciation pattern of the U.S. dollar stemming from increased uncertainties in the Eurozone, concerns about the pace of growth in China, improvement in the balance of trade and the overall U.S. economy. Flight-to-quality drivers also favor JPY, NOK, and GBP. Opportunities exist on AUD following Government's plans to achieve a budget surplus within 12 months. Short-term risks on Brazilian real given monetary policy interventions to sustain exports A recessionary pattern in Europe and a slowdown in China and Brazil, the never-ending debt crisis in the Eurozone with increased market volatility, oversupply in the market for many commodities, and the strength of the U.S. dollar are all factors compatible with a scenario of prolonged weak commodity prices. Then, in the first week of June, according to the Commitment of Traders data as published by the U.S. Commodity Futures Trading Commission, hedge funds have withdrawn about U.S.$1.7 billion invested in long positions in commodities markets. The price of gold, in addition to suffering from a series of profit taking, continues to be penalized by the levels of the U.S. dollar (on May 31 the U.S. Dollar Index was up 5.51% from the lows recorded on April 27) The banking crisis in Spain, the solution of which will likely boost market confidence only temporarily, Greek politics equilibrium in a post-election scenario, the geopolitical escalation of crisis in Syria, the risk of hard landing in China, and potential protectionist measures in Brazil represent the most prominent themes in coming months
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ENERGY/METALS

HIGH

COMMODITIES

AGRICULTURE

LOW

PRECIOUS METALS

MODERATE

VOLATILITY

TAIL RISK

HIGH

Leading Intelligence & Independent Insight

HF Strategies Risk Assessment & Outlook
HF STRATEGY RISK COMMENTARY Short Term Medium-Long Term

Equity Hedged EU

Peripheral countries’ public debt sustainability; banks’ bad loans sustainability; defaults at corporate level

A fresh round of LTRO in the Eurozone & removal of short-selling restrictions support the long side. Deep-recession, contagion risk & crowded trades in tohigh-yielding names, and post fat tail risks on the downside. Near-zero rate policy continues to support liquidity. Positive induced effects from first quarter earnings announcements, which were coming in as the third best in the S&P 500’s history, the current macro environment and U.S. government fiscal and economic policies undermine investors’ confidence in forward earnings. Low bond yields support valuations, though. Macro & geopolitical news continuing to impact on market volatility, with creeping risk of volatility clustering Positive: removal of short-selling ban in some jurisdictions and short-term volatility. Negative: fire-sale of stocks paying high dividend yield.

NEUTRAL TO NEGATIVE

POSITIVE

Equity Hedged US

Faltering economic growth and deflationary impact arising from high unemployment; risk of an EU breakup, Spanish banks, lower growth in China; escalation of the Syrian uprising

NEUTRAL TO POSITIVE

POSITIVE +

Equity Market Neutral

Macro and geopolitical drivers are expected to continue prevailing on fundamental factors. Unwinding of crowded trades; momentum drivers vs. fundamental factors

NEUTRAL TO POSITIVE

POSITIVE

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Leading Intelligence & Independent Insight

HF Strategies Risk Assessment & Outlook (cont’d)
HF STRATEGY RISK COMMENTARY Short Term Medium-Long Term

Equity Event Driven

Macro environment & recession in Europe

Potentially, high liquidity supports M&A and shares’ buy-backs. Recession in Europe & macro uncertainty still weight on the negative side. China, India and big Private Equity names could play a key role within the M&A game. In light of fundamental divergences in the respective patterns to economic recovery, we may expect a decoupling between European and US high yield and corporate indices, with correlation in the two indices lower than that observed in the last two years. At corporate level, high grade names and components of sector indices are expected to continue benefiting from flight-to-quality drivers and allocation to safe haven assets. In the current macro context, autos might continue exhibiting a better resilience allowing the sector to perform relatively well on an excess return basis Convertible Arbitrage exposed to worsening bond valuations and credit-spread widening. On the positive side: corporate activity in the US is to pick up due to an improvement in economic perspectives and resumed action at convertible issuers level
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NEUTRAL

POSITIVE+

Credit

Bankruptcy in Europe and widening corporate spreads globally due to cost of borrowing

NEUTRAL (US) NEGATIVE (EU)

NEUTRAL TO POSITIVE

Convertible Arbitrage

Widening spread; tail-risk

NEUTRAL

NEUTRAL

Leading Intelligence & Independent Insight

HF Strategies Risk Assessment & Outlook (cont’d)
HF STRATEGY RISK COMMENTARY Short Term MediumLong Term Eurozone: reversal of flight-to-quality drivers, massive trade imbalances between peripheral countries and core countries coupled with liquidity issues in the banking system sustain a high volatility environment. US: near zero-rate policy and expected QE3 will push yield curve to steepen as markets anticipate the end of the long bull market in fixed income. This environment will increase arbitrage opportunities. In the U.S. the MBS market is sustained by supply almost peaking at historical highs. Federal Reserve’s near zero-rate policy continues to allow positive carry on mortgage-backed securities (one-month U.S. Libor represents MBS roll funding basis), hence the positive roll characteristics are still in play. The U.S. Mortgage Bankers Association (MBA) on May 24 announced an upward revision of its mortgage origination forecast for 2012 by almost $200 billion, due entirely to an increase in refinances. MBA now expects that mortgage originations will reach US$1.28 trillion in 2012, up from US$1.26 trillion in 2011. Positive factors that contributed to better estimates included HARP 2.0 initiatives and record low mortgage rates
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Fixed Income Arbitrage

Unconventional intervention on secondary market. Credit crunch due to banks’ default or interbanking market failure

POSITIVE

NEUTRAL

MBS/ABS Arbitrage

US: negative surprise on Conditional Prepayment Rate (CPR) & interest rates (FOMC may ends its near zero-rate policy before 2014) Europe: real-estate bubble to burst vs. soft deleveraging.

NEUTRAL TO POSITIVE

POSITIVE

Leading Intelligence & Independent Insight

HF Strategies Risk Assessment & Outlook (cont’d)
HF STRATEGY RISK COMMENTARY Short Term Medium-Long Term

Global Macro

Uncertainty over economic and fiscal policy measures; asset bubbles on precious metals vs. market shock; reversal in FX carry-trades; escalation of the Syrian uprising

Recent Ben Bernanke’s speech suggest the economy is not out of the woods yet and an additional round of quantitative easing remains an option if things worsen. After first quarter’s honeymoon, as the macro picture remain bleak, markets will continue to be driven by geopolitical biases, rather than fundamental factors. Still directional FX and Equity trades offer best opportunities; riskier trades exist in rates & commodities Positive: currency & equity. Neutral: commodities & rates Positive: high frequency trading & currency programs. Negative on trend-following programs

NEUTRAL

NEUTRAL TO POSITIVE

Managed Futures Discretionary Managed Futures Systematic Trading

FX markets’ distortions; carry trades unwinding Choppy markets due to shortterm patterns of volatility clustering

NEUTRAL

POSITIVE

POSITIVE TO NEUTRAL

POSITIVE

Emerging Markets

Macro environment (recessionary pattern in the Eurozone and faltering recovery in the US)

Potential risk: China remains exposed to risks of a fresh downturn in demand for goods from its massive factory sector as concerns over rising inflationary pressures and labor force costs, along with banks’ need of refinancing, mount. Positive factors: rising consumption in all emerging economies and money-outflow already occurred in 2011. BRIC countries performance might continue to disappoint in the short run
44

NEUTRAL TO NEGATIVE

POSITIVE

Leading Intelligence & Independent Insight

Mathema’s HF Strategies Forecast
January 2012
HF STRATEGY
Short
Neutral to Negative Neutral to Negative Neutral

February 2012
Short MediumLong
Positive

March 2012
Short MediumLong
Positive

April 2012
Short MediumLong
Positive

May 2012
Short MediumLong
Positive

MediumLong
Positive

Equity Hedged (EU)

Neutral to Negative NeutralPositive Neutral

Neutral to Negative Neutral to Positive Neutral to Positive Neutral

Neutral to Negative Neutral to Positive Neutral to Positive Neutral

Neutral to Negative Neutral to Positive Neutral to Positive Neutral Neutral (US) Negative (EU) Neutral

Equity Hedged (US) Equity Mkt Neutral Equity Event Driven Credit Convertible Arbitrage Fixed Income Arbitrage MBS/ABS Arbitrage Global Macro Managed Futures Discretionary Managed Futures Systematic Trading Emerging Markets

Positive +

Positive +

Positive +

Positive +

Positive +

Positive

Positive

Positive

Positive

Positive

Neutral

Positive+ Neutral to Positive Neutral

Neutral

Positive + Neutral to Positive Neutral

Positive+

Positive+

Positive+ Neutral to Positive Neutral

Negative

Negative

Negative

Neutral

Negative

Neutral

Neutral

Neutral

Neutral

Neutral

Neutral

Neutral

Positive

Neutral

Positive Neutral/ Positive Neutral

Neutral

Positive Neutral to Positive Neutral

Neutral

Positive Neutral to Positive Neutral

Neutral

Positive Neutral to Positive Neutral

Neutral

Neutral+

Positive Neutral to Positive Positive

Positive Neutral to Positive Positive

Positive Neutral to Positive Positive

Positive Neutral to Positive Positive

Positive Neutral to Positive Positive

Negative

Negative

Neutral

Neutral

Neutral

Neutral

Positive

Positive

Positive Neutral/ Negative

Positive

Positive to Neutral Neutral to Negative

Positive

Positive to Neutral Neutral to Negative

Positive

Positive to Neutral Neutral to Negative

Positive

Negative

Positive

Positive

Positive

Positive

Positive

45

Leading Intelligence & Independent Insight

Disclaimer
© Mαthεmα 2012. All Rights Reserved. The report was closed with information available as of the market close on May 31, 2012. Mαthεmα Hedge Fund Strategy Insight Reports are for informational purposes only, and do not constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any jurisdiction. Although the information herein is believed to be reliable and has been obtained from sources believed to be reliable, we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information. No guarantee is made that the information in this report is accurate or complete and no warranties are made with regard to the results to be obtained from its use. Mαthεmα will not be liable for any loss or damage resulting from information obtained from this Report. Furthermore, past performance is not necessarily indicative of future results. This report is for individual and internal use only. It may not be reproduced or transmitted in whole or in part by any means, electronic, mechanical, photocopying, or otherwise, without Mαthεmα's prior written approval.

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