The ABC of Hedge Fund investing

JUNE 2012

Institutions are increasingly challenged by more frequent changes of risk-on / risk-

off cycles. Liability matching with such frequent changes of regime is extremely
difficult, all the more so that this high level of volatility is often not rewarded by
extra returns. This paper investigates how allocating to hedge funds can help
investors reduce the overall volatility of their assets and limit the impact of
market drawdowns. We will first start by reviewing some characteristics of the
Hedge Fund industry, the type of strategies they cover and we will decipher a
number of myths and realities related to this sector much in the limelight. In the
second part of this paper, we will use a typical institution’s allocation as an
example and measure the impact of an allocation to hedge funds, in terms of
volatility, drawdown and performance. Finally, we will highlight why it is
important to have clearly set goals and objectives before allocating to hedge
funds, and how this hedge fund allocation should be tailored taking these goals
and the current allocation of the institution into account.
Table of contents

1. Presentation of a hedge fund ................................................................................................................................ 3

1.1. Definition ..................................................................................................................................................................... 3

1.2. Organisation ................................................................................................................................................................ 3

2. The hedge funds industry ...................................................................................................................................... 5

2.1. The hedge fund industry has regained its pre-crisis size .......................................................................................... 5

2.2. Institutional investors now account for the majority of hedge fund investors ......................................................... 6

2.3. Institutional investors increased their allocation to hedge funds between 2007 and 2011 .................................... 7

3. Hedge funds, myths and misconceptions ............................................................................................................. 8

4. The different alternative strategies .................................................................................................................... 11

4.1. A family tree of investment strategies..................................................................................................................... 11

4.2. Each strategy plays a different role within a portfolio allocation ........................................................................... 12

4.3. Each strategy uses a different set of underlying assets.......................................................................................... 12

5. Assessment of a fund of hedge funds manager ................................................................................................. 13

5.1. Fund of hedge funds indices ..................................................................................................................................... 13

5.2. Criteria used in evaluating funds of hedge funds .................................................................................................... 13

6. Comparative return and risk features of traditional portfolios vs. hedge funds ................................................ 15

7. Added value of including hedge funds in a traditional portfolio ........................................................................ 19

8. Conclusion ........................................................................................................................................................... 21

9. Contacts Information ........................................................................................................................................... 22

Unigestion SA I 2/23
1. Presentation of a hedge fund

1.1. Definition

A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than
other funds, but which is only open for investment from particular types of investors specified by regulators.
These investors are typically institutions, such as pension funds, university endowments and foundations, or high
net worth individuals. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade
liquid securities on public markets. They also employ a wide variety of investment strategies, and make use of
techniques such as short selling and leverage. They aim to identify and take advantage of investment
opportunities which may arise from market inefficiencies. To achieve this aim they rely on their ability to price
financial instruments and to correctly assess a given situation; in addition, they can afford to take a view over a
longer time frame than more traditional managers.

Investment opportunities may arise either for macro-economic reasons (differences in monetary policy, currency
arbitrage etc.) or for micro-economic ones (capital restructuring, mergers & acquisitions etc.).

A hedge fund’s success relies among others on its ability to recruit talented staff and to set up a solid
operational structure.

Hedge fund managers invest a proportion of their own wealth in the funds which they manage and sometimes in
the management company as well, a double alignment of interest with those of their clients. Finally their
remuneration is based on a mix of fixed and performance fees.

1.2. Organisation

A hedge fund enters into a number of contractual arrangements with a variety of service providers.

Exhibit 1*: Contractual arrangements between a hedge fund and its services providers

Asset management company Administrator

Hedge Funds

Auditor Prime Broker(s)

* This graph provides a simplified illustration of the role of each of these service providers in relation to a hedge
fund; we should be happy to discuss these in greater detail.

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Service provider Role
Responsible for implementing the investment policy within the regulatory
Management company
framework and the constraints applying to the investment vehicle.
Responsible for recording transactions on the investment vehicle’s books
Administrator
and for valuing the portfolio.
Certifies the vehicle’s accounts on a regular basis, in compliance with the
Auditor
relevant accounting standards.

One or more banks which will execute orders on behalf of the hedge fund
Prime broker(s)
in the market and which may, in addition, provide leverage to it.

Unigestion SA I 4/23
2. The hedge funds industry

The Exhibit 2 below highlights the steady growth in assets managed by hedge funds, except with a pause in 2008 due
to three reasons:

The effect of the sharp corrections in the markets;

Massive outflows by short term, mostly private investors;

The liquidation of certain, more reckless, hedge funds which had been surfing the bull markets since the mid 2000s.

Since then, assets’ growth has resumed to the point where assets under management have now returned and even
overtaken their pre-crisis level. In recent years, the sector underwent a consolidation phase, with the stronger
participants taking advantage of the financial crisis to make acquisitions. The growth in assets has been driven by a
rise in demand from institutional investors which increasingly use a hedge fund allocation to dampen the impact of
volatility, and more apparent since recent flare ups in equity volatility have tended not to be rewarded by performance.

2.1. The hedge fund industry has regained its pre-crisis size

Exhibit 2: Worldwide evolution of hedge funds assets under management since 1990

$2'500

$2'000

$1'500
USD Bn

$1'000

$500

$0
1990

1992
1991

1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Source: HFR. Data as at 31.12.2011.

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2.2. Institutional investors now account for the majority of hedge fund investors

Exhibit 3: Hedge funds AuM by investor type

$1'400

$1'200 $1'220.00
$1'100

$990
$1'000

$740 $806
Billion USD

$800 $780.00
$878

$600
$600
$500
$400

$200

$125
$0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Institutional (non profit organizations, foundations, insurers, pension funds and sovereign wealth funds)

Private (HNW, family offices & others)

Source: Citi Prime Finance Analysis, McKinsey & Company, Preqin and Greenwich Associates. Data as at 31.12.2011.

Exhibit 4: Hedge funds and funds of hedge funds AuM by investor type

39% 36%
Funds of
Hedge Funds
Hedge Funds
61%
64%

Institutional Investors Private Clients

Source: Citi Prime Finance and Preqin. Data as at 31.12.2011.

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2.3. Institutional investors increased their allocation to hedge funds between 2007 and 2011

Exhibit 5: Allocation to hedge funds by investor type (globally)

25.00%

19.7%
Mean Allocation to Hedge Funds

20.00%
17.5%
15.3%
15.00%
12.7%

10.00% 8.2%
6.8%
5.0%
5.00% 3.8% 3.6%
3.0%

0.00%
Non profit Family Offices & Insurance Companies Private Pension Funds Public Pension Funds
Organisation Foundations

2007 2011

Source: Preqin. Data as at 31.12.2011.

As highlighted above, institutional investors have meaningfully increased their allocation to hedge funds between
2007 and 2011.

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3. Hedge funds, myths and misconceptions

“Hedge funds lack transparency in the provision of management data to their clients.”

Until the mid 2000s, hedge funds were mainly the preserve of wealthy families and family offices, which paid little
consideration to the need for transparency. Nowadays, hedge fund clients are largely institutional investors with
exacting transparency requirements, to which hedge fund managers have adapted themselves.

Furthermore, professional bodies such as the HFSB (Hedge Funds Standard Board) or the AIMA (Alternative
Investment Management Association) have devised and implemented transparency rules and reporting standards
which meet the needs of institutional investors.

“Hedge funds are located in unregulated, offshore tax havens.”

Investment vehicles are indeed sometimes incorporated offshore as regulations and tax constraints tend to be more
flexible. Nevertheless, management companies are mostly domiciled in onshore financial centres such as London and
New York and are, for the most part, registered with and supervised by the FSA or the SEC and, as such, have to
comply with their strict reporting requirements.

Furthermore, hedge funds have been globally supportive of those initiatives which aim to improve the regulation of
financial markets. Some hedge funds are now under the obligation to declare their CDS as well as their short
positions to their regulator1.

“Hedge funds deploy purely speculative strategies.”

Hedge funds managers use a wide array of sophisticated management techniques. They can and do go both long and
short in a stock, credit or index and they do use derivatives and make use of leverage. The purpose of these
techniques however is to allow a hedge fund manager to express a view, be it fundamental, directional or relative,
and to protect or hedge the fund against any market correction.

“Hedge funds rely upon excessive leverage.”

When leveraging, a hedge fund borrows from a bank to increase the size of its exposure. Until 2008, hedge funds did
apply significant leverage to compensate for the low volatility in the markets; since then though, investment banks
have considerably reduced hedge funds financing. According to HFR Leverage Report, the average leverage ratio as of
31st March 2011 had fallen to 1.1 times the invested capital.

It is also worth mentioning that hedge funds do not in fact rank among the most leveraged institutions; investment
banks occasionally apply leverage in excess of 10 times to support their proprietary trading business.

1
For example, new regulations demand that short positions greater than 0.25% in UK listed securities are reported to the FSA.
A recent EU regulation, restricting short selling and certain aspects of credit default swaps, will apply across EEA starting 1st
November 2012.

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“Hedge funds destabilize financial markets.”

In the past, moves by some hedge funds in the stock and currency markets have contributed to destabilising some
markets or prices. Nowadays, the sheer size of those markets coupled with the large number of participants make it
highly improbable that any one hedge fund could upset a whole market. In fact, outstanding assets managed by hedge
funds represent only a small proportion of those managed elsewhere, amounting to about 8.4% only of mutual funds
assets at the end of 2011.

Exhibit 6: Assets managed by hedge funds as a proportion of global AuMs (USD trillion)

2.00

23.80

Hedge Funds Mutual Funds

Source: Investment Company Institute. Data as at 31.12.2011.

In reality, the price of large market capitalisations is much more influenced by capital flows from index funds and ETFs
that account for huge volumes, than it is by hedge funds. Besides, there is ample evidence that short selling has but a
limited impact on stock quotes. Regulations that led to the ban on short selling did nothing to prevent sharp falls in
prices, for instance in the prices of European financial stocks in the winter of 2008 and the summer of 2011.

It is true however that hedge funds account for a meaningful proportion of transactions in certain markets, such as
agricultural commodities for instance. Even though they may contribute towards increasing volatility in these specific
markets, hedge funds remain vigilant as regards liquidity and take pains not to get boxed into any particular position.

“Hedge funds are decorrelated from traditional asset classes.”

Some alternative investment strategies indeed aim to be decorrelated as much as possible from traditional assets;
examples of such strategies include equity market neutral strategies. Even though this decorrelation may be effective
in the long run, it does not follow that, over shorter time periods, the performance of these strategies is systematically
independent of that of the financial markets.

Moreover the term “hedge funds” actually covers a wide range of funds which may pursue markedly different
strategies, of which some may actually be correlated to traditional asset classes. For instance, long-short equity
managers are by their very nature exposed to the equity markets to a greater or lesser extent; this exposure varies as
a hedge fund manager may for instance aim to capture two thirds of the market’s rise while being exposed only to a
third of its losses.

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“Hedge Funds are illiquid. Funds of hedge funds do not always meet their liquidity terms.”

Hedge funds cover a wide array of strategies. Investors need to check that the liquidity terms which hedge funds offer
are consistent with that of the instruments in which they invest and with the time horizon of their investment strategy.
Hedge funds that pursue highly liquid strategies may even offer daily liquidity. By contrast, hedge funds that take
advantage of illiquidity premiums on certain transactions will necessarily offer less frequent redemption terms.

Similarly, liquidity terms offered by a fund of funds need to be consistent with those of the underlying funds. As early
as 2007, Patrick Fenal2 addressed this issue in an article published in the magazine of the AIMA, the Alternative
Investment Manager Association. A good way for an investor to check the consistency of these liquidity terms is to
request a liquidity schedule from his fund of hedge funds manager.

We would be delighted to send you a copy of this article in case of interest.

“Hedge funds are expensive, funds of hedge funds even more so.”

Management fees charged by hedge funds are intended to:

Recruit talented individuals who can implement sophisticated investment strategies;

Acquire the most advanced information systems to analyze financial markets and securely and reliably execute
transactions;

Comply with increased regulatory requirements.

Moreover, unlike traditional asset managers, hedge funds tie a portion of their earnings to the success or failure of
their managers by linking their fees to their long term management performance.

As regards to fund of hedge funds, fees are intended to pay for suitably staffed and qualified teams to analyse hedge
funds from a strategic, reputational, operational and legal point of view. There can be many operational issues which
can have a significant impact on a fund’s performance (most scandals that recently befell the hedge funds industry
were due to operational issues). Finally, the ability to build a meaningful and coherent fund of funds portfolio, which
meets an investor’s needs, requires an intimate understanding of the strategies pursued by individual hedge funds.

2
Patrick Fenal is the Deputy Chairman of Unigestion. He also heads Unigestion’s Family Investment Office. Back in 1997, he was
CEO of Unigestion. Patrick Fenal pioneered Unigestion’s move into Hedge Funds in 1986.

Unigestion SA I 10/23
4. The different alternative strategies

4.1. A family tree of investment strategies

The various alternative strategies are marked by a wide range in terms of their degree of volatility and correlation to
traditional asset classes. Unigestion has adopted the following classification which seeks to regroup within three
styles those strategies which share a common risk profile:

Tactical Trading: trading strategies that seek to take advantage of macro data such as economic data and
forecasts;

Arbitrage: non- directional strategies which seek to take advantage of unjustified price differences;

Equity Hedge: directional credit and equity strategies.

Exhibit 7: The family tree of investment Styles & Strategies

Styles
Tactical Trading Arbitrage Equity Hedge
Strategies
Global Macro Equity Arbitrage Long/Short Equity
Managed Futures Convertible Arbitrage Event Driven
Commodities Fixed Income Arbitrage Long/Short Credit
Volatility Arbitrage Distressed

Unigestion SA I 11/23
4.2. Each strategy plays a different role within a portfolio allocation

Exhibit 8: Features of various investment strategies

Equity Hedge
Expected return and risk budget

Tactical
Trading

Arbitrage

- Decorrelation potential vs risky assets +

Source: Unigestion

4.3. Each strategy uses a different set of underlying assets

Exhibit 9: Strategy exposure to different asset classes

Inte rest ra te s C u rren c ie s C o m m o d ities E q uitie s Vola tility C red it

Tactical Trading

Global Macro

Managed Futures

C ommodities C ommodities

Equity Arbitrage
Arbitrage

Convertible Arbitrage

Fixed Income
Arbitrage

Volatility Arbitrage

Long/S hort Equity

Equity Hedge

Event Driven Event driven

Distressed Distressed

Long/Short C redit

Source: Unigestion

Unigestion SA I 12/23
5. Assessment of a fund of hedge funds manager

5.1. Fund of hedge funds indices

Several providers of fund of hedge funds indices exist; however they generally confine themselves to the provision of
a single index, combining all strategies.

Only one provider, InvestHedge ([Link]) offers individual fund of hedge funds indices per
strategy in addition to a multi-strategy index. InvestHedge’s database covers 2,324 funds of hedge funds managed by
560 investment managers for a combined value of $371 billion as of 30th June 2011, about two thirds of the entire
market (source: InvestHedge).

In Unigestion’s view, the quality of the various InvestHedge indices as regards representativeness and transparency
make them suitable to qualify as a benchmark.

Some of the main indices are listed below:

Total AuM
Number of components (31st December 2011)
Index Class (31st December 2011) USD Bn
InvestHedge- Global Multi-Strategy Multi-Strategy 835 158.0
InvestHedge - Global Macro-Currency Tactical Trading 103 18.4
InvestHedge - Arbitrage Arbitrage 86 29.8
InvestHedge- Global Equity Equity Hedge 150 29.5

Source: HedgeFund Intelligence

5.2. Criteria used in evaluating funds of hedge funds

In a first instance, investors need to proceed with a quantitative evaluation and to analyse performance and risk
statistics over different periods of time, and notably during periods of market stress such as in 2008. Investors also
need to compare the performance of a fund of hedge funds to its peers, meaning either to the relevant InvestHedge
index or to a sample of competing funds.

However, a historical performance analysis cannot by itself demonstrate a manager’s quality and professionalism; to
assess these and other aspects, investors typically use a standard due diligence questionnaire which was developed
by the Alternative Investment Management Association (“AIMA”).

Even though we view satisfactory answers to this questionnaire as a prerequisite, we still do not believe that it is
sufficient to assess fully a fund of hedge funds manager: an in-depth analysis coupled with one or more meetings
with the management team form an essential element of the evaluation process. As part of this analysis, we believe
that investors need to pay particular attention to:

Unigestion SA I 13/23
 The investment process:
− Hedge funds’ due diligence, in particular as regards to operational and reputational risks;
− Portfolio construction;
− Risk control and monitoring.

Robustness of the fund of hedge fund’s management company as an ongoing business:

− Team stability;
− Key man retention policies.

Key features of the investment vehicle:

− Regulatory environment;
− Capital structure;
− Risk of liquidity mismatch.

Transparency and quality of the communication offered by the fund of hedge funds manager.

The Guide to Sound Practices for Funds of Hedge Funds Managers, published by the AIMA in 2009, remains the
standard reference for conducting such an assessment. This document is available for registered AIMA users only on
their website: [Link] We would also be pleased to send you a copy of
this guide upon request.

Unigestion SA I 14/23
6. Comparative return and risk features of traditional portfolios vs. hedge funds

In this section, we will compare the behaviour of a traditional portfolio vs. a hedge fund portfolio. The Traditional
Portfolio – as we will call it in the rest of this paper- is an example of a real institutional portfolio composed of 40%
equities, 55% bonds and 5% Real Estate. The results of this traditional portfolio are expressed gross of fees. We will
compare the results of the Traditional Portfolio to those of Unigestion’s flagship multi-strategy portfolio, the Uni-
Hedge Diversified hedged in EUR, also expressed gross of fees.

Exhibit 10: Detailed composition of the Traditional Portfolio

Asset Class Allocation Proxy

20% MSCI World ex Europe (EUR)
Equities 40% 15% MSCI Europe (EUR)
5% MSCI Emerging Markets (EUR)
40% Citi Government Bond Index (EUR)
Bonds 55%
15% BarCap Global Aggregate Corporate (EUR)
Real Estate 5% Bloomberg Real Estate Europe Index (EUR)

Performances

Exhibit 11: Annual performances from 2006-2011

Traditional Portfolio (EUR)

30%
18.51%

Uni-Hedge Diversified Class EUR

12.47%

20%
8.53%

7.98%
7.40%

7.13%

5.14%

4.79%

10% 1.30%
0.75%

0.79%

0%
-1.10%
-7.68%

-10%

-20%
-20.62%

-30%
2006 2007 2008 2009 2010 2011 2012 (YTD)

Source: Bloomberg and Unigestion. Data from 01.01.2006 to 31.03.2012.

Data are presented gross of fees. For more information please refer to the important information section at the end of this
document. Past performances are no indication of future performance.

This chart highlights well the greater stability of the funds of hedge funds portfolios’ performance compared to
that of the Traditional Portfolio.

Unigestion SA I 15/23
 Risks

Exhibit 12: Return vs. Standard risk Exhibit 13: Return vs. Extreme risk
(Volatility) (Maximum Drawdown)

3.5%
3.5%
3.0%
3.0%
Annualised Return

2.5%

Annualised Return
2.5%

2.0% 2.0%

1.5% 1.5%

1.0% 1.0%

0.5% 0.5%

0.0% 0.0%
4.0% 5.0% 6.0% 7.0% 8.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Annualised Volatility Maximum drawdown

Traditional Portfolio (EUR) Uni-Hedge Diversified Class EUR Traditional Portfolio (EUR) Uni-Hedge Diversified Class EUR

Source: Unigestion and Bloomberg . Data from 31.12.2005 to 31.03.2012, presented gross of fees.

Exhibits 12 and 13 illustrate that, for a slightly superior performance, funds of hedge funds also display lower
risks. For instance, the annualised volatility of Uni-Hedge Diversified is lower by 40% to that of the Traditional
Portfolio. Equally, the maximum drawdown of the former is 55% inferior to that of the latter.

Exhibit 14: Comparative 12- month rolling negative performance

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
0%

-5%

-10%

Traditional Portfolio (EUR)

-15% Uni-Hedge Diversified Class EUR

-20%

-25%

Source: Unigestion and Bloomberg. Data from 31.12.2005 to 31.03.2012.

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 Exhibit 14 shows that the worst 12-month rolling performance is – 23.6% for the Traditional Portfolio whereas it
is -9.68% for the Uni- Hedge Diversified portfolio over the same period.

It can also be deducted from the above chart that over a 12-month window, an investment in Uni-Hedge
Diversified will produce negative performance in 25% of the cases, with an average negative performance
during these periods of -6.4%. Looking at the Traditional Portfolio over the same period, the investment will
exhibit negative results in 38% of the cases with an average performance of -10.5%.

These data highlight the merits of including hedge funds in an institutional asset allocation. Greater stability of
performances and greater resilience in downside markets enable institutional investors to meet their liabilities
with greater serenity.

Sensitivity and asymmetry compared to the equity market

Exhibit 15: 12-month rolling beta evolution and average compared to equity markets (MSCI World)

0.60 Uni-Hedge Diversified Class EUR

Traditional Portfolio (EUR)

0.50 Average

0.40

0.30

0.20 

0.10

0.00
Jan-07 Sep-07 Apr-08 Nov-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11

Source: Unigestion and Bloomberg. Data from 31.05.2005 to 31.03.2012.

The above graph measures the sensitivity of hedge funds to the equity markets. It demonstrates that hedge funds
portfolios have a lower sensitivity to equities than the Traditional Portfolio. For Unigestion, controlling this sensitivity
(or beta) is an important portfolio management objective. Each portfolio we manage integrates a sensitivity limit to
equities, and is also designed to have a limited volatility and a limited maximum drawdown.

Exhibit 15 also illustrates hedge funds managers’ capacity to swiftly adjust their exposure to equities. For instance,
hedge fund managers have drastically reduced their exposure to equities after Lehman Brother’s failure (point 1 on the
graph) whereas they rapidly increased exposure at the end of 2009 (point 2 on the graph).

Unigestion SA I 17/23
Performance Asymmetry

Exhibit 16: Monthly participation vs. MSCI World.

Source
70%
Traditional Portfolio (EUR) Uni-Hedge Diversified Class EUR
60% 58%

50%

40%
40%

30% 28%

20%
11%
10%

0%
Average participation in up equity markets Average participation in down equity markets

Source: Unigestion and Bloomberg.

The average monthly positive performance of the Traditional Portfolio represents 58% of the average monthly
positive performance of the MSCI World, whereas participation rate in down markets is 40%. This asymmetry is
the result of the diversification effect coming from the asset allocation of the Traditional Portfolio.

This asymmetry is even greater for the funds of hedge funds portfolios due to their limited exposure to equity
risk as well as to their capacity to swiftly adapt their exposure overtime (as already commented while looking at
the Exhibit 15 above). Uni-Hedge Diversified portfolio displays a participation rate of 28% in case of positive
performance on the equity market and 11% during negative equity markets.

To add to this, Warren Buffet prominently said, “Rule number one: Never lose money. Rule number two: Never
forget rule Number one”. In other words, it is important to limit losses as an investment will need to generate
100% performance to recoup a 50% loss.

Unigestion SA I 18/23
7. Added value of including hedge funds in a traditional portfolio

We conducted a simulation to measure the impact of substituting 10% of equity allocation by 10% hedge funds in the
Traditional Portfolio. We used our Uni-Hedge Diversified fund as the proxy for the hedge funds allocation. The results
of this simulation are gross of fees.

Exhibit 17: Traditional Portfolio vs. Portfolio including Hedge Funds

Portfolio (EUR)
Allocation Traditional Portfolio (EUR) including Hedge Funds
Equities 40% 30%
Bonds 55% 55%
Real Estate 5% 5%
Alternative Investments - 10%

Results of the simulation

Exhibit 18: Annualised Performance

Portfolio (EUR)
As at 31.03.2012 Traditional Portfolio (EUR) including Hedge Funds
1 year performance 6.00% 5.52%
5 years annualised performance 2.22% 2.40%
Annualised performance over the period* 3.09% 2.94%
*Data from 31.12.2005 to 31.03.2012

Source: Unigestion and Bloomberg.

Unigestion SA I 19/23
 Exhibit 19: 36-month rolling volatility and performance of the Traditional Portfolio
vs. the Portfolio including Hedge Funds.

Traditional Portfolio (EUR)

Portfolio (EUR) including Hedge Funds

4.00%

3.50%
Annualised Performance

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
6.00% 6.50% 7.00% 7.50% 8.00% 8.50%

Annualised Volatility

Source: Unigestion and Bloomberg. Data from 31.03.2007 to 31.03.2012.

Exhibit 20: Comparative Maximum Drawdown

Portfolio (EUR)
Traditional Portfolio (EUR)
including Hedge Funds

Maximum drawdown -27.12% -21.70%

Source: Unigestion and Bloomberg. Data from 31.12.2005 to 31.03.2012

Results interpretation

As highlighted in the results of the simulation in Exhibit 18, the portfolio including a 10% allocation to hedge
funds displays an almost equivalent performance to that of the Traditional Portfolio over the long term. This
characteristic is also well reflected in Exhibit 19, demonstrating the similarity in performance results of the 2
portfolios. While performance remains identical, the significant advantage of the portfolio including hedge funds
is to display a consistent lower volatility of approximately 20% than that of the Traditional Portfolio. It is also
worth mentioning that since the graph highlights results over different 36-months rolling periods of time, the
results displayed are representative of the portfolios’ behaviour over a full market cycle (through bull and bear
markets).

In addition, including a 10% hedge fund allocation in the Traditional Portfolio enables the portfolio to better
weather the effects of adverse markets with a maximum drawdown of -21.70% for the Portfolio including Hedge
Funds vs. – 27.12 % for the Traditional Portfolio. This is partly due to the better participation of hedge funds in
up markets than in down markets.

Unigestion SA I 20/23
8. Conclusion

The hedge fund industry has gradually become more institutionalised in recent years, with industry practices
improving sharply: more transparency, more clarity on commitments and increased regulation.

The growing attraction which institutional investors hold towards hedge funds is most certainly due to their equally
growing disappointment towards equity markets: high volatility on the one hand, periods of sharp and brutal declines
on the other hand, constitutes major challenges for any investor with a mandate to meet liability commitments.

Thanks to the decorrelation potential to risky assets hedge funds bear, an allocation to alternative investments can
materially reduce the volatility of a pension fund and offer protection against sharp falls while returning similar
performance.

We also saw that hedge funds form quite a diverse range of instruments, which therefore allow, by way of the
different combination of underlying instruments, to structure solutions which match an institutional investor’s
particular needs. This step, where allocation decisions are made, is critical as it relies upon an investor’s existing
asset allocation as well as on their investment objectives.

For all these reasons, if you believe, like we do, that equity market cycles will get shorter in the future while their
amplitude will increase, then the inclusion of a fund of hedge fund allocation within your portfolio is worth
investigating. We remain at your disposal to engage in just such a discussion and answer any questions that you may
have.

Unigestion SA I 21/23
9. Contacts Information

If you are an institutional investors: clients@[Link]

If you are a consultant: consultants@[Link]
If you are a journalist/press agency: pressrelations@[Link]

Unigestion SA I 22/23
Disclaimer
This document is addressed to professional investors, as described in the MiFID directive, and has therefore not been
adapted to retail clients. This document has been prepared by Unigestion SA, Geneva, Switzerland. It has been
approved for publication by Unigestion SA, authorized and regulated by the Swiss Financial Market Supervisory
Authority (FINMA), by Unigestion (UK) Ltd , authorized and regulated by the Financial Services Authority (FSA) and by
Unigestion Asset Management (France) SA, authorized and regulated by the Autorité des Marchés Financiers (AMF).

This presentation has been prepared for information only and must not be published, distributed, reproduced or
disclosed (in whole or in part) by attendants to any other person without the prior consent of Unigestion. The
materials contained in this report should only be considered current as at the date of publication without regard to the
date on which you may access the information. All information provided here are subject to change without notice.
This presentation does not purport to be a complete description of the securities markets or developments referred to
in the material and are likely to be modified without prior notice.

It is a promotional statement and generic of our investment philosophy and services and does not constitute an offer
or solicitation to subscribe in the strategies or in the investment vehicles described or alluded to herein which may be
construed as high risk and not readily realisable investments and may experience substantial and sudden loss
including total loss of investment. All investors must obtain and carefully read the prospectus which contains
additional information needed to evaluate the potential investment and provides important disclosures regarding risks,
fees and expenses. This investment is not suitable for all types of investors.

Uni-Hedge Diversified IC Ltd is a Cell of Uni-Hedge ICC Limited, an Incorporated Cell Company authorised as a Class B
scheme by the Guernsey Financial Services Commission only. It has not been authorised by the Swiss Financial
Market Supervisory Authority (FINMA) for public offering. Accordingly, its shares may not be offered or distributed in
or from Switzerland or in any other country where such offer or distribution would be prohibited by law. This
investment is not suitable for all types of investor

Data and graphical information herein are for information only. No separate verification has been made as to the
accuracy or completeness of these data, which may have been derived from third party sources. As a result, no
representation or warranty, express or implied, is or will be made by Unigestion as regards the information contained
herein and no responsibility or liability is or will be accepted. To the extent that this report contains statements about
the future, such statements are forward-looking and subject to a number of risks and uncertainties. Significant
deviations from forecasted figures are possible. Unless otherwise mentioned, source of data is Unigestion.

Past performance is not indicative of future performance. There are no guaranteed returns.

Unigestion SA I 23/23