How Plan Sponsors use Hedge Funds in portfolios:

Specific allocation:

• Certain hedge funds tend to have low correlations to traditional equity and fixed income markets
• Allocations can come from equity or fixed income, or a combination of both, for investors seeking a combination of return enhancement and risk reduction

Multi-Strategy Fund used as either a fixed income substitute or complement

• Certain hedge fund returns have been attractive over many different market cycles
• Standard deviation typically are less than equity
• Interest rates on bonds are currently very low

• Seek greater diversification due to a wider range of tools being available to mitigate risk
• Equity long/short correlation is approximately 0.8% to the S&P 500 Index (February 2000 - January 2010)*

Portable Alpha Strategy

• Use Multi-Strategy Fund to create Alpha (a return above short-term rates -LIBOR)
• Alpha can be added to market index returns (Beta) through futures or swaps
• Targets 200 to 400 basis points over selected index returns

*Equity long/short is represented by the HFRI Equity Hedge Index (Hedge Fund Research, Inc.), which is the average performance of over 500 long/short funds.