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The Uneven Hedge

• Presentation CIFPS Conference, June 20, 2005

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Miklos Nagy, CFA, CFP

• CEO and co-founder of Quadrexx
• a leading hedge fund expert in Canada
• Founder and Chairman of Canadian Hedge Watch Inc.
  - Canadian leader in hedge fund information /
  education (www.canadianhedgewatch.com)
• Co-author of Canadas first hedge fund book
  Hedge Funds for Canadians. This book was the
  number 5 best selling investment book in Canada.
  Updated second edition is published in June, 2005
  by Wiley.
• Co-author of CHAIP course (Chartered Alternative
  Investment Planner) for IFIC (www.ific.ca) and
  CIFPs (www.cifps.ca)

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The Global Hedge Fund Market

• Hedge Funds globally between US1 and US1.5
  trillion
• Fund of hedge funds represent over 35 of hedge
  funds in terms of AUM
• Growth in FOHF is fastest within the hedge fund
  industry (40 per year since 2000)

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The US Hedge Fund Market

• Still account to roughly 50 of global hedge fund
  market
• SEC vs FED view of hedge funds
• Increased regulation on hedge funds in the coming
  years

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Why Hedge FundsHedge Funds versus Equities/Bonds
Long-Term
Global Hedge Fund Net Returns Global Hedge Fund Net Returns Global Hedge Fund Net Returns Global Hedge Fund Net Returns
January 1, 1988 - December 31, 2004 January 1, 1988 - December 31, 2004 January 1, 1988 - December 31, 2004 January 1, 1988 - December 31, 2004
Style/Strategy Annual Return Standard Deviation Sharpe Ratio
Van Global HFI 16.0 8.8 1.5
MSCI World Equity 6.6 16.1 0.3
SP 500 12.4 15.2 0.7
Morningstar Average Equity Mutual Fund 10.0 15.7 0.6
Lehman Brothers Aggregate Bond Index 8.1 4.4 1.3
Source VanHedge Source VanHedge
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Why Hedge Funds Hedge Funds versus
Equities/Bonds Snap Shots
April, 2000 to March, 2005 DIFFICULT MARKET April, 2000 to March, 2005 DIFFICULT MARKET April, 2000 to March, 2005 DIFFICULT MARKET
VAN Global Hedge Fund Index MSCI World Index
Annualized Return 6.29 -5.91
Annualized Standard Deviation 5.87 13.68
Sharpe Ratio (4) 0.39 -0.72
January, 1995 to March, 2000 BULL MARKET January, 1995 to March, 2000 BULL MARKET January, 1995 to March, 2000 BULL MARKET
VAN Global Hedge Fund Index MSCI World Index
Annualized Return 20.21 19.86
Annualized Standard Deviation 8.51 13.34
Sharpe Ratio (4) 1.90 1.19
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Low correlation to Major Markets

• During distressed market conditions, some Hedge
  Funds lose their diversifying properties i.e.
  Concentration Risk

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Correlation switching
This is an example of how individual managers
change correlations during distress.
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The Canadian Hedge Fund Market

• Hedge Funds in Canada AUM estimated to be
  between 26 billion (16 billion retail)
• Fund of hedge funds represent between 35 and 40
  of hedge funds in terms of AUM
• Fastest growing hedge fund type used to be (until
  Portus) in the Canadian hedge fund industry
  Guaranteed Notes backed by major banks

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The Canadian Hedge Fund Market

• Fagmented market depending on
• Type of Product
• Province of Residence
• Investor Class
• Accredited Investor
• Eligible Investor
• Investor signing Risk Acknowledgement Form
• Anybody else

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The Canadian Hedge Fund MarketThe Effect of
PORTUS

• Canada needs more level playing field for hedge
  funds
• The growth in Principal Protected Notes will slow
  considerably
• More regulation is likely

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The effect of Principal Protection(based on
back-tested data bw. Jan, 1998 to Dec, 2004)
Type of Investment Percentage of Principal in FOHF Percentage of Principal in Bonds Annualized Return Annualized Standard Deviation
FOHF 100 0 8.82 8.03
PPN 25 (unleveraged) 75 1.17 1.74
PPN 50 (100 leveraged) 75 2.71 3.84
PPN 75 (200 leveraged) 75 4.13 5.80
PPN 100 (300 leveraged) 75 5.44 7.64
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Who is Quadrexx Asset Management Inc.

• Toronto based asset management firm
• Managing unique and high quality alternative
  investment products.
• The company was established in March, 2003 by the
  leaders of Canadian Hedge Funds to build a
  platform for a fund of hedge funds building on
  their relationship with Professor Luis Seco
  (Sigma)

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Quadrexx Market Neutral Performance Funds
Back-Tested Return Statistics(as of February 28,
2005)
Performance QMNPF SP 500 SP/TSX SC Universe Van Global HF Index
1 year 3.75 -1.09 10.94 5.26 6.20
3 year 12.95 -4.17 8.84 7.53 8.87
5 year 16.89 -4.17 1.52 7.90 6.86