Brevan Howard Asset Management LLP

Brevan Howard Asset Management LLP

Your attention is drawn to the disclaimer set out at the beginning of this presentation

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Hedge Funds Past, Present and Future:

What should the regulatory response be?

Dr. Aron LandyPartner, Chief Risk Officer, Brevan Howard Asset Management LLPApril 2007

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Disclaimer

Brevan Howard Master Fund Limited (“BHMF") is an exempted company incorporated with limited liability under the law of the Cayman Islands. Applications for shares of BHMF can only be made on the basis of the current prospectus. Investing in the shares of BHMF involves certain risks, as more fully described in the prospectus. There can be no assurance that the investment objective of BHMF will be met or that its investment program will be successful. Shares have not been and will not be registered under any securities laws of the United States of America or any of its territories or possessions or areas subject to its jurisdiction, and may not be offered for sale or sold to nationals or residents thereof except pursuant to an exemption from the registration requirements of the Securities Act of 1933 of the United States, as amended, and any applicable state laws.

Brevan Howard Fund Limited (“BHFL”) is an exempted company incorporated with limited liability under the law of the Cayman Islands as an open-ended investment company. BHFL is organised as a “feeder fund” and invests all its assets in (to the extent not retained in cash) the shares of BHMF.

Brevan Howard LP (“BHLP”) is a Delaware limited partnership. BHLP is organised as a “feeder fund” and invests all of its assets (to the extent not retained in cash) in the shares of BHMF.

For the remainder of this document BHFL and BHLP shall be referred to as the “Funds”.

This document has been prepared and issued by Brevan Howard Asset Management LLP (“BHAM”), the investment manager, which is authorised and regulated by the Financial Services Authority (“FSA”). It refers to the Funds and BHMF which are unregulated collective investment schemes for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the “Act”) and whose promotion is accordingly restricted by law.

This document is being issued inside and outside the United Kingdom to and/or is directed at persons who are both (a) intermediate customers or market counterparties for the purposes of the FSA Conduct of Business Sourcebook (“COBS”) and (b) of a kind to whom the Fund may lawfully be promoted bya person authorised under the Act by virtue of Section 238(5) of the Act and Annex 5 to Chapter 3 of COBS. The investments and investment services to which this document relates are only available to the persons referred to above and other persons should not act or rely on it.

This document is exempt from the scheme promotion restriction in Section 238 of the Act on the communication of invitations or inducements to participate in unregulated collective investment schemes on the grounds that it is being issued only to the types of person referred to above.

The investment programmes of the Funds are speculative and entail substantial risks. Interests in the Funds may be subject to sudden and large falls in price or value and there could be a large loss on realisation which could equal the amount invested. As there is no recognised market for the interests, it may be difficult for an investor to sell or realise the interests or to obtain reliable information about their value or the extent of the risks to which they are exposed. Changes in rates of exchange may have an adverse effect on the value, price or income of the interests. References to future returns are not promises or even estimates of actual returns an investor may achieve. The forecasts and material contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The information herein reflects prevailing conditions and BHAM’s judgement as of this date, all of which are subject to change. Past performance or experience does not give a guide for the future. Performance of BHFL Class A Shares and BHLP Class A Limited Partnership Interests is shown net of 2% management fee and 20% performance fee. Performance of BHFL Class B Shares and BHLP Class B Limited Partnership Interests is shown net of 2% management fee and 25% performance fee. Please note that Class A Shares and Class B Shares of Brevan Howard Fund Limited are not currently available for general subscription.

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Disclaimer (cont’d)

The investment strategy described herein involves one or more investment management entities which are part of the Brevan Howard group of companies. Some of the functions described herein are performed by employees of affiliated companies of BHAM. Indices are unmanaged; the figures for the index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses, which would reduce returns. Investors may not be able to invest directly in an index. The portfolio characteristics and risk controls set forth are not static and may change over time. BHAM does not represent that the statistics, investment guidelines, capital allocation and limits disclosed herein will remain constant over time. The portfolio risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk.

The information and opinions contained in this document are for background purposes only and do not purport to be full or complete. No reliance may be placed for any purpose on the information or opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by BHAM and no liability is accepted BHAM for the accuracy or completeness of any such information or opinions.

This information is being circulated by the BHAM on a confidential basis. The information contained herein is confidential to such person and is neither to be disclosed to any other person, nor copied or reproduced, in any form, in whole or in part without the prior consent of the BHAM.

BHAM believes that the source of this information is reliable however it cannot and does not guarantee, either expressly or implicitly, and accepts no liability for, the accuracy, validity, timeliness, merchantability or completeness of any information or data (whether prepared by BHAM or by any third party) for any particular purpose or use or that the information or data will be free from error. BHAM does not undertake any responsibility for any reliance which is placed by any person on any statements or opinions which are expressed herein. Neither BHAM, nor any of its affiliates, directors, officers or employees will be liable or have any responsibility of any kind for any loss or damage that any person may incur resulting from the use of this information.

Recipients of this document who intend to apply for interests in the Funds are reminded that any such application may be made solely on the basis of the information and opinions contained in the prospectus relating thereto when available, which may be different from the information and opinions contained in this document. Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any shares or any other interests nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefore.




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• “Hedge funds and systemic risk”, speech by Ben Bernanke, FRB, May 2006

• “Recent developments in Hedge Funds”, Bank of Japan, June 2006

• “Hedge funds: what should be the regulatory response?”, speech at SUERF 2006 by Callum McCarthy, FSA, December 2006

• Financial Stability Review special issue on Hedge Funds, Banque de France, April 2007

Recent central bank speeches and publications



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• Overview of hedge fund industry

• Case study: Brevan Howard

• Systemic risk & other regulatory issues



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• Unregulated collective investment fund

• Derivatives

• Short selling

• Leverage

• Performance fees

• Restricted investor base

But … these factors exist in banks, insurance companies and other institutions

What is a hedge fund?



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Traditionally:

• Developed and emerging markets• Equities• Bonds• Foreign exchange• Commodities

More recently:

• Credit derivatives

Newer developments include:

• Insurance• Private equity

Where are hedge funds active?



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Hedge fund performance

Source: Credit Suisse/Tremont

Credit Suisse/Tremont Hedge Fund Index

Credit Suisse/Tremont Hedge Fund Index (USD)S&P 500 (USD)Dow Jones World Index (USD)



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1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Num

ber o

f fun

ds

0

5000

10000

15000

20000

25000

USD

bn

0

500

1000

1500

2000

2500

3000

Source: Hedge Fund Research, Inc. (HFRI) and Hennessee Group, LLC. As at 30 September 2006, the actual number of funds is 9,228 and the hedge fund assets is USD 1,336 billion

Number of hedge funds

Projected number of hedge funds – 20% growth p/a

Projected number of hedge funds – 10% growth p/a

Hedge fund assets

Projected hedge fund assets – 20% growth p/a

Projected hedge fund assets – 10% growth p/a

Projected growth of the global hedge fund industry

Hedge Fund Attrition Rate:1999 2000 2001 2002 2003 2004 20054.7% 6.4% 4.3% 3.8% 5.3% 5.9% 3.9%



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Life time in years

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Num

ber o

f fun

ds

0

100

200

300

400

500

Source: Man database and TASS Research*As of 31 December 2006. Please note that 3167 hedge funds were used in this analysis

But it is a two-way street…

Life time of hedge funds that ceased reporting (period = 1978 – 2006)

Hedge Fund Closures:2001 2002 2003 2004 2005 2006*272 261 284 350 574 445



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• Global macro – seeking assets mispriced relative to forecasts

• Arbitrage – seeking related assets that have deviated from some anticipated relationship

• Convertible arbitrage – between convertible bond and equity • Fixed income arbitrage – between related bonds and/or interest rates • Merger arbitrage – between securities whose prices appear to imply different probabilities for an

event • Statistical arbitrage (or 'StatArb') – between securities that have deviated from some statistically

estimated relationship• Derivative arbitrage – between a derivative security and the underlying security

• Long / short equity – generic term covering all hedged investment in equities

• Short bias – emphasizing or investing solely short• Equity market neutral – maintaining a close balance between long and short positions

• Event driven – specialized in the analysis of a particular kind of event

• Distressed securities – companies that are or may become bankrupt

• Regulation D – distressed companies issuing securities

• Emerging markets

Types of hedge fund strategy



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3.24 %Fixed income (total)13

3.84 %Event driven12

0.60 %Equity non-hedge11

1.68 %Equity market neutral10

5.28 %Equity hedge9

0.36 %Emerging markets (total)8

2.40 %Distressed securities7

0.48 %Convertible arbitrage6

0.14 %Short selling5

0.26 %Sector (total)4

10.08 %Relative value arbitrage3

0.60 %Merger arbitrage2

71.04 %Macro1

Source: Hedge Fund Research, Inc. (HFRI)

1990

1

2

3

456 7

8 910

1112 13

Growing diversity in the hedge fund industry

Strategy % of global hedge fund assets



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0.24 %Regulation D180.08 %Fixed income convertible bonds17

0.80 %Fixed income high yield 152.20 %Fixed income MBS14

0.35 %Market timing19

1.55 %Fixed income diversified 16

3.12 %Fixed income arbitrage1313.37 %Event driven124.10 %Equity non-hedge112.74 %Equity market neutral10

28.38 %Equity hedge94.20 %Emerging markets (total)84.47 %Distressed securities73.25 %Convertible arbitrage60.32 %Short selling55.08 %Sector (total)4

13.31 %Relative value arbitrage31.55 %Merger arbitrage2

10.90 %Macro1

Source: Hedge Fund Research, Inc. (HFRI)¹As at 30 September 2006

20061

1

2

3

4

56

7

89

10

11

12

1314

151617

1819

Growing diversity in the hedge fund industry% of global hedge fund assetsStrategy



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Source: Bloomberg and Stark & Co, Inc. Managed futures: Stark 300 Trader Index. World stocks: MSCI World Index (hedged to USD).

14.4 %6.0 %12.5 %5.0 %7.2 %14.3 %World stocks

9.2 %6.4 %8.4 %7.0 %5.4 %2.4 %Managed Futures

1 December 1996 to30 November 2006



9.3 %13.1 %6.1 %9.0 %6.0 %12.8 %HFRI Equity Hedge Index

2.0 %

4.2 %

4.7 %

4.8 %

1 year annualised

volatility

12.3 %

15.6 %

10.6 %

13.5 %

1 year annualised

return

1.9 %

5.7 %

3.6 %

4.8 %

5 year annualised

volatility

7.6 %

11.3 %

7.3 %

9.7 %

5 year annualised

return

3.2 %9.4 %HFRI Relative Value Arbitrage

6.6 %12.1 %HFRI Event Driven Index

6.0 %7.7 %HFRI Fund of Fund Index

7.4 %10.6 %HFRI Composite Index

10 yearannualised

volatility

10 year annualised

return

Reasons for impressive growth of hedge funds



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Hedge fund performance

Source: Credit Suisse/Tremont



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• Positive returns in differing market conditions

• Above average risk-adjusted returns

• Low correlation to leading market indices

• Effective instrument for portfolio diversification and risk reduction

Portfolio benefits for a hedge fund investor



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Source: The case of Hedge Funds; Fung/Hsieh; 1997. The case study is the most current available

Performance explained by the market0% 20% 40% 60% 80% 100%

Dis

tribu

tion

of fu

nds

0%

5%

10%

15%

20%

Hedge funds Mutual funds

Hedge funds versus mutual funds: why hedge funds add value



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Alpha generatorshedge funds,private equity,

CTAs, real estate etc.

Beta generatorsindex funds, ETFs,

index futures, equity swaps

Traditional activeasset management

‘Active’ fees for‘passive’ management

with sub-indexperformance

Passive or ‘quasipassive’ strategies

Active mutual funds ‘Skill-based’ strategies

Schematic illustration

Asset management trends: the present situation



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Alpha generatorshedge funds,private equity,

CTAs, real estate etc.

Beta generatorsindex funds,

ETFs, index futures, equity swaps

Traditional activeasset management

‘active’ fees for‘passive’ management

with sub-indexperformance

Passive or ‘quasipassive’ strategies

Active mutual funds ‘Skill-based’ strategies

Asset management trends: the future situation

Schematic illustration

Polarisation of the market



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By Investment Style By Asset Class

Global Macro 72%Relative Value

20%

Other8%

Developed MarketsFixed Income53%

FX15%

Emerging Markets15%

Equities11%

Commodities / Other 6%

(% of capital allocation) (% of capital allocation)

BHMF’s exposures are predominantly to global fixed income and FX markets

BHMF: Investment Profile as at 31 March 2007

Brevan Howard Master Fund Limited

Source: BHAM



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Trade• Buy 1yr USD put/BRL call option, strike 3.00 at a cost of 1.5%

– Option decay funded by carry– Even if USD/BRL unchanged after 6 months, option still worth 1.5%– Limited liability and leveraged exposure

Result• At the end of 2004, spot rates were BRL/USD 2.65• Performance including carry: [(3.00-2.65)/2.65] -1.5% = 11.7%

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-01 May-02 Sep-03 Feb-05 Jun-06

Source: Bloomberg

Background• Strong Brazilian GDP, tighter monetary policy, primary budget surplus• Strong Brazilian external balances (current account surplus, strong FDI)• High commodity prices and Selic rate pointed to strengthening currency• In mid-2004 spot and forward FX and interest rates were as follows

--2.5%-USD

16.5%3.5019.0%3.00BRL

Forward discount

1yr Forward FX

vs. USD

1yr interest rate

Spot FX vs. USD BRL/USD

Case study shown is for illustrative purposes only. Trades illustrated may not have been executed by Brevan HowardPAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Case Study: Long Brazilian Real vs. US Dollar (2004)



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Source: BHAM; all data as at 31 March 2007. Inception date of USD Class A Shares of Brevan Howard Fund Limited is 01 April 2003. Please note that Class A Shares of Brevan Howard Fund Limited are not currently available for general subscription* Sharpe Ratio is annualised excess return over Fed Funds divided by annualised standard deviation of excess return. Information Ratio is annualised return divided by annualised standard deviation of return. Sharpe Ratio, Information Ratio and Annualised Volatility are calculated by BHAM based on daily data from International Fund Services (Ireland) Limited and otherwise on BHAM internal estimates. Where no BHAM estimate of the BHFL NAV is available for a given day, the BHFL share price for that day is assumed to be the same as the previous dayThe performance set out above is net of all investment management fees (2% annual management fee and 20% performance fee for USD Class A Shares) and all other fees and expenses payable by Brevan Howard Fund LimitedPAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Strong, well-diversified returns since inception**• Annualised return 10.58%• Sharpe Ratio 1.5x*• Information Ratio 2.2x*• Annualised volatility 4.9%*• Over 70% of monthly performance figures are positive

11.10-0.150.591.000.30-1.961.500.93-2.752.862.981.793.682006

4.091.310.741.992007

10.58Since Inception (Annualised)

8.031.770.20-2.522.330.85-0.311.421.37-0.102.31-0.010.562005

14.620.381.111.29-0.53-0.251.011.660.682.412.700.562.762004

4.622.09-0.51-1.752.62-2.92-1.772.753.950.31---2003

YTDDecNovOctSepAugJulJunMayAprMarFebJan

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Brevan Howard Fund Limited USD Class A Shares (monthly performance net of fees in %)

Source: Underlying data provided by the Administrator, International Fund Services (Ireland) Limited Return calculations made by BHAM

Industry recognised excellenceEurohedge:• Awarded Best Macro Fund 2004• Nominated Best Macro Fund 2006

Risk:• Awarded Best Hedge Fund End User 2005

Financial News:• Nominated European Asset Management Firm of the

Year (2005)

Brevan Howard Master Fund Limited



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Established, proven alternative asset manager• One of the world’s largest global macro/relative value hedge fund managers*, founded in 2002 by former

members of the CSFB Developed Market Rates trading team, led by Alan Howard• As at 31 March 2007, over $13.9 billion of assets under management in three separate funds; over $11.7 billion

of AUM in BHMF• As at 31 March 2007, Brevan Howard Fund Limited** provided net annualised returns since inception of

10.58%**, with a Sharpe Ratio of 1.5x

Global reach/geographic spread• 8 offices worldwide - Europe, US, Asia and the Middle East • 279 employees: 202 London, 24 New York, 16 Hong Kong, 22 Tel Aviv, 6 Jersey, 6 Washington, 2 Tokyo and

1 Dublin (as at 31 March 2007)

Deep pool of talent• 27 Partners: 13 trading Partners, all trading for Brevan Howard Master Fund Limited• Over 100 investment professionals: 60+ traders, 17 quantitative analysts, 11 economists, 8 strategists, 9 risk

specialists (as at 31 March 2007)

Over 300 institutional and high net worth investors in over 30 countries• Investment management companies (fund of funds), private banks, pension funds, family offices, insurance

companies and government agencies • Low key investor risk; no single investor exceeds 6% of AUMSource: BHAM; all data as at 31 March 2007*HSBC Private Bank Hedge Weekly Investments Funds Performance Review** USD Class A shares. The performance set out above is net of all investment management fees (2% annual management fee and 20% performance fee for USD Class A Shares) and all other fees and expenses payable by Brevan Howard Fund LimitedPAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Company overview



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Proprietary Capital Trading Features:

• Risk capital allocations are made to over 50 traders*, operating independently

• Diversification of risk capital across traders

• Focus on excellence

• Increase risk weighting given to traders with positive performance

• Decrease risk weighting given to traders with negative performance

Investment philosophy and strategy

Source: BHAM*As at 31 March 2007



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Risk Management: process, infrastructure and control

Risk Team• Risk Team: Aron Landy (CRO) + 8 risk specialists• Risk Oversight Committee: Aron Landy, Nagi Kawkabani (Joint-CEO) and James Vernon (COO); all partners

Formal, written mandate for each trader• Defined markets and instruments• Defined capital allocation and risk parameter limits• Risk parameter and stop-loss limits for the portfolio as a whole

Quantitative risk monitoring at trader and Master Fund level on a daily basis• Automated risk limit monitoring for each risk parameter• Automated liquidity monitoring for each instrument and portfolio as a whole • Over 90 historical and theoretical scenario and stress tests calculated daily using RiskMetricsTM on each trader

book and portfolio as a whole

Qualitative interpretation of risks at both trader and Master Fund levels• Daily qualitative analysis of key risks

Weekly formal risk review process• Risk Team to assess ‘blow-up’ risk




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Historical Stress TestingReporting Sample

Source: BHAMThe table above is for illustrative purposes only. Results of stress tests may vary over time




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Volatility Stress TestingReporting Sample





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FX Stress TestingReporting Sample





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Positive:

• Visionary investors• Efficient capital allocators• Improve market efficiency• Aid capital formation• Provide price discovery• Boost market liquidity• Increase stability

Cautious:

• Dangerously secretive• Enormously risky• Systemic threat• Prone to fraud and abuses• Need more scrutiny• Must become transparent• Require oversight

Different perspectives on hedge funds



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• Prudential (financial stability)– Stability of banks, brokers and prime brokers is primary concern– Need to identify transmission mechanism from hedge funds to banks– Impact on markets of hedge fund activity

• Consumer protection– Nature of hedge fund investor base

• Market abuse– In UK, managers are regulated by FSA in matters of market abuse, competency, record keeping,

fiduciary responsibility etc

Questions to consider:

• Do hedge funds really affect markets?• Do they pose systemic risk?• Should borrowing and/or lending limits be imposed?

• Do investors need more protection?• Is transparency adequate?• Should minimum investor capital limits be maintained?• How prevalent is fraud?

• Is market abuse adequately contained?

Regulatory issues



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Annual high-Low range for Dow Jones Industrials and S&P 500 equity indices

0%

25%

50%

75%

100%

1920 1940 1960 1980 2000

DJ range S&P range

Do hedge funds increase volatility?

Source: Bloomberg



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• Hedge funds find it convenient to have one clearing counterparty for all securities and derivatives – this is a “prime broker”

• Prime brokers provide most of the leverage used by hedge funds

• Large source of fee income for banks

• Vital that prime brokers properly assess counterparty risk– High portfolio turnover– Netting agreements– Multiple prime brokers– Cross default– Exposure to groups of funds and fund sectors

• Initial & variation margin

What is a Prime Broker?



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• Hedge funds make illiquid investments

• Investments leveraged by prime brokers, other lenders or via derivatives and are subject to daily mark-to-market margin calls

• Investments decline sharply in value

• Banks make large margin calls, forcing fund to liquidate in a “fire sale”

• Hedge fund investors redeem, forcing further liquidations – Many funds offer monthly liquidity to investors

• Possible contagion to other funds/banks/brokers

Hedge funds – nightmare scenario



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• Leverage is much lower now than a decade ago

• Markets are more mature, much more liquid

• Many more types of hedges are available

• Prime brokers have much better controls, are much better capitalised and regulated

• Permanent capital vehicles (debt and equity) are starting to appear

Hedge fund – comfort factors



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• Orange County (1994)

• Enron (2001)

• WorldCom (2002)

• Parmalat (2003)

• LTCM (1998)

• Tiger (2000)

• Bailey Coates Cromwell (2005)

• Amaranth (2006)

Private sector failures



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• Size of loss

• Banks’ gross exposures

• Impact of collateral

• Counterparty credit monitoring

• The outcome

LTCM versus Amaranth



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Constraining factors

Source: SDCERA



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Source: U.S. Department of Justice



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Source: The Times

Source: FSA (UK)



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• Hedge funds are higher risk investments due to leverage and other factors

• Increasingly popular because they offer high risk-adjusted performance as well as diversification

• Investors seek to split alpha from beta

• Hedge fund risk management operational controls becoming more “institutional”

• Regulators’ focus is on financial stability– Counterparty risk management at banks and prime brokers– Market abuse by fund managers

• Current regime appears to have the right balance

Conclusions

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