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Stradivari Technical Perspective on Hedge Fund Allocation Jan 2010

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STRADIVARI TECHNICAL PERSPECTIVE technical driven ideas on strategical Hedge Fund allocation JANUARY 2010

STRADIVARI Technical Perspective,STP, is a free monthly research note with views and ideas on strategic Hedge Funds allocation. While Quantitative and Technical Analysis are common tools for traders and investment managers, we believe that it could be very interesting to apply these tools to strategic Hedge Funds allocation in order to have an assessment from a different analytical point of view. The complete universe of charts we are analyzing can be found in our free monthly chartbooks, showing how single hedge fund strategies have behaved in the past, with historical volatility, performance, Sharpe ratios, relative performance & correlation versus equities, bonds, commodities and global hedge funds index. STRADIVARIs Technical Perspective only covers the most interesting and rewarding charts from our view. It is of critical importance to understand that our approach and model portfolio is driven exclusively by quantitative and technical analysis.

About STRADIVARI Advisors S.A.STRADIVARI Advisors S.A. is a consulting firm specialized on marketing Alternative Investments to the German and French speaking investors, with a particular focus on hedge funds and fund of hedge funds. We also support alternative asset managers improving their communication strategies, creating new brand identities and developing as well as implementing effective new marketing strategies to differentiate from their competitors.

Rgis Weiler+352 691 256 256 [email protected]

Uwe Truppel+352 691 257 257 [email protected] Research can be downloaded:

www.stradivari-cm.com

STRADIVARI TECHNICAL PERSPECTIVE:technical driven ideas on strategical Hedge Funds allocation January 2010

Market Comments:2009 was a very interesting year in many aspects: ar performance, industry trends , fraud, legal environment, liquidity, assets under management. Looking back at all these aspects, we think that the industry has successfully gone through a difficult but necessary purification process that will provide a robust base for future developments. We noted with interest that 2009, in terms of performance, has been symmetrically opposed to 2008. Strategies that were positive in 2008 were negative in 2009, and vice versa. Managers are also surfing on the trend of regulation and there are already a lot of strategies available as UCITS 3: more than 75% of the managers are considering launching their strategies as UCITS 3. Combined with lower entry levels, this builds a strong foundation of an inevitable democratisation ble process that is needed for the industry to find new sources of capital across all types of asset allocators. Regrettably, frauds of different nature and size came , also to light in 2009 and gave a feeling of dj vu to n investors. While one could have avoided some of le them with a better operational due diligence process, investors can hardly be blamed when a fraud is about insider trading. Liquidity terms are improving: almost 2/3 of the fund that had liquidity issues have now returne to returned standard liquidity: 5% (or USD 70 bn) of the USD 1.5 : trn total estimated current AUM have not returned to standard liquidity. We remain convinced that the ability and flexibility of the alternative investments industry to react and adapt to new market environment and investors demand is one of its major asset.

remain very cautious on the economic front and therefore equity markets. We believe that Event Driven strategies, especially Special Situations and Distressed Securities will offer ations the best chances for the coming months

Our Allocation: summary-3 -2 -1 0 1 2 3

Equity Market Neutral Distressed Securities Merger Arbitrage Special Situations Convertible Arbitrage Fixed Income Arbitrage Other Arbitrage Statistical Arbitrage Growth Opportunistic Short Selling Value Managed Futures Global Macro Market Timing Emerging Markets Fixed Income Multi-Strategy

Chart 1: Percentage of strategies with positive performance: 3-months average months (based on Greenwich Alternative Investments Indices)100% 80% 60% 40% 20% 0%

Outlook:It is too early to appraise the consequences of the recent Obamas proposal, but it gives a good idea about the kind of unexpected external factors that could impact the hedge fund industry in 2010. stry We expect significant inflows as strong performance is generally followed by more risk appetite, but weSTRADIVARI Advisors S.A.Rgis Weiler +352 691 256 256 [email protected] cm.com Uwe Truppel +352 691 257 257 [email protected] cm.com

The current percentage of strategi with a positive strategies performance is currently at 72% . tly It is worth to note that December was the eighth consecutive month staying above its average (70%) This has only happened four times before since the beginning of the index in 1995.

STRADIVARI TECHNICAL PERSPECTIVE:technical driven ideas on strategical Hedge Funds allocation January 2010

Global Hedge Funds and Balanced Portfolio Analysis:The 12-months rolling performance of a balanced BondEquityCommodity portfolio (17.27%), is almost 2% below the performance of a portfolio invested in Global Hedge Funds (19.44%).(Chart 2) The 12-Months rolling volatility of a balanced BondEquityCommodity portfolio (11.3%) is still almost 2 times higher than a portfolio invested in Global Hedge Funds (5.83%) (Chart 4).Chart 2: 12-months rolling returns for Greenwich Global HF Index (P4) and a Bond-Equity-Commodity portfolio weighted 45%/45%/10% (P1)60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%

Chart 4: 12-months rolling volatility for Greenwich Global HF Index (P4) and a Bond-Equity-Commodity portfolio weighted 45%/45%/10% (P1)25% 20% 15% 10% 5% 0%

P1

P4

Chart 5: High Water Mark (green line) and Total Return (red line) for Greenwich Global HF Index450% 400% 350% 300% 250% 200% 150% 100% 50% 0%

P1

P4

Jan-96

Jan-97

Jan-99

Jan-00

Jan-01

Jan-03

Jan-04

Jan-05

Jan-08

Jan-09

Jan-95

Jan-98

Jan-02

Jan-06

Jan-07

Chart 6: High Water Mark (green line) and Total Return (blue line) for a Bond-Equity-Commodity portfolio (P1)160% 140% 120% 100% 80% 60% 40% 20% 0%

Chart 3: Total return for Greenwich Global HF Index (P4) and a Bond-Equity-Commodity portfolio weighted 45%/45%/10% (P1)450% 400% 350% 300% 250% 200% 150% 100% 50% 0%

P1

P4

It is worth noting that a portfolio invested in Global Hedge Funds has reached its high water mark again in December 2009. The drawdown period started in May 2008, touched a low in February 2009 and lasted 19 months. It took 10 months to reach a new high after the low (Chart 5). A balanced BondEquityCommodity portfolio should produce a performance of 21% in order to

STRADIVARI Advisors S.A.Rgis Weiler +352 691 256 256 [email protected] Uwe Truppel +352 691 257 257 [email protected]

STRADIVARI TECHNICAL PERSPECTIVE:technical driven ideas on strategical Hedge Funds allocation January 2010reach its old high water mark. The drawdown period started in October 2007, touched a low in February 2009 and is on its way to new highs for 27 months now. (Chart 6)Chart 7: 12-months rolling returns for a Bond-Equity- HF portfolio weighted 45%-35%-20% (P3) and a Bond-EquityCommodity portfolio weighted 45%/45%/10% (P1)30% 20% 10% 0% -10% -20% -30% -40%Jan-95 Jan-98 Jan-99 Jan-01 Jan-02 Jan-03 Jan-05 Jan-06 Jan-07 Jan-09 Jan-96 Jan-97 Jan-00 Jan-04 Jan-08

Charts 7, 8, 9 show a comparison of two different balanced portfolios: P1 being invested in Bond-Equity-Commodity 45%-45%-10% (Red Line) and P3 being invested in Bond-Equity-HF 45%-35%-20%. On Chart 7, one can see that the 12-months rolling return structure seems to be very similar, with a small advantage for P3. On Chart 8, one can realize the effect of this small advantage when it is compounded since 1995. The performance of P3 is 180% while P1 is at 124%. Chart 9 shows the volatility since inception of both portfolios. P1: 8,02% P3: 6,97% All these numbers show that including hedge funds in an allocation mix can add a lot of value (more performance, less volatility), especially on a mid to long term basis.

P3

P1

Chart 8: Total return for a Bond-Equity- HF portfolio 45%35%-20% (P3) and a Bond-Equity-Commodity portfolio weighted 45%/45%/10% (P1)250% 200% 150% 100% 50% 0%

P3

P1

Chart 9: Volatility since Inception of a Bond-Equity- HF portfolio 45%-35%-20% (P3) and a Bond-EquityCommodity portfolio weighted 45%/45%/10% (P1)9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

P3

P1

STRADIVARI Advisors S.A.Rgis Weiler +352 691 256 256 [email protected] Uwe Truppel +352 691 257 257 [email protected]

STRADIVARI TECHNICAL PERSPECTIVE:technical driven ideas on strategical Hedge Funds allocation January 2010

STRADIVARI HEAT MAPThe goal of our heat map is to provide a visual and easy to understand map showing the current state of different technical and quantitative factors. Green is good, red is bad. Explanations of factors: Distance to HWM (high water mark): Absolute performance in % that the strategy has to realize to reach the precedent high. High distance to HWM is bad. 0 means that the strategy is currently at its all time high. Table 1: STRADIVARI Heat Map (Part 1)Perf . D ec 0 9 Perf . 1Y e a r A nnua l i z e d P e r f . s i nc e I nc e p t i o n

Expected Recovery Period: This number gives an idea about the average time in years needed to reach the precedent high. It is based on the annualized performance of each strategy since 1995. High Expected Recovery period is bad. No number when annualized performance since 1995 ha

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