An Overview of Hedge Funds

1
An Overview of Hedge Funds
Their Growing Impact and Importance as Equity
Investors

• Rick Hanley
• Deutsche Bank Securities, Inc.
• NIRI Fairfield/Westchester Chapter Presentation
• November 17, 2004

2
Hedge Fund Investors Theyre Not Going Away

• Investment Performance is the Key
• Assets Top 800 Billion in 2003
• Increasingly Important Role in MA Transactions
  and Providing Equity Capital
• Now Represent 25 of Wall Street Revenues
• Various Investing Strategies are Impacting Your
  Equity Performance
• Hedge Fund Targeting by IROs is on the Rise

Source Hedge Fund Research, Deutsche Bank
Estimates
3
Hedge Fund Performance The Focus on Absolute
Returns
Hedge Fund investment performance has been
relatively stable and rising in both good and bad
equity market environments.
Index Comparison Jan 1993 - Dec 2003
Source Bloomberg 31 Dec 2003. Standard Poor
500 Tremont Hedge Fund Index Citigroup WGBI All
Maturities (USD).
4
Hedge fund capital has grown at an impressive
rate (CAGR - 27) over the past 13 Years
Hedge Funds Impressive Asset Growth
Hedge Fund asset growth will likely continue as
long as investment returns remain stable and
positive, as Assets Chase Performance
Post LTCM
Source Hedge Fund Research
5
Hedge Fund - Fund of Funds The Predominant
Investor Vehicle
1993 Global Hedge Fund Assets US180 Billion
2003 Global Hedge Fund Assets US600 Billion
Institutional investment in Hedge Funds is on the
rise, through direct investments into hedge
funds, as well as through a fund of funds
approach.
Funds of Funds10
Institutional Direct14
HNW Direct36
HNW Direct90
Funds of Funds50
Source Cerulli Associates, Inc. KPMG, and
Deutsche Bank
6
Hedge Fund Investor Groups Lengthening Time
Horizons
Institutional investors with absolute return
objectives are often more stable, longer-term
investors. Certain hedge fund managers are now
more likely to pursue investments with extended
time horizons as a result of this growing
investor base.
Percent of respondents that hold their Hedge Fund
investments for over 3 years
Family Office 57.14 Endowment/Foundation 47.83 C
ompany Pension 45.45 Bank 44.00 Fund of
Funds 36.76
Source 2004 Deutsche Bank Alternative
Investment Survey
7
Hedge Fund Managers The Assets are Concentrated
15 of hedge funds control roughly 60 of capital
The Largest Hedge Funds now manage 5 -12 Billion
of assets. When using leverage, one hedge fund
might now have the buying power equivalent to 10
- 25 Billion of investment capital.
(billions)
65 of hedge funds control roughly 15 of capital
20 of hedge funds control roughly 25 of capital
Source Deutsche Bank Estimates, TASS Research
8
Hedge Funds An Important Source of Capital
Total US Equity Markets Follow-On Offerings
2003-2004 YTD
More complex securities are being issued, and
time-sensitive transactions are being completed
in todays environment. Hedge Funds are an
important source of this capital being raised by
companies.
Source Deutsche Bank Estimates
9
Hedge Funds A Revenue Stream for Wall
Street
Wall Street Research remains an important
constituency of most companies investor
relations programs. Hedge Funds continue to grow
their in importance to Wall Streets business
model, and as significant research consumers.
Wall Street Revenues From Hedge Funds Are
Estimated At 7.5 Billion in 2004
Convertible Trading (1.5 billion)
Equity Trading Commissions (3 billion)
Prime Brokerage (3 billion)
Source Deutsche Bank Estimates
10
Hedge Funds An Important Asset Class

• Buying Power of the Largest Hedge Funds is
  Significant
• Hedge Funds Investor Base is Gradually Changing,
  and Impacting Their Investment Time Horizons
• Their Influence on Capital Market Transactions
  Can Impact Your Business and Financing Strategies
• Hedge Funds are Key Customers of Wall Street
  Researchers, an Important Constituency of an IRO

11
Hedge Funds as Shareholder Targets

• Educate Senior Management on the Asset Class
• Identify Long Oriented Hedge Fund Strategies, and
  Investors with Significant Assets
• Qualify a Hedge Fund Target - The Top 10
  Questions
• Leverage Hedge Funds to Your Strategic Advantage
  - As You Do Long Only Funds

12
Hedge Funds Equity Investing Strategies
But Which Strategies Might Employ Long-Term
Fundamental Analysis in Their Investment Process?

• Long/Short Strategies
• Pairs Trades
• Equity Market Neutral
• Equity Hedge
• Leveraged Long or Short

• Relative Value Strategies
• Index Arbitrage
• Merger Arbitrage
• Statistical Arbitrage
• Convertible Bond Arbitrage
• Asset Stripping

13
Hedge Funds as Targets Where Should I Start?

• Brokerage Relationships
• Deutsche Bank Corporate Marketing
• Trusted Sell Side Analysts
• Investment Banking Partners
• Trade Publications
• Absolute Risk Magazine, Hedge Fund Research,
  Institutional Investor Magazine
• Corporate Treasury Departments
• Personnel Within Your Own Company Have Likely
  Reviewed Key Managers and Investment Styles of
  Some of the Funds You are Considering

14
Qualifying A Hedge Fund The Top Ten Questions

• How long has the fund been in existence?
• What are the backgrounds/resumes of the key
  principals of the fund?
• Describe the funds primary investment style?
• Quantify the amount of assets in the fund, and
  those dedicated to the primary investment style?
• How long have you owned your top 5-10 positions?
• Describe the funds organisational structure?
• Are you the key decision maker on our
  sector/company?
• How will information on our company be
  disseminated internally?
• Length of experience investing in/analysing this
  sector?
• Are you currently a shareholder of the company?
• What level/depth of work has already been done on
  the company?

15
Deutsche Bank Securities, Inc.
Deutsche Bank North American Corporate Marketing
Group 60 Wall Street New York, New York 10005
Rick Hanley Managing Director (212)
250-2629 rick.hanley_at_db.com
Chal Chute Director [phone] chal.chute_at_
db.com
Liz Brodbar Vice President (212)
250-5926 elizabeth.brodbar_at_db.com

• Deutsche Banks North American Corporate
  Marketing Group assists US based corporations as
  they develop investor relations strategies to
  meet with equity and fixed income investors
  globally. Understanding our corporate clients
  needs allows Deutsche Bank to more effectively
  partner with companies during Deutsche Bank
  sponsored events such as investor marketing
  roadshows and conferences. Building long term
  relationships with senior corporate managers
  helps ensure that our clients investor relations
  goals and objectives are met with a higher degree
  of service and attention.