Mathema January 2012 HF Strategy Insight Report

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Leading Intelligence & Independent Insight

HEDGE FUND STRATEGY INSIGHT REPORTJANUARY 2012A good decision is based on knowledge and not on numbers Plato (427 BC-347 BC) - The Republic AURELIANO GENTILINI

[email protected]

MASSIMO [email protected]


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4 Leading Intelligence & Independent Insight

Rise in Global Stock Markets Markets appeared to awaken in January to a renewed sense of optimism towardsglobal economic perspectives, with greater appetite for risk. Market sentiment wassustained by hopes for definitive agreement on a Greek bond deal, a new fiscalcompact setting new measures on country budget discipline, and easing pressureson banks as the second long-term refinancing operation (LTRO) by the EuropeanCentral Bank comes due on February 29

Nonetheless geopolitical risk continued to top rank investors concerns. Accordingto the latest iteration of the BofA Merrill Lynch Survey of Fund Managers theproportion of respondents considering geopolitical risk as "above normal" hasjumped to 69% in January from 48% in December 2011. Historically, this has beencorrelated with a spike in the oil price.

Equity allocation models favored US equities through January as concerns aboutEuropean equities mounted. Eurozone debt crisis, corporate profits decline, anduncertainties about European growth all weighed on investors decisions. U.S.Federal Reserves decisions to keep the door open for more quantitative easing,along with Ben Bernankes announcement it would likely keep interest rates nearzero until at least late 2014, also sustained a benign market sentiment

Despite rosier expectations, cloud formations still extend above the horizon. Wehave the opinion that the macro picture remains bleak in the short run andinvestment themes remain sensitive to changes in economic policies and sovereignrisk. Portugal might be the next Greece in a new round of bailouts in the Eurozoneregion, where unemployment at the end of last year hit a record high since theintroduction of the single currency

-3.66%

-3.94% 11.06%

7.58%

6.91%

2.96%

7.96%

1.48%

-1.70%

5.86%

4.36%

-6.00% -3.00% 0.00% 3.00% 6.00% 9.00% 12.00%

Index

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

S&P 500 - Index Sector Price ReturnJanuary 2012


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Emerging Markets A liquidity rally, driven by a successful long-term refinancingoperation from the European Central Bank in December, sustainedemerging stocks in January. Emerging markets returned 11.56% in

January according to the S&P Global Broad Market Index (BMI),Emerging (compared to Decembers 1.42% decrease, and 2011s22.92% loss), as eight countries posted double-digit gains on theirpath to recovery. Eqypt (+25.25%) held the top spot month on

month, while Hungary (+21.81%) and India (+20.42%) were therunner up. BRIC members outperformed their peers (considered as agroup), with Brazil gaining 14.81%, Russia increasing 14.23%, Indiaup 20.42% and China adding 10.84% (slightly below the aggregateperformance reading)

Emerging sovereign debt spreads traded at the end of January aroundthe lowest levels since mid-November, reflecting growing riskappetite.

Similarly, emerging currencies rallied to multi-month highs sincethe start of January. Demand for higher-yielding assetssustainedby expectations of ultra-low U.S. interest rates through late 2014drove Latin American currencies, namely Mexicos and Chiles pesoand Brazils real, to multi-month highs.

Official Chinas PMI reading signaled a modest expansion in factorysactivity at the beginning of the year. Data showed China'smanufacturing sector expanded modestly in January, with an officialPMI reading increasing to 50.5 from 50.3 in December, above a 49.5reading according to market expectations.

According to data from Nomura, foreign investors favored Japaneseand South-Korean markets in the first four weeks of January. Theybought US$6.52 billion of Japanese equities and US$4.61 billion ofSouth-Korean stocks in 2012 up to January 27. Foreign netinvestment in South-Korean stocks up to January 27 accounted formore than 31% of year-to-date net investments into an aggregateregion that includes seven Asia ex-Japan markets.


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Safe Haven Assets

Swiss franc traded within ranges in January and is expected to range-trade in the short run, mainly driven by improved sentiment in the U.S.$ currency area andexpectations of Swiss National Bank's intervention. Two factors will be at play in driving money flows to safe-haven. USD/CHF cross rate is capped to the upsideby broadly weaker demand for safe-haven USD as investors risk appetite improves on better-than-expected macro data, though failure to reach an agreement onGreece's second bailout loan will drive capital flight back to the U.S. dollar

Because of reversing in the second week of January, according to the Commitment of Traders Report on the Commodity Exchange Inc., in the five-week periodended on January 31 large speculators sentiment on gold stayed bullish (for the same period net-long exposure amounted to approximately US$8.93 billionnotional value). Increasing since December close, outstanding net long exposure to gold for the overall five-week period ended January 31 peaked to the tune of

about US$32.72 billion notional value


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Tail Risk Market Expectations Despite easing from November and December 2011 highs theEurozone ten-year swap spread at the end of January still appearsto incorporate less-clear information regarding changes inexpectations of future economic activity After surging towards the end of November last year at levels close

to those recorded in mid-December 2008, the annualized ten-dayrolling window volatility of the euro swap spread tapered off atthe end of January, appearing to reflect more-stable and less-negative expectations about the aggregated likelihood of defaultprevailing among market participants. Investors shrugged offconcerns about a contagion effect in the Eurozone, triggered bythe debt crisis, An early propensity to risky assets investingappeared to dominate investors agenda in January

Percentage

BasisPoints


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Tail Risk Stock Market Positioning

U.S. stock market closed the last trading session of January on a flat note as anumber of economic reports took investors by surprise. After declining 0.7%month on month in October, the S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas decreased in November a higher-than-expected 0.7% on a seasonally adjusted basis. At the same time an index ofconsumer attitudes published by the U.S. Conference Board Board dropped to 61.1in January from 64.8 for December. A gloomy perspective of both the job marketand disposable income weighed on consumers sentiment. Also, weighing on themarket sentiment was a report that showed business activity in the U.S. Midwestgrew lower than expected in January. Weaker labor market conditions contributedto the disappointing reading

As current and estimated nominal P/Es remain historically low, in absence of anymacro- and market sentiment-driven stock market upside trend, anydisappointment on the earnings front will hold back stock market index price.Earnings growth for the S&P 500 Index is expected to be 9% for the current year

The ten-day exponential moving average of the CBOE Equity Put/Call Ratio, agauge of the sentiment of speculative traders (which hit a multi-year record low of0.472 on April 15, 2010 and a 2011 low on January 19) continues to move along apattern to the downside within the bullish-bearish range


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Commodities

The S&P GSCI rose 2.23% in January, mainly driven by strength in the metals. Benign market sentimentbuoyed by rosy macro readings in the U.S. and China, along with U.S. dollar weakness in January, providedsupport for commodities. The S&P GSCI Precious Metals index held the top spot for January as it posted a11.98% gain month-on-month, while the S&PGSCI Industrial Metals index was the runner up with a 10.13%increase. Silver top performed among all the S&P GSCI commodities in January, with a 19.16% increase month onmonth in the S&P GSCI Silver index. On a 20-day rolling window annualized volatility basis, silver traded atthe end of January 1/24th the daily volatility of gold (27.4% versus 669.1%) Oil prices rose 3.17% in January as supply worries from OPEC's second-largest producer, Iran, weighed onsupply-and-demand dynamics

The S&P GSCI Agriculture Index was the bottom performing sector index in January with a modest 0.03%increase. A decline in wheat prices determined the poor performance for the subsector. A considerable increasein exportable grain production in Ukraine, along with estimates of the largest Australian wheat crop in historyand the potential that Australia will export 20 million metric tons throughout 2012the most ever accordingto the USDAs Foreign Agriculture Serviceadded to pressure on wheat

Safe haven drivers apart, in the last two years trade weighted US dollar, in general, and EURUSD cross rate, inparticular, have been the key determinants of gold price movements. We expect that a weakening euro willcontinue acting in the short run as a key factor in curbing any gold price gains. Also, aggressive long-termrefinancing operation (LTRO) by the ECB are expected to cap gold price movements to the upside.


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Yield Curves An improved market sentiment sustained by: a) rosier perspectivesabout the global economy, b) lower concerns about the euro-sovereign debt crisis, and c) U.S. Fed chairman Bernanke announcedplans to keep rates low until late 2014which buoyed secondarymarkets in the last few trading sessions of the monthdroveoutperformance in January in higher yielding country debts Those sovereigns, such as Norway and New Zealand, thatbenefited in previous months of flight-to-quality drivers lagged inthe performance ranking for January Amid signs of an improving economy, Mexico held the top spot inJanuary as investors directed money flows to the country, followingBernankes decision to maintain a zero interest rate policy until late2014 and Mexicos central bank decision to keep its overnight rate at

4.5% Steepening trades on the Eurozone yield curve were profitable inJanuary

US 30yr-2yr yield spread 8 bps yield curve steepening and anegative 1-bp average shift month on month at the end of January

Eurozone 30yr-2yr yield spread 8 bps yield curve steepening anda positive 9-bps average shift month on month on January 31

As the agreement over Greeces debt restructuring and deal withprivate bondholders failed to materialize in January, Greeces yieldcurve continued to stay inverted, with 2-year governmentbenchmark yield peaking at a record 219.52% on January 31

U.S. Yield Curve, December 30, 2011, January 31, 2012, and Janu ary 31, 2011

(source: Mthm calculations on market data)

0

1

2

3

4

5

1 month 3 month 6 month 1 year 2 year 3 year 5 year 10 year 20 year 30 year Maturity

Y

ield

30-Dec-2011

31-Jan-2012

31-Jan-2011

Eurozone Yield C urve, December 30, 2011, January 31, 2012, and January 31, 2011

(source: Mthm calculations on m arket data)

-0.5

0.0

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ield

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Greece Yie ld Curve, December 30, 2011, January 31, 2012, and January 31, 2011

(source: Mth m calculations on market data)

0.0

50.0

100.0

150.0

200.0

250.0


Y

ield

30-Dec-2011

31-Jan-2012

31-Jan-2011


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Yield Curves UK 30yr-2yr spread 6 bps yield curve flattening and anegative 1-bp average shift month on month at the end ofJanuary 2012

The Bank of England is expected to extend in the first week ofFebruary its bond-buying program by at least GBP50 billionfrom GBP275 billion. Disputes mounted around the additionalround of the money supply program in the UK despite somerecent survey evidence suggested that the UK economy enjoyeda spike up in activity in January after GDP contracted 0.2%quarter-on-quarter in the fourth quarter of 2011. Lord Lamont,

former Chancellor in the John Major government, has slammedquantitative easing (QE) as a "panic measure" that could damagethe recovery

Japan 30yr-2yr yield spread as global risk sentiment resumedJapans yield curve was almost flat month on month amidreduced safe-haven appeal of yen and yen-funded carry trades,

and expectations of Japan MOF's yen-selling intervention

Japan Yield Curve, December 30, 2011, January 31, 2012, and January 31, 2011(source: Mthm calculations on market data)

0.0

0.5

1.0

1.5

2.0

2.5


Y

ield

30-Dec-2011

31-Jan-2012

31-Jan-2011

UK Yield Curve, December 30, 2011, January 31, 2012, and January 31, 2011

(source: Mth m calculations on market data)

0.000000

1.000000

2.000000

3.000000

4.000000

5.000000


Y

ield

30-Dec-2011

31-Jan-2012

31-Jan-2011


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Yield Curves Portugal 30yr-2yr spread 110 bps yield curve flatteningand a positive 410-bps average shift month on month at theend of January. Portugals yield curve amplified itsinversion in January as short-end yields rose an average494 bps compared to an average 295 bps increase in thelong-end segment

Italy 30yr-2yr yield spread 122 bps yield curve bullsteepener and a negative 115-bps average shift month onmonth at the end of January 2012. Managers in fixedincome strategies locked in profits in January throughsteepeners on Italys yield curve

Portugal Yiel d Curve, Decem ber 30, 2011, January 31, 2012, and January 31, 2011

(source: Mthm calculations on market data)

0.0

5.0

10.0

15.0

20.0

25.0

2 year 3 year 5 year 10 year 15 year 30 year Maturity

Y

ield

30-Dec-2011

31-Jan-2012

31-Jan-2011

Italy Yield Curve, December 30, 2011, Janu ary 31, 2012, and January 31, 2011

(source: Mth m calculations on m arket data)

0.000000

1.000000

2.000000

3.000000

4.000000

5.000000

6.000000

7.000000

8.000000

3 month 6 month 9 month 1 year 2 year 3 year 5 year 10 year 30 year Maturity

Y

ield

30-Dec-2011

31-Jan-2012

31-Jan-2011


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Money & Interbanking Markets

Euro three-month Ted spread (the difference between three-month Liborinterbank rates and Treasury Bill yields) as a measure of stress in the

Eurozone, just as it anticipated the credit crisis in 2007, declined 25.51% inJanuary from multi-year record level posted on December 29 last year at148.229.

Despite easing from 2011 record levels, a relatively wide three-monthLIBOR-OIS spread, which is the difference between the rate banks charge forloans in the interbank market and the overnight index swap ratewhichcaptures central bank interest-rate riskcontinues to highlight a decreased

banks propensity to lend to each other

Bank-to-bank lending rates declined to fresh lows on both sides of theAtlantic. In both cases Central Banks action offered a silver lining. In theEurozone, the European Central Bank (ECB) is poised to offer the secondlong-term refinancing operation (LTRO) at the end of February. In the U.S.Federal Reserve Chairman Ben Bernanke lent support to expectations about anew program of about $600 billion of asset purchases to further stimulate the

economy in the first half of the year


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Money & Interbanking Markets Despite being swamped with ample liquidity as theEuropean Central Bank pumped 489 billion into thesystem in December in its first-ever offering of 3-yearrefinancing operations, banks recourse to theEuropean Central Bank deposit facility overnight wassustained throughout January, with aggregate averagedeposits for the month staying above the 480-billionmark

As Eurozone banks continue to park excess funds atthe ECB overnight deposits at the ECB hit a recordhigh of 528 billion at the peak of the ECB's lastreserves period in the week ending January 20.Deposits dropped to 492 billion on January 23 as

banks arbitrage on the greater degree of freedom theyhave at the start of the monthly ECB reserves cycle


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Sovereign Benchmark Yields

Markets continue to neglect the potential deterioration of financialconditions in peripheral Eurozone countries and some Central andEastern European countries

The sentiment only increases the potential of a market correction.Should conditions change adversely the impact on opening positions

would be dramatic

A crisis of confidence in Greece is still evident as the two-yeargovernment benchmark yield continues to climb well above the ten-year government benchmark. On January 31 Greeces two-yeargovernment YTM peaked at a record 225.239%


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Sovereign Benchmark Spreads Alleging a worsening outlook and vulnerability in the near-term

to monetary and financial stocks, on January 27 Fitch downgradedthe sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia,and Spain, Fitch also indicated there was a 1-in-2 chance of furthercuts in the next two years

10-year Eurozone sovereign spreads continued to widen for Greeceand Portugal in January Greeces and Portugals 10-year sovereign spreads against GermanBund hit new record highs at the end of January at 32.509% and

15.553%, respectively

Italys sovereigns sold off after January 13 as market participantsresponded to a rating downgrade to BBB+ with negative outlookby S&P, which cited rising external financing risks. Debt fears alsomounted after Standard & Poors cut its AAA rating for two majorEuropean economies, France and Austria, as well as for theEuropean Financial Stability Facility

Following the double digit returns that posted in 2011 bothDenmark and Sweden, the two countries suffered a loss on theirsovereign debt in January Irelands sovereign debt continued to show some resilience as 10-

year yield spreads decoupled from a generalized widening pattern


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Hedge Fund Strategy Performance Short bias outperformed in December (+1.65%,

returning 3.85% for 2011) as the strategy benefitedfrom global stock markets declines and uncertaintieson the macro front until mid-December. Performancefor the strategy was capped thereafter as stock marketvolatility tapered off in the second half of the month

and the Santa rally detracted from monthly return.Global Macro (+6.44% year on year on December 30)held the top spot in the performance league table forthe whole year 2011. In the last part of the year thestrategy benefited from a number of profitable tradesalong the various ends of the yield curves on bothsides of the Atlantic, and short euro vs. long U.S.dollar exposure

Event-driven Multi-Strategies (-1.25% month onmonth in December, -11.96% for 2011), bettered byLong/Short Equity (-0.88% month on month, -7.31%year on year at the end of December) and EmergingMarkets (-0.70% month on month, -6.68% for 2011),ranked at the bottom of the performance league tableof the various hedge fund substrategies for the wholeyear

Comparative Hedge Fund Index Performance: Dow Jones Credit Suisse Indices

50

90

130

170

210

250

290

330

370

410

Aug-97

Feb-98

Aug-98

Feb-99

Aug-99

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11

Aug-11

Convertible

Arbitrage

Dedicated

Short Bias

ED Distressed

Securities

ED Multi-

Strategies

ED Risk-

Arbitrage

Emerging

Markets

Equity MarketNeutral

Event Driven

Fixed IncomeArbitrage

Global Macro

Long/Short

Equity

Multi-Strategies

Managed

Futures

Russian Financial

Crisis & LTCM

Collapse - Jul-Sep

'

Asian Crisis -

Aug-Oct '97

Tech Stocks

Bubble Collapse -

Feb'00-Mar'03

Bull Market

Rally - April '03-

August '07

Credit Crisis -

August '07-Feb

'09

Post Credit Crisis -

March '09

Greece's Fiscal

Position Crisis -

December '09

Political Unrest in MENA

& Earthquake in Japan -

Jan-March '11Eurozone Debt

Crisis - May-

June '11

Comparative Hedge Fund Index Performance:Dow Jones Credit Suisse Indices

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Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11

Convertible

Arbitrage

Dedicated Short

Bias

Event Driven

Distressed

SecuritiesEvent Driven Multi-

Strategy

Event Driven Risk

Arbitrage

Emerging Markets

Equity MarketNeutral

Event Driven

Fixed Income

Arbitrage

Global Macro

Long/Short Equity

Multi-Strategies


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Hedge Fund Strategy Correlations

In an era when sovereign risk persists a risk-on/risk-off paradigm creates an investmentenvironment where correlation across asset classes zeroes out the benefit of diversification.Correlation across various asset classes and markets at the end of 2011 remained close tohistorical highs. Among other factors, the six-month rolling correlation between the S&PGSCI and the S&P 500 at the end of December 2011 stood at 0.84, two notches below thehighest reading since October 1980 recorded at the end of November 2010. A similarreading was observed for the six-month correlation between the S&P GSCI and the MSCIWorld TR.

December 2011 confirmed the steady and significant correlation pattern of most of thehedge fund strategies with the MSCI World TR Index, similarly to what has beenevidenced throughout 2010. Dedicated Short-Bias, along with Managed Futures, and,although of a lower magnitude, Global Macro, continued to show a negative correlation

against the index (-0.97, -0.56, and -0.19 for the six-month period at the end of December,respectively). The Credit Suisse Dow Jones Hedge Fund Composite Index recorded a firmlevel of positive correlation with the global stock market index at 0.91 for both the six-month and one-year periods. Equity hedge strategies, namely Long/Short Equity, alongwith Event-Driven and Equity Market-Neutral, continued to be somewhat long-biased; inother words, the strategies maintained a significantly high positive correlation to equities(a correlation between 0.92 and 0.99 for the six-month period) despite macroeconomicthemes and macro information flow arrival dominated financial markets for most of

2011a frustration for stock pickers

Correlation of Credit Suisse Dow Jones HF Strategy Indices Vs. MSCI World TR Index

December 31, 2011

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Correlation 6 Months Correlation 1 Year Correlation 3 Years

Correlation of Credit Suisse Dow Jones HF Strategy Indices Vs. Reuters/Jefferies CRB Index

December 31, 2011

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

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Correlation 6 Months Correlation 1 Year Correlation 3 Years


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Investment Risk AssessmentINVESTMENT RISK TYPE RISK LEVEL COMMENTARYSovereign Debt

Europe: default in Greece& Portugal, risingborrowing cost in Spain,Italy & France.

US: curve steepening

Very High

High

Eurozone: massive trade imbalances between peripheral countries and core countrieswill render any debt solution a moot point, since a country cannot balance its budgetwhile it runs a trade deficit and its citizens and businesses also deleverage.US: zero-rate policy and QE3 will push yield curve to steepen as markets anticipate theend of the long bull market in fixed income.

Corporate DebtSpread widening

Default rate increase

High

Moderate

Sovereign crisis to infect he corporate sector: global recession, borrowing constraintsand FX volatility put pressures on corporate debt.

Financials in Europe: growing fears of multiple defaults makes most of thebanks in Europe at risk of being insolvent with the need of hundreds of billions of euros

of new capital.

MortgagesPrepayment RiskInterest Rate Risk

LowLow

Two opposing forces at work: 1) massive deleveraging (recessionary and deflationaryforce) and 2) aggressive monetary easing in history by the Fed and other central banks(seeding the next inflationary asset bubble). Deflationary forces to give way to themonetization of sovereign debt and the resulting inflation.

Equity USLiquidity Volatility -

Leverage

Low - Mid- Low Near-zero rate policy and QE3 support liquidity. Low bond yields supportingvaluations. US Industrial growth diverging positively from stagnant internationalindustrial growth rate. Macro news affect volatility.

Equity EuropeLiquidity Volatility -

Leverage

Mid-High - High January rally is not sustainable: deep-recession and contagion risk post fat tail risks onthe downside. LTRO may affect the risk appetite for crowded trades in to high-yieldingnames.

EquityEmergingMarkets

Liquidity Volatility -

Leverage

Mid Mid - Low Largest outflows already occurred during 2011. The magnitude of China soft landingtogether with news from Europe may affect short-term volatility. India to surprise onthe upside.


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Investment Risk Assessment (Contd)INVESTMENT RISK TYPE RISK LEVEL COMMENTARYFX rates

Volatility

Government

Restrictions

Very High

Moderate

USD to outperform: obstructionist debate around presidential elections easing,international investments in U.S. gas resourcesfor the first time since the 1950sthe U.S. became a net energy product exporter as supplies of North Americannatural gas rapidly increasedChina need of liquidity to sustain growth, and

weakness of the Euro all suggest an upward pressure on the U.S. dollar.

Commodities

Energy/Metals ModerateContango vs. backwardation conditions of the futures term structures of the two

main grains in the agriculture index, i.e. wheat and corn, along with supply-and-

demand dynamics and imbalances, will dictate investment decisions in

agriculture commodities. Metals at peaks level: recession in Europe and China

soft landing are expected to put pressure on the downside. Gold price might be

back soon at levels where the bubble could burst. In a low interest rate

environment gold is considered by many investors as a quasi-currency.

Agriculture Low

Precious Metals High

Volatility Tail Risk HighEurozone-defaults, employment readings in the US, tensions in Iran, themagnitude of China soft landing, and political worries in East-Europe all pose apotential major threat to the markets.

EmergingMarkets

Debt

Equity

Moderate

Moderate/Low

The withdrawal of European banks from the EM syndicated loan market coupledwith low long term rates could make 2012 a record year for net EM corporatecredit issuance


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HF Strategies Risk Assessment & OutlookHF STRATEGY RISK COMMENTARY Short Medium-LongEquity Hedged

EU: Short selling Ban, recession andwidening corporate spreads.US: seasonally adjusted unemploymentand consumption readingsdisappointing

Exchanges restrictions in Europe on top of Eurozonedebt collapse are still set for a high-volatility bearmarket. US: quality large cap names maintain attractivevaluations while many small caps have becomingovervalued.

NEUTRAL TONEGATIVE(EU)NEUTRAL TOPOSITIVE(US)

POSITIVE +

Equity MarketNeutral Short-selling ban; momentum drivers

Positive: fundamental factors increasingly overstatingpolitical and macro factors. Negative: sector rotation &unpredictable political interventions

NEUTRAL POSITIVE

Equity EventDriven Macro environment

Unless uncertainty on macro scenarios fades away and

volatility in the global financial markets tapers off M&Aactivity is seen muted in the short run. The factorsabove are keeping the IPO and M&A markets on aleash. Nonetheless, Facebook may initiate a new seasonof IPOs. Potentially, high liquidity supports M&A andshares buy-backs. Recession in Europe weighs on thenegative side; risks remain on macro environment

NEUTRAL POSITIVE+

Credit Widening corporate spreadsWorsening conditions in borrowing costs are expectedto affect assets swaps and corporate financing in astagflationary environment NEGATIVE NEUTRAL/POSITIVE

ConvertibleArbitrage Widening spread; tail-risk

Convertible Arbitrage will be negatively impacted byworsening bond valuations as equity markets reverserecent rallies and credit-spread widening. Should amarket shock materialize , liquidity might become anissue and exit trades an expensive exercise

NEUTRAL NEUTRAL


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HF Strategies Risk Assessment & Outlook (Contd)HF STRATEGY RISK COMMENTARY Short Medium-LongFixed IncomeArbitrage

Unconventional intervention onsecondary market

The continuing impact of the Volker Rule, together withincreasing bank regulation (Dodd-Frank, Basel III) will resultin less competition for trades, with bigger dislocations andpotentially higher volatility than in the past, as banks have adiminished capacity to warehouse risk. This environment,

coupled with coordinated support from Central Banks,generate increasing arbitrage opportunities along the variousends of the yield curves and debt structure of private sectors.

POSITIVE NEUTRAL

MBS/ABSArbitrage

Negative surprise on U.S. growth andunemployment readings; real-estatebubble to burst vs. soft deleveragingin European markets

US: High yields - or low price-to-rent ratios - puttingupward pressure on prices over the longer term; QE3 andlarger asset purchases announced by the U.S. Federal Reservesupport liquidity in the segment; zero-rate policy protectingfrom interest rate risk.Europe: banks are forced to sell NPLs.

NEUTRAL/POSITIVE POSITIVE

Global Macro Political uncertainty; FX marketspolicy interventionMassive injection of liquidity (LTRO, QE3), central bankscoordination, improving US economy, soft vs. hard landingin China all support a lower risk environment (governmentintervention vs. fundamentals). Directional FX and Equitytrades offering best opportunities; riskier trades exist in rates& commodities.

NEUTRAL NEUTRAL/POSITIVE

Managed Futures FX markets distortions; unwindingcarry tradesCurrency & equity positive vs. commodities & rates neutral NEUTRALDiscretionarytradingPOSITIVESystematictrading

POSITIVE

EmergingMarkets China growth & liquidity issues

Positive factors include lower liquidity risk due to globalcoordination among central banks and rising appetite forinvesting in emerging economies. Recession and debtdefaults in Europe still represent the main threat.

NEUTRAL TONEGATIVE POSITIVE


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Disclaimer Mthm2012. All Rights Reserved.

The report was closed with information available as of the market close on January 31, 2012.

MthmHedge Fund Strategy Insight Reports are for informational purposes only, and do not constituteinvestment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any

jurisdiction.Although the information herein is believed to be reliable and has been obtained from sources believed to bereliable, we make no representation or warranty, express or implied, with respect to the fairness, correctness,accuracy, reasonableness or completeness of such information. No guarantee is made that the information inthis report is accurate or complete and no warranties are made with regard to the results to be obtained fromits use. Mthmwill not be liable for any loss or damage resulting from information obtained from thisReport. Furthermore, past performance is not necessarily indicative of future results.

This report is for individual and internal use only. It may not be reproduced or transmitted in whole or inpart by any means, electronic, mechanical, photocopying, or otherwise, without Mthm's prior writtenapproval.

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Mathema January 2012 HF Strategy Insight Report