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Montreal Exchange Canadian Annual Derivatives

ConferenceAugust 17-19, 2005

Fairmont Le Chateau Frontenac

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Global, not-for-profit trade association

Corporate membership: Europe, Asia, Australia, North America (Chapters in

Australia, Canada, Hong Kong, Japan and South Africa)

Non-commercial communication with institutional investors, regulators, financial

media

Providing research, education, lobbyingenhancing understanding, sound

practices and industry growth

Alternative Investment Management Association (AIMA)

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Established in March, 2003 Over 70 corporate members across Canada Educational Initiatives

– March 2004 – Guide to Sound Practices for Canadian Hedge Fund Mangers

– June 2004 – AIMA Canada Primer – June 2005 – Guide to Sound Practices for Disclosure and

Promotion of Alternative Investments in Canada– June 2005 – AIMA Canada Research Award

Actively communicating with regulators, media and other participants in the hedge fund community

AIMA Canada - www.aima-canada.org

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Growth of Canadian Hedge Funds IndustryHedge Funds by Product Type

Assets in billions of dollars

Source: Investor Economics

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Growth of Canadian Hedge Funds IndustryPrincipal-protected Products by Type

December 2004

Source: Investor Economics

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Growth of Canadian Hedge Funds IndustryStand Alone Hedge Funds

Assets in billions of dollars

Source: Investor Economics

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Growth of Canadian Hedge Funds IndustryPure Fund of Hedge Funds

Assets in billions of dollars

Source: Investor Economics

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Portus Scandal/Norshield Liquidation IDA Report: Regulatory Analysis of Hedge Funds” (May

18/05) AIMA Canada’s Response

– Formal response to IDA in September– Senate Banking Committee Appearance– Guide to Sound Practices For Disclosure & Promotion– Investor Checklist

AIMA Canada is actively communicating with regulators, media and other participants in the hedge fund community

Canadian Hedge Fund Developments - 2005

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Performance Headwinds– Secular or Cyclical

Regulatory Developments– SEC (US)

– FSA (UK) Global Growth Continues

– Global assets exceed $1 trillion– Inflows are moderating– Number of hedge funds continues to

grow

Global Hedge Fund Developments - 2005

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Growth in Hedge Funds Since 1990

$38,910$58,370

$95,720

$185,750

$256,720

$456,430

$490,580

$539,060

$57,407

$91,431

$4,406

$55,340

$23,336$46,545

$99,436

$374,770$367,560

$625,554

$820,009

$972,608

$167,360$167,790

$73,585

$8,463

$70,635

$14,698

($1,141)

$36,918$27,861

($100,000)

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Ass

ets

(In

$M

M)

Estimated Assets Net Asset Flow

Source: HFR 2004 Annual Report

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Estimated Number of Hedge Funds 1990 - 2004

1,105

1,514

1,945

610

3,617

5,379

4,454

3,873

821

2,9902,781

3,325

2,383

6,297

7,436

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Nu

mb

er o

f F

un

ds

Source: HFR 2004 Annual Report

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Many researchers claim portfolios of hedge funds expose investors to risks that can be surprising to the downside – this is based on the higher kurtosis and negative skew found in hedge fund returns

However, the occurrence of extreme returns in hedge funds (negative or positive) is much less frequent for hedge fund indices then for equity indices - why??

The problem lies in the distribution of returns for hedge funds – they are not normal – and correcting for this demonstrates that “extreme events” in portfolios of hedge funds are surprisingly low!

AIMA Canada Research Award – 2005“Faulty Hypotheses and Hedge Funds”*

*Todd Brulhart & Peter Klein, KCS Fund Strategies (Vancouver)

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AIMA Canada Research Award - 2005

Higher Moments of Equity and Hedge Fund IndicesThis skew is calculated by dividing the third moment by the standard deviation, while the kurtosis is calculated by dividing the fourth moment by the standard deviation.

Index Standard Deviation

(%)

Skew KurtosisThird Moment (%)

Fourth Moment

(%)

Panel A – CSFB/Tremont (Jan. 1994 to Dec. 2004)

U.S. Equity Index

S&P 500 Total Return 4.402 -0.611 3.486 -52.15 1,309.11

Nasdaq 8.003 -0.373 3.664 -191.13 15,028.66

CSFB/Tremont Hedge Fund Indices

Hedge Fund Index 2.352 0.098 5.046 1.27 154.38

Panel B – HFRI (Jan. 1994 to Dec. 2004)

U.S. Equity Indices

S&P 500 Total Return 4.229 -0.470 3.644 -35.56 1,165.49

Nasdaq 7.390 -0.390 3.889 -157.52 11,596.31

HFRI Hedge Fund Indices

Fund Weighted Composite 2.001 -0.626 5.898 -5.02 94.47

Fund of Funds Composite 1.625 -0.257 7.305 -1.10 50.92

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Conclusions

A diversified portfolio of hedge funds is suitable for a broad range of risk tolerances and large allocations are justified

The use of leverage on a diversified portfolio of hedge funds is supportable

Allocating to hedge funds by applying mean-variance tools only may cause investors to overlook risks associated with higher moments

Caveat

“Past performance is not indicative of future results”

AIMA Canada Research Award – 2005“Faulty Hypotheses and Hedge Funds”*

*Todd Brulhart & Peter Klein, KCS Fund Strategies (Vancouver)

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Hedge Fund industry is alive and well and growing (albeit more slowly)

AIMA continues to:

– Work with regulators, the media and other interested parties to promote the proper use of alternatives

– Continues to promote due diligence, transparency and education

Summary Thoughts

Source: Investor Economics