Hybrid Hedge

NOTABLE PROS AND CONS OF HEDGE FUNDS

Pros	Cons
Absolute Return Focus	Transparency-limited
Flexible Investment Style	Liquidity-limited
Top Manager Talent	Costs-high and layered
Well-diversified	Tax treatment + K-1s
	Underlying funds maybe unregistered

Why have many hedge fund of funds lost their appeal?
We think part of the answer starts with a riddle:

When is a 10% return not a 10% return?

ANSWER: WHEN MANAGEMENT AND INCENTIVE FEES SHRINK YOUR RETURNS!

HEDGE FOR GROSS RETURN	20.0%	10.0%
-Hedge fund management fee	1.0%	1.0%
-Hedge fund incentive fee	3.8%	1.8%
-Fund-of-funds managment fee	2.2%	2.2%
NET RETURN	13.0%	5.0%

Notes: Assumes hedge funds charge 1% management fee and 20% of profits after management fee. Fund-of-funds fee based on annual charge for DB Hedge Strategies Fund. Fees for other funds may be higher or lower. Source: MONEY Magazine, 2003

CONCLUSION

Hedge FOFs have a significant cost "hurdle" to overcome.

CERULLI REPORT ON THE HEDGE FUND INDUSTRY DECEMBER, 2005

"... the nagging fears over opaque portfolios and lack of performance have yet to subside..."

"... clearly some of those investors are more comfortable with mutual fund fees, since half of them said they would rather invest in hedge fund strategies that are found within the mutual fund format."

"…Mutual funds with a hedge fund bent are becoming more widely available. We estimate that US$200 billion to US$300 billion in mutual fund assets are actually invested hedge fund-type strategies."