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THE EUREKAHEDGE REPORTFebruary 2009

Eurekahedge1866 578 4832 (US toll free) | +65 6212 0925 (Singapore)

[email protected] | www.eurekahedge.com


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2 >>> January 2009 Asset Flows Update

This article is brought to you by

JANUARY 2009 ASSET FLOWS UPDATE

January was a positive month for hedge funds, as managers outperformed the underlying equity markets and most

strategies finished the month in the black; the Eurekahedge Hedge Fund Index returned 0.2%

1

. This translated into US$2billion net performance-based increase in assets during the month, which was, however, negated by net redemptions ofUS$71 billion

2through January.

Figure 1: Summary Monthly Asset Flow Data for 2008-to-date

Below are the highlights on asset flows for the month of January:

Total industry assets down an estimated 4.7% (US$69.3 billion) on the month, and down 28.1% from their June2008 peak, to US$1.4 trillion

Outflows of US$77 billion eclipsed fresh inflows of US$6 billion, while US$10 billion in performance-driven assetgains were offset by losses to the tune of US$8 billion

Largest performance-based gains in absolute terms across North America in terms of regional mandates and instrategy allocations to macro and multi-strategy managers

Fixed income was the only strategy that saw a net increase in assets (US$170 million) during the month

1 Based on 65% of the funds reporting their January 2009 returns as at 18 February 2009.2 Estimate based on 65% of AuM reported, and subject to a final revision towards mid-March.


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4 >>> January 2009 Asset Flows Update

This article is brought to you by

In terms of strategic mandates, long/short equities lost in excess of US$30 billion in redemptions, although losses acrossthe strategy were limited to US$1.5 billion as shorts across equities helped offset a large portion of losses sufferedthrough long exposure. CTAs, despite a good run in recent months, saw a US$9 billion decline in assets (US$600 millionof which was due to losses) as a further decline in commodity prices, among other factors, triggered redemptions from the

strategy. Macro and multi-strategy managers, however, saw performance-based increases of nearly US$2 billion each,which went some way in offsetting a portion of the decline in assets caused by redemptions (US$5.8 billion and US$10.7billion respectively).

Figure 3: Jan-2009 Asset Flow Estimates by Strategy Employed

January marked the sixth consecutive month of redemptions from the hedge fund industry, with over US$360 billion of net

outflows seen since August 2008. We expect to see more redemptions over the coming months owing to the followingfactors:

a) Economic uncertainty across underlying marketsb) Continued risk aversion among investorsc) A redemption notification period of (or exceeding) one month for a majority of the funds, hence a lag of a month or

more between redemptions being filed and them completely taking effectd) Institutional investors tending to shore up their balance sheets for the quarter ending March 2009, hence withdrawing

their investments

However, we also expect some fresh allocations into hedge funds, and foresee gradual inflows to surpass redemptionsover the first half of 2009. This is primarily because the bulk of the panic-driven redemptions have subsided, and alsobecause we expect investors to turn to hedge funds for absolute risk-adjusted returns and for their ability to consistently

outperform their long-only counterparts (the Eurekahedge Long-only Absolute Return Fund Index shed 3.3% in January,while hedge funds finished in the black).


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5 >>> January 2009 Hedge Fund Performance Commentary

The Eurekahedge Report February 2009

JANUARY 2009 HEDGE FUND PERFORMANCE COMMENTARY

Introduction

Hedge funds started the year with notable outperformance and loss mitigation, as the Eurekahedge Hedge Fund Indexrose 0.2%

1despite the MSCI World and Dow Jones-AIG Commodity indices losing 8.9% and 5.4% respectively through

January. This performance was achieved against the backdrop of persistent concerns on the health of the financial sectorand discouraging earnings reports for 2008, which also went some way in triggering further redemptions of US$77 billionfrom the industry during the month.

In terms of regional investment mandates, Latin America and North America finished the month with healthy returnsaveraging 1.6% and 1.2% respectively, with managers in both markets making gains from equities, shorting energy-related commodities and from pair trades in currencies. The MSCI EM Latin America Index finished the month flat (-0.3%), while the North American index lost 8% for the month.

Other mandates namely, Europe (including Eastern Europe & Russia), Japan and Asia ex-Japan saw hedge funds

finishing the month in negative territory, partly owing to the sharp equity market declines in their respective regions, on theback of unfavourable macroeconomic factors, among other factors.

The chart below shows the current month, previous month and 2008 returns across broad regional mandates.

Eurekahedge Performance Indices Regions

Global Market Review

Global equity markets closed lower in January, with most major indices falling in excess of 5% during the month.Continued evidence of a deepening recession, coupled with mixed reactions about the US economic stimulus plan wereamong the factors responsible for the drawdowns. Furthermore, discouraging macroeconomic news including declininggrowth, rising unemployment, shrinking consumer demand and falling exports, coupled with grim near-term economicoutlooks also took a toll on equities across the board. In the US, the S&P 500 lost 8.6%, while MSCIs European andAsian indices fell 11.3% and 6.3% respectively.

In the fixed income space, treasuries slid lower on the back of falling demand, with longer term bonds falling more thantheir shorter termed counterparts; yields on the US 90-day T-bill rose 10 bps, while those on the US 10-year T-notefinished the month 60 bps higher. The credit space, however, saw some improvement in the high yield market, whichrecorded an increase of 5.8%

2during the month.

1Based on 61% of the funds reporting their January 2009 returns as at 17 February 2009.

2As tracked by the JP Morgan Global High Yield Index.


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In the currency markets, lower yielding currencies like the US dollar and the Japanese yen saw strong appreciation amidrenewed risk aversion among investors. Furthermore, a rate cut by the ECB coupled with weakening of the regionseconomy saw the euro finish the month 9% and 9.2% lower against the US dollar and the yen respectively.

The commodity markets saw mixed movements in January, with energy prices falling on concerns on declining demand

and growing inventories; crude oil fell another 6.5% on a monthly basis. Precious metals, however, rose into the monthwith gold up 5% owing to lower interest rates across the board, coupled with a flight to quality among investors.

The chart below shows the current month, previous month, and 2008 returns across the various strategic mandates.

Eurekahedge Performance Indices Strategies

Strategic Performance

A) Arbitrage and Relative ValueThe Eurekahedge Arbitrage Hedge Fund Index rose a healthy 1.5% in January, with North American allocationscontributing the most (2%). Managers of the strategy largely benefited from improvement in the convertible market, whichdespite still being cheaply priced, saw a healthy rally during the first half of the month as investors either bought into themarket or held on to their holdings.

European managers were up 0.8%, with systematic trades in the equity markets faring positively, while Asian allocationsended the month flat.

Relative value players ended the month with an average loss of 0.9%, with North American managers posting losses of1.9%. Managers with an equity focus (with the exception of those with a short-bias) had a difficult month owing to a sharpdecline across equities in the region; the MSCI North America Index lost 8% for the month. European managers,however, were up 0.8%, benefiting from some pair trades across regional equities during the month.


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Arbitrage and Relative Value (Jan-09 and 2008 Returns)

B) Long/Short Equities and Event DrivenLong/short managers registered varied returns across different regions, but fared impressively on a relative basis giventhe sharp declines in most major equity markets during January. The Eurekahedge Long/Short Equities Hedge FundIndex lost 0.3% (yet outperforming the MSCI World Index by 8.6%), with European and Asian managers dragging theaverage down.

Japanese managers recorded the largest losses averaging 1.6%, against a decline of 7.6% in the Topix. Long exposureto the financial and real estate sectors proved loss making, while investments in small caps helped offset some losses;the TSE Mothers index which tracks small-caps, finished the month in positive territory.

Asia ex-Japan investing funds were down 1% on average; allocations to Greater China, Korea and Australia/New Zealandfinished the month flat to negative but in the range of -1% to 0.2%, but losses from exposure to India (-3.4%) broughtdown the regions average return. This was mainly because of an accounting scandal at one of Indias leading informationtechnology companies, which was brought to light in early January. This took a toll on investor confidence, bringing thecountrys equity index down by 16% intra-month (from its monthly peak to its trough).

In Europe, hedge fund allocations to Eastern Europe & Russia (-8.5%) suffered large losses as falling oil prices andliquidity concerns, among other factors, put downward pressure on the regions equity markets; the MSCI Eastern EuropeIndex ended the month down 15.7%. Other Europe-investing managers recorded mixed returns, as long positions provedloss making on the whole, while shorts fetched gains; the FTSE and the DAX shed 6.4% and 9.8% respectively, owing tofurther deterioration of the European economy.

Latin American (1.1%) and North American (1%) managers turned in strong returns. The former made gains from longexposure to select oil and mining companies (in Brazil) whose stocks rose partly due to an increase in lending capacityannounced by the Brazilian government; defensive sectors like telecom and utilities slid lower during the month, affordingmanagers with opportunities on the short side. Brazils IBOVESPA recorded a monthly gain of 4.7%. In North America,too, many defensive names ended the month lower, resulting in handsome gains from managers short books; the S&P500 lost 8.6%.


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Long/Short and Event Driven (Jan-09 and 2008 Returns)

Event-driven managers were up 1.8% on average; however, the average was positively skewed by a handful of NorthAmerican managers who recorded impressive returns in the range of 8-22% during the month. Among them weremanagers allocating to the energy sector who were afforded with lucrative shorting opportunities during the month, andsome focusing solely on Canadian equities; the MSCI Canada Index ended the month with a loss of 3.8%.

The Japanese index for the strategy, on the other hand, were down in excess of 5% on average, due to an activist fundhaving lost 13% on the month, and the small number of equally weighted funds in this index.

C) Fixed Income and Distressed DebtFixed income and distressed debt managers returned 0.8% and 0.3% respectively in January, with most of the gains for

both strategies coming from North American allocations (up 3.3% and 1.8% respectively).

Fixed income managers in North America made their gains from short positions across US treasuries which saw a notablecorrection amid declining demand. The yield on the US 30-year T-note recorded its biggest 2-week increase in over twodecades, while those on the 10-year note and the 90-day T-bill rose 60bps and 10bps respectively.

European fixed income managers posted an average loss of 2.4%, with three of four managers (out of six indexconstituent funds) that have reported till date, in negative territory. Allocations to Eastern European and Russian debtproved particularly loss making, and the marked weakening of the euro against the US dollar, partly due to a 50bps ratecut by the ECB, adversely impacted the performance of managers in the region. However, lower mortgage spreadsacross countries like Sweden and Denmark among others, worked to the benefit of some managers.

For Latin American fixed income managers (0.5%), long positions across Argentine bonds, among other things, fetched

gains as the markets reassessed the probability of defaults over the next year.

Distressed debt managers allocating to North America had a good month, benefiting from improvement across the highyield space; the JP Morgan Global High Yield Index, which tracks the performance of high yield corporate debt, rose inexcess of 5%.


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Fixed Income and Distressed Debt (Jan-09 and 2008 Returns)

D) CTA / Managed Futures and MacroThe Eurekahedge CTA/Managed Futures Hedge Fund Index rose 0.5% in January, as short exposure to energy-relatedcommodities and long bets in the precious metals space helped more than offset losses suffered by wrongly positionedmanagers.

CTA/Managed Futures and Macro (Jan-09 and 2008 Returns)

Macro managers (0.7%) fared better, with short equity and currency plays (such as long US dollar/short euro, for instance)contributing the most to their monthly gains. Not surprisingly, net-long positioned energy-dedicated funds, among others,finished the month down.

E) Multi-StrategyMulti-strategy managers had a good month; the Eurekahedge Multi-Strategy Hedge Fund Index rose 1% in January.While long exposure to equities resulted in losses across most regions, short equity positions coupled with trades across

the directionally trending currency and commodity markets, afforded managers with lucrative opportunities during themonth. Sharp appreciation in the US dollar against the euro, the British pound and the Australian dollar (among othercurrencies), were among the movements that worked in favour of North American managers, during the month. Most


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managers in the region had a good month, but the regions index rose 4.1% owing to double-digit returns realised bysome constituent funds. Most other regional mandates returned between -0.5% and 2% through January.

Multi-Strategy (Jan-09 and 2008 Returns)

In Closing

January came across as a good month on the whole as far as hedge fund performance is concerned, as most strategiesended the month in the black, despite harsh movements across the underlying markets. The month also witnessed US$6billion of fresh inflows from investors which come across as an encouraging sign though the inflows were more thanoffset by redemptions of US$77 billion.

Our outlook on hedge fund performance remains positive for the months to come. We expect equities to still be volatileand range-bound over the near term, and work in favour of managers employing short-term trading strategies. Directionalstrategies like CTA and macro will continue to benefit from trends across the currency and commodity markets, as theyhave over the past year. And lastly, we expect to see a gradual decline in redemptions over the coming months, therebypermitting managers to reduce their cash levels and increase their exposure to the markets, potentially resulting in higherreturns.

We expect to continue seeing fund closures in the near term, as a number of managers whose funds are below their highwater marks are unable to charge performance fees, rendering the funds unprofitable. Additionally, dwindling assetsresulting in lower management fees, make it harder to meet operating costs. However, we should also see a number offund start-ups in the months to come, given the large number of finance professionals and investment bankers movingout of their jobs (whether voluntarily or otherwise); a key decided factor on this front would be whether or not they areable to raise capital in the near future.


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11 >>> 2008 Key Trends in Global Hedge Funds


2008 KEY TRENDS IN GLOBAL HEDGE FUNDS

Introduction

After a very strong 2007, hedge funds faced a challenging year in 2008 (particularly the latter half) in the face of highvolatility, collapsing banks, drying up liquidity, heightened investor risk aversion and severe redemption pressures.Against this backdrop, hedge funds had their worst year on record with the Eurekahedge Hedge Fund Index ending theyear down 12.5%

1.

The tumultuous year witnessed the industry shrinking to 8,471 funds, managing US$1.49 trillion in assets as at end-2008,down from 8,642 hedge funds with assets under management (AuM) of US$1.89 trillion as at end-2007. Interestingly, thenumber of funds fell by a mere 2% in contrast to an over 20% fall in assets. This difference can be explained by bothlosses suffered by managers, as well as significant redemptions across the board with strategies like long/short equitiesseeing net outflows of 20%; net redemptions across the industry amounted to US$200 billion throughout the year. Despitethis notable decline, the industry still stands 50% stronger than it was five years ago, in terms of the number of funds, witha two-fold increase in assets.

Figure 1: Industry Growth over the Years

In the write-up that follows, we attempt a closer look at some of the trends shaping the structure and size of the globalhedge fund space in recent months, relying on data culled from the Eurekahedge Global Hedge Fund Database withextensive information on 7,500

2single manager funds. The report is split into two broad sections the first whichexamines the current structure of the industry, highlighting any significant changes over recent years, while the secondsection takes on an analysis of fund performance.

Industry Size and Structure

Fund SizeTo start with, we look at how the structure of the industry has changed over recent years in terms of fund sizes. To thisend we analysed three breakdowns of funds by different size ranges as at end-2008, 2007 and 2003.

1The previous worst year being 2002, up 7.27%.

2Including 484 long-only absolute return funds and 1,905 obsolete funds.


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Figure 2: Hedge Fund Population by Fund Sizes as at Dec-03 (in US$m)



An examination of the above three charts throws up some interesting observations:

1) The percentage of funds with over US$200 million in assets rose from 14% to 23% between 2003 and 2007, but fellsharply to 15% by the end of 2008. This decline between 2007 and 2008 can be explained by the losses suffered bymanagers, which brought down the assets of funds, coupled with redemptions which led to a decrease in fund sizesacross the board.

2) Similarly, funds making up the smallest range (up to US$20 million in assets) considered in this evaluation fell from

39% in 2003 to 28% in 2007, and then rose again to 35% by the end of 2008, further reiterated the above point.

Investment StrategyIn terms of strategic mandates, 2008 saw the largest decline in the market share of long/short equity managers; the


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Eurekahedge Long/Short Equities Hedge Fund Index registered a record loss of 21% for the year. These losses, largelyowing to sharp declines across global equity markets (MSCI World Index shed 42% in 2008), led to large scaleredemptions (net outflows of US$141 billion through 2008) across funds of the strategy, which further contributed to thedecline in their market share in terms of assets through 2008.

CTA/managed futures managers, on the other hand, saw a remarkable increase in their share of the pie (with assets atUS$180 billion, up from US$160 billion as at the end of 2007) through 2008, being the only hedge fund strategy to postdouble-digit gains during the year; the Eurekahedge CTA/Managed Futures Hedge Fund Index advanced a solid 17% in2008. Managers of the strategy made healthy gains from exploiting directional trends in the currency and commoditymarkets during the year. Furthermore, CTAs saw relatively lower redemptions through 2008, which further helpedincrease their share of the pie.

Some other strategies like event-driven and multi-strategy also saw an increase in market share during the year.However, their increase can be explained more by the fact that their assets fell at a lower rate than those of the industry,than by them having seen an increase in assets or impressive returns during the year. Figures 5 and 6 below show thechanges in the strategic-mix of the industry over recent years.

Figure 5: Strategic-mix of the Hedge Fund Industry (by Assets) in 2007

Figure 6: Strategic-mix of the Hedge Fund Industry (by Assets) in 2008

Geographic MandateWe have put together a similar breakdown for broad investment regions across the industry to understand how themarket share of each has changed, both during 2008 and over preceding years. Figure 7 indicates a marked decline (inassets) in the share of North American managers over the years an outcome of other regions having gained popularityamongst hedge fund managers and investors.

However, 2008 witnessed a considerable increase in the share of North American managers, despite a decline of overUS$200 billion in the regions hedge fund space during the year. This increase was mainly a result of a corresponding(and relatively larger) decrease in the shares of all other regions; worse-than-anticipated equity market declines (amongother things), particularly across the emerging markets, took a heavy toll on the performance of managers, thereby also


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triggering large scale redemptions from hedge funds allocating to these regions. In terms of returns too, North Americanmanagers (-11%

3) were among the least negative performers in 2008, resulting in the least redemptions (in percentage

terms) in the region.

Japan, on the other hand, has seen its share decline since end-2005, when it made up 2.7% of the industry. This decline

mirrored the end of the bull-run in the countrys equity markets, partly owing to which, hedge funds in the region haveregistered three consecutive years of negative returns. Poor performance, both on a relative and absolute basis, in thecountry led investors to reallocate their assets across other more profitable regions like the rest of Asia, particularly indeveloping markets like China and India for instance, with the expectation of superior risk-adjusted returns. Assets inJapanese hedge funds, after increasing US$200 million in 2006, fell by US$18 billion to US$16 billion at the end of 2008.

Figure 7: Change in the Geographic Mix of the Hedge Fund Industry (by Assets)

Emerging markets like Latin America and Asia ex-Japan saw a steady increase in their market shares up to 2007; theshare of Asia ex-Japan nearly doubled while that of Latin America tripled over the past five years. This was becauseinvestors and managers with broader geographical mandates increased their exposure to emerging market funds andequities across such markets respectively to benefit from their growth; the MSCI Emerging Markets Index recorded a 34%5-year annualised return up to end-2007. However, a dramatic sell-off across equities in these regions through 2008,amid slowing exports, drastic swings in commodity prices, and a general increase in investor risk aversion led to theoutflow of money from emerging markets, and resulted in a decline in the regions shares during the year; the MSCIEmerging Market Index shed 54% in 2008.

Manager Location and Fund Domicile

Figure 8 provides a snapshot4

of the hedge fund population broken down by the head office locations of managers. Aquick glance at the chart suggests the US to be home to nearly half of the hedge funds, with the UK being a distantsecond, accounting for a fifth of the population. Interestingly, the two countries house close to 70% of the hedge fundpopulation, but account for over four-fifths of the assets invested into the industry globally. This suggests that funds basedin the US and the UK generally tend to be larger, on average, than funds based in other parts of the world like Asia orLatin America, primarily because a) the majority of the investors are based in these countries, and b) hedge fundsbecame common in these countries long before they did in Asia and other parts of the world.

Figure 9 illustrates a breakdown of hedge fund assets by the head office locations of managers.

3Based on the Eurekahedge North American Hedge Fund Index.

4Based on data contained in the Eurekahedge Global Hedge Fund Database.


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Figure 8: By Fund Population

Figure 9: By Assets

In a similar fashion, we have also put together breakdowns of the fund population separately for onshore and offshorefunds by fund domicile. This is mainly to look into which jurisdictions are more popular than others in terms ofregulations and tax benefits to funds and investors, Figures 10 and 11 illustrate the breakdown of onshore and offshorefunds respectively by their domiciles.

Figure 10: Breakdown of Hedge Funds by Domicile Onshore Funds


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Figure 11: Breakdown of Hedge Funds by Domicile Offshore Funds

Industry Performance

Some of the structural trends reviewed above indicate the industry to have shrunk both in terms of the number of fundsand assets, owing to performance losses, redemptions and the resultant fund closures (Eurekahedge has data on over500 funds that have confirmed their closure since the start of 2008). That said, we now look at the performance ofmanagers during 2008 and over previous years, to understand the regions and strategies that have performed better thanothers and briefly analyse the reasons.

This analysis is based on the returns of 2,4465

funds, and only takes into account funds which have been in operation forthe entire 3-year period ending December-2008. Additionally, we have excluded onshore Latin American funds from thisanalysis, since most of them are based in Brazil and are denominated in the Brazilian real the marked appreciation of

which against the US dollar, tends to greatly positively skew their returns thereby leading to an unfair comparison.

Strategy-wise Returns

Figure 12 illustrates the average strategy-wise 36-month annualised returns and the risk-adjusted returns (Sharpe ratio6)

of different hedge fund strategies, as well those of other investment vehicles like long-only absolute return funds andfunds of hedge funds. This is mainly to understand how each of the strategies performed during recent years when themarkets saw both strong rallies as well as the worst corrections in recent history. Furthermore, this analysis is aimed atunderstanding how each of the aforementioned types of investment vehicles fare in different market conditions, and whichof them proves to be the most favourable investments in terms of risk-adjusted returns.

Among hedge funds, CTA/managed futures managers have undoubtedly fared the best (annualised 13%) over the period

in question, with macro managers (annualised 9.3%) being a distant second. Managers of both these strategies madehealthy gains in 2008, being the only strategies to finish the year positive; gains were realised from exploiting movementsacross the directionally trending currency and commodity markets through most of the year.

Most other strategies had a rough year amid record volatility, sharp sell-offs across equities and other asset classes,heightened investor risk aversion and the consequent redemptions (particularly after the collapse of Lehman brothers inSeptember). Furthermore, redemption pressures forced some funds to sell their illiquid portfolios of real estate and privateequity holdings at the prevalent low market prices, which further worsened their performance, and hence triggered furtherredemptions. For instance, long/short managers record losses of 21% negated most of their preceding years gains.

5Including hedge funds, funds of funds and long-only absolute return funds.

6Calculated using the riskfree rate of return at 4%.


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Figure 12: 36-Month Annualised Returns and Risk-Adjusted Returns by Investment Strategy

Figure 13: Annual Returns by Investment Strategy

Figure 13, which shows the annual returns for the last three years, suggests that although long-only absolute return fundsrecorded the largest losses over a 3-year period, they were among the best performers in 2006 and 2007; however,needless to mention, they were also the worst performers in 2008 when the underlying equity markets tumbled. Thereason behind the behaviour of their returns is that long-only managers provide high beta, resulting in impressive gainsduring rallying marketsbut worse-than-average losses during market downturns. This pattern of returns also exhibits highvolatility, especially over a period that sees a bull run followed by a bear market or vice versa, resulting in discouragingrisk-adjusted returns by managers of the strategy (as seen in Figure 12). It should be noted, however, that even duringmarket downturns, long-only absolute return managers tend to outperform traditional mutual funds, since the former areincentivised the same as hedge funds, getting paid through performance as opposed to pure asset growth.

Funds of funds were also in negative territory over the past three years, after their double-digit gains in two consecutiveyears were more than offset by losses averaging 19.4% in 2008. These losses can be attributed primarily to a) Thelower net-of-fee returns, owing to the double-layer of fees funds of funds charge (fees they charge directly for their


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services and fees they pay hedge funds that they invest into, both of which are deducted from the returns to theinvestors); and (b) Funds of funds were also victims of redemption pressure, forcing them to liquidate positions in bothpoor performing as well asadmirably performing hedge funds in order to raise cash for both the short and longer term.

In terms of hedge fund strategies, both CTA/managed futures and macro managers saw positive returns for each of the

last three years, benefiting from directional movements in the underlying markets. Arbitrage and relative value managerssaw healthy returns over the preceding two years and were among those that registered the least losses in 2008; highvolatility across the underlying market through 2008 and the resulting mispricing of securities afforded them with someopportunities to offset a portion of their losses suffered from other allocations through the year.

Similarly, Figures 12 and 13 also show that most hedge fund strategies performed well in 2006 and 2007 amid rallyingmarkets, record inflows and strong risk appetites among investors, but saw most of their gains being eroded last yearwhen the markets went south, liquidity contracted and risk appetites declined drastically.

Region-wise Returns

It is important to note, at the outset, that we have clubbed single-country mandates into appropriate broader mandates

for example, we have included Greater China, Taiwan, Korea and India-dedicated funds into Asia ex-Japan for thesake of simplicity in analysing the data. Similarly, as per classifications in the Eurekahedge databases, Europe alsoincludes funds allocating to Eastern Europe and Russia, Middle East and Africa.

Figure 14: 36-month Annualised Returns and Sharpe Ratio

Figure 15: Annual Returns by Investment Regions


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Looking at both the graphs above, one can easily infer that Japanese allocations fared the worst over the last three years.Not only did they post the worst 3-year cumulative returns, they were also the only ones to post negative returns for threeconsecutive years. However, interestingly, they were among the best performers (with the least losses) through 2008,although the Nikkei lost 42% during the year; gains from shorting financial and export related stocks, among other things,

helped managers offset a portion of the losses suffered from other allocations.

Most other broad mandates exhibited similar trends in their returns decent gains in 2007 and initially in 2008, followedby double-digit losses in the latter part of 2008. But over the 36-month period ended December-2008, geographicallydiversified Global managers posted the best returns (annualised 6.6%), partly owing to their flexibility of being able toadjust their allocations to different regions during times of economic uncertainty. Furthermore, global funds, which alsotend to be larger

7than those employing most other geographical mandates, were in a better position through 2008 to

meet redemptions requests, than most of their peers who had to sell holdings in order to raise cash.

In Closing

To sum up, 2008 was a historic year in the financial markets, as liquidity contracted, credit markets froze and investor riskappetites shrank dramatically. In addition, the year also witnessed the largest bankruptcy, the largest financial rescueplan and the largest ponzi scheme, which was brought to light as the year drew to a close.

Against this backdrop, the hedge fund industry saw well over 5008

fund closures through 2008 amidst a vicious cycle ofrisk aversion leading to redemptions, which in turn led to forced selling, causing further losses and hence furtherredemptions. Additionally, other factors like increased margin calls by prime brokers and counterparty exposure todistressed investment banks, also led to some forced selling and hence losses, particularly through the latter half of theyear. The resultant losses and redemptions eroded over US$450 billion from the industry during 2H2008, bringing theindustry down from US$1.95 trillion in June 2008, to US$1.47 billion as at year-end.

On a positive note, hedge funds largely outperformed the underlying markets. While the MSCI World Index lost over 40%through the year and the Reuters CRB Index was off nearly 40% from its mid-year high, the average hedge fund shed a

mere 13% through 2008. The industry also witnessed over 3809 new fund launches during the year, confirming thedemand for hedge funds and absolute returns.

7Eurekahedge Research shows that an average global fund has over US$300 million in assets, while all other funds have close to US$150 million on

average.8

Actual number of fund closures confirmed with Eurekahedge up to February 2009.9

Actual number of newly launched funds listed in the Eurekahedge databases as at February 2009.


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20 >>> Global Hedge Fund Top 10 Tables


* Based on 65% of the funds reporting their January 2009 returns as at 18 February 2009.** Only for funds with a minimum track record of 12 months.

GLOBAL HEDGE FUND TOP 10 TABLES

Forbes Futures 113.62 AIS Gold Fund LP 102.20

Kayne Anderson Midstream Energy Fund Ltd 27.79 Hamton I - Bond 004 Ltd 60.08

Financials Opportunity Fund 25.00 Knight Asia Property Fund 58.49

Pearlman CTA Silver Conservative Program 24.73 Stratton Street PPC Ltd Japan Synthetic Warrant Fun 50.57Kayne Anderson MLP Fund LP 21.90 Wessex Gold Fund - Class A 48.61

Osiris Investment Partners LP 21.49 PBK Capital Partners LP 47.66

AIS Gold Fund LP 21.41 INSCH Insight Ltd 47.32

Passport I LP - Rig Strategy 19.40 Osiris Investment Partners LP 46.87

Vltava Fund Sicav 18.59 Financials Opportunity Fund 45.16

Quantitative Global Fund - 3x 18.02 SAC Global Energy and Mining Fund 39.66

Borromeo Program 198.16 Elk River Master Fund Ltd 300.07

Global Wealth Class B 171.24 Edge Investment Management Ltd 257.12

Creststreet Alternative Energy Fund 143.09 Sparta Cclico 244.94

CAIM Premium Alpha I 140.64 Passport I LP - Global Strategy 232.63

Zentrender 136.16 Balestra Capital Partners LP 199.15

The 3% Return Per Quarter Program 134.50 HFH ShortPLUS Fund LP 191.33Bearing Fund LP 132.54 SYW LP 169.55

D'Best Futures Fund LP 126.76 Lionhart Aurora Fund SPC Ltd - Venture Segregated 161.51

Parizek Futures Program 120.75 Paulson Advantage Plus Ltd 158.56

Sparta Cclico 116.34 Everyoung Growth Fund 158.29

BlueGold Global Fund Inc 248.98 Salus Alpha Real Estate 0.28

Creststreet Alternative Energy Fund 158.68 Coast Enhanced Income Fund II Ltd 0.75

Zentrender 145.79 Dexia Money + Double Alpha 0.79

Sparta Cclico 117.55 WG Trading Company LP 0.91

CAIM Premium Alpha I 106.04 Dexia Index Arbitrage 1.03

Financials Opportunity Fund 85.98 Genesis Merchant Partners LP 1.04

The Ebullio Commodity Fund 82.98 Advis Macro FIM 1.25

Sparta Anti-Cclico 75.98 Centurion Credit Group International Ltd 1.28

Dynamo Cougar 70.70 Dexia Money + Emerging Arbitrage 1.38

Phalanx Japan-AustralAsia Multi-Strategy Fund 69.33 GAP Institucional 1.42

Genesis Merchant Partners LP 9.99 QM Multi-Strategy Fund - USD 69.24

Advis Macro FIM 9.14 GAP Hedge 35.13

HG DI 8.81 CMT Global Fund Limited 33.53

GAP Institucional 8.13 Tri Global FX Managed Account Program 30.88

NEO Multi Estrategia Fund 7.41 JGP Hedge FIF 28.23

Centurion Credit Group LLC 7.37 Fator Balanceado FIM 23.98

Centurion Credit Group International Ltd 6.63 Atico Hedge FIF 22.05

Creststreet Alternative Energy Fund 6.59 HG Allocation Managers 20.23

Quest Iporanga 15 FIM 6.57 KWK Partners LP 17.27

Fator Sigma Institucional FIM 5.79 Da Vinci Arbitrage Fund 16.50

January 2009 Return (%)* 3-month Returns (%)

Sharpe Ratio** Sortino Ratio**

Annualised Return (%)** Annualised Standard Deviation (%)**

2008 Returns (%) 2007 Return (%)


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Documents

09 Feb Eurekahedge Report