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Lombard Odier Investment Managers

Citywire Pan European Fund Selectors Forum Zurich

Lombard Odier Investment ManagersMay 2010

LOF – Alternative Beta

A robust, transparent and liquid way to access hedge fund -like returns

Jérôme Teiletche, PhD, Head of Systematic & FoHF Portfolio ConstructionMay 2010

Please see important information at the end of the document

LOIM · May 2010 · 4

Contents

1. Opportunity

2. Investment thesis

3. Key investment beliefs

4. LO Funds – Alternative Beta

5. Key characteristics

6. Appendix


LOIM · May 2010 · 6

1. Opportunity


LOIM · May 2010 · 7

Opportunity

• Our proposal is based on key differentiating elements, including• Lead manager is one of the pioneers of the hedge fund

replication industry with a strong track record in managing hedge fund replication products since 2007

• Robust investment and replication process at the forefront of technology

• Close and complementary interaction with our hedge fund analysts and investment team

• It is delivered in a UCITS-III format

(i) targeting returns superior to investable hedge fund indices, with 90% correlation to the flagship HFRI Index and

(ii) offering daily liquidity

Lombard Odier has developed a robust, transparent and liquid way to access hedge fund-like returns


LOIM · May 2010 · 8

2. Investment thesis


LOIM · May 2010 · 9

Market context

• Hedge fund market is characterised by an important dispersion of performance returns and discrimination is necessary to select the best hedge funds

• But at the same time, it is interesting to invest in the hedge fund market average because:

• It offers an attractive risk-return profile over time• Hedge fund return average can now be delivered in a

passive, cheap, liquid and transparent way through large and diversified hedge fund exposure

Exposure to the hedge fund market average can be attractive to investors


LOIM · May 2010 · 10

Passive investment alternatives

Two classes of passive products enable investors to get exposure to the hedge funds’ average returns

Large and diversified investable hedge fund indices

Replication funds(*)

Description Investment vehicle managed by an index provider or managed account platform investing in the underlying hedge funds

Investment vehicle replicating the average risk-return profile of hedge funds by systematically investing in liquid instruments only

Format ETFs, UCITS III, managed accounts UCITS III

Valuation Daily to Weekly Daily

Liquidity Monthly, weekly with possible gating Daily

Transparency Average High

Fees Index fees + underlying managers fees Fixed at fund level

Capacity constraints Medium Low

Access to closed funds None Indirect exposure

Minimum size threshold Low Low

Manager risk Low to medium None

(*) Based on LOF – Alternative Beta


LOIM · May 2010 · 11

Risk/return profile

Replication delivers an attractive risk / return profile relative to investable hedge fund indices

Hedge Fund replication index is constructed as an equally weighted average of the largest providers of hedge fund replication vehicles (see hedgefundreplication.com) The HFR Index is a trademark of Hedge Fund Research, Inc. (“HFR”) and has been licensed for use by Lombard Odier in connection with its Hedge Fund Index

Replication Fund. HFR makes no recommendation or representation regarding the Hedge Fund Index Replication Fund or the advisability of investing in it HFRX Global Index is an investable index published daily with performance finalized at year-end with roughly 250 components HFRI Fund of Funds Composite is non-investable, representing the monthly returns of over 800 funds of hedge fund

Monthly cumulated returns (%)

Since Nov 2004 Hedge Fund replication index

HFRI FOF HFRX Global Index

Annualized Return 4.69% 3.67% 1.33%

Annualized Volatility 6.11% 6.53% 7.22%

-10%

0%

10%

20%

30%

40%

50%

10.0

412

.04

02.0

504

.05

06.0

508

.05

10.0

512

.05

02.0

604

.06

06.0

608

.06

10.0

612

.06

02.0

704

.07

06.0

708

.07

10.0

712

.07

02.0

804

.08

06.0

808

.08

10.0

812

.08

02.0

904

.09

06.0

908

.09

10.0

912

.09

02.1

004

.10

Hedge Fund Replication Index

HFRI FOF

HFRX Global Index


LOIM · May 2010 · 12

Replication aim and methodology

Replication aims to replicate the risk-return profile of a diversified portfolio of hedge funds without investing in hedge funds

Bottom-up approach

• Systematic and quantitative replication of trading strategies employed by hedge funds

• Example: foreign exchange and volatility carry trade

Top-down approach

• Aim to replicate hedge fund returns using statistical techniques based on observable market factors, representative of hedge fund global exposure

• Suitable for broad index replication of hedge fund returns • Usually complex and not transparent replication

• In contradiction with delivering broad hedge fund returns


LOIM · May 2010 · 13

Top-down replication approach

A top-down approach is suitable to broad hedge fund replication

• Choice of an index, typically monthly non-investable

• Choice of market factors based on liquidity and explanatory power

• Assessment of weight allocation to selected market factors based on systematic econometric model

• Weights allocation can be long or short

• Weights are re-estimated every month, at the time of release of the index

• Investments liquid instruments only (index futures, ETFs, options)

1. Index to replicate and investment universe

2. Estimation method 3. Rebalancing

Rationale • Diversified index to limit influence of manager idiosyncratic risk, thereby facilitating the replication of hedge fund average returns

• Market factors are representative of hedge funds’ global exposure: equity; bonds; foreign exchange; commodities; volatility

Advantages • Transparency, liquidity and low costs• Ability to replicate non-investable indices

Considerations • Time lag and stability of returns


LOIM · May 2010 · 14

Replication facilitated by diversification

Diversification limits the influence of manager idiosyncratic risk, making the replication of hedge fund average returns possible

Source : Lombard Odier

• This graph represents the average correlation between the returns of increasingly large portfolios of single hedge funds and returns of a back-tested version of Lombard Odier top-down replication model

• The sample of single hedge funds is randomly drawn from HFR database (Active funds as of January 2010 denominated in USD), excluding funds of hedge fund and the period Jan. 2001-Jan. 2010

• Number of simulations is fixed to 5'000 for each hedge fund portfolio size threshold

Average correlation between returns of hedge fund portfolios and replication

0%

20%

40%

60%

80%

100%

1 2 3 4 5 10 15 20 30 40 50 60 70 80 90 100 200 300 400 500

Average correlation (%) over period Jan 2001- Jan 2010

Number of hedge funds


LOIM · May 2010 · 15

Stability of replication model

Changes in allocation to selected market factors tend to be limited. Thisfacilitates the prediction and stability of the replication model and limits the time lag effect

-20%

-10%

0%

10%

20%

S&P 500 Russel 2000

MSCI EFEA

MSCI EM

UST 10 years

EUR/USD JPY/USD VIX GSCI

Range of month-on-month changes corresponding to 50% of the data Min, max, median

Changes in the allocation to market factors based on replication of a broad hedge fund index (*)

(*) Analysis from January 2001 and January 2010 using Lombard Odier top-down replication model applied to the non-investable HFRI Fund Weighted Composite (see description in appendix)


LOIM · May 2010 · 16

3. Key investment beliefs


LOIM · May 2010 · 17

Key investment beliefs

1

2

3

We believe in the “replicability” of hedge fund returns on the premise that hedge funds’ composition and allocation are on average relatively stable over time

We view alternative beta replication as a complementary rather than as replacement solution to investing in hedge funds

Our approach is systematic and transparent, using liquid and listed investment instruments only and managing cash in a conservative and passive way

Our quantitative approach allows us to replicate the returns of a diversified portfolio of hedge funds with all the advantages of a UCITS III vehicle

We believe in the differentiating quality of our proposition, combining our expertise in hedge fund investment management with our quantitative modeling skills

4


LOIM · May 2010 · 18

4. LO Funds – Alternative Beta


LOIM · May 2010 · 19

Overview

Investment universe

• Listed futures and options selected for their replication quality and liquidity

• Cash invested in short-term government bonds

Investment approach

• Top-down econometric multi-factor replication approach

Objective • Returns superior to investable hedge fund indices (HFRX)• 90% correlation to the HFRI Index and 3-5 % Tracking Error

for monthly returns over a 24 month rolling period

Key portfolio characteristics

• 10-15 market factors• Weights rebalanced on monthly basis

The LOF – Alternative Beta is a hedge fund replication UCITS-III vehicle offering daily liquidity


LOIM · May 2010 · 20

Index selection

We put the bar high by choosing to track the top performing non-investable HFRI index in order to foster the likelihood of outperforming our benchmark (HFRX)

• HFRI Fund Weighted Composite is non-investable. It represents the monthly returns of a large portfolio of HF (~ 2000). It is published every month• HFRX is an investable index published daily with performance finalized at year-end with roughly 250 components

The non-investable index (HFRI) outperforms the investable index (HFRX) for two main reasons :• It includes closed funds • It is based on a voluntary mechanism leading to survivorship and self selection biases

Monthly cumulated returns (%)

HFRX Global IndexHFRI Fund Weighted Composite

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2003 2004 2005 2006 2007 2008 2009 2010


LOIM · May 2010 · 21

Performance

LOF – Alternative Beta performance is in line with its target

(30.04.2010)

HFRI HFRXLOF – Alternative

Beta

Tracking error 2.3% 3.4% -

Correlation 91.2% 81.7% -

Volatility 5.4% 3.4% 5.5%

Returns (%)Since

02.2009Year-to-Date

2010

LOF – Alternative Beta (I USD) 15.61% 1.24%

HFRX Global Hedge Fund 15.35% 2.45%

HFRI Weighted Composite 26.17% 3.79%

Daily cumulated returns (100-based)(*)

(*) Monthly returns only for HFRI Weighted Composite

LOF – Alternative Beta (I USD)HFRX Global Hedge FundHFRI Fund Weighted Composite

95

100

105

110

115

120

125

130

02.0

9

03.0

9

03.0

9

04.0

9

04.0

9

05.0

9

05.0

9

06.0

9

06.0

9

07.0

9

07.0

9

07.0

9

08.0

9

08.0

9

09.0

9

09.0

9

10.0

9

10.0

9

11.0

9

11.0

9

12.0

9

12.0

9

01.1

0

01.1

0

01.1

0

02.1

0

02.1

0

03.1

0

03.1

0

04.1

0

04.1

0


LOIM · May 2010 · 22

Market factors

Market factors are selected on the basis of their explanatory power and liquidity

Liquidity filter:

• Listed futures, ETFs

• Listed derivatives

Statistical analysis

• Linear regression (24 month rolling)

• “out-of-sample” tracking error minimization(*)

• Maximum drawdown; Turning points

Fundamental analysis

• Leveraging hedge fund selection team expertise and experience

Market Factor universe screening (10-15) market factors

9 market factors currently:

• S&P 500

• MSCI EAFE

• Russell 2000

• MSCI Emerging

• US Treasuries 10-years

• EUR / USD

• JPY/USD

• GSCI

• VIX

(*) Annualized tracking-error taking into account the lag between the observation of the performance of hedge funds and the implementation of positions


LOIM · May 2010 · 23

Estimation method and rebalancing

The allocations are revised each month at index publication date, based on a regression model

Trade-off • Being dynamic enough in order to reproduce the hedge fund return average• Being robust enough in order to minimize out-of-sample tracking error

Tracked index returns Factors returns

Optimization model

Monthly allocation


LOIM · May 2010 · 24

Example of allocation to market factors(30.04.2010)

Monthly allocations (%)

-0.66%

-0.04%

-2.12%

-11.33%

18.35%

11.34%

8.62%

6.15%

-15%

-10%

-5%

0%

5%

10%

15%

20%

S&P 500 VIX US Treasuries

10 years

Russell 2000 JPY/USD GSCI MSCI EAFE MSCI Emerging Markets


LOIM · May 2010 · 25

Team

LOF – Alternative Beta Lead Portfolio manager

Quant specialists• Alexandre Deruaz• Laurent Joué• Arnaud Néris• Marc Pellaud• Guillaume Sabouret

Hedge fund analysts• Frédéric Bezolles• Thomas Chladek• Michael Clark• Hugues Girard• Brian Hayes

Jérôme Teiletche

Marc Pellaud

Portfolio Manager

Laurent Joué

Portfolio Manager

• Lead manager is one of the pioneers of the hedge fund replication industry (first replicants launched in 2007)

• He has been managing successfully hedge fund replication products since 2007 and modelling hedge fund risk/returns since 2003

• He is also a regular publisher in leading academic reviews(*)

• Organization structure fosters a strong collaboration between the quantitative specialists and the hedge fund analyst team

(*): Journal of Portfolio Management; Journal of Empirical Finance; Journal of Alternative Instruments; Journal of Asset Management


LOIM · May 2010 · 26

Risk metrics

Category Metric / Guideline Typical range / Measures / Limit

Concentration • Number of futures contracts 10 - 15

Asset classes • Equities • Bonds • Foreign exchange• Commodities• Volatility

---

+ / - 10 % specific to the GSCI index-

Geography • International and diversified indices -

Model The model and the process are monitored on an on-going basis by both quantitative and hedge fund teams

• Model risk is monitored through continuous analysis of tracking-error and research• Systematic algorithm (no judgmental bias) • Portfolio's market risk can be easily

estimated by any risk system

VaR Limits • Absolute VaR on 99% confidence interval and holding period of 20 days

20% max of net asset value

Liquidity • Daily (highly liquid instruments) -


LOIM · May 2010 · 27

5. Key characteristics


LOIM · May 2010 · 28

LOF – Alternative Beta – Why invest?

Why broad hedge fund returns?

• Broad exposure to hedge fund market offers an attractive risk-return profile over time• Diversification and stability of the allocation mix facilitates replication and delivery of hedge

fund-like returns

Why replication? • Replication delivers hedge fund average in a passive, cheap and liquid way• Replication eliminates any selection risk as no selection of managers is necessary • In addition, replication offers:

• Stricter defined passive and transparent investment rules• Indirect exposure to closed funds

Why the fund "LO Funds – Alternative Beta"?

• Strong investment team: lead manager is one of the pioneers of the replication industry• Robust replication methodology at the forefront of technology, based on top-down approach• Transparent investment process and fund positions• Close and complementary interaction with our hedge fund analysts and investment team• Solid track-record: performance and replication results in line with objectives • Benefits from UCITS III rules: liquidity, diversification, transparency


LOIM · May 2010 · 29

LO Funds – Alternative Beta

Legal structure SICAV (Luxemburg)

Custodian bank CACEIS Bank Luxemburg SA

NAV calculating agency

Fastnet Luxemburg

Liquidity Daily

Subscriptions / redemption details

NAV Calculation : NSubscription deadline : 3 pm Luxembourg (T - 1)Payment : T + 3Europe / Asia / Americas price : T Close / T Close / T CloseFrequency : Daily

Launch date USD: 27.02.2009 / EUR: 21.09.2009 / CHF: 11.09.2009

Reference currency USD / EUR / CHF

Fee / performance fee

Class I : mgt 0.75 % p.a. Class P : mgt 0.75 % p.a. - dist 0.75 % p.a. No performance fee

ISIN number Class IA : LU0428700214 (USD) ; LU0428700131 (EUR) ; LU0428700057 (CHF)Class PA : LU0428700990 (USD) ; LU0428700727 (EUR) ; LU0428700644 (CHF)

Telekurs Class IA : 010166707 (USD) ; 010166800 (EUR) ; 010167560 (CHF)Class PA : 010166597 (USD) ; 010166740 (EUR) ; 010166908 (CHF)


LOIM · May 2010 · 30

6. Appendix


LOIM · May 2010 · 31

Track record since inception(30.04.2010)

LOF – Alternative Beta (I USD) 0.24% 2.85% 5.11% -0.13% 1.73% 0.09% 1.33% -0.23% 1.35% 1.13% -1.42% 1.39%

HFRX Global Hedge Fund -0.03% 1.61% 3.15% 0.04% 1.59% 1.25% 2.22% -0.06% 1.66% 0.55% -0.02% 0.26%

HFRI Fund Weighted Composite 1.66% 3.60% 5.15% 0.25% 2.50% 1.30% 2.79% -0.20% 1.52% 1.28% -0.76% 0.66%

HFRI Funds of Funds 0.03% 1.05% 3.32% 0.38% 1.54% 1.09% 1.74% -0.09% 0.80% 0.76% -0.36% 0.13%

Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10

1.42%

1.38%

2.57%

1.72%

Mar 10 Apr 10

-0.13%

0.80%

1.29%

0.98%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

03.09 04.09 05.09 06.09 07.09 08.09 09.09 10.09 11.09 12.09 01.10 02.10 03.10 04.10

LOF – Alternative Beta (I USD)HFRX Global Hedge FundHFRI Fund Weighted CompositeHFRI Funds of Funds

Since 02.09 Year-to-Date 2010

15.61% 1.24%

15.35% 2.45%

26.17% 3.79%

13.85% 2.48%

Returns (%)


LOIM · May 2010 · 32

Overview of HFR indices : main differences

HFRI Fund Weighted Composite HFRI Fund of Funds Composite HFRX Global Hedge Fund Index

Inception date January 1990 January 1990 April 2003 (live)

Weighting Equal-weighted Equal-weighted Representative Optimization

Performance Time Series Available

Monthly Monthly Daily

Index calculated Three times per month Three times per month Daily

Index rebalanced Monthly Monthly Quarterly

Index performance finalized Trailing four months of performance are subject to revision

Trailing four months of performance are subject to revision

Performance finalized at month-end

Criteria for fund inclusion Listing in HFR Database; Reports monthly net of all fees monthly performance and assets in USD

Listing in HFR Database; Reports monthly net of all fees monthly performance and assets in USD

In addition to meeting HFRI criteria, fund must be open to new transparent investment and meet track record and minimum asset size requirements as listed below

Minimum Asset Size and/or Track Record for fund inclusion

$ 50 Million minimum or > 12-Month Track Record

$ 50 Million minimum or > 12-Month Track Record

$ 50 Million and 24-Month Track Record (typical)

Investable No No HFR Asset Management, LLC constructs investable products that track HFRX

Number of components Over 2000 Over 800 Over 250 in total constituent universe

Currency USD USD USDSource : HFR, https://www.hedgefundresearch.com/index.php ?fuse=indices-faq&1246877203.


LOIM · May 2010 · 33

HFRI index breakdown by strategy(28.02.2010)

Equity Hedge47.9%

Event Driven9.8%

Macro24.0%

Relative Value18.4%

5.4

%

13.

3%

16.

9%

1.9

%

3.3

%

3.0

%

3.2

%

0.9

%

0.5

%

0.4

%

3.3

%

0.9

%

0.6

%

0.4

%

3.8

%

1.1

%

0.8

%

0.3

%

0.4

%

1.9

%

0.6

%

2.3

%

4.3

%

3.4

%

8.9

%

3.3

%

1.8

%

3.0

%

0.9

%

5.2

%

2.6

%

1.0

%

0.6

%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Equ

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Fun

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LOIM · May 2010 · 34

HFRI index historical performance(31.03.2010)

HFRI Fund Weighted Composite (monthly NAV since January 1990)

0

2000

4000

6000

8000

10000

12000

dec.

89

dec.

90

dec.

91

dec.

92

dec.

93

dec.

94

dec.

95

dec.

96

dec.

97

dec.

98

dec.

99

dec.

00

dec.

01

dec.

02

dec.

03

dec.

04

dec.

05

dec.

06

dec.

07

dec.

08

dec.

09


LOIM · May 2010 · 35

HFRX index historical performance(31.03.2010)

1000

1050

1100

1150

1200

1250

1300

1350

1400

1450

Mar

.200

3

Mar

.200

4

Mar

.200

5

Mar

.200

6

Mar

.200

7

Mar

.200

8

Mar

.200

9

Mar

.201

0

HFRX Global Hedge Fund Index (daily NAV since April 2003)


LOIM · May 2010 · 36

Hedge fund risk premium and market factors

Hedge fund risk premia Examples of representative market factors (futures, options, ETFs)

Core equity premia • S&P 500; Dow Jones Industrial

Small cap bias • Russell 2000

Growth versus Value premia • NASDAQ 100

Rest of the industrial world premia • MSCI EAFE

Emerging premia • MSCI Emerging

Fixed income carry • US T-note 10-years

Term premia • US T-note 10-years vs US T-note 2-years

Credit premia • Iboxx High Yield; Iboxx Investment Grade

Currencies carry • EUR/USD; JPY/USD; USD/basket of currencies (DXY)

Commodities premia • GSCI; ETFs Commodities (Agriculture, Industrial metals, Gold, Oil)

Volatility premia • VIX


LOIM · May 2010 · 37

Investment team

Jérôme Teiletche, Lead portfolio manager10 years of financial market experienceJerôme Teiletche started his professional career in 1999 at the French Ministry of Finance as an economist. In 2001 he joined IXIS CIB as a senior quantitative analyst in charge of asset allocation, more specifically advising various institutional clients (pension funds, insurance companies, banks). From 2006 to mid-2008, he worked for Société Générale Alternative Investments where he was in charge of designing quantitative processes and hedge fund structuring. He joined Lombard Odier during the summer of 2008, where he is responsible for Systematic Investments Strategies. Jerôme holds a PhD in economics with a specialization in financial econometrics and is the author of numerous professional and academic publications Author of numerous professional and academic publications

Laurent Joué, Portfolio manager4 years of financial market experienceLaurent Joué started is professional career in 2005 at Géa in Paris, the ADI-LODH joint-venture specialized in Hedge Fund multi-management. He worked as a middle officer and assistant portfolio manager. He joined Lombard Odier in 2008 as a junior portfolio manager in the Fund of Hedge Funds team. In 2009 he joined the Systematic Investments Strategies Team as a quantitative analyst / portfolio manager. Laurent is graduated from the French business school l’Institut Supérieur Européen de Gestion.

Marc Pellaud, Portfolio manager3 years of investment experienceMarc Pellaud joined the Systematic Investments Strategies Team of Lombard Odier in 2007 as a quantitative analyst / portfolio manager after obtaining his Ph.D. in Numerical Ecology from the Swiss Institute of Technology – Lausanne


LOIM · May 2010 · 38

Lombard Odier Investment Managers

Lombard Odier Investment ManagersMay 2010


LOIM · May 2010 · 42

Contents

1. Introduction to LOIM

2. Our investment approach

3. Our alpha engines

4. Our asset allocation group

5. Your contacts


LOIM · May 2010 · 44

1. Introduction to LOIM


LOIM · May 2010 · 45

LOIM in a nutshell

Here to stay • More than 200 years of experience• Private ownership by 8 managing partners with unlimited liability• One of the largest “true” private bank in Europe

A real player in wealth management

• EUR 104 bn of AuM with EUR 27 bn for institutional clients• Global footprint with 23 offices in 18 countries• Nearly 1'900 professionals with 260 dedicated to the institutional

business• Pure player – no other business – thus no conflicts of interests

Close to our clients

• Long term relationships as the DNA inherited from our private banking culture

• Focused on delivery customized solutions• One core principle: “managing clients’ money as if it was ours”

Strong belief in our model

• Unique model at the heart of the convergence between traditional and alternative asset management

• Partners personally invested in our products

(31.03.2010)


LOIM · May 2010 · 46

2. Our investment approach


LOIM · May 2010 · 47

1

4

2

3

Our core investment beliefs

We have 4 key investment beliefs that have deeply influenced our organization

We are a fundamental active asset manager and we believe in the virtue of isolating alpha from beta generation

We believe that multi-asset portfolios need to be constructed using a risk-balanced approach and not the traditional capital allocation approach

We rely on 3 key ingredients for our alpha generation: (i) specialization of portfolio managers in narrowly defined areas of expertise, (ii) unconstrained long/short portfolio management and (iii) tight risk framework

We believe in a disciplined approach for all our processes and in providing maximum transparency across all our portfolios


LOIM · May 2010 · 48

Manufacturing of our single-asset solutions

Our single-asset solutions are directly provided by our alpha generation teams or by our asset allocation group when constructed using portable alpha technology

ALPHA ENGINES

Passive portfolios

1

DIRECTIONAL

BETA REPLICATION

Alpha portfolios

1

2

3

ABSOLUTE RETURN

• 1798 Relative Value• 1798 Convertible Opp.

ASSET ALLOCATION GROUP

Portable alpha portfolios

1

1

2

Traditional portfolios

1+1

• LOF Convertible Bond• LOF EU Small & Mid

• LOF Investment Grade• LOF US Equities

• LOF EMU Equities Tracker• LOF Swiss Equities Tracker


LOIM · May 2010 · 49

Manufacturing of our multi-asset solutions

We rely on the same approach to construct both traditional and alternative multi-asset portfolios Risk-driven portfolio construction

ALPHA ENGINESBETA REPLICATION

TRADITIONAL(VDA+Tactical alpha) ALTERNATIVE

Risk contrib. #1 Risk. contrib. #2 Risk. contrib. #3

• Balanced mandates :benchmarked or absolute return

• Balanced mandates• Multiadvisers FoHF

ASSET ALLOCATION GROUP


LOIM · May 2010 · 50

Our fund range

• Tactical • Alpha Strategies

Multi-asset

A B S O L U T E R E T U R N D I R E C T I O N A L

• Alternative Beta• Global Trading

Dynamic beta multi-asset

• Infrastructure• Private equity

Private equity

OTHERS

• Commodities• Gold Expertise

Commodities

• Distr. EU• Distr. US• Healthcare L/S• Convert. Arb.• Relative Value

Equities

• Alto• Generation• Selective• Global Equity L/S

Global

• Energy• Golden Age• Clean Tech• Technology• Life Sciences• Nutrition

Themes

• Systematic Europe• All caps• S&M• CH large• CH S&M

Europe

• Global• EMEA• Great. China• Pacific Rim

Emerging

• Global • Asia• Recovery

Convertibles

EQUITIES

• All caps• S&M

Japan

• CHF• EUR

Aggregate

• EUR 1-3 yrs• CHF 1-3 yrs• EUR all mat.• USD all mat.• EUR inflation• Systematic World

Government

• Global Hard• Global LC• EU convergence

Emerging

• EUR• USD• CHF• GBP

Money market

• Optimum Trend• Care

Fixed income

FIXED INCOME & CURRENCY

• EUR• EUR+• CHF• USD, EUR

short term

Credit


LOIM · May 2010 · 51

+ 14% in 2009

USD 207m

Performance of selected products

Our investment model enables us to provide products with attractive performance

A B S O L U T E R E T U R N D I R E C T I O N A L

+ 50.4% in 2009 + 20% since inc. (2) 15 positive months in a

row

1798 RELATIVE VALUE

1st decile 3y & 5y+ 18.0% in 2009+ 28.8% over 5y

CONVERTIBLE

ALTERNATIVE BETA

of + 50.4% in 2009+ 80% in 2009+ 36.8% over 3yTop quartile 3y

WORLD GOLD EXPERTISE

1st decile 2009+ 23.8% in 2009 of + 16.3% in 2009

ALPHA JAPAN

Global convertible

Japan equities all caps

Hedge funds replicator

Gold mine equities

Multi-strategy

of + 1.4% in 2009+ 23.2% in 2009

CONVERTIBLE ASIA

USD 110m

USD 136m

USD 4'040m USD 697mUSD 246m

+ 34.9% since 12.2008No negative month

1798 CONVERTIBLE OPPORTUNITY

Convert arbitrage USD 47m

+ 8.6% p.a. with 8.7% vol. since inc. (3)

+ 12.5% in 2009

GLOBAL EQUITY L/S

Fund of hedge funds

+ 40.3% in 2009

EUROZONE S&MC

Europe ex-UK small and mid USD 214m USD 167m

+ 13.2% since inc.(1)

CONVERTIBLE RECOVERY

High-yieldconvertible USD 209m

of + 2.4% in 2009+ 17.7% in 20092nd quartile 2009

INVESTMENT GRADE

EUR credit USD 540m

+ 138% in 2009

1798 CREDIT OPPORTUNITY

High yield and distressed

Asiaconvertible

* AuM and performance as of end year 2009 (1) Inception date: 13.07.2009 (2) Inception date: 15.11.2007 (3) Inception date: 31.12.1995


LOIM · May 2010 · 52

3. Our alpha engines


LOIM · May 2010 · 53

1

4

2

3

6

5

Key principles of our alpha engines

Our alpha engines are specialized teams to generate a wide set of uncorrelated returns under strict risk oversight

Specialists – The teams are composed of specialist managers each focused on a particular alpha source under the leadership of experienced CIOs with a proven track record

Strict risk oversight – We apply the same systematic and real-time independent risk monitoring across all strategies

Unconstrained – Managers use robust long/short asset management tools, techniques and instruments

Accountability – Each manager is accountable for his/her own P&L within the well-defined limits of his/her assigned risk budget

Selected partnerships – We also team up with a few leading-edge third-party managers for niche strategies we do not manage ourselves

Transparency – We offer to our investors full transparency on underlying positions as well as on investment thesis


LOIM · May 2010 · 54

Investment strategies

EQUITIESA. Nahas

FIXED INCOME & CURRENCIESS. Monier

Equity long/short strategies

Global healthcare

Global industrials

Global TMT

Emerging markets Europe

US consumer

Non-US financials

Equity high conviction long-only strategies

Global Europe

Technology & CleanTechHealthcareEnergy

Convertible strategiesConvertible long-only Convertible arbitrage

Distressed/credit strategiesDistressed EU Distressed US

US financials

Merger arbitrage

Nutrition

Emerging market equity strategies

Themes/sectors

We are offering today more than 30 performing and uncorrelated investment strategies

Switzerland

Macro strategies

Inflation

Volatility

Sectors

EMEA

Rates & currencies

Asia

LATAM

Developed Markets Emerging Markets

Quantitative strategies

Trend following Mean reverting

Carry

Credit strategies

Top-down Bottom-up


LOIM · May 2010 · 55

Experienced senior investment professionals

Aziz Nahas, Chief Investment Officer EquitiesExperience2007 to date Lombard Odier Investment Managers2006-2007 Dillon Read Capital Management, Global Head of Equities2005-2006 JP Morgan, Global Head Proprietary Equities1996-2004 Credit Suisse First Boston, Head of Equity Derivatives1994-1996 Banque Paribas, Convertible Trader

Stéphane Monier, Chief Investment Officer Fixed Income & CurrenciesExperience2009 to date Lombard Odier Investment Managers2006-2009 Fortis Investments, Global Head of Fixed Income

& Currencies1998-2006 Abu Dhabi Investment Authority, Head of Fixed Income

& Currencies1991-1998 JP Morgan, Fixed Income Portfolio Manager

Stephen Grobman, Chief Risk OfficerExperience2008 to date Lombard Odier Investment Managers2008 Diamond Lake Investment Group, Senior Risk Officer2004-2008 Société Générale, Aarxis Capital, Principal2003-2004 Forstmann Asset Management, Head of Risk & Research2000-2003 EIM, Senior Hedge Fund Analyst1997-2000 Gollyhott Trading, System Trader, Risk Manager1992-1997 Moore Capital, System Trader Risk Manager

Education• Thesis on stochastic volatility, ESCP• Law Degree, Sorbonne

Education• Chartered Financial Analyst (CFA)• M.S. in International Finance, HEC• Engineering degree, Institut National

Agronomique

Education• B.A. Physics, Binghampton University


LOIM · May 2010 · 56

Our risk framework

We are using leading-edge tools and techniques coming from the proprietary trading and hedge fund world to manage risks carefully

% $ Event Code % $ Event CodePortfolio Loss LimitsYearly Loss 8.4% 6,216,000 S 12.0% 8,880,000 H1 Yearly loss as a % of AAUMMonthly Loss 4.2% 3,108,000 S 6% 4,440,000 H1 Monthly loss as a % of AAUMDaily Loss 1.8% 1,295,000 S 3% 1,850,000 S Daily Loss as a % of AAUMLoss per Name 1.8% 1,295,000 S 3% 1,850,000 H1 Largest loss in a name, where a position exists as a % of AAUM

Portfolio ExposuresNMV Long 35.0% 25,900,000 S 50% 37,000,000 H2 Net

‐market

‐value Long of Equities/ Beta

NMV Short 14.0% 10,360,000 S 20% 14,800,000 H2 Net

‐market

‐value Short of Equities/ Beta

GMV 140.0% 103,600,000 S 200% 148,000,000 H2 Gross

‐market

‐value of Equities

NMVo 0.0% - S 0% - H2 NMV of FI positions (CB is min of bond floor and price)GMVo 0.0% - S 0% - H2 GMV of Fixed Income positions

Portfolio Value at RiskVaR 1.1% 777,000 S 2% 1,110,000 H2 Standard Deviation, 1 day, 20 day look

‐back

Portfolio SensitivitiesTheta 0.2% 129,500 S 0% 185,000 H2 P&L from a 1 day of decay (Theta) as a % of AAUMVega 0.7% 518,000 S 1% 740,000 H2 P&L from a 10 volatility point (Vega) up move as a % of AAUMDV01 0.0% - S 0% - H2 P&L from a 100bps up move in yield as a % of AAUMCS01 0.0% - S 0% - H2 P%L from a 100 bps widening of credit as a % of AAUMDelta

‐10% 3.5% 2,590,000 S 5% 3,700,000 H2 P&L from a 10% decrease in the S&P 500, using beta

Stress 3.5% 2,590,000 S 5% 3,700,000 H2 Sum of Theta, Vega, DV01, CS01 and Delta

‐10%

Single Position LiquidityLargest Equity Long 7.0% 5,180,000 S 10% 7,400,000 H2 Largest equity long position as % of AAUM excluding IndexesLargest Equity Short 5.3% 3,885,000 SLargest Fixed Income 0.0% - SOutstanding Shares 1.4% 1,036,000 SDays Ownership 3.5 4 S

Sector 14.0% 10,360,000 SIndustry 7.0% 5,180,000 SSingle Issuer 5.6% 4,144,000 SETFs 10.5% 7,770,000 S

Soft Stop Limits Hard Stop Limits

Risk charts

Major factor analysis Live risk tool

Risk mandate / limits


LOIM · May 2010 · 57

Illustration of our alpha generation capabilities

* Inception date : 15.11.2007 ** Estimated

(31.01.2009)

Our flagship absolute return fund is combining 13 strategies within the equities alpha engine and has delivered highly attractive results

* Inception date : 15.11.2007 ** Estimated performance for the A-1 USD (new issue) share class, net of fees

Performance since inception*

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

2007 - - - - - - - - - - - -6.20 -6.20

2008 -1.34 1.29 0.56 1.74 0.48 -0.85 -0.52 0.67 -6.32 -7.75 -4.46 0.71 -15.19

2009 4.74 0.81 5.90 4.28 7.55 2.46 2.94 4.07 5.82 0.39 1.01 1.77 50.31

2010 0.98** 0.98

Performance since inception – monthly figures in %*

Annualized return since inception + 9.3%

Annualized volatility since inception 13.1%

Maximum drawdown - 21.0%

Annual Sharpe Ratio (RF=1.5%) 0.6

% positive months 73%

Normal monthly VaR 95% - 5.4%

Bear beta to S&P500 Index 0.3

Bull beta to S&P500 Index 0.4


LOIM · May 2010 · 58

4. Our asset allocation group


LOIM · May 2010 · 59

Asset allocation group

ASSET ALLOCATIONJ. L. Nakamura

Our asset allocation group uses a risk-balanced asset allocation process to combine alpha and beta in a liquid and effective format

BETA REPLICATIONRISK-BALANCED PORTFOLIO CONSTRUCTION TACTICAL ASSET ALLOCATION

Equity replication

Fixed income replication

Alternativereplication

Judgmental macro

Long term carry

Flow / sentiment analysis

Technical analysis

Tradi-tional

Alter-native


Multi-beta


LOIM · May 2010 · 60

Experienced senior investment professionals

Christophe Morel, PhD, Head of Tactical Asset AllocationExperience2008 to date Lombard Odier Investment Managers2006-2008 Natixis AM, Head of TAA & Overlay2004-2006 French Pension Reserve Fund, Head of TAA2001-2004 Ixis Asset Management, Strategist1998-2001 Ministry of Finance

Jérôme Teiletche, PhD, Head of Systematic InvestmentsExperience2008 to date Lombard Odier Investment Managers2006-2008 SGAM, Quantitative Alternative Investments2001-2008 IXIS CIB, Quantitative Analyst1999-2001 Ministry of Finance, Economist

Education• M.A. in Political Sciences, ENA • Lecturer in Economics at Sciences Po Paris

and ENA

Education• M.A. in econometrics & PhD in Finance• Affiliated researcher in Finance, Dauphine

University, Paris

Education• PhD in econometrics• Author of numerous professional and academic

publications

Jean-Louis Nakamura, Chief Investment Officer Asset Allocation GroupExperience2008 to date Lombard Odier Investment Managers2007-2008 French Civil Service Pension Plan, CEO2002-2007 French Pension Reserve Fund, CIO1999-2001 Council of the European Union, Counselor1995-1999 Ministry of Finance, Head of Int'l forecasts


LOIM · May 2010 · 61

Key principles of our portfolio construction

Risk-balanced portfolio construction is an innovative approach going beyond traditional risk budgeting

3

2

1

4

5

Risk-balanced among risk factors – Without top down convictions, we prefer an agnostic, risk-balanced portfolio, because risk diversification is the only "free lunch" in finance. To express specific top down convictions, we can tilt the risk-balanced portfolio

Risk analysis and budgeting – Risk-balanced asset allocation starts with a clear identification of risk factors and the definition of a target risk profile

Risk weights – Asset class weight is a misleading metric in asset allocation, marginal risk contribution is the right metric

Risk-balanced in time – We continuously monitor the risk profile of our portfolios and we rebalance them to stay in line with our target risk profile taking into account the evolution of the risk environment

Universal – We apply the same methodology to build single-asset or multi-asset portfolios as well as traditional and alternative portfolios


LOIM · May 2010 · 62

Risk-balanced portfolio construction

The notions of risk and balancing are at the heart of our risk-balanced portfolio construction approach

* Equal Weight Risk Contribution ('EWRC') ** Risk contribution structure implied by client's strategic asset allocation


Volatility-Driven Allocation ('VDA')**

Risk-balanced portfolio (‘EWRC’)*


2 main types of target risk profiles

No conviction

Top-down convictions

1. Identify risk factors

2. Determine target risk profile

4. Rebalance to target risk profile

3. Monitor risk factors drift


LOIM · May 2010 · 63

Risk-balanced portfolio (‘EWRC’)

Capital weight

Risk contribution Risk contribution

Capital weight

Traditional 50/50 portfolio Risk-balanced portfolio

10%

90%

Fixed income Equities

50% 50%


50% 50%


80%

30%


120%

Without top down convictions, we prefer an agnostic, risk-balanced portfolio, because risk diversification is the only "free lunch" in finance

* Equal Weight Risk Contribution ('EWRC')


LOIM · May 2010 · 64

Performance: Volatility-Driven Allocation (VDA)

VDA is our proprietary risk-driven portfolio construction approach for traditional global balanced portfolios to reduce drawdown

Example of portfolio: 30% equities / 70% interest rates

No Rebalancing (Buy-and-hold) Monthly Rebalancing Lombard Odier VDA Process

Average annual returnAverage ex-post volatilityMaximal drawdownSharp ratioPeakValleyEnd

2.2 %3.8 %12.6%0.20

29.10.200709.03.200919.10..2009

3.1 %5.3 %

15.7 %0.31

29.10.200709.03.200929.09..2009

4.0 %3.9 %

10.9 %0.66

29.10.200709.03.200919.10.2009

90

100

110

120

130

140

150

09-00 09-01 09-02 09-03 09-04 09-05 09-06 09-07 09-08 09-09No rebalancing (Buy and hold) Monthly rebalancing Lombard Odier VDA process


LOIM · May 2010 · 65

5. Your contacts


LOIM · May 2010 · 66

Your contact people

You can contact our relationship managers for more information

Géraud [email protected]+33 1 49 26 46 73

[email protected]+33 1 49 26 46 21

France

Alessandro [email protected] +41 44 214 1496

Heidi [email protected] +41 44 214 1470

Italy

Corrine [email protected]+44 20 3206 6155

United Kingdom

Emmanuel [email protected]+41 22 709 9339

Asia

Olivier [email protected]+41 22 709 9454

Claudia [email protected]+41 44 214 1379

Consultants

Uwe [email protected] +49 211 3003 306

Frank [email protected] +49 211 3003 305

Germany

Ernst [email protected]+31 20 522 0508

Andre Van [email protected]+31 20 522 0526

Benelux

Heide Jimenez Dá[email protected] +41 22 709 2762

Thomas [email protected] +41 44 214 1429

SwissInstitutions

Patrick Hjelmè[email protected] +41 44 214 1567

Scandinavia

Stefan [email protected] +41 44 214 1454

Frank [email protected] +41 44 214 1428

SwissFund Sales

David [email protected] +34 91 790 2882

Spain

Tom [email protected]+1 212 295 6169

US


LOIM · May 2010 · 67

Important information

This document reflects the opinion of Lombard Odier Darier Hentsch & Cie or an entity of the Group (hereinafter "Lombard Odier") as of the date of issue. It constitutes research, which is intended primarily for internal staff, but may be distributed upon request to certain institutional or sophisticated private investors for authorized purposes only. This document is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor it is directed to any person or entity to which it would be unlawful to direct such a document.

This document is furnished for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security. The opinions herein do not take into account individual clients’ circumstances, objectives, or needs. Each client must make his own independent decisions regarding any securities or financial instruments mentioned herein. Before entering into any transaction, each client is urged to consider the suitability of the transaction to his particular circumstances and to independently review, with professional advisors as necessary, the specific risks incurred, in particular at the financial, regulatory, and tax levels.

The information and analysis contained herein have been based on sources believed to be reliable. However, Lombard Odier does not guarantee their timeliness, accuracy, or completeness, nor does it accept any liability for any loss or damage resulting from their use. All information and opinions as well as the prices indicated are subject to change without notice. Past performance is no guarantee of current or future returns and the client may consequently get back less than he invested. Performance data of mutual funds do not take into account the commissions and fees charged on the issue and redemption of the units or shares.

The investments mentioned herein may be subject to risks that are difficult to quantify and to integrate into the valuation of investments. Generally speaking, products with a high degree of risk, such as derivatives, structured products, or alternative/non-traditional investments (Hedge Funds, private equity, real estate funds, etc.) are suitable only for sophisticated investors who are capable of understanding and assuming the risks involved. Upon request, Lombard Odier is available to provide more information to clients on risks associated with specific investments.

If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any and all of the subject securities or issuers. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. The description of the rating system used by Lombard Odier for its financial research is available on www.lombardodier.com.

This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.

© 2010 Lombard Odier Darier Hentsch & Cie - all rights reserved.


LOIM · May 2010 · 68

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