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KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management

Page 2. Agenda. Why add hedge funds to a portfolio?Why take a portfolio approach?What are the merits of low volatility hedge funds?Is an equity investing framework useful?. Page 3. . What is a Hedge Fund?. Page 4. Description. What is a Hedge Fund?. Similar to mutual fundProfessionally man

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KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management

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    1. KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management

    2. Page 2 Agenda Why add hedge funds to a portfolio? Why take a portfolio approach? What are the merits of low volatility hedge funds? Is an equity investing framework useful?

    3. Page 3 What is a Hedge Fund?

    4. Page 4 Description Similar to mutual fund Professionally managed pool of assets Specified objectives Investors typically must be qualified or accredited Short positions/hedging allowed Leverage Position concentration Lower liquidity Trading strategy ? investment strategy

    5. Page 5 Hedge Fund Strategies Equity Long/Short Equity Market Neutral Dedicated Short Bias Emerging Markets Convertible Arbitrage Fixed Income Arbitrage Event Driven Merger Arbitrage Distressed Global Macro Managed Futures / CTA Multi-Strategy

    6. Page 6 Typical Hedge Fund Trade

    7. Page 7 Typical Hedge Fund Trading Model A convergence hypothesis underlies the trading model of most hedge fund managers Trading models are analogous to business models for private or public companies Evaluation of likelihood of success is similar: Focus on quality, track record of managers Ensure strategy is well articulated Look for sustainable competitive advantages

    8. Page 8 Why add Hedge Funds to a Portfolio?

    9. Page 9 Stability of Returns & Outperformance

    10. Page 10 High Return per Unit of Risk

    11. Page 11 Diversification Benefits I dont know how this really shows diversification benefits.I dont know how this really shows diversification benefits.

    12. Page 12 Drawdown & Recovery

    13. Page 13 The Need for a Portfolio Approach

    14. Page 14 Benefits of Portfolio Approach Daryl, keep the size and scaling for all histograms the same throughout the entire presentation. You will also need change slightly the Representative Canadian Hedge Fund; you can do this by simply moving some of the bars but keeping the general degree of dispersion the same. BCE Annualized Std Devn is 17.5% Representative Cdn Fund is 16.5% Vertex is 17.1%Daryl, keep the size and scaling for all histograms the same throughout the entire presentation. You will also need change slightly the Representative Canadian Hedge Fund; you can do this by simply moving some of the bars but keeping the general degree of dispersion the same. BCE Annualized Std Devn is 17.5% Representative Cdn Fund is 16.5% Vertex is 17.1%

    15. Page 15 Benefits of Portfolio Approach Daryl, keep the size and scaling for all histograms the same throughout the entire presentation. You will also need change slightly the Representative Canadian Hedge Fund; you can do this by simply moving some of the bars but keeping the general degree of dispersion the same. BCE Annualized Std Devn is 17.5% Representative Cdn Fund is 16.5% Vertex is 17.1%Daryl, keep the size and scaling for all histograms the same throughout the entire presentation. You will also need change slightly the Representative Canadian Hedge Fund; you can do this by simply moving some of the bars but keeping the general degree of dispersion the same. BCE Annualized Std Devn is 17.5% Representative Cdn Fund is 16.5% Vertex is 17.1%

    16. Page 16 Risk of One Stock vs One Hedge Fund Daryl, keep the size and scaling for all histograms the same throughout the entire presentation. You will also need change slightly the Representative Canadian Hedge Fund; you can do this by simply moving some of the bars but keeping the general degree of dispersion the same. BCE Annualized Std Devn is 17.5% Representative Cdn Fund is 16.5% Vertex is 17.1%Daryl, keep the size and scaling for all histograms the same throughout the entire presentation. You will also need change slightly the Representative Canadian Hedge Fund; you can do this by simply moving some of the bars but keeping the general degree of dispersion the same. BCE Annualized Std Devn is 17.5% Representative Cdn Fund is 16.5% Vertex is 17.1%

    17. Page 17 Risk of non-Blue Chip stocks Tremont Annualized Std. Devn is 7.74% S&P is 14.84% Tremont Annualized Std. Devn is 7.74% S&P is 14.84%

    18. Page 18 Risk of Hedge Fund Index vs Equity Index Tremont Annualized Std. Devn is 7.74% S&P is 14.84% Tremont Annualized Std. Devn is 7.74% S&P is 14.84%

    19. Page 19 Risk of Hedge Fund Index vs Equity Index Tremont Annualized Std. Devn is 7.74% S&P is 14.84% Tremont Annualized Std. Devn is 7.74% S&P is 14.84%

    20. Page 20 The Merits of Low Volatility Hedge Funds

    21. Page 21 Hedge Fund Strategy Risk Profiles Delete/move?Delete/move?

    22. Page 22 Hedge Fund Strategy Betas

    23. Page 23 Best Diversification includes Global HFs Globally $1.5 Trillion with 8,000 managers Canada approx. $60 Billion with 70+ managers (Canada Hedge Watch)

    24. Page 24 Applying an Equity Investing Framework to Hedge Funds

    25. Page 25 U.S. Value Stock Selection Process Quantitative Screens Price-to-book Price-to-earnings Dividend-Yield Create Short list Why is through Option there? Retitle as Investment process?Why is through Option there? Retitle as Investment process?

    26. Page 26 Hedge Fund Selection Process Quantitative Screens Understand drivers of returns Assessment of risks Consistency of results with stated strategy Quantitative fit with overall portfolio Why is through Option there? Retitle as Investment process?Why is through Option there? Retitle as Investment process?

    27. Page 27 Demands of Hedge Fund Investing

    28. Page 28 KCS Approach

    29. Page 29 Investment Strategy Based on 10 years Hedge Fund Investing experience AIMA Award-winning Research Proprietary Analytics Focus on risk reduction Objectives Low volatility Low correlations with traditional assets Tax-preferred deferred capital gains Equity-like returns with bond-like volatility Strategy Levered low-volatility

    30. Page 30 HF Strategy Risk Profiles & the ACRF

    31. Page 31 Performance + 15.7% for 2006 Ranked #1 Fund of Funds in 2006 on Canadian Hedge Watch

    32. Page 32

    33. Page 33 Questions and comments?

    34. Page 34 This presentation is confidential. The contents are not to be reproduced or distributed to the public or the press. Securities legislation may prohibit such distribution. This presentation is a summary only and should be used in conjunction with the detailed information in the Confidential Offering Memorandum. The information contained in this presentation is believed to be reliable, but is not guaranteed as to its accuracy or completeness. This presentation is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. No securities commission or similar regulatory authority has reviewed this document or has in any way passed on the merits of the securities describe and any representation to the contrary is an offence. Historical performance is not a guarantee future results. KCS Fund Strategies Inc. recommends consulting appropriate investment and financial advisors when considering any investment decision. KCS Fund Strategies Inc. 2150 555 West Hastings Street Vancouver, British Columbia V6B 4N6 Ph: 604-730-0729 x 225 www.kcsfunds.com

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