Hedge Funds Class
London February 2007
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February 9, 2007

SECTION 1
Class Agenda
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Agenda
♦ 9:00 - 10:30 Hedge Fund Basics Joe Troccolo
♦ 10:30 - 10:45 Coffee Break
♦ 10:45 - 12:15 Basics Continued Joe Troccolo
♦ 12:15 - 1:30 Lunch
♦ 1:30 - 2:15 Continued Joe Troccolo
♦ 2:15 – 3:00 Hedge Fund Services Tamera Hodges
♦ 3:00 - 3:15 Coffee Break
♦ 3:15 - 4:00 Fund of Funds Stuart Trueman
♦ 4:00 - 4:45 Hedge Funds & Corp Finance Laurent Charbonnier
♦ 4:45 - 5:00 Wrap-up / Optional Exam Joe Troccolo
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Hedge Funds
Joe Troccolo, Managing Director
Financial Markets Education
London, February 2007
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Table of contents
SECTION 1 Why Hedge Funds? 3
SECTION 2 Hedge Fund Strategies 28
SECTION 3 Equity Long/Short 31
SECTION 4 Equity Market Neutral 50
SECTION 5 Risk Arbitrage 60
SECTION 6 Global Macro 74
SECTION 7 LTCM: Case Study 89
SECTION 8 Appendix: Pick Your Fund 100
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1

Financial Markets Education
Financial Markets Education provides instruction on all
aspects of banking and finance for UBS employees and
for our top clients.
Europe United States APAC
Joe Troccolo Joe Bonin Onn Chan
London Stamford Singapore
+44 20 7568 0735 + 1 203 719 6507 +65 6836 5708
joe.troccolo@ubs.com joe.bonin@ubs.com onn.chan@ubs.com
Walter Braegger Kai-Hing Lum
London
Tokyo
+44 20 7568 8938
+81 352 08 6494
walter.braegger@ubs.com
kai-hing.lum@ubs.com
Spencer Morris
London
+44 20 7568 8939
spencer.morris@ubs.com
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SECTION 1
Why Hedge Funds?
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Comparison to traditional strategies
Traditional Fund Hedge Fund
Return ♦ Relative to benchmark ♦ Absolute, positive returns
Characteristics (capture asset class (exploit investment
premium) opportunity)
♦ Return volatility tracks ♦ Return volatility dictated by
market volatility manager’s approach to risk
Risk Attributes ♦ Market risk ♦ Liquidity risk
♦ Credit risk ♦ Mark to market risk
♦ Change of strategy risk
♦ Human risk
Transparency ♦ High ♦ Low
Regulation ♦ High ♦ Low
Performance ♦ Market performance ♦ Sustainable investment skills
Driver ♦ Asset allocation decision ♦ Sound risk management
Fee Structure ♦ Management Fee < 1% ♦ Management Fee (1-2%)
♦ Incentive Fee (10-25%)
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Investing
♦ Asset Allocation is the most important decision
♦ Avoiding “negative compounding” is crucial
♦ Hedge Funds offer the possibility of
– Returns uncorrelated to other asset classes
– Low probability of negative returns
– Neither is guaranteed!
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5

Negative Compounding
♦ Nearly impossible to over-emphasise the importance of avoiding losses
♦ Investment 1: +6.00% per annum every year for 20 years
– £100 invested for 20 years =
♦ Investment 2: +18% per annum for 10 years, -6.00% per annum for 10 years
– £100 pounds invested for 20 years =
♦ Put another way – if you have in a 20 year period, 10 years of 6% losses, how
much profit do you need in the other 10 to make it up so that you average
+6% for the full 20 years?
– 6.00% losses for 10 years plus ____% gains for 10 years = +6.00% gains for 20 years
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A Picture Worth 1000 Words!
Hedge Fund Index vs SP Total Return
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
SPTR
CS/TRE
0.00%
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
53
55
57
1
3
5
7
9
-10.00%
-20.00%
-30.00%
-40.00%
-50.00%
Nov 2000 - Sep 2005
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Average returns and variability: Jan 1994 to May
2003
30
25
Annualised Average Return (%)
20
CSFB/Tremont Index
15
Distressed Securities Global Macro
Equity Market
10 Neutral Convertible Arbitrage Long/Short Equity
Merger Arbitrage
S&P 500
Managed Futures
5 FIA Event-Driven
1 Year T-Bill
Emerging Markets
0
0 2 4 6 8 10 12 14 16 18 20
Risk
Annualised Standard Deviation (%)
Source: CSFB/Tremont Advisers
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