1. EFG Bank 18/F, International Commercial Centre, 1 Austin Road West, Kowloon, Hong Kong.
Tel: (852) 2298 3000 Fax: (852) 2298 3300
Hedge Funds
Various Strategies Explored
Richard Boutland ACA, CFA
richard.boutland@efgbank.com

2. 2
A brief background to hedge funds
1949 and Alfred W Jones
The types of trades utilized by hedge funds have been in existence for centuries (for example the first short selling
regulations were introduced in 1610 by the Amsterdam Stock Exchange), the first modern hedge fund is
generally considered to date from 1949.
The fund was created by Alfred Winslow Jones, a sociologist and freelance writer of magazine articles. In March 1949
he wrote an article for Fortune magazine called “Fashions in Forecasting” which reported on the technical
analysis employed by market forecasters. His research left him unconvinced of their ability to consistently
predict the direction of the market. This led to his thinking about ways in which a fund could keep its capital
fully invested while having a lower exposure to swings in the market.
Jones’s key insight was that a fund manager could combine two techniques to create a conservative investment
scheme. He used leverage to buy more shares, and used short selling to avoid market risk. He bought as many
stocks as he sold, so market-wide moves up or down would not affect the total value of such a portfolio.
Performance would therefore not be determined by the overall movement of the market but whether the
manager had picked the right stocks to buy and sell.
In 1949 he and four friends formed A.W. Jones & Co, a private partnership (thus avoiding the regulatory and
disclosure requirements of the Investment Company Act of 1940 by limiting itself to 99 partners). Jones chose
to take 20 percent of profits as compensation.

3. 3
A brief background to hedge funds - continued
1966 and ‘The Jones that nobody can keep up with’
Although a small number of similar funds were created in the following years, the ‘hedged fund’ industry remained
out of the public view until 1966 when Carol Loomis wrote an article called "The Jones Nobody Keeps Up
With." Published in Fortune, Loomis' article lionized Jones and his approach. The article's opening line
summarizes the results at A.W. Jones & Co.: "There are reasons to believe that the best professional money
manager of investors' money these days is a quiet-spoken seldom photographed man named Alfred Winslow
Jones." Coining the term 'hedge fund' to describe Jones' fund, it pointed out that his hedge fund had
outperformed the best mutual fund over the previous five years by 44 percent, despite its management-
incentive fee. On a 10-year basis, Mr. Jones's hedge fund had beaten the top performer Dreyfus Fund by 87
percent. Alfred Jones's investors lost money in only 3 of his 34 years. By contrast, the S&P500 had 9 down
years in during a similar period.
Although hedge funds have evolved greatly since 1949, the philosophy of minimizing risk to create an absolute return
remains central to the hedge fund industry.

4. 4
A brief background to hedge funds - continued
1966 and ‘The Jones that nobody can keep up with’
The 1966 article led to a flurry of interest in hedge funds and within the next three years at least 130 hedge funds were
started, including George Soros's Quantum Fund and Michael Steinhardt's Steinhardt Partners.
Jones’s original hedge fund is what is now termed an equity long/short fund, a hedge fund strategy that still remains
the most. In contrast, both Soros and Stenhardt followed investment styles that are now called ‘global macro’,
which means they aim to produce profits from major macro economic moves (such as currency, commodity
and inflation and interest movements) rather than picking good and bad stocks.
Global macro was the second major hedge fund investment style to evolve and has subsequently been followed by a
wide range of others, each with their own distinctive investment characteristics:
Breakdown of Industry AUM by Strategy
Macro
6%
Event-Driven
9%
Multi-Strategy
21%
Long-Short
Equities
35%
Fixed Income
6%
Relative
Value/Arbitrage
16%CTA
3%
Distressed Debt
4%
Source: EurekaHedge:
Data as at 31st December 2006

5. 5
Short selling
Source: www.telegraph.co.uk

6. 6
Main strategies – Equity long/short
Equity long/short
This is what most people recognize as a hedge fund. It involves buying long equities that are expected to
increase in value and selling short equities that are expected to decrease in value.
About 35% of all hedge funds are recognizable as equity long/short but they generally break into two
approaches:
Fundamental
A fundamental manager is the classic Warren Buffett type of investor. Carefully analyzing the inherent value
in an investment and then either buying it (going long) or going short (ie, borrowing the investment
and selling it into the market).
Quantative
A quantative manager is one who invests purely on the basis of the movement of a security or market. They
are looking for repeating patterns and invest accordingly.
They have little or no interest in understanding why the pattern occurs or in the fundamentals of the
underlying investment (in fact they often invest into indices). They are however very interested in how
reliably the pattern repeats and how durable it is.

7. 7
Performance:
Equity like performance during equity bull markets – which means that they have tended to have material
levels of equity market risk (ie, as a group they are not always hedged).
Sources: Bloomberg, Credit Suisse/Tremont Data period from 31 Dec 1993 to 30 Nov 2008
Equity long/short
Hedge Fund Index
Long-Short Equity
Hedge Funds
Global Equities
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
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
Credit Suisse/Tremont Hedge Fund Index Credit Suisse/Tremont HFI Long-Short Equity
MSCI AC World Index in USD

8. 8
Fundamental managers tend to differ from quantative managers in:
1. being more market directional,
2. having higher volatility,
3. being less liquid
However, they tend to be much less highly geared as they profit opportunities are ‘fatter’ and the scope for
leveraging is lower.
Leverage is the Achilles heel of investors as it forces them to sell when the market moves against them:
“ the greatest threats to wealth are liquor and leverage.“
Warren Buffett
Main strategies – Equity long/short

9. 9
Performance
1. Generally has been uncorrelated with equity markets.
2. Macro has been more volatile
3. CTA’s has tended to perform well when the markets suffer major dislocations (an analogy
with insurance brokers: they don’t suffer the loss, but everyone wants to buy insurance when
disaster strikes).
Sources: Bloomberg, Credit Suisse/Tremont Data period from 31 Dec 1993 to 30 Nov 2008
Main strategies – Macro and CTA
Global Equities
Credit Suisse/Tremont
HFI Managed Futures
Global Macro
0.50
1.50
2.50
3.50
4.50
5.50
6.50
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
MSCI AC World Index in USD Credit Suisse/Tremont HFI Managed Futures
Credit Suisse/Tremont HFI Global Macro

10. 10
Global Macro and Managed Futures
These two strategies are often considered complementary in that their investment characteristics can be
similar and the futures markets are strongly influenced by macro economic factors. Indeed many
macro managers will actively trade in the futures markets.
However they differ in the way that they invest – using the analogy from equity long/short above; Managed
Futures managers are ‘quantative macro’ and ‘global macro’ are ‘fundamental macro’
Global Macro
After equity long/short, the next major hedge fund strategy to evolve was global macro which started to
appear in the mid to late sixties. During the 1970’s and early 1980’s the poor performance of the
equity markets compared to the strong global macro economic changes benefited macro managers
compared to equity long/short ones. Macro managers grew quickly and became the dominant strategy
(estimated at 71% of hedge funds in 1990).
However the equity markets hit their lows in 1982 and have been on a long bull market since. At the same
time the macro economic environment became more placid and opportunities for macro managers
were reduced. They are now only a small proportion of hedge fund assets.
Marco managers have performed very well so far in 2008 (and performed well in 2007) and it is possible that
macro may be making a comeback.
Macro managers position their portfolios in the expectation of some macro- economic change. For example
they may believe that US interest rates will rise relative to European ones due to the differing levels of
growth and inflation in those economies. They will then look for investment vehicles that they can
combine together to capture profit from this change.
They’ll use whatever investment vehicle best fits their purpose – FX, equities, bonds and commodities can all
be utilized. They are therefore amongst the most opportunistic and dynamic managers.
Main strategies – Macro and CTA

11. 11
Managed Futures
Although (often called CTA’s Commodity Trading Advisors) futures markets have been around for centuries,
managed futures funds only started to appear in the late 1940’s. The ‘commodities’ name is somewhat
misleading as the nature of the trading does not give much economic exposure to the commodity
markets. Indeed as CTA’s trade in all futures markets much of what they do is in non-commodity (such
as financial and currency futures) markets.
They make money by being prepared to take either side of a futures contract whenever they see an
opportunity. They can therefore be viewed as providing temporary liquidity to the futures market and
making it more efficient.
They are very quantative in approach and utilize computer screening techniques to identify repeating patterns
within the futures markets. Managers that are completely driven by computer trading are termed
‘systematic’, those that involve human oversight are called ‘discretionary’
Main strategies – Macro and CTA

12. 12
Event driven
“We are ready for any unforeseen event that may or may not happen. “
Dan Quayle
These managers are investing on the expectation of a catalyst occurring that will realize profits for them.
There are two main types:
1. Merger Arbitrage
2. Distressed/High-Yield
Main strategies – Event Driven

13. 13
Merger Arbitrage – a bull market strategy
This strategy is often called ‘risk arbitrage’ and traditionally involves buying the stock of the target company
and selling the stock of the buying company. As there is a degree of uncertainty as to whether or not
the merger will go through there is an arbitrage opportunity between the current prices and the
prospective merger price.
The hedge fund manager will carefully review the probability of the merger going through and will decide
whether the merger premium is worth the risk.
This strategy naturally requires a strong flow of deals and therefore tends to be most profitable during equity
bull markets. Additionally more managers are now pursuing profits by investing on the presumption of
a merger (or demerger) and even pushing management to accept change (so called activist managers).
Distressed – a ‘bear’ market strategy
Contrary to popular opinion, distressed managers don’t tend to do well in times of economic hardship. They
do however benefit from such periods as it provides an increased pool of attractively priced assets that
will provide profits once the economy improves.
They receive quite a poor press, but actually they are providing a major economic benefit by purchasing
assets when few buyers are available. They return economically viable assets back to the economy that
would otherwise be scrapped.
As these managers wish to ensure that they are provided security for their risk they tend to invest into the
debt of their target companies (and therefore have a superior claim to collateral and interest) rather
than equity. This is why they are often termed distressed/high yield.
Main strategies – Event Driven

14. 14
Performance
Distressed has been:
1. more aggressive
2. more volatile
3. given higher returns
4. But with less liquidity and has been (potentially) more risky
Event Driven
Sources: Bloomberg, Credit Suisse/Tremont Data period from 31 Dec 1993 to 30 Nov 2008
Distressed Hedge Funds
Global Equities
Event-Driven Multi-
Strategy Funds
0.50
1.50
2.50
3.50
4.50
5.50
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
Credit Suisse/Tremont HFI Distress Securities MSCI AC World Index in USD
Credit Suisse/Tremont HFI Event-Driven Multi-Strategy

15. 15
Relative value
These managers are true arbitragers and seek to identify market mis-pricings. By hedging out all of the other
risks they should be able to extract a risk free (or low risk) profit.
The problem is that such profits are hard to come by and there is a strong temptation to employ leverage to
make competitive returns. Although the strategy may appear to be low risk the use of leverage reduces
its attractiveness.
Convertible Bond Arbitrage – the most common strategy
A convertible bond is a hybrid instrument that can be thought of as combining a corporate bond with an
embedded equity option. The combined theoretical value often differs from the market value and so
can be released by talented arbitrage.
Relative Value
Sources: Bloomberg, Credit Suisse/Tremont Data period from 31 Dec 1993 to 30 Nov 2008
Convertible Arbitrage
Fixed Income Arbitrage
MSCI AC World Index in
USD
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
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
Credit Suisse/Tremont HFI Convertible Arbitrage Credit Suisse/Tremont HFI Fixed Income Arbitrage
MSCI AC World Index in USD

16. 16
Most hedge fund strategies are actually quite strait-forward (Jones’s original approach for example was
strikingly simple). Their application however requires a high level of skill and expertise – managing a
hedge fund is definitely something to be left to the experts.
Where hedge funds do differ greatly from conventional investments is the level of freedom given to the hedge
fund manager. This can be seen by comparing the prospectuses of a hedge fund with that of a
conventional fund (a bond fund for example):
Conventional Fund:
Investment flexibility: the difference between hedge
funds and conventional Funds
Source: PIMCO Funds: Global Investors Series plc: Prospectus July 2003

17. 17
Contrast this with a Hedge Fund:
Investment Guidelines
The Company intends to have a diversified portfolio consistent with its investment objectives and
policies and will seek returns that are commensurate with the level of risk undertaken. The Articles
do not contain any restrictions on the investment powers of the Company. However, as a matter
of policy, the Manager intends to observe the following general guidelines in managing the assets
of the Company:
(a) the net exposure of the Company to the obligations of any one issuer will not normally exceed
10% of the Company’s gross assets, except for securities issued or guaranteed by government,
sovereign and quasi-sovereign entities, public or local authorities;
(b) the net exposure of the Company in relation to any one non-OECD country will not normally
exceed 30% of the Company’s gross assets (for this purpose, the People’s Republic of China
and Hong Kong will be considered as two separate countries);
(d) the value of securities sold short will not normally exceed 50% of the latest available Net Asset
Value of the Company;
Investment flexibility
Source: Asian Credit Hedge Fund, Prrivate Placing Memorandum, July 2007

18. 18
Hedge Fund:
Hong Kong: WARNING – THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED
BY ANY REGULATORY AUTHORITY IN HONG KONG. YOU ARE ADVISED TO EXERCISE
CAUTION IN RELATION TO THIS OFFER. IF YOU ARE IN ANY DOUBT ABOUT ANY OF THE
CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL
ADVICE. This document is distributed on a confidential basis. No interest in the Company will be
issued to any person other than the person to whom this document has been sent. No person in
Hong Kong other than the person to whom a copy of this document has been addressed may treat
the same as constituting an invitation to him to invest. This document may not be reproduced in
any form or transmitted to any person other than the person to whom it is addressed. This
document has not been approved by the Securities and Futures Commission in Hong Kong, nor
has a copy of it been registered by the Registrar of Companies in Hong Kong and, accordingly,
Participating Shares may not be offered or sold in Hong Kong by means of this document or any
other document other than in circumstances which do not constitute an offer to the public for the
purposes of the Hong Kong Companies Ordinance or the Hong Kong Securities and Futures
Ordinance.
The downside– marketability is much more restricted
Source: Asian Credit Hedge Fund, Prrivate Placing Memorandum, July 2007

19. 19
Apart from flexibility, Hedge Funds are not so different from conventional managers
Most hedge fund strategies are actually quite strait-forward and easy to understand (Jones’s original approach
for example was strikingly simple). Their application however requires a high level of skill and
expertise – managing a hedge fund is definitely something to be left to the experts.
As stated above, where hedge funds do differ greatly from conventional investments is the level of freedom
given to the hedge fund manager. The conventional fund will state that the manager must be fully
invested into US large cap equities at all times, the hedge fund manager by comparison is able to
invest into virtually any investment, can go long or short, and can even go completely into cash.
The Future
Hedge Fund Index
Global Equities
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
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
US 3-month LIBOR Credit Suisse/Tremont HFI Long-Short Equity MSCI AC World Index in USD
Sources: Bloomberg, Credit Suisse/Tremont Data period from 31 Dec 1993 to 30 Nov 2008

20. 20
The Future
We can see that hedge funds would perform very similarly to a conventional manager who invested into
equities during bull markets and then had the freedom to switch to bonds or cash during bear markets.
Although this is a great simplification and doesn’t apply to all hedge funds, it is useful to think hedge funds
as pools of capital managed by entrepreneurial and talented investment managers.
Myth: Hedge Funds are always fully hedged
The only way to guarantee a return is to buy a high quality government bond. Any return above this low rate
involves risk and therefore can’t be guaranteed. Hedge funds can only perform strongly by taking at
least an element of downside risk.
What hedge funds can do is manage the downside risk by hedging against large market falls and by shifting
away from risky assets (such as equities) when they feel the risks are not worth the returns. A
conventional manager meanwhile would be obliged to remain invested in a falling market.
Myth: Hedge Funds are unregulated
Although hedge funds are private investment vehicles that do not openly publicise themselves in the way that
conventional managers do, this is mainly due to the regulatory authorities who restrict investment into
hedge funds to sophisticated investors. Therefore hedge can’t openly advertise or publicise themselves
and remain very private.
Hedge funds though are regulated. Although the fund may be domiciled in an offshore location, such as
Bermuda or the Cayman Islands, the actual investment management is usually carried out in one of the
major onshore financial centers. For hedge funds, these centers are New York in the Americas, London
in Europe, and Hong Kong, Singapore, Tokyo, and Sydney in Asia. The hedge funds are closely
monitored and regulated by the authorities in these financial centres.

21. 21
The Future
If we don’t believe in the efficient market theory then hedge funds are the next logical evolution of the
asset management industry:

22. 22
Manager Selection
Quantative Screening
“to a man with a hammer the whole world looks like a nail”
Warren Buffett
Statistics are like a drunk with a lampost: used more for support than illumination.
Sir Winston Churchill
Qualatitive Screening
Administrator of the Fund and Its Role
Regulator Overseeing the Fund Manager
Operational Infrastructure of the Fund Manager
Special Terms for Other Investors

23. 23
Risk Warning and Disclaimer
Nothing in this document constitutes an offer to buy or sell any hedge fund or investment described herein, and all expressions of opinion are subject to change
without notice.
Each hedge fund is managed at the full discretion of the fund’s investment adviser(s), pursuant to the general investment strategy described in the fund’s
prospectus.
EFG Funds are available only outside the United States to investors who are neither citizens nor residents of the United States. In addition, the hedge funds and
any services offered in connection with them shall only be available in jurisdictions where it is lawful to do so. Thus, in certain jurisdictions, investors who have
received this document may be prohibited from subscribing to any or all of the referenced hedge funds from EFG Bank.
If you have an account with EFG Bank, EFG Bank may provide you, from time to time, with advice or information on available investments. Any provision of
such advice or information is provided at EFG Bank’s sole discretion, without obligation to update the information or advice provided. Further, the information
provided will not contain an analysis of all material facts concerning any hedge fund or investment discussed, and while the information has been obtained from
sources believed to be reliable, EFG Bank does not guarantee its accuracy or completeness and does not accept liability for any direct or consequential losses
arising from its use.
You are solely responsible for your investment decisions, even if the decision is based on advice or information provided by us. Thus prior to making any
investment decision you should fully understand the characteristics and risks associated with the investment and make your own determination that the
investment is consistent with your objectives, that it is suitable for you and that you are able to assume the risks.
EFG Bank assumes no liability for any actions or omissions of the individual fund houses, in general or in connection with hedge funds referenced herein.
This information is confidential and intended solely for the use of EFG Bank and the client or prospective client to whom it has been delivered. It is not to be
reproduced or distributed to any other person except to the client’s professional advisers, nor is it to be used or distributed by any other broker/dealer or
investment bank.
Hedge funds and the securities they hold are not deposits; are neither obligations of, nor guaranteed by, EFG Bank or any of its affiliates; are not
government insured; and are subject to investment risks, including possible loss of principal amount invested.
January 2009

24. 24
Hedge Fund:
Hong Kong: WARNING – THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED
BY ANY REGULATORY AUTHORITY IN HONG KONG. YOU ARE ADVISED TO EXERCISE
CAUTION IN RELATION TO THIS OFFER. IF YOU ARE IN ANY DOUBT ABOUT ANY OF THE
CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL
ADVICE. This document is distributed on a confidential basis. No interest in the Company will be
issued to any person other than the person to whom this document has been sent. No person in
Hong Kong other than the person to whom a copy of this document has been addressed may treat
the same as constituting an invitation to him to invest. This document may not be reproduced in
any form or transmitted to any person other than the person to whom it is addressed. This
document has not been approved by the Securities and Futures Commission in Hong Kong, nor
has a copy of it been registered by the Registrar of Companies in Hong Kong and, accordingly,
Participating Shares may not be offered or sold in Hong Kong by means of this document or any
other document other than in circumstances which do not constitute an offer to the public for the
purposes of the Hong Kong Companies Ordinance or the Hong Kong Securities and Futures
Ordinance.
The downside– marketability is much more restricted
Source: Asian Credit Hedge Fund, Prrivate Placing Memorandum, July 2007