Explanation of portable alpha concept in finance.

1. You’re the one that I want… Oo Oo Oo A L P H A

2. Special Sponsor Tattoos (available at break)

3. Other Tattoo Choices…

4. Special Custom Tattoos… QUANT R / E HEDGER

8. Staff 13 employees 1 to 3 contractors 2 vendors (Custody) Senior Investment Managers (4) Senior Operations Manager (1) Operations Analysts (3) Administrative Assistant (1) Investment Committee Organization – U. S. Reps from: Finance H/R Tax Pensions Sr. Mgmt (7) Investment Managers (3) Group VP Finance VP Global Pensions Director, Trust Investments

11. Pensions 101 A Refresher Course

13. Pension Cost Benefits Promised Investment Return (Liabilities) Pension Finance

14. Pension Cost Benefits Promised Investment Return Pension Finance (Done Right!) Asset Mix Risk Alpha

15. The Traditional Sponsor Model

19. Equities Core Style Niche Int’l Equities Core Regional Emerging Fixed Interest Core International High Yield Other Real Estate Venture Capital Hedge Funds Typical Investment Program

24. New Bonus Team Meeting

26. Some Real Issues Also Surfaced 1. What was our team’s purpose? 3. What value added could we provide? 2. What value added did we provide? 4. What about risk? Started to look a lot like our process for reviewing a new manager?

27. Clarity Comes to the Pension Team 1.5% Value Added 2.0% Risk (residual) Incentive: An 8% bonus So now what do we do? Time: Rolling 3 year periods INFO RATIO 0.75 Fund Goals:

28. WE WERE SHOCKED & APPALLED…

29. RETURNS have always been the name of the game , NOT RISK !

30. Since when did RISK Become so darn IMPORTANT ?

31. CASH BONDS EQUITY Risk Return Asset Class Frontier: Traditional Investment Model

32. CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A Asset Class Value Added: Traditional Investment Model

33. CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A Asset Class Value Added: Asset Class Allocation Drives The Total Fund Alpha! Traditional Investment Model

34. Slowly We Begin to See the Light…

35. Shake Up The Traditional Model CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A

36. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Shake Up The Traditional Model

37. CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A Shake Up The Traditional Model

38. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model

39. V. A. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Shake Up The Traditional Model

40. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model

41. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model

42. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model

43. Birth of The Alpha Philosophy

45. The Alpha Philosophy Begins With Return (or Return Expectations) for a manager or a portfolio TOTAL RETURN

46. Total Return Consists of Two Components -- The Market and Alpha TOTAL RETURN MARKET RETURN ALPHA RETURN The Alpha Philosophy

47. Each Return Component Has A Unique Distribution of Outcomes (most folks call this Risk ) Residual Risk Market Risk (Beta) TOTAL RETURN MARKET RETURN ALPHA RETURN The Alpha Philosophy

48. The Components Can Also Be Separated (more about this later) TOTAL RETURN MARKET RETURN ALPHA RETURN ALPHA RETURN MARKET RETURN The Alpha Philosophy Resid Market (Beta) Surprise, Surprise …

49. Market Return can be an Index, Benchmark, Sector, or any security universe. TOTAL RETURN MARKET RETURN (INDEX) ALPHA RETURN ALPHA RETURN MARKET RETURN (INDEX) The Alpha Philosophy Resid Market (Beta)

52. Okay, Can I hear a Hallelujah & an Amen? Let’s try that again… uh1 uh2 uh3 Hal le lu jah & A men ARE YOU WITH ME?

53. Gee This Alpha Philosophy could Improve The Way We Build Portfolios ? ? ? ?

54. How Might This Alpha Philosophy Improve The Way We Build Portfolios ? ? ? ? The New Bonus is in the Bag-come to me new bass boat…come to me.

56. Converting the Philosophy into Reality

58. Philosophy into Reality – Phase I TOTAL RETURN MARKET RETURN ALPHA RETURN Step 1: Review: Total Return Comprised of a Market and an Alpha Component (S&P 500)

60. TOTAL RETURN CASH RETURN ALPHA RETURN Step 3: Short Selling the Market cancels out (X) the market portion of manager’s total return, producing a Cash Type Return. (Referred to as the Short Rebate ) MARKET RETURN MARKET RETURN Philosophy into Reality – Phase I SHORT REBATE

61. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN MARKET RETURN Result: Alpha immediately becomes “Ported” i.e., Transported to the Cash Return number (such as LIBOR or a T-Bill type return) PORTING ALPHA RETURN

62. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN MARKET RETURN Result: Alpha is Ported to Cash PORTING ALPHA RETURN

63. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result: Alpha is Ported to Cash PORTING

64. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result: Alpha is Ported to Cash PORTING

65. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN MARKET RETURN ALPHA RETURN Result: Alpha is Ported to Cash PORTING

66. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result: Alpha is Ported to Cash PORTING

67. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result: Alpha is Ported to Cash PORTING

68. Philosophy into Reality – Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result: Alpha is Ported to Cash PORTING

69. TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result: Alpha is Ported to a Cash Return Bottom Line: We just created a “Synthetic” Cash Plus Strategy Philosophy into Reality – Phase I

72. Creating Customized Strategies (This is the good part!) Phase II

73. ALPHA RETURN CASH RETURN Step 1: We Start With the Philosophy to Reality - Phase II “ Synthetic” Cash Strategy from Phase I

74. FUTURES (SWAP) RETURN ALPHA RETURN CASH RETURN + Step 2: To Reintroduce Desired Market Return i.e., Exposure we buy futures or (use a swap) The D-words again Philosophy to Reality - Phase II

75. + ALPHA RETURN CASH RETURN ALPHA RETURN CASH RETURN Result #1: Lots of colorful boxes FUTURES (SWAP) RETURN FUTURES (SWAP) RETURN Philosophy to Reality - Phase II

76. + NEW MARKET RETURN ALPHA RETURN ALPHA RETURN CASH RETURN ALPHA RETURN CASH RETURN Result #2: We have Created a New Synthetic Market Return (or Asset Class) Keeping our Original Alpha FUTURES (SWAP) RETURN FUTURES (SWAP) RETURN Philosophy to Reality - Phase II

86. And Now Our Special Alpha Finale!