Disclaimer:

This is neither an offer to sell nor a solicitation of any offer to buy shares in any fund managed by NewFinance Capital LLP. Any offering is made only pursuant to the relevant Prospectus, together with the current financial statements of the relevant fund, if available, and the relevant subscription application, all of which must be read in their entirety. No offer to purchase shares can be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation. The shares have not and will not be registered for sale, and there will be no public offering of the shares. No offer to sell (or solicitation of an offer to buy) will be made in any jurisdiction in which such offer or solicitation would be unlawful. This presentation is not an advertisement and is not intended for public use or distribution

20th-21st November 2007

NewFinance Capital

EDHEC Workshop

Convergence of Hedge Funds & Long Only investing: Enhanced Beta Funds and UCITS III compliant hedge funds

Convergence of Hedge Funds & Long Only investing:

1. Introduction

2. Enhanced Beta Funds: application to commodities

3. UCITS III Compliant Hedge Funds: beyond 130/30 and market neutral funds

Enhanced Beta Funds and UCITS III compliant hedge funds

AGENDA

European Mutual Fund market size

Approx €5,000 bios(excluding. Money market funds)

European On-shore Hedge Fund market size

< € 100 bios ( < 2%)(excluding. Luxembourg and

Ireland)

How relevant is convergence to investors and managers?

In Europe

• Traditional asset management products market size dwarfs domestic HF market.

• Large Institutional investors can access non domestically regulated HF’s and FoHF’s.

• Retail investors have hardly any exposure to HF’s or FoHF’s.

Off-shore

• On-shore Fund managers can advise offshore HF’s and FoHF’s.

• Large and established demand of offshore products from offshore private banks in Europe.

• HF’s are generally managed separately from traditional assets in alternatives allocation.

HF’s

…On the one hand; not really:

• Institutional investors looking at HFs within existing asset classes.

• Integration of Hedge fund and traditional asset management industry.

• Sophisticated funds under UCITS regulation.

• New domestic Hedge fund regulation in Spain in 2007.

• Rapport Adhémar in France: AMF to switch from rules based to principles based approach in 2008.

• ……….

Evolution of regulation to further accommodate hedge funds in Europe Innovation & evolution

• Domestically regulated HFs and FoH’s accessible by all institutional investors . • Retail investors can access domestic FoHF’s with no minimum investment ( Spain) •……..

Widening of investor base and blending of Hedge fund and traditional fund management .

• Active extension funds ( 130/30s) : $ 100 bios in 24 months in the U.S. and coming to Europe in UCITS III compliant format.• UCITS III compliant market neutral funds • ………

How relevant is convergence to investors and managers?……But on the other hand it is becoming increasingly so:

EDHEC Workshop

Enhanced Beta Funds: application to commodities

When Worlds Collide

OR

Commodities Markets meet Long Only Investors

Investor Interest in Commodities

• At least $120B is invested globally in basic commodities index products

• Another $35B with Hedge Funds

• At least $12B with Long-only funds

Source: Bloomberg 2007

Estimated Global Commodities Investment Growth

Investment (adjusted to 1990 data)

0

20

40

60

80

100

120

1991 1993 1995 1997 1999 2001 2003 2005 2007E

GSCI and Sub-indices DJAIG and Sub indices Other Commodities indices

Asse

ts (B

n. U

SD)

Hedge Funds: Commodities Trading

• 120 funds• $35B in assets• Experienced Traders• No directional bias

Dis

cret

iona

ry

Syst

emat

ic

Commodities Risk Commodities/Financial Risk

Long-only Commodities Investments

• 47 funds and hundred of index note products• >$150B in assets• Mainly managed by outsiders to commodity

markets• Long

Hedge Funds: Commodities Equities

• Hundreds of funds• >$100B in assets• Equity focus• Long bias built into DNA

Hedge Funds: Systematic Trading

• Few funds - <10 of reasonable size• Low asset base• No traders – computers• No directional bias

Hedge fund strategy

Long-only strategy

Who’s Who in Commodity Markets Four main strategies for investors in commodities markets

• Commodities traders are trained to go long (buy futures) when they have a bullish viewpoint and to go short (sell futures) when they have a bearish perspective

• They expect to be long 50% of the time and short 50% of the time over a long career

• In general, shorts are not regarded as exotic or more hazardous than longs

• Many traders are perplexed to be constrained to only hold long positions

• The standard Hedge Fund structure matches the trading style of many experienced commodities traders

• Commodities-trading hedge funds have existed since 1999 and have readily attracted talent from traditional trading companies

• These funds have no pre-ordained directional bias

• Consequently there is no commodities market analog to Mutual Funds

• Despite investor demand for such a product this type of vehicle has only recently come into existence.

The Worldview of Traditional Commodity Traders ….and how this contrasts with (say) that of equities traders

• Commodities prices are volatile and long-only investments pose significant drawdown risk

• In the commodities investment universe, Hedge Funds offer the most carefully risk-managed source of commodities market exposure. Experienced traders set stop-losses and concentration limits that limit potential drawdowns.

• Index investments, largely, employ no risk management tools

• No commodities investment is truly “passive” and Beta risk is complex

• Investors need to understand that commodities Beta (i.e. high quality directional exposure to markets) is harder to obtain that commodities Alpha

• Assets managers work in a world where the regulations were designed around an equities template

• Investors may have institutional constraints that make no sense in a commodities environment

• UCITS III qualification is only open to a small proportion of commodities investments and by no means those that are safest or most transparent.

Creating Long-only Commodities Products Three key issues

1

• Investment products that reflect the returns of a basket with defined weights, rolling rules, maturities and risk management methods

• Portfolio of net long commodities positions

• Out-performance is generated by fundamental weighting as well as risk management

• Fundamentally driven relative value strategies in commodities futures and equities with opportunistic long positions

• Low or incidental correlation to benchmark performance

Hedge Funds Long Funds Enhanced Index Products

Sector allocation = Benchmark Strong Out-Performance Low Tracking ErrorINVESTMENT OBJECTIVES

Our Approach to building a Rational Long Commodities PortfolioInvestor wants to out-perform the benchmark while keeping a low tracking error

1

Individual Fund Type Beta Alpha Allocation per sector

similar to Benchmark

Hedge Funds low high Low Tracking Error

Long Funds high mediumStrong Out-

Performance Enhanced Index Products

high low

OCC+ Objectives

The combination of all three commodities investment alternatives within one portfolio allows to :

• Gain a net long exposure to Commodities prices

• Diversify among commodities sectors, trading and styles

• Capture performance from selected portfolio managers and index products with solid track record

• Achieve an attractive mix between out-performance and Tracking Error against the benchmark

Our Solution for investors : OCC+

1

EDHEC Workshop

UCITS III Compliant Hedge Funds: beyond 130/30 and market neutral funds

1

Introduction to UCITS III

Why is UCITS III Important

Investment Powers Examples Concluding

remarks

Roadmap

1

What is UCITS III

• Is an European legislation, which objective is to allow for open-ended funds to be subject to the same regulation across the EU member states

• Consists of 2 Directives

•Management Directive

•Product Directives

What is the Management Directive

• It gives management companies a “European passport” to operate throughout the EU and widens its activities to include discretionary management and fund administration.

• It also aims to protect investors by ensuring that the management companies are adequately capitalised and have the appropriate means for managing risk.

• It introduces the concept of a “simplified prospectus”, which is intended to provide investors with the essential information of the “full prospectus” in a more simplified format.

What is the Product Directive

• Its aim is to ease the cross-border marketing of the funds by allowing it to invest in a wider range of financial instruments, in particular allowing the use of derivatives for investment as well as for hedging purposes. (Prior to UCITS III, only EPM was permitted)

Introduction to UCITS III

1

vestors wantGreater access to retail and institutional investors to diversify their client base

Name recognition

Compete with the traditional fund managers

To achieve financial goals

To spend their risk budget wisely

Diversification of alpha source

Comfort of a regulated environment

Transparency

Hedge Funds want

UCITS III

Low correlation to traditional assets

Expertise in managing skill based investments

Well established risk management tools

Hedge Funds provide

A regulated environment

Use of derivatives for investment purpose

“EU Passport”Easier to distribute/market within the EU

Broaden the investors base

Opportunity: UCITS III compliant hedge fund

Why is UCITS III Important

1

• Example 1, an UCITS fund domiciled in Luxembourg can have exposure to hedge fund of up to 10%, whereas an UCITS fund domiciled in the UK cannot.

• Example 2, the Directive prohibits UCITS from carrying out uncovered sales of transferable securities.• In Oct 07, the Irish Regulator has adopted a stance that a security which is borrowed before entering into a short sale would be

regarded as a covered short.

• But, for most jurisdictions, it is still regarded as physical shorting.

• In general, the regulator will look for the following:• Overall Limitations

• Global Exposure

• OTC counterparty exposure

• Concentration limits

• Coverage rule

Directives adopted by different EU

Jurisdictions since 2002

Issues with interpretation, esp.

in the area of derivatives.

2004 interpretation introduces the

concept of sophisticated/non

sophisticated

Clarified that funds can short

synthetically

Eligible assets directives 2006/2007

EU adoptions of UCITS III

Different member states may interpret the EU Derivative slightly differently

1

• Global Exposure relating to derivatives must not exceed the total net asset value of the fund (refer to regulator guidelines)

• Derivative include those that are dealt on a regulated market and/or dealt OTC, provide that• the underlyings are dealt on a regulated market.

• the underlyings may consist of financial indices, interest rates, FX rates and currencies.

• Others that are stated in the prospectus (subject to prior approval of the regulator) e.g. CDS, CDO, Equity linked notes etc.

• OTC derivatives are subjected to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed at any time.

• The fund may borrow up to 10% of its net assets provided the borrowing is temporary and will not be used for investment purposes.

• Frequency of subscriptions and redemptions must be at least twice a month (the terms of the subscriptions and redemptions must be provided in the prospectus)

• The fund may not grant loans to third parties or act as guarantor for third parties

• The fund may not acquire either precious metals or certificates representing them.

• The fund may not carry out uncovered sales (Most regulators would interpret this as: The fund is prohibited from selling assets that it does not hold)

Key overall limitations

Use derivatives to gain short exposure

1

Sophisticated UCITS• Extensive use of derivatives• Daily risk monitoring

Non Sophisticated UCITS• Traditional long only• Limited use of derivatives• At least bi-monthly risk monitoring

Relative VaR• Funds with market indices as benchmark• Limited to 2 times benchmark VaR

Absolute VaR• Funds with absolute return targets• Limited to 20%

Global Exposure based on VaR• 99% Confidence interval• 1 month holding period (20 days)• Effective observation period of risk factors of > 1 year (250 days)• Quarterly data update• Need to be back and stress tested

Global Exposure based on commitment• Derivative positions are converted into the equivalent positions of the underlyings (adjust by delta)• Netting of positions is permitted provided the underlyings are identical

Total commitment to derivatives• Limited to 100%

Global Exposure

1

1st Stage

2nd Stage

3rd Stage

• For each contract, determine the replacement cost using the mark to market value

• Unrealised profit of the contract

• Take into account of the potential future credit risk of the counterparty

• Add-on factors:

• Apply a weighting factor of 20% for Credit Institution

• And 50% for others

15%10%7.50%1.50%More than 5 years

12%8%5%0.50%Between one and five years

10%6%1%0%Up to one year

Other eligible contracts

Contracts on securities

Foreign currency contracts

Interest rate contractsResidual Maturity

Maximum limit per entity:

Collateral can be used to mitigate counterparty exposure

• Has to be calculated at least as frequently as the NAV

• With Hair-cuts (normally specified in ISDA)

• Limited risk and can be realised at anytime e.g. Government Bonds or Cash

OTC Counterparty Exposure

• Credit Institution: 10%• Others: 5%

2

• Derivative positions are to be converted into the equivalent positions of the underlyings (delta adjusted)

• If the conversion proves to be technically not feasible then maximum potential loss linked to the derivative can be used i.e. Mark to market value.

• Assets embedded into derivatives have to be considered

• Netting of the long and short positions possible

• Conversion to underlying does not apply if the derivative is based on an index whose:• Composition is sufficiently diversified

• Represents the market adequately

• Published in an appropriate manner

40% on aggregateTS+MMI > 5%

30% on aggregateOther UCIs

20% eachOther UCITS funds

30% eachUCITS invest in single govt. then min. of 6 issues

35%TS or MMI issued or guaranteed by OECD

20%TS or MMI + Deposits + OTC

20%Deposits

10%TS+MMI

10%Money market instruments, MMI (regulated market)

10%Transferable securities, TS (regulated market)

LimitsKey concentration limit per issuer

Concentration limitsGeneral principle

2

• The fund must at any point have the ability to meet the obligations incurred by transactions involving derivatives and which give rise to delivery and payment obligations.

• Delivery obligations:• The fund must either holds the underlying assets as cover or

• Other liquid assets in sufficient quantities that can be used at any time to acquire the underlying assets which is to be delivered.

• Payment obligations:• The fund must hold enough cash and/or liquid assets (after the application of hair cuts) to allow the fund to make the contractually

required payments.

• Coverage is to be checked on a regular basis.

Coverage RuleGeneral principle

2

• Selected hedge fund strategies can be made UCITS III compliant.

• Schroders NewFinance is currently working on bringing several hedge funds to the UCITS space.

• For illustration, we have selected 2 hedge funds, one equity and one fixed income and we tested them against each investment criteria.

The convergence is happening!The gap between hedge fund and UCITS III compliant hedge fund is small

Overall Limitations

20% Absolute VaR

5/10% OTC counterparty exposure

5/10/40% Concentration limits

2

Eligible assets Test

Equity Fund

• Primarily invest in:• Physical Equities• Indices• Contract for difference (OTC)• Equity Options • Total Return Swaps (OTC)• Futures (Exchange/OTC)• Equity linked notes• Credit via CDSs

• All the short exposures are either Contract for difference or Swap based

Fixed Income Fund

• Primarily invest in:• Sovereign bonds• Corporate bonds• Indices• Total return swaps (OTC)• Futures (Exchange/OTC)• Credit derivatives e.g. CDS, CDO• ABS• Equities• Convertible bonds• Loans (securitized)

• All the short exposures are derivative based

Eligible investment universe

No gearing of the fund and no exposure to precious metals

2

Liquidity

• Bi-monthly dealing of the fund

• The liquidity are comparable to the traditional small cap equityand emerging market bond funds (typically a daily dealing fund)

Global Exposure

• Absolute VaR limit of 20%

• Comfortably within the limit

Liquidity and VaR Test

2

• Typically, hedge funds may have margining of 5%-40%.

• The equity fund is at 20% and the fixed income fund is at 5%.

• Separation of the initial margin and the daily margin

• Initial margin can be placed with the administrator with a pledge on the assets

• Daily mark to market must stay within the 5/10% limits

OTC counterparty exposure test

By working closely with brokers and the fund administrator; operational changes can easily be implemented to meet this requirement

2

Concentration limits test

Equity Fund

• 10% single issuer limits on transferable securities:• Currently 2 positions• 0-2 positions for the past 3 months

• 5/40% rule (The sum of all the positions > 5% must be < 40%):

• Currently at 70%• Historically 50-75%

Fixed Income Fund

• 10% single issuer limits on transferable securities:• Currently 1 position• 2 positions for past 3 months

• 5/40% rule (The sum of all the positions > 5% must be < 40%):

• Currently at 23%

Performance implications expected to be minimal

2

Different sources of alpha to the UCITS III investorsFor illustration, we have blended the performances of the 2 hedge funds previously mentioned

2

No correlation with traditional risk factors & unprecedented alpha generation in the UCITS World

Single regression – best explaining factors out of 2000 traditional factors1) Lehman High Yield index – Beta of 38%

Using approx. 2000 traditional factors and found that there is no significant correlations

-4.7%2.9%3.3%Beta

-3.6%4.4%11.7%Alpha

Max. Drawdown

Volatility (Annualised)

Return (Annualised)

2

Regression on the 2 best explaining factorsLehman High yield index - Beta of 24% and MSCI Small Cap Europe Local Currency Index - Beta of 11%

-8.7%2.9%1.6%Beta

-3.8%4.4%13.5%Alpha

Max. Drawdown

Volatility (Annualised)

Return (Annualised)

-6.8%3.3%3.1%Beta

-3.3%4.1%11.9%Alpha

Max. Drawdown

Volatility (Annualised)

Return (Annualised)

No correlation with traditional risk factors & unprecedented alpha generation in the UCITS World2) MSCI Small Cap Europe Local Currency Index - Beta of 17%

3

EDHEC Workshop

Concluding remarks

3

Convergence of Hedge Funds & Long Only investing:Enhanced Beta Funds and UCITS III compliant hedge funds

CONCLUSION

• Trends of convergence between traditional and Hedge fund management are accelerating

• Enhanced beta products including hedge fund technology increasingly popular.

• UCITS can accommodate several hedge fund strategies but not all.

• Schroders New finance a leader in bringing innovative products to investors

3

Thorkild Junckertjuncker@newfinancecapital.com

NewFinance Capital LLP

Authorized and Regulated by FSA and Registered as an Investment Advisor with SEC

100 Brompton Road

London SW3 1ER

United Kingdom

Tel: +44 207 591 2500

Fax: +44 207 589 5632

www.newfinancecapital.com

Contact Details

3

Important Information

For Professional Investors only. Not suitable for Retail clients.

This presentation contains indicative terms for discussion purposes only . It is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but New Capital Finance (NCF) and Schroder Investment Management Ltd(Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that of NFC and Schroders have to their customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.

NFC and Schroders has expressed its own views and opinions in this document and these may change.

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