1. Andrew McCaffery Aberdeen Asset Management Absolute return investing, looking to achieve higher quality risk adjusted returns International Investment Italian Forum 2007

2. 1 Cumulative and yearly asset flows Overall asset inflows The hedge fund industry has experienced record inflows in 2006, and even higher to new records n 2007 Asset inflows into all strategies totaled $126bn in 2006, compared to $47bn in 2005 and $74bn in 2004. Database provider totals range from $2.1trn - $2.5trn now Industry has experienced 25% YoY growth since 1990 However still small when compared with global asset values – Est $160trn worldwide, so less than 2% of assets Source: Hedge Fund Research, OECD The hedge fund industry has experienced high levels of asset inflows in recent years The ‘Institutional Age’ begins...

3. 2 From 90%+ in Global Macro only in 1990 Estimated HF strategy decomposition Source: HFR Sector 5.1% Equity non-hedge 4.2% Equity market neutral 2.5% Equity hedge 28.8% Equity 40.6% Fixed income relative value 2.9% MBS 2.1% High yield 0.9% Diversified 1.2% Convertible bonds 0.1% Relative value arbitrage 13.3% Merger arbitrage 1.6% Convertible arbitrage 3.2% Fixed income 7.2% Arbitrage 21.0% Regulation D 0.2% Short selling 0.3% Market timing 0.4% Event driven 13.6% Distressed securities 4.4% Emerging markets 4.4% Macro 11.0% Growing diversity, growing opportunity

4. 3 Simple perspectives on ‘Absolute Return’ Absolute Return – A style of investing that seeks to preserve capital and produce superior risk adjusted returns -Lowly or non correlated performance to traditional asset classes -Minimise downside losses through active, specialised investment and risk management The Absolute Return approach combines traditional fund manager’s skills of exploiting market opportunities with the trader’s skill in managing total risk to produce a positive asymmetric return profile Can be viewed as a portfolio where you use ‘cash’, or the ‘risk free rate’, as the ‘benchmark’ and the manager is actively seeking to hedge out the downside risks

5. 4 What are ‘Absolute Return strategies’? Portfolios are not artificially constrained, ensuring access to the most attractive asset classes and financial instruments types in all market conditions Utilises: -Leverage – To enhance returns in high confidence trades -Short sales – To take advantage of downside movement in markets and individual securities -Combining leverage and short selling allows one to manage/reduce risk within a portfolio, eg As a fundamental view driven trade, eg sell an equal risk amount of BP (equity or credit risk) vs a long position in an Exxon Mobil security By allowing offsetting exposures to be created, eg sell a CDS vs convertible bond credit risk Skilfully combined together, within a strong risk management framework, it provides the opportunity to improve the quality of returns and utilise risk more cost effectively

6. 5 Perspectives on portfolio risk Relative-return model (market-based) Absolute-return model (skill-based) Return objectiveRelative to an asset benchmarkAbsolute, positive return This means:Capture asset class premiumIdentify and exploit investment opportunities Risk managementTracking error to benchmarkTotal risk of positions, ‘tail risk’ management This means:Capture asset class premiumPreserve capital Source: Original – UBS AS/AAM Symmetrical return profile Asymmetrical return profile Measure value of portfolio at risk, assess how different stress scenarios can impact and then actively manage the profile

7. 6 Hedge fund assets still small, ‘alpha’ to remain plentiful for the skilled… Sources: OECD/IMF/IFSL/ICI/HFR/Morgan Stanley, Q2 07

8. 7 CDS now in excess of $45trn, Equity at $10trn+, with IR/FX OTC above $350trn* Growth of OTC credit and equity derivative markets – Innovation accelerates and liquidity grows… * End H1 07 Source: ISDA Market Dealers Survey data Corporate bonds o/s 2.0 2.5 3.0 3.5 3.8 4.2 5.0 4.8 5.1 Credit default swaps - - - - 0.9 2.1 3.8 8.4 17.0 26.0 OTC equity derivatives - - - - - 2.4 3.4 4.1 5.5 6.4 0.0 5.0 10.0 15.0 20.0 25.0 30.0 $trn 1997199819992000200120022003200420052006

9. 8 Hedge funds: Low correlation, enhancing diversification benefits * Information ratio defined as the excess returns over the benchmark divided by the volatility of the portfolio return, ie the return per unit of risk Source: CSFB/Tremont

10. 9 Rolling 12 month correlations* Correlation movement * 1 year rolling correlation vs MSCI World Source: HFR, CS Tremont, MSCI

11. 10 Outperforming in bad years, and good years… 2002 Lehman Bond Agg10.26 HFRI Convertible Arbitrage Index 9.05 HFRI Fixed Income 8.87 HFRI Macro Index 7.44 HFRI Relative Value Arbitrage Index 5.44 HFRI Fund of Funds Composite Index 1.02 HFRI Merger Arbitrage Index-0.87 HFRI Fund Weighted Composite Index-1.45 HFRI Event-Driven Index-4.30 HFRI Equity Hedge Index-4.71 S&P500-17.82 MCSI World-21.05 S&P MIB-27.74 Returns in 2002 – A bad year for equities Absolute returnTraditional indices Returns in 2006 – A good year for equities 2006 HFRI Emerging Markets24.29 S&P MIB20.02 HFRI Equity Market Neutral Index17.56 HFRI Merger Arbitrage Index15.67 HFRI Event-Driven Index15.30 MSCI World13.51 HFRI Fund Weighted Composite Index12.85 HFRI Relative Value Arbitrage Index12.38 HFRI Convertible Arbitrage Index12.17 S&P50012.09 HFRI Equity Hedge Index11.68 HFRI Fund of Funds Composite Index10.35 HFRI Fixed Income8.87 HFRI Macro Index8.54 Lehman Bond Agg4.33 Absolute returnTraditional indices

12. 11 Hedge funds perform well in positive and negative markets Hedge funds: A longer term performance perspective Source: CSFB/Tremont indices data High quality of downside risk management pays dividends over time Value of the preserving capital principle

13. 12 Performance statistics * One zero return month Source: HFRI, CS Tremont 1 Jan 96 – 30 Sep 07, monthly return data Equity/bond and hedge fund indices WGBI/MSCI World 50/50 weightingHFRI fund of fundsCS Tremont Multi-Strategy Return statistics Annual average compound return6.19%8.14%10.01% Positive months8995121 Negative months514519 Best month18.99%6.85%3.12% Worst month-16.68%7.47%-4.76% Maximum 12 months rolling24.46%29.14%19.03% Minimum 12 months rolling-10.68%-9.18%2.07% Maximum drawdown-20.25%-14.02%-4.88% Total return since inception72.21%158.34%221.60% Annualised standard deviation Since inception11.06%5.81%3.63% Last 12 months3.37%4.04%3.81% Risk ratios Sharpe ratio0.190.661.51

14. 13 To summarise Absolute Return investing involves unconstrained and continually evolving strategies to capture market opportunities, both for the short term and the long term Absolute Return investing can deliver a diversifying return profile to underlying asset markets and high quality compounded returns through the active management to limit draw-downs Absolute Return investing benefits from a growing, and constantly innovating financial market, with access to the broadest range of trading and investment ideas available The quality of managing risk around trade and portfolio investments provides the opportunity for significantly higher quality risk adjusted returns versus outright exposure in asset markets in the medium to longer term

15. 14 For professional use only Not for public distribution Investors should be aware that past performance is not a guide to future returns, the price of shares and the income from them can fall as well as arise and investors may not get back the amount that they invested initially The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by intermediate customers/market counterparties and not the general public. The information is being given only to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of AAM