1. Explaining Hedge Fund Performance With Risk Sigma Asset Management March 1, 2001

2. Sigma Asset Management Agenda Background Methodology Results Q&A

3. Sigma Asset Management Hypothesis Hedge funds generate significant excess returns after adjusting for risk.

4. Sigma Asset Management Background Hedge funds vs. mutual funds Trading strategy: dynamic vs. static Use of leverage Regulatory environment Compensation of fund managers

5. Sigma Asset Management Background Performance and risk of hedge funds 1994-2000: r = 13.2%,  = 10% (annualized) * * (Source: CSFB/Tremont)

6. Sigma Asset Management Avg R Avg R -  Avg R +  Methodology

7. Sigma Asset Management Results

8. Sigma Asset Management Results

9. Sigma Asset Management Summary Majority of the HF have   0 The relationship between the the benchmark and HF returns are not linear. The volatility and  of the HF spikes with the extreme benchmark swings. The questionable “better-then-the-benchmark” HF returns come at the price of volatility in extreme periods.

10. Sigma Asset Management Q&A  OR E(r)