Alternative Investments “Outlook for the Investment Management Industry” San Antonio October 17, 2007 Bank Depository User Group Meeting

The Mystery of Alternative Investments What are they?? and what do they do???? Perception Vs. Reality 1

Alternative Investments – Perception vs. Reality 2 Questionnaire: Do Private Equity Funds Buy Only Private Companies? Do Hedge Funds Hedge? Do Real Estate Investments Appreciate with Property Values? Do Structured Products Perform Like the Underlying Asset or Index?

3 What are alternative investments?  Incentive based investment management  Less liquid and longer term investment vehicles  Absolute return investments  Skill based investment vehicles

4 Examples of Alternative Investments  Hedge Funds  Private Equity & Venture Capital  Real Estate Investment  Structured Notes  Commodity Funds?

5 Benefits of Alternative Investments in Investment Portfolios  Performance  Diversification  Non Correlation ?  Lower Volatility?  Downside Protection?

6 Do Alternative Investments Increase Portfolio Risk? Perception  More Volatile  Market risk is large  Highly Speculative 1 Reality  Less Volatile  Absolute return  Provide diversification

7 What are the real risks in alternative investments?  Illiquidity  Leverage  Redemptions  Less regulated 1

1.Absolute Return 2.Tax Inefficient 3.Active Risk Management 4.Variable Concentration of Holdings 5.Benchmarking Less Relevant 6.Not Dependent on Market Direction 7.Large Assets Detract from Performance 8.Less Transparent 9.Less Regulated 10.Higher Minimum Investment Required 11.Less Liquidity – “Lock-ups” 12.Higher Fees and Manager Incentives 1.Relative Return Measurement 2.Longer Term & Tax Efficiency 3.Less Turnover and Trading Cost 4.Often Greater Diversification 5.Benchmarked Performance 6.Will Lose Money in Down Markets 7.Scalable Asset Growth 8.Greater Transparency 9.Regulated 10.Lower Investment Minimums 11.Daily Liquidity 12.Lower Fees; Lower Incentives Traditional Long Only Investments Asset Allocation Alternative Investments Alternative Investments vs.Traditional Funds Pros and Cons 8

9 Mercer Investment Consulting Survey Diversification Performance Reducing risk in combination with enhancing return is the most common motivation for asset allocation to alternative investments – more specifically hedge funds Survey respondents pointed to a lack of understanding of alternative investment strategies as a serious challenge While increased asset allocations were expected…. More education was needed

10 Diversification - Increased Asset Classes

11 Performance of alternative investments vs. traditional Annualized returns Source: Goldman Sachs Thomson Venture Hennessee Hedge Fund Group

Performance for Alternative Investments  “Boom Year” Hedge Funds Private Equity REITs 11.36% 23.3% 36.06% 11.20% 10.62% 14.79% 10 year Annualized return information - Sources:Hennessee Hedge Fund Group NAREIT, Thomson Venture Capital Assoc., Institutional Investor, JP Morgan 12

Benefits of Alternative Investments 13 Annualized Return Annualized Volatility Max.. Drawdown Period Months Recovery Months Beta to MSCI Sharpe Ratio 9.45%3.87%-4.14% %3.83%-5.15% %2.90%-6.27% %8.05%-7.74% %10.05%-15.04% %5.54%-16.05% %13.45%-46.80% Multi Strategy Fund Index Lehman Aggregate Bond Index Relative Value Custom Index Tactical Trading CTA Index Barclay Equity Long/Short CSFB Index Event Driven CSFB Index MSCI World Index *Data from Goldman Sachs Jan. ’94 through Dec.’06 Non Correlation, Lower Volatility & Capital Preservation

14 Public vs. Private Investing 2005 $139.6B $135.8B Demand for Alternative Investments Source: Federal Reserve Bank of Chicago Private Equity Conference 2006

1 Hedge Fund Capital Under Management $500 Billion $1.500 Billion Demand for Alternative Investments 1999 Source: Federal Reserve Bank of Chicago Private Equity Conference 2006 $500 B $1.500 B

16 $ Billion Buyout Funds (Excludes Venture Capital) Source: Private Equity Analyst, Willis Stein Partners Private Equity Dollars Raised

17 Institutional Asset Managers Offering Alternative Investments Do not offer Alternative Investments Offer Alternative Investments 1.Private Equity 2.Real Estate 3.Hedge Funds 4.Structured Products

18 Alternative Investments - For Asset Managers… Disproportionate Profitability Proportion of firm’s institutional assets and revenues from Alternative Investments %36% Source: McKinsey 2006 AssetsRevenues

Alternative Investments Pricing Power vs. Traditional Funds 19 Structured Products Hedge Funds Real Estate Equity –41 BPS Fixed Inc.- 18 BPS Money Market - 12 BPS Firm Managed Hedge Funds Source: McKinsey Annual Management Fees in Basis Points

Core & Satellite Investment Model Consultants Getting on Board As Traditional Managers Fall Out of Favor 20 Core Investments Market based returns ETFs, Index, Passive Skill based Risk based

Source: McKinsey & Company “Cheap Beta” “Traditional” Alternatives Alpha Strategies International Institutional AUM Favor Alternatives and Cheap Beta Growth Rates 21

Alternative Investments 22 Fixed Income +28% Quantitative Enhanced +28% U.S Equity –6% Alpha Strategy Alternatives +12% Defined Benefit Asset Allocations Trends 2006 Source: McKinsey & Company

23 Pension Fund Return Assumptions S&P 500 Companies Source: JP Morgan 1999 Average: 9.2% 2006 Average: 8.1% Return Assumptions % of Companies

24 Performance of alternative investments vs. traditional Annualized returns Source: Goldman Sachs Thomson Venture Hennessee Hedge Fund Group

25 More Growth is on the Way from Pension Investors Endowments, and High Net Worth Individuals are there Asset Allocation Percentages – Source: JP Morgan, Merrill Lynch, Cap Gemini

26 Alternative Investment Outlook – Major Themes for 2007 Expanded Customer Adoption of Alternative Investments  Diversification Driven  Non Correlation Driven  Performance Driven Firms will increasingly look to alternative investments To generate increased revenues and profitability