Return on Knowledge Danske Capital Luxembourg Danske Hedge Fixed Income Strategies February 2011

22 Agenda The Basics Examples of current strategies Danish government-guaranteed bank issues Svenske bostäder I (Swedish mortgage bonds) Svenske bostäder II (Swedish mortgage bonds) Outright interest-rate call on long EUR swap rates Relative Value 10s30s yield curve steepening on a forward basis Relative Value Danish government rich compared to German government bonds Relative Value USD interest rate curve (5-year vs. 2-year) Risk In general Scenario analysis Historical utilisation Exposure Current allocation of risk 2011 forecast Historical returns

3 Portfolio Managers and Strategy Team Michael Petry is Portfolio Manager of the Danske Invest Hedge Fixed Income Strategies fund. Michael joined Danske Capital in November 2005 from a position as Senior Dealer with Danske Markets where he worked as a market maker in swaps and options. At Danske Markets he has previously worked with derivatives sales. Prior to this, Michael worked as a Portfolio Manager with Danmarks Nationalbank (the Danish central bank). Michael has 17 years’ experience within Fixed Income and bond markets and holds a Graduate Diploma in Business Administration (Economics & Financial Planning) from the Aarhus School of Business. Tom Rosenkrans is associate portfolio manager of the Danske Invest Hedge Fixed Income Strategies fund and primary portfolio manager of the Danske Invest Hedge Mortgage Arbitrage hedge fund that focuses on investment in Danish mortgage bonds. Tom has more than nine years of experience within the financial markets and primarily focuses on Fixed Income and bond markets. Tom was previously employed by the Ministry of Finance. Tom holds a MSc in mathematics and economics from the Copenhagen Business School. Carsten Cilieborg works as an analyst with the Global Fixed Income dept. of Danske Capital. Carsten is a member of the research team behind the Danske Invest Hedge Fixed Income Strategies fund and is also a member of the research team behind our global bond portfolios. Carsten prepares quantitative and strategic analyses of the global fixed income markets on a regular basis for the Danske Invest Hedge Fixed Income Strategies fund. Carsten has seven years of experience within the financial markets, and prior to joining Danske Capital he worked as an analyst with the Treasury Dept. of Danmarks Skibskreditfond (Danish Ship Finance). Carsten holds a MSc (economics) from the Copenhagen University. The team has a solid and well-balanced mixture of experience from different areas of the financial markets as well as a sound theoretical and educational background. The combination of experience and theoretical knowledge adds value to the investment process. Michael Petry, Chief Portfolio Manager. Born Tom Rosenkrans, Senior Portfolio Manager. Born Carsten Cilieborg, Portfolio Manager. Born 1978.

4 Risk Management Team Per Søgaard-Andersen is Chief Analyst with the Alternative Solutions and Risk Measurement team in Danske Capital. The team is responsible for development of risk models for a number of Danske Capital’s products, including hedge funds. Per has more than 22 years of experience within the financial markets. Before joining Danske Capital, he worked at SimCorp, ABN- AMRO, Nordea and SAMPENSION. Per Søgaard-Andersen holds a Ph.D. from DTU (the Technical University of Denmark). Rasmus Majborn is Risk Analyst with the Alternative Solutions and Risk Measurement team in Danske Capital. The team is responsible for development of risk models for a number of Danske Capital’s products, including hedge funds. Rasmus has seven years of experience within the financial markets and holds a MSc in mathematics and economics from the Copenhagen Business School. The team is highly dedicated with the monitoring and managing of portfolio risk. The state of the art Value-at-Risk based risk management model is so superior, that the portfolio managers use the model actively in the decision-making process to evaluate portfolio impact in terms of diversification effects. Per Søgaard-Andersen, Chief Analyst. Born Rasmus Majborn, Risk Analyst. Born 1973.

5 The Basics Per Søgaard-Andersen is Chief Analyst with the Alternative Solutions and Risk Measurement team in Danske Capital. The team is responsible for development of risk models for a number of Danske Capital’s products, including hedge funds. Per has more than 22 years of experience within the financial markets. Before joining Danske Capital, he worked at SimCorp, ABN- AMRO, Nordea and SAMPENSION. Per Søgaard-Andersen holds a Ph.D. from DTU (the Technical University of Denmark). Rasmus Majborn is Risk Analyst with the Alternative Solutions and Risk Measurement team in Danske Capital. The team is responsible for development of risk models for a number of Danske Capital’s products, including hedge funds. Rasmus has seven years of experience within the financial markets and holds a MSc in mathematics and economics from the Copenhagen Business School. 5 To generate attractive absolute returns by investing in primarily Scandinavian and European Fixed Income Markets. The value is mainly created through relative-value and convergence strategies Objectives Target return = risk free rate + 4% Attractive Sharpe ratio Low correlation with other asset classes Target return = risk free rate + 4% Attractive Sharpe ratio Low correlation with other asset classes Targets Danske Capital’s long expertise and experience as one of the leading managers in the Scandinavian Fixed Income Markets Means Risk not exceeding 125% of a 10-year Danish government bond measured by Value-at-Risk The investment universe as described later Risk not exceeding 125% of a 10-year Danish government bond measured by Value-at-Risk The investment universe as described later Restrictions

66 Danish government-guaranteed bank issues Purchase of Danish government-guaranteed bank issues And sale of e.g. short-term Danish government bonds with similar maturities I.e. no interest-rate risk or credit risk associated with debt issued by the Danish government Yield pick-up of 80 basis points De facto we have hedged the interest-rate risk through the use of interest-rate swaps (credit risk associated with Denmark) The risk is one of liquidity shortages and spread widening in a stressed market In terms of risk, bonds are treated as a combination of AAA rated covered bonds and government bonds Purchase of Danish government-guaranteed bank issues And sale of e.g. short-term Danish government bonds with similar maturities I.e. no interest-rate risk or credit risk associated with debt issued by the Danish government Yield pick-up of 80 basis points De facto we have hedged the interest-rate risk through the use of interest-rate swaps (credit risk associated with Denmark) The risk is one of liquidity shortages and spread widening in a stressed market In terms of risk, bonds are treated as a combination of AAA rated covered bonds and government bonds Because of the crisis in the financial sector many banks had to apply for a government-guarantee to raise cash in the capital markets

77 Swedish bostäder I The figure shows the yield pickup on a 4-year AAA rated Swedish mortgage bond (Stadshypotek) The bond is trading at a relatively high premium in a historical perspective The red dots indicate how much the yield spread may rise on a 3, 6 and 12-month horizon before leading to a negative return on the investment The investment has been hedged. Thus the return will be inde- pendent of the underlying trend in interest rates Turbulence in the SEK money market has been the driver of the recent spread widening The figure shows the yield pickup on a 4-year AAA rated Swedish mortgage bond (Stadshypotek) The bond is trading at a relatively high premium in a historical perspective The red dots indicate how much the yield spread may rise on a 3, 6 and 12-month horizon before leading to a negative return on the investment The investment has been hedged. Thus the return will be inde- pendent of the underlying trend in interest rates Turbulence in the SEK money market has been the driver of the recent spread widening Strategy: Purchase of bostad bonds funded through repo trades. Hedging of interest-rate risk through a matching interest-rate swap StrategyTotal Buy/SellBondYTM, bondYTM, swap3M REPO3M Stiboryield BuySM1576 (4½-årig) Fixed legFloating leg

88 Swedish bostäder II The figure shows the ASW structure for Swedish bostäder Bonds with shorter maturities are more expensive (lower risk premium) than bonds with longer maturities However, this trend is reversed around a maturity of 5-6 years 10-year bostäder appear relatively expensive compared to 5-year bonds Primarily because of the lack of issuance of 10-year maturities and heavy issuance of 5-year maturities In our opinion investors are not sufficiently compensated for the (spread) risk in the 10-year segment The figure shows the ASW structure for Swedish bostäder Bonds with shorter maturities are more expensive (lower risk premium) than bonds with longer maturities However, this trend is reversed around a maturity of 5-6 years 10-year bostäder appear relatively expensive compared to 5-year bonds Primarily because of the lack of issuance of 10-year maturities and heavy issuance of 5-year maturities In our opinion investors are not sufficiently compensated for the (spread) risk in the 10-year segment Strategi: Buy 5-year bonds and sell 10-years (on an ASW basis) in a spread risk neutral ratio (2:1) Risk: The price of 10-year bonds will exceed that of 5-year bonds on an ASW basis

99 Outright: Long-term EUR forward rates are considered overbought The figure shows the development in the level of 20-year rates in 20 years in Euroland since Long- term EUR forward rates appear overbought. The reason for this is the risk aversion caused by the South European sovereign debt crisis and fears of recession which have prompted/led to a demand for long-term swap rates by European pension funds. Source: Danske Analytics and Danske Capital. Historical performance is not indicative of future performance

10 Relative Value (RV): 10s30s steepening 4y forward Strategy: Pay 30s and receive 10s with a 4-year forward start. Beta-neutral ratio  no underlying interest-rate risk. Strategy has positive roll-down/carry Risk: The curve (10s30s) is flattening further because of increased risk aversion

11 Danish long dated bonds (30 year) rich compared to Germany

12 Danish medium term bonds (6 year) rich compared to Germany on a relative basis (vs. swapcurve)

13 On the USD curve 5-year looks cheap compared to 2-year. We believe the curve is to steep and position for a flatter curve

forecast, strategies and returns Short-term Danish non-callable mortgage bonds Perhaps hedged through the use of government bonds Swedish bostäder where the interest-rate risk has been hedged through the use of interest-rate swaps (attractive spread curve on a 5-year horizon looks attractive) New positions in short-term European AAA-rated mortgage bonds (< 3 years) Relative value strategies Higher yields Steeper curves Country spreads As basic return is provided on the basis of our current holding of Danish government-guaranteed bank issues and EUR covered bonds Short-term Danish non-callable mortgage bonds Perhaps hedged through the use of government bonds Swedish bostäder where the interest-rate risk has been hedged through the use of interest-rate swaps (attractive spread curve on a 5-year horizon looks attractive) New positions in short-term European AAA-rated mortgage bonds (< 3 years) Relative value strategies Higher yields Steeper curves Country spreads As basic return is provided on the basis of our current holding of Danish government-guaranteed bank issues and EUR covered bonds

15 Return

16 Return relative to the FI Arbitrage Hedge Fund Index

17 Return relative to other asset classes since inception aktivklasser siden etablering

18 Performance ratios Rasmus Majborn is Risk Analyst with the Alternative Solutions and Risk Measurement team in Danske Capital. The team is responsible for development of risk models for a number of Danske Capital’s products, including hedge funds. Rasmus has seven years of experience within the financial markets and holds a MSc in mathematics and economics from the Copenhagen Business School. All data hedged to EUR

19 Management and performance fee /issuance / home page Performance fee - 20% of the return above the risk free rate Management fee -1,10% (63,5 bp to Luxembourg) Weekly NAV / weekly issuance / weekly redemptions (1 week notice) /

20 Awards / nominations DIHFIS winner of hedgeweek Best Fixed Income Hedgefund award -Hedgeweek - March 2009 “The fund posted a positive return over the financial crisis with more than 40% and also managed to maintain low volatility” DIHFIS ranked 6th best Fixed Income Hegdefund by Barclayshedge based on a 3 year-period return - Barclays Hedge - November 2010 DIHFIS nominated by EuroHedge/Euromoney as best Fixed Income Hedgefund in Eurohedge/Euromoney – December 2010

21 What happened …. ? What appeared cheap … Cheap Rich

22 … a massive cheapening of even AAA-rated short-term assets …. became a lot cheaper! Cheap Rich

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