©2007, The McGraw-Hill Companies, All Rights Reserved 14-1 McGraw-Hill/Irwin Hedge Funds vs. Mutual Funds Regulation Minimum Investment Investors Availability SEC Registered Small $ amounts Unlimited General Public Unregulated private investment vehicle Average Minimum $1million Max of 499 “limited partners” that can invest in a particular fund Accredited Investor (Net worth of $1million, etc.) Mutual Funds Hedge Funds Characteristic

©2007, The McGraw-Hill Companies, All Rights Reserved 14-2 McGraw-Hill/Irwin Hedge Funds vs. Mutual Funds Liquidity Short Selling Leverage Fees Daily Max 30% of profits from short sales Little if any leverage Limits Imposed by the SEC “Lock up” periods vary from monthly to annually Unlimited No regulatory limit on the leverage assumed by fund No limits, typically 1-2% up front plus 20% of the profits Mutual Funds Hedge Funds Characteristic

©2007, The McGraw-Hill Companies, All Rights Reserved 14-3 McGraw-Hill/Irwin Advantages of Hedge Funds vs. Mutual Funds Source: Hedge Fund Association Flexibility –Instruments that mutual funds can’t use Short selling, leverage, concentrated investments, derivatives –Complex hedging strategies to protect against downside risk Incentive Structure –Compensation potential Attracts top talent Pays manager only when returns are positive Over past nine years the number of hedge funds has grown 20% each year. –Estimated to be an $875 Billion industry with 8350 funds

©2007, The McGraw-Hill Companies, All Rights Reserved 14-4 McGraw-Hill/Irwin Various Categories of Hedge Funds Strategies Source: Hedge Fund Association Aggressive Growth Market Neutral – Securities Hedging Distressed Securities Emerging Markets Fund of Funds Market Timing Opportunistic Multi-Strategy

©2007, The McGraw-Hill Companies, All Rights Reserved 14-5 McGraw-Hill/Irwin Various Categories of Hedge Funds Strategies Source: Hedge Fund Association Income Macro Market Neutral – Arbitrage Short-Selling Special Situations Value