1. © 2009 Investment Technology Group, Inc. All rights reserved. Not to be reproduced or retransmitted without permission. Broker-dealer products and services offered by ITG Inc., member FINRA, SIPC. 091709-37177 Ian Domowitz, Managing Director Transaction Costs and Portfolio Capacity Analysis

2. 1 Capacity Analysis Academic Definitions and Industry Practice The dependence between portfolio performance and size of fund The study of ways to increase AUM for a target level of return Identification of optimal turnover for every level of AUM How to expand fund size while ‘remaining efficient’ Current investment strategy will lose 15 places in its ranking by growing to $5B Based on a peer group of 746 names the fund will likely fall into the second quartile by growing to $6B Growing to $3.5B, while keeping within first quartile, might be possible with careful liquidity planning At a level of $2.5B, there is room to increase turnover

3. 2 An Alternative View of Portfolio Capacity Analysis General themes ex ante versus ex post strategy space underlying investment decisions Fixed portfolio strategy Determination of turnover and net returns jointly Capacity Conclusions Ex post analysis Ex ante analysis

4. 3 Cost and Fixed Portfolio Strategies Daily Market-Impact Costs for U.S. Indices Trade Lists up to $5 Billion

5. 4 Past is Prologue “Optimal” Turnover Optimal Turnover Rates for Different Levels of Assets Under Management

6. 5 An Efficient Frontier for Turnover

7. 6 Regional Weights in a Tangent Portfolio August 2008 $500 Million Source: Investment Technology Group, Inc.

8. 7 The Smoking Gun Optimization and Costs

9. 8 Turnover Determined

10. 9 Optimal Turnover Revisited Levels Corresponding to Highest Net Return

11. 10 Removing Turnover Constraints The envelope curve which traverses all possible turnover levels for a $500mln fund and which passes through the highest net return

12. 11 Trading Strategy and Turnover

13. 12 Two Lessons from the Analysis Previous focus on turnover as a choice variable, and on its role as a proxy for implementation cost, is misplaced Considering stock-specific transaction costs at the portfolio construction stage enables higher turnover levels Turnover levels are determined through the interaction of alpha predictions and expected cost estimates Managing at higher turnover levels allows for faster processing of new information, and in conjunction with cost control, leads to superior net return Limiting the strategy space within which portfolio strategy is formulated negatively impacts returns and reduces the capacity of a fund Limiting that set of strategies also distorts capacity analysis and biases capacity choice down, in general There is particular importance to adding trading strategy to the strategy space underlying the investment decision

14. 13 Disclaimers The information contained herein has been taken from trade and statistical services and other sources we deem reliable but we do not represent that such information is accurate or complete and it should not be relied upon as such. No guarantee or warranty is made as to the reasonableness of the assumptions or the accuracy of the models or market data used by Investment Technology Group, Inc. or the actual results that may be achieved. These materials are for informational purposes only, and are not intended to be used for trading or investment purposes or as an offer to sell or the solicitation of an offer to buy any security or financial product. These materials do not provide any form of advice (investment, tax or legal). Investment Technology Group, Inc. is not a registered investment adviser and does not provide investment advice or recommendations to buy or sell securities, to hire any investment adviser or to pursue any investment or trading strategy. Any opinions expressed herein reflect the judgment of the individual presenter as this date and do not necessarily reflect the opinions of Investment Technology Group, Inc. All information, analysis and terms set forth herein are indicative, based on, among other things, market conditions as of the time of this presentation, and are subject to change without notice.