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

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

3. 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?

4. 3 What are alternative investments?  Incentive based investment management  Less liquid and longer term investment vehicles  Absolute return investments  Skill based investment vehicles

5. 4 Examples of Alternative Investments  Hedge Funds  Private Equity & Venture Capital  Real Estate Investment  Structured Notes  Commodity Funds?

6. 5 Benefits of Alternative Investments in Investment Portfolios  Performance  Diversification  Non Correlation ?  Lower Volatility?  Downside Protection?

7. 6 Do Alternative Investments Increase Portfolio Risk? Perception  More Volatile  Market risk is large  Highly Speculative 1 Reality  Less Volatile  Absolute return  Provide diversification

8. 7 What are the real risks in alternative investments?  Illiquidity  Leverage  Redemptions  Less regulated 1

9. 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

10. 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

11. 10 Diversification - Increased Asset Classes

12. 11 Performance of alternative investments vs. traditional Annualized returns 1994-2006 Source: Goldman Sachs Thomson Venture Hennessee Hedge Fund Group

13. 1 2006 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

14. 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%330.131.37 6.19%3.83%-5.15%58-0.010.63 8.95%2.90%-6.27%350.051.66 5.82%8.05%-7.74%515-0.050.28 12.09%10.05%-15.04%29170.470.80 11.77%5.54%-16.05%5100.251.35 8.84%13.45%-46.80% 3040 1.000.41 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

15. 14 Public vs. Private Investing 2005 $139.6B $135.8B Demand for Alternative Investments Source: Federal Reserve Bank of Chicago Private Equity Conference 2006

16. 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 2006 15

17. 16 $ Billion Buyout Funds (Excludes Venture Capital) Source: Private Equity Analyst, Willis Stein Partners Private Equity Dollars Raised

18. 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

19. 18 Alternative Investments - For Asset Managers… Disproportionate Profitability Proportion of firm’s institutional assets and revenues from Alternative Investments 2006 15%36% Source: McKinsey 2006 AssetsRevenues

20. 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

21. 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

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

23. 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

24. 23 Pension Fund Return Assumptions S&P 500 Companies Source: JP Morgan 1999 Average: 9.2% 2006 Average: 8.1% Return Assumptions % of Companies

25. 24 Performance of alternative investments vs. traditional Annualized returns 2002-2006 Source: Goldman Sachs Thomson Venture Hennessee Hedge Fund Group

26. 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

27. 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