Title S32 - Black

Hedge Fund Replication inAsset Allocation& Risk Management

November 16th, 2007Vassilis Karavas, Ph.D.Head of Portfolio DesignCredit Agricole Structured Asset Management

Frontiers in Hedge Funds And Proprietary Trading Forum

CASAM Group Managed Account Platform

Disclaimers

THIS MATERIAL HAS BEEN PROVIDED FOR INFORMATIONAL AND ILLUSTRATION PURPOSES, IS FURNISHED ON A CONFIDENTIAL BASIS, IS INTENDED ONLY FOR THE USE OF THE AUTHORIZED RECIPIENT AND MAY NOT BE DISTRIBUTED TO ANY OTHER PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF CRÉDIT AGRICOLE STRUCTURED ASSET MANAGEMENT (“CASAM”), CRÉDIT AGRICOLE STRUCTURED ASSET MANAGEMENT ADVISERS LLC (“CASAM ADVISERS”), LYRA CAPITAL LLC (“LYRA”) AND CREDIT AGRICOLE STRUCTURED ASSET MANAGEMENT AMERICAS LLC (“CASAM AMERICAS”, AND TOGETHER WITH CASAM ADVISERS, CASAM, LYRA AND THEIR AFFILIATES, THE “CASAM GROUP”). THIS MATERIAL IS NEITHER ADVICE NOR A RECOMMENDATION TO ENTER INTO ANY TRANSACTION. THIS MATERIAL IS NOT AN OFFER TO BUY OR SELL, NOR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. ANY OFFER OR SOLICITATION OF AN INVESTMENT IN ANY FUND MANAGED BY ANY MEMBER OF THE CASAM GROUP NOW OR IN THE FUTURE (THE “FUNDS”) MAY BE MADE ONLY BY DELIVERY OF THE FUND’S CONFIDENTIAL OFFERING DOCUMENTS (COLLECTIVELY, THE “MEMORANDUM”) TO QUALIFIED INVESTORS. AN INVESTMENT IN A FUND IS NOT SUITABLE FOR ALL INVESTORS. BEFORE MAKING ANY INVESTMENT IN A FUND, YOU SHOULD THOROUGHLY REVIEW THE MEMORANDUM WITH YOUR LEGAL, FINANCIAL AND TAX ADVISORS TO DETERMINE WHETHER AN INVESTMENT IN THE FUND IS SUITABLE FOR YOU. YOU SHOULD NOT RELY IN ANY WAY ON THIS INFORMATION. CERTAIN INFORMATION PROVIDED HEREIN IS OBTAINED FROM SOURCES, INCLUDING PUBLICLY AND PRIVATELY AVAILABLE INFORMATION, THAT THE CASAM GROUP CONSIDERS TO BE RELIABLE; HOWEVER, WE CANNOT GUARANTEE AND MAKE NO REPRESENTATION AS TO, AND ACCEPT NO RESPONSIBILITY OR LIABILITY FOR, THE ACCURACY, FAIRNESS OR COMPLETENESS OF THIS INFORMATION. INFORMATION IS AS OF THE DATE(S) INDICATED AND IS SUBJECT TO CHANGE.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

THE FUNDS ARE UNREGISTERED PRIVATE FUNDS AND ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS. THERE ARE RESTRICTIONS ON TRANSFERRING FUND INVESTMENTS AND THERE IS NO SECONDARY MARKET NOR IS ONE EXPECTED TO DEVELOP FOR INVESTMENTS IN ANY FUND MANAGED BY THE CASAM GROUP. THE FUNDS HAVE HIGH FEES AND EXPENSES THAT WOULD REDUCE RETURNS AND OTHER SPECIFIC RISKS AS TO A PARTICULAR FUND’S INVESTMENTS AND STRATEGIES.

"DOW JONES HEDGE FUND STRATEGY BENCHMARKS" AND “DOW JONES BALANCED PORTFOLIO INDEXES” ARE TRADEMARKS OF DOW JONES HEDGE FUND INDEXES, INC. ("DOW JONES"). THE TRADEMARKS HAVE BEEN LICENSED FOR CERTAIN PURPOSES BY AIRT LLC. THE INSTITUTIONAL BENCHMARKS SERIESTM ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY DOW JONES OR ANY OF ITS AFFILIATES AND NEITHER DOW JONES NOR ANY OF ITS AFFILIATES MAKES ANY REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN SUCH PRODUCTS. CASAM AND AIRT LLC CLAIM COPYRIGHTS IN ALL WORKS OF AUTHORSHIP CONTAINED IN THIS PUBLICATION AND ITS CONTENTS.

CERTAIN INFORMATION CONTAINED IN THIS DOCUMENTS REFLECTS THE OPINIONS OF THE PRESENTER AND SHOULD NOT IN ANY WAY BE PERCEIVED TO BE THE OPINIONS OF CREDIT AGRICOLE STRUCTURED ASSET MANAGEMENT.

THIS MATERIAL AND ITS CONTENTS ARE PROPRIETARY INFORMATION OF CASAM AND AIRT LLC AND AFFILIATES AND MAY NOT BE REPRODUCED OR OTHERWISE DISSEMINATED IN WHOLE OR IN PART WITHOUT PRIOR WRITTEN CONSENT.

CONFIDENTIAL — DO NOT COPY OR DISTRIBUTE

© 2007 CASAM & AIRT LLC. ALL RIGHTS RESERVED.


CASAM - Corporate Structure

100% Crédit Agricole subsidiary

Founded on 1st September 2005, Crédit Agricole Structured Asset Management is a joint venture equally owned by Crédit Agricole Asset Management (CAAM) Group and Calyon

International presence strengthened through the purchase of CASAM Americas (formerly Ursa Capital), a US player recognized for its expertise in managed accounts

The CASAM Group managed account platform, and each constituent fund, is subject to the oversight of CASAM Advisers LLC and Lyra Capital LLC, registered investment advisers pursuant to the U.S. Investment Advisers Act of 1940.

CASAM Americas

100%

50%

Crédit Agricole S.A.

50%

100%

CAAM Financial Solutions


CASAM – Key Figures at September 28th, 2007

Assets (Billion) EUR USD

Total 50.4 72.0

Structured Products* 36.3 51.7

“Vanilla” Employee Savings Schemes

8.1 11.6

Managed Accounts 3.9 5.6

ETF 2.1 3.1

Funds

Total 486

Structured Products 318

“Vanilla” Employee Savings Schemes

89

Managed Accounts 76

ETF 3

* Including Structured Employee Savings Schemes

Breakdown of Assets by Activity

StructuredProducts

72%

ManagedAccounts

8%

Exchange TradedFunds

4%

"Vanilla" Employee Savings

Schemes16%


CASAM Group Alternative Investment Solutions

CASAM Group Managed Account Platform A customized solution for investors seeking the returns of alternative

investments in a risk-controlled environment while satisfying requirements such as transparency and liquidity

Dow Jones Hedge Fund Index Products Licensing agreement dating back to October 2003

Dow Jones Hedge Fund Indexes uses Lyra’s investment methodology and platform, as the basis for its hedge fund indexes

CASAM/CISDM Database Formerly the MARHedge database, the CASAM CISDM Database is the oldest

CTA and hedge fund database in the market, providing research data for the hedge fund universe

The sole source of data for Barron’s monthly hedge fund and CTA league tables


Why Hedge Fund Replication

Hedge Fund Replication is: The ability to deliver the economic characteristics of a particular beta (traditional and/or

alternative)

True alpha is too idiosyncratic and often volatile to be meaningfully replicated

The asset allocation perspective Hedge fund performance is largely due to exposure to market factors (alternative betas)

The definition of alpha has changed to include less “beta”

Hedge fund replication allows for both asset allocation & portfolio risk management

Institutional Portfolios Equity & Fixed Income exposure as primary holdings

New betas as part of the new primary holdings Hedge Funds as a source of alternative betas

Institutional investors introduce or increase hedge fund exposure Primary concern remains the conservative approach to investing in hedge funds

Increased interest in transparency (managed accounts as a means of hf investing)

Hedge fund investing expertise is not always available in-house for institutional portfolios


What hedge fund Replication does offer … or does not offer

Caution!

Hedge Fund Replication ≠ Duplication

Investors should NOT expect an exact replica of the asset



Caution!

Exposure to the same underlying economic factors

does not necessarily mean same

performance or risk

Performance: 174mph

Performance: 225mph

Performance differential: 29.31%



Caution!Replication of the certain statistics does not imply

exposure to same economic factors

and/or

same performance over short periods of time

Performance: 140mph

Performance: 140mph

Performance differential: 0%

0-60mph: 9.2’’

0-60mph: 7.1’’

Time differential (0-60mph) 2.1’’


Investors Approach

Investors should be wary and examine the means of replication and what is actually offered through that investment vehicle

Important to understand what exactly needs to be replicated – different techniques offer different replicating attributes

Examine the fit to the entire portfolio, risk management, and cost


Manager-based Hedge Fund Replication

Manager Based Replication via direct investment to hedge fund manager or managed accounts

Investable Indices – Dow Jones, HFR, CS/Tremont, FTSE, etc.

Benefits to Portfolio Management Low cost access to alternative betas

Liquidity

Daily NAV (when based on managed accounts)

Easy integration to the overall asset allocation model

In a core-satellite approach, alternative betas are often met in the core portfolio

Can be used as the Main allocation to hedge funds or as the Core hedge fund portfolio

Institutional type products that do not require the extensive expertise of hedge fund allocators

Greater flexibility to product creation

Structured Notes (CPPI’s, Options etc)

Participation in tax efficient structures/products


Factor-based Hedge Fund Replication

Factor Based Replication of the alternative betas using factor models that replicate certain

economic factors and allow for exposure to them

In Portfolio Management Low cost access to alternative betas

Liquidity is dependent on the underlying assets

Particularly useful for asset allocation models based on macro-economic data and views – More difficult to incorporate in an active portfolio with many moving pieces


Distribution-based Hedge Fund Replication

Distribution Based Emphasis on statistical behavior instead of sources of return

In Portfolio Management Low cost to modifying portfolio behavior over time

Time is important for replication

Liquidity depends on the underlying assets, but can be high

Can be used in asset allocation models with predetermined behavior over time

Market dislocations may affect the statistical behavior


Security-based Hedge Fund Replication

Security Based Replication via direct investment to

liquid securities

Model driven allocations – quantitatively selected

Benefits to Portfolio Management Low cost access to alternative betas

Highly liquid investments

Easy to participate on the long and short side as stand alone investment or as a hedge

Alpha

Beta

80

90

100

110

120

130

140

150

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64

Alpha?

Alpha?

Beta

-170

-160

-150

-140

-130

-120

-110

-100

-90

-80

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64

Beta Hedge

Beta exposure


Risk Management & Portfolio Selection

Risk Management Ability to take control of the portfolios exposure to economic factors &

adjust at a low cost

Addresses actively or passively the liquidity concerns

Direct investment to provide exposure

Overlay to hedge exposures during market dislocations

Ability to create “Look through” products – currently available only in managed account based investments

Particularly important to certain regions where Basel II has been implemented


Conclusions

Facilitate access to hedge fund investing. Choice of

Strategy betas

Statistical properties

Economic factors

Combination

Lower cost of entry

A new era in

Hedge fund investing

Hedge fund based products

Ability to hedge Hedge Funds (hedge2 ?)


Contact CASAM

CASAM Advisers LLCTwo Grand Central Tower

140 E. 45th Street, 16th Floor

New York, NY 10017

Tel : (212) 277-6440

Fax : (212) 277-6441

[email protected]

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