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Fresno County Employees’ Retirement Association 2006 RetreatEducational Session on Portable AlphaHarris RanchNovember 19, 2006

Jeffrey J. MacLean, President, Chief Executive Officer

SEATTLE999 Third AvenueSuite 3650Seattle, Washington 98104206.622.3700 telephone

206.622.0548 facsimile

LOS ANGELES2321 Rosecrans AvenueSuite 2250El Segundo, California 90245310.297.1777 telephone310.297.0878 facsimile

Presentation Note: Portions of this presentation from Blackstone Alternative Asset Management

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What is Portable Alpha?

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Portable Alpha: Basic Example

Traditional Approach

Invest $80 million in market exposure (S&P 500 Index)

Invest $20 million in market neutral hedge fund

Portable Alpha Approach

$100mm exposure via swap (S&P 500 Index)

Invest $100 million in market neutral hedge fund

$80mm $20mm

Index HF Swap HF

Portfolio Expected Return =

($80mm * 4.0%) + ($20mm * 8.0%) = 4.8%

Portfolio Expected Return =

($100mm * 4.0%) + ($100mm * 8.0%) = 12%

$100 mmLIBOR +/-

•Example

• $100MM portfolio invested in US Stocks

• Would like get a real return of 4%, better if possible

• Investor has identified a hedge fund of funds likely to generate alpha, with an expected return of 8%

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Swap Counterpar

ty

Hedge Fund of

FundFresno

$10MM

Index return + fund return less

costsLIBOR +/- Spread

Return on Index

Underlying Hedge Fund

Managers or

Securities

$10MM

Return on hedge

funds less costs

Advantages

Access strategy through a single transaction

No ongoing management is necessary

Access to broadly diversified uncorrelated basket of securities

Capture Intelligence

Disadvantages

Fees for management and execution

Alpha sources are limited to one manger

Manager fails to outperform benchmark

Liquidity/Flexibility is sacrificed

Counterparty Credit Risk

Portable Alpha: Actual Example

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Alpha & Beta Considerations

Alpha:

• Alpha source should provide superior risk-adjusted returns and lower volatility • Focus on absolute return rather than performance relative to a benchmark• High attention to risk management to minimize negative returns• Highly diversified with low correlation to other asset classes and no concentrated

risks

Beta:

• Beta is primarily obtained via Futures or Swaps• Many beta exposures are available (S&P 500, Russell 2000, Lehman Agg, EAFE)• Beta should be selected from the most efficient segments of the market• Cost of beta varies depending on liquidity and pricing• Choice of Counterparty is critical, default risk or credit risk must be minimized

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Efficient MarketsUniverse Name: Large Cap Core Equity

Data Frequency Used: Quarterly

Benchmark Used: S&P 500

Period Ending Date: Jun-06

3 Years 5 Years 10 Years

Annualized Alpha Annualized

Alpha Annualized

Alpha 

High  18.16  11.13  16.08 

5th Percentile  6.89  6.36  5.61 

25th Percentile  3.24  2.97  3.03 

Median  0.99  1.29  1.50 

75th Percentile  -0.42  -0.08  0.18 

95th Percentile  -2.97  -1.82  -2.00 

Low  -6.92  -4.26  -3.76 

# of Observations  273  244  167 

Universe Name: Core Fixed Income Universe Name: Core Plus Fixed Income

Data Frequency Used: Quarterly Data Frequency Used: Quarterly

Benchmark Used: LB Aggregate Bond Benchmark Used: LB Aggregate Bond

Period Ending Date: Jun-06 Period Ending Date: Jun-06

3 Years 5 Years 10 Years 3 Years 5 Years 10 Years

Annualized Alpha Annualized

Alpha Annualized

Alpha  Annualized Alpha Annualized

Alpha Annualized

Alpha 

High  3.56  2.77  3.29  High  8.11  8.68  8.16 

5th Percentile  1.18  1.28  1.20  5th Percentile  4.62  5.12  5.42 

25th Percentile  0.58  0.57  0.55  25th Percentile  1.78  2.34  2.18 

Median  0.26  0.21  0.05  Median  1.15  1.35  1.14 

75th Percentile  -0.14  -0.19  -0.35  75th Percentile  0.64  0.83  0.71 

95th Percentile  -0.87  -0.96  -1.21  95th Percentile  -0.10  -0.36  -0.86 

Low  -1.48  -2.27  -2.90  Low  -3.59  -5.88  -8.03 

# of Observations  247  240  193  # of Observations  128  118  68 

Large Cap Core and Fixed Income are among the most efficient segments of the market. Market performance is easy to obtain (Beta), but risk adjusted excess return (Alpha) is not.

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Hedge Fund of Funds Provide “Alpha Engines”Hedge Fund of Funds provide possible alpha engines because of their focus on low volatility, diversified strategies and absolute returns:

Blackstone Partners NT

Since July of 1996, out of 123 monthly observations:

Partners NT has had 18 negative months Lehman Agg has had 37 negative months S&P 500 has had 47 negative months

Of Partners NT’s 18 negative months, 13 have coincided with S&P 500 negative months and 7 have coincided with Lehman Agg negative months.

Lehman Agg Partners NT S&P 500

Annualized Geometric Return 6.5% 10.0% 8.7%

Annualized Standard Deviation 3.6% 4.0% 15.4%

% Positive Months 69.9% 85.4% 61.8%

% Negative Months 30.1% 14.6% 38.2%

*July 1996 – September 2006

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Blackstone’s Performance

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

2001 na na na na na na na na na na na 1.16% 1.16%

2002 1.03% 0.43% 0.44% 0.72% 0.28% -1.79% -1.90% 0.79% -0.30% 0.28% 1.27% 0.69% 1.88%

2003 1.00% 0.42% 0.04% 1.37% 1.31% 0.95% -0.19% 0.40% 0.64% 1.06% 0.52% 1.38% 9.27%

2004 1.32% 0.52% 0.25% 0.31% -0.33% 0.14% -0.54% 0.06% 0.55% 0.77% 1.56% 1.22% 5.97%

2005 0.37% 0.94% -0.02% -0.84% 0.18% 1.08% 1.34% 0.62% 1.42% -1.06% 1.42% 1.35% 6.99%

2006 2.47% 0.73% 1.44% 2.02% -1.54% 0.10% -0.05% 0.49% 0.83% na na na 6.61%

Portfolio Sep-06 QTD YTD Life *

Partners NT 0.83% 1.27% 6.61% 6.59%

90 day T-bill 0.41% 1.27% 3.63% 2.29%

Lehman Agg Bond 0.88% 3.81% 3.06% 4.83%

S&P 500 TR Index 2.58% 5.67% 8.53% 5.19%

*Funded 12/1/01

2002 2003 2004 2005

S&P 500 Index -22.10% 2.87% 10.90% 4.90%Total U.S. Fixed 4.50% 7.30% 4.40% 2.70%LB Aggregate 10.30% 4.10% 4.30% 2.40%Partners NT 1.88% 9.27% 5.97% 6.99%

Blackstone monthly returns since inception

A portable alpha program would have outperformed corresponding investments over the past 4 full calendar years

Fresno has experienced 11 negative months while invested in Partners NT