KCS Fund Strategies Inc Disciplined Fund of Hedge

KCS Fund Strategies Inc. Disciplined Fund of Hedge Funds Portfolio Management Contemporary Perspectives on Hedge Fund Investing CFA Victoria – February 21 st, 2007

Agenda Why add hedge funds to a portfolio? Why take a portfolio approach? What are the merits of low volatility hedge funds? Is an equity investing framework useful? 2

What is a Hedge Fund? 3

What is a Hedge Fund? Description n Similar to mutual fund Professionally managed pool of assets Ø Specified objectives Ø n n n Investors typically must be qualified or accredited Short positions/hedging allowed Leverage Position concentration Lower liquidity Trading strategy ≠ investment strategy 4

What is a Hedge Fund? Hedge Fund Strategies 1. 2. 3. 4. 5. 6. 7. Equity Long/Short Equity Market Neutral Dedicated Short Bias Emerging Markets Convertible Arbitrage Fixed Income Arbitrage Event Driven n n 8. 9. 10. Merger Arbitrage Distressed Global Macro Managed Futures / CTA Multi-Strategy 5

What is a Hedge Fund? Typical Hedge Fund Trade Hypothetical Convergence/Divergence Pairs Trade 110 Trade Initiated 100 Trade Completed Price 90 80 70 60 50 Asset 1 Asset 2 6

What is a Hedge Fund? Typical Hedge Fund Trading Model n n n A convergence hypothesis underlies the trading model of most hedge fund managers Trading models are analogous to business models for private or public companies Evaluation of likelihood of success is similar: Focus on quality, track record of managers Ø Ensure strategy is well articulated Ø Look for sustainable competitive advantages Ø 7

Why add Hedge Funds to a Portfolio? 8

Why add Hedge Funds to a Portfolio? Stability of Returns & Outperformance 9

Why add Hedge Funds to a Portfolio? High Return per Unit of Risk CSFB/Tremont Indices vs. Traditional Assets – Since February 1997 20% 16. 3% 15. 2% 15% 10% 9. 8% Returns 9. 0% 7. 1% 7. 2% Standard Deviation 5% 0% Tremont Hedge Fund Index S&P 500 TSX 10

Why add Hedge Funds to a Portfolio? Diversification Benefits Correlations – Since February 1997 CSFB/Tremont S&P 500 0. 43 TSX 0. 62 0. 79 Scotia Bond Index 0. 12 -0. 02 TSX 0. 05 11

Why add Hedge Funds to a Portfolio? Drawdown & Recovery n Drawdown Ø n Period of negative returns from peak to trough Hedge Fund Indices Ø Less severe and faster recovery Other Metrics - Since February 1997 S&P 500 TSX Scotia Bond Index HFRI Conservative Fo. F Index (HFRI CFI) CSFB/Tremont Index % Positive Months Maximum Drawdown Months to Recover / % Yet to Recover 60. 5% 61. 3% 69. 7% 77. 3% 71. 4% -46. 28% -45. 05% -11. 19% -6. 62% -13. 81% 52 / 6. 55% 38 / none 9 / none 6 / none 12

The Need for a Portfolio Approach 13

Need for a Portfolio Approach Benefits of Portfolio Approach Annualized Standard Deviation of Various Equities 83. 18% 90 80 70 55. 59% 60 50 40 26. 27% 30 16. 40% 20 10 0 BCE Nortel Kinross TSX 14

Need for a Portfolio Approach Benefits of Portfolio Approach Annualized Standard Deviations of Hedge Funds 30% 25% 20% 13. 72% 15% 12. 44% 7. 82% 10% 5. 81% 5% 0% 10 Largest Canadian Hedge Funds 10 Largest Global Hedge Funds CSFB/Tremont Hedge Fund Index HFRI Fund of Funds Index 15

Need for a Portfolio Approach Risk of One Stock vs One Hedge Fund BCE - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Representative Canadian Hedge Fund - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 16

Need for a Portfolio Approach Risk of non-“Blue Chip” stocks Nortel Networks Corp. - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Kinross Gold Corp - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% Some extreme returns exceed scale and are lumped at +/- 50% 17

Need for a Portfolio Approach Risk of Hedge Fund Index vs Equity Index S&P 500 Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Credit Suisse / Tremont Hedge Fund Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 18

Need for a Portfolio Approach Risk of Hedge Fund Index vs Equity Index TSX Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Scotia Capital Universe Bond Total Return Index - February 1997 to December 2006 40% 35% 30% 25% 20% 15% 10% 5% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 19

The Merits of Low Volatility Hedge Funds 20

Merits of Low Volatility Hedge Funds Hedge Fund Strategy Risk Profiles CSFB/Tremont Risk/Return - Since February 1997 - Annualized 20% 15% 10% 5% 11. 9% 9. 9% 2. 7% 9. 8% 3. 6% 5. 4% 3. 8% 9. 0% 4. 8% 10. 7% 9. 4% 5. 9% 12. 4% 10. 7% 11. 9% 7. 1% 17. 8% 15. 0% 9. 6% Tremont Returns Tremont Std Deviation 0% -1. 5% -5% Equity Market Neutral Multi Strategy Fixed Income Convertible Arbitrage Event Driven Global Macro Long / Short Managed Emerging Futures / CTA Markets Equity Dedicated Short Bias Hedge Fund Strategies to the left are less volatile and have higher return per unit of risk (i. e. standard deviation). 21

Merits of Low Volatility Hedge Funds Hedge Fund Strategy Betas CSFB/Tremont Strategy Betas vs. S&P 500 - Since February 1997 1. 0 0. 54 0. 40 0. 5 0. 07 0. 04 -0. 01 0. 04 0. 21 0. 10 -0. 91 -0. 13 -0. 5 -1. 0 Equity Market Neutral Multi Strategy Fixed Income Convertible Arbitrage Event Driven Global Macro Long / Short Managed Equity Futures / CTA Emerging Markets Dedicated Short Bias Hedge Fund Strategies to the left have lower beta (i. e. sensitivity) to the S&P 500. 22

Need for a Portfolio Approach Best Diversification includes Global HFs n n Globally $1. 5 Trillion with 8, 000 managers Canada approx. $60 Billion with 70+ managers (Canada Hedge Watch) Scotia HF Index CSFB/Tremont Index 27 Managers Strategies 341 Managers 39 Funds 56 % 11 % 10 % 9 % 2 % 3 % 0 % 2 % 3 % Equity L/S Multi -Strategy Market Neutral Event Driven Managed Futures Fixed Income Global Macro Emerging Markets Convertible Arbitrage Dedicated Short Bias Other 410 Funds 28 % 11 % 4 % 24 % 5 % 8 % 11 % 4 % 2 % 1 % 2 % As of December, 2006 23

Applying an ‘Equity Investing Framework’ to Hedge Funds 24

Applying an ‘Equity Investing Framework’ U. S. Value Stock Selection Process 10, 000+ US equities Quantitative Screens ‘Short list’ Bottom Up Analysis Diversified Mutual Fund Quantitative Screens n Price-to-book n Price-to-earnings n Dividend-Yield n Create ‘Short list’ Qualitative Analysis n Bottom-up company review n Core competencies and competitive advantages n Industry position Diversified Portfolio n Reduces risk n Manager monitors holdings 25

Applying an ‘Equity Investing Framework’ Hedge Fund Selection Process 8, 000+ US and International hedge funds Quantitative Screens ‘Short list’ Bottom Up Analysis Diversified Portfolio of Hedge Funds Quantitative Screens n Understand drivers of returns n Assessment of risks n Consistency of results with stated strategy n Quantitative fit with overall portfolio Qualitative Assessment n Bottom-up manager review n Core competencies and competitive advantages n Qualitative fit with overall portfolio n Nature and extent of risk controls Diversified Portfolio n Reduces risk n Manager monitors holdings 26

Applying an ‘Equity Investing Framework’ Demands of Hedge Fund Investing n Successful hedge fund investing requires: Expertise in analyzing trading strategies as businesses Ø Entry and exit discipline Ø Time commitment Ø Sufficient size of investment to allow diversification Ø Need more than a single manager multi-strategy Ø n Decide between: Self manage Ø Outsource Ø Custom portfolio v Funds of hedge funds v Ø Combination 27

KCS Approach 28

KCS Approach Investment Strategy n Based on 10 years Hedge Fund Investing experience Ø AIMA Award-winning Research Ø Proprietary Analytics Ø Focus on risk reduction Ø n Objectives Low volatility Ø Low correlations with traditional assets Ø Tax-preferred deferred capital gains Ø ‘Equity-like’ returns with ‘bond-like’ volatility Ø n Strategy Ø Levered low-volatility 29

KCS Approach HF Strategy Risk Profiles & the ACRF CSFB/Tremont Weights vs. Current ACR Basket Weights 50% 40. 8% 40% 29. 6% 30% 20% 10% 5. 1% 11. 3% 9. 9% 11. 9% 6. 2% 11. 2% 6. 3% 10. 9% 9. 7% 2. 7% Equity Market Multi Strategy Fixed Income Convertible Arbitrage Event Driven Global Macro 5. 1% 7. 0% 0. 5% 0. 0% Long / Short Managed Emerging Futures / CTA Markets Equity Dedicated Short Bias 2. 5% 0% 0. 0% CSFB/Tremont Risk vs. Current ACR Basket Risk - Annualized 20% 17. 8% 15. 0% 15% 10. 7% 9. 4% 10% 5% Tremont Weights ACR Basket Weights 23. 1% 2. 7% 2. 3% 3. 6% 2. 8% 3. 8% 4. 4% 5. 9% 6. 0% 4. 8% 3. 4% 2. 1% Multi Strategy Fixed Income Convertible Arbitrage Event Driven Global Macro Tremont Std. Dev’n ACR Basket Std Dev’n 5. 9% 0. 0% 0% Equity Market Neutral 11. 9% 0. 0% Long / Short Managed Emerging Equity Futures / CTA Markets Dedicated Short Bias Notes: Weights are as at December 30, 2006. All risk/return measures are since February, 1997, and have been annualized. 30

Performance + 15. 7% for 2006 Ranked #1 Fund of Funds in 2006 on Canadian Hedge Watch 31

KCS ACR Fund Performance 32

Questions and comments? 33

This presentation is confidential. The contents are not to be reproduced or distributed to the public or the press. Securities legislation may prohibit such distribution. This presentation is a summary only and should be used in conjunction with the detailed information in the Confidential Offering Memorandum. The information contained in this presentation is believed to be reliable, but is not guaranteed as to its accuracy or completeness. This presentation is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. No securities commission or similar regulatory authority has reviewed this document or has in any way passed on the merits of the securities describe and any representation to the contrary is an offence. Historical performance is not a guarantee future results. KCS Fund Strategies Inc. recommends consulting appropriate investment and financial advisors when considering any investment decision. KCS Fund Strategies Inc. 2150 – 555 West Hastings Street Vancouver, British Columbia V 6 B 4 N 6 Ph: 604 -730 -0729 x 225 www. kcsfunds. com 34