ARBITRAGE STRATEGIES

Convertible Arbitrage: Managers invest in companies' convertible securities. Typically, they will be long the convertible bond and short the common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of stock, while protecting principal from market moves.

Fixed Income Arbitrage: Managers try to profit from price anomalies between related interest rate securities. Most trade globally to generate steady returns with low volatility. This category includes interest rate swap arbitrage, U.S. and non-U.S. government bond arbitrage, forward yield curve arbitrage and mortgage-backed securities arbitrage. The mortgage-backed market is primarily U.S.-based, over-the-counter and particularly complex.

DEDICATED SHORT BIAS

Dedicated short sellers were once a robust category of hedge funds before the long bull market rendered the strategy difficult to implement. A new category, short biased, has emerged. The strategy is to maintain net short as opposed to pure short exposure. Short bias managers take short positions in mostly equities and derivatives. The short bias of a manager's portfolio must be constantly greater than zero to be classified in this category.

EMERGING MARKETS

Managers invest in equities or bonds in emerging markets around the world. Because many emerging markets do not allow short selling, or offer viable futures or other derivative products with which to hedge, emerging market investing often employs a long-only strategy.

EQUITY MARKET NEUTRAL

Managers exploit equity market inefficiencies by holding simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta, currency neutral or both. Well-designed portfolios typically control for industry, sector, market capitalization and other types of exposures. Leverage is frequently applied to enhance returns.

EVENT-DRIVEN

Managers invest in equities in order to capture price movement generated by anticipated corporate events. There are four popular sub-categories:

Risk Arbitrage: Specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. Risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquirer. The principal risk is deal risk, should the deal fail to close.

Distressed Securities: Managers invest in the debt, equity or trade claims of companies in financial distress and bankruptcy. The securities of companies in need of legal action or restructuring to revive financial stability typically trade at substantial discounts and have upside potential if a turnaround occurs.

Regulation D, or Reg. D: This subset refers to investments in micro and small capitalization public companies that are raising money in private capital markets. Investments are usually convertible securities with an exercise price that floats or is subject to a look-back provision that insulates the investor from a decline in the price of the underlying stock.

High Yield: Managers invest in low-graded fixed-income securities of companies that show significant upside potential. Managers generally buy and hold high yield debt.

GLOBAL MACRO

Top-down global approach based on an overall market direction influenced by major economic trends and/or events. Managers speculate on changes in economic policy, currency and interest. The portfolios can include stocks, bonds, currencies and commodities in the form of cash or derivatives instruments.

LONG/SHORT EQUITY

Managers invest in both the long and short sides of the market, shifting among value to growth, small, medium and large capitalization stocks, and net long and short positions. Managers may use futures and options to hedge. The focus may be regional, such as long/short U.S. or European equity, or sector specific, such as long and short technology or healthcare stocks. Long/short equity funds tend to build and hold portfolios that are substantially more concentrated than traditional stock funds.

MANAGED FUTURES

Invest in listed financial and commodity futures markets and currency markets around the world. Managers either use technical trading systems or discretionary judgement to make trades.