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Items (Page #) Background Information (4) Product Information (12) Performance (17) Asset Allocation/Style Allocation (19) Due Diligence/Manager Selection (42) Portfolio Construction (45) Risk Management (52) Administration/Operations (56) Client Information/Reporting (56) Compliance/Legal (57)

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Items Bios: Biographies of Key Personnel

Org Chart: Organizational chart of various groups within PARADIGM and the personnel involved

Fund Performance: Historical performance data for a selection of products, including monthly returns, standard deviation, and drawdown analyses

Client Reporting: Sample client account statement

BACKGROUND INFORMATION

CONTACT INFORMATION Company name: PARADIGM Global Advisors, LLC Address: 650 Fifth Avenue, 17th Floor, New York, NY 10019 Telephone: 212.271.3388 Fax: 212.271.3395 E-mail: [email protected] Website: www.paradigmhedgefunds.com Name of contacts: Jean-Michel Savre Title of contacts: SVP, Marketing & Structured Products Telephone of contacts: 212.271.3388 Ext. 303

STAFF INFORMATION E-mail of contacts: [email protected] How many employees does the firm currently have?

28 employees

Show the number of employees by working area:

Please note that the bracketed values include those employees who perform multiple functions at the firm.

What is the greatest and least number of employees the firm has had in the last three years?

Over the last three years, the greatest number of employees the firm has had is 28, and the least number of employees is 13.

Explain any significant employee turnover:

Michael Natbony, co-founder and co-chairman of PARADIGM since inception, retired in 2003. We also made several new additions to the firm in 2003, 2004 and 2005.

NAME POSITION START DATE

Stephane Farouze Partner & Managing Director of Marketing & Structured Products 2003

Matteo Solbiati Head of the European Branch 2003

Denis Bychov Computer ProgrammerResearch Department 2003

Gerald Toledano Vice PresidentMarketing & Structured Products 2003

Jean-Michel Savre Senior Vice PresidentMarketing & Structured Products 2004

Jeffry Schneider Senior Vice PresidentMarketing & Structured Products 2004

Rafael Castellanos Vice PresidentMarketing & Structured Products 2004

Robin Liu AnalystAsset Allocation 2004

Louis Hanna Senior Vice PresidentMarketing & Structured Products 2005

Nick Markola Senior Vice PresidentMarketing & Structured Products 2005

AREA NO. OFEMPLOYEES

Management 3Portfolio Managers 3{2}Research 3 {4}Marketing 11{1}Risk Management 1Administration 5{1}IT Support 2

How does the firm attract new people?

PARADIGM attracts new people with its very competitive compensation scheme and the competitive edge in its investment strategy. PARADIGM hires employees through personal references. Through its many industry contacts, PARADIGM performs an ongoing and continuous search for intelligent, highly educated individuals with specific skills. Once hired, all new employees go through a long and extensive training process to understand PARADIGM’s unique approach to hedge funds.

Provide a brief background of key personnel (education, professional background):

Please see “Bios” attachment and the biographies section of the marketing presentation.

Explain the compensation scheme for key people:

PARADIGM employees are compensated in line with industry standards, which include salary plus bonus and a profit sharing plan based upon position, tenure and performance.

COMPANY STRUCTURE

Legal structure: Limited Liability Company

Provide details of the firm’s current ownership structure and any changes in the last three years:

Until 2002, PARADIGM was a privately owned company run by three founding partners – James Park, Bill Natbony, and Michael Natbony. In 2002, Dr. Park bought out Bill Natbony’s share in the partnership, and he later bought the remaining shares of Michael Natbony in 2003. In that same year, Stephane Farouze joined the firm as Managing Director of Structured Products & Institutional Marketing with a 31.5% partnership in the company. Currently, James Park owns 49.5%, Stephane Farouze owns 31.5%, senior members of PARADIGM own 10%, and a passive private equity shareholder owns 9% of the company.

Are there any plans for further ownership changes?

No.

Provide a short history of the company with the most important milestones:

PARADIGM Partners was launched by Dr. James Park in 1989. Suma Capital Corporation was launched by Michael Natbony in 1991, and in that same year, both companies merged, forming PARADIGM Capital Management, Inc. (“PCMI”), a Georgia corporation. James Park was responsible for research and asset allocation, Michael A. Natbony was responsible for administration and operations, and Bill Natbony served as legal counsel. In April 1991, PARADIGM launched its core fund of funds program, Suma Fund I, LP, which later changed its name to PARADIGM Master Fund, LP. From 1992 through 1995, Dr. Park completed his Ph.D. in Financial Economics at Columbia Business School. His doctoral thesis on hedge funds as an asset class was the first work of its kind, and The Journal of Futures Markets published a portion of this landmark paper in 1996. In that same year, PARADIGM launched its second fund of funds program, PARADIGM Equities Ltd., and Markus Karr

joined as Managing Director of Asset Allocation to assist Dr. Park in implementing the company’s research in areas of manager selection and portfolio management. Topics from Dr. Park’s thesis include but are not limited to statistical algorithms and the Diversification of hedge funds, as well as subsequent research conducted by the firm. Dr. Park’s research has been ingrained in and apply to PARADIGM portfolios’s construction ans risk management process. In 2001, PARADIGM’s assets under management grew to more than $1 billion, and Alla Babikova joined the firm as Director of Marketing & Client Services. In addition, the PARADIGM Employee Compensation Program (PECP, allowing for compensation of senior personnel with shares in the company) was established. In 2002, Dr. Park purchased Bill Natbony’s share in the partnership, and Jim Hirchak joined PARADIGM as Director of Risk and Compliance. In the same year, PARADIGM launched its enhanced-return fund of funds programs to give investors leveraged exposure to our core Master Fund program. PARADIGM’s levered vehicles are offered to both onshore and offshore investors. In 2003, Dr. Park purchased Michael Natbony’s share in the partnership. In that same year, PARADIGM launched PARADIGM Master Fund, Ltd., the offshore version of our diversified core strategy. Stephane Farouze joined the firm as Managing Director of Structured Products & Institutional Marketing with a 31.5% partnership in the company. In 2003, Gerald Toledano formerly with Société Générale joined PARADIGM, bringing his experience in structured products and institutional marketing. In 2004, Jean-Michel Savre joined PARADIGM and is responsible for the joint-venture with Cargill Investor Services (CIS). CIS is a subsidiary of Cargill, one of the largest private companies in the world. CIS signed an advisory agreement with PARADIGM to distribute our Futures portfolio worldwide. In 2004, PARADIGM signed distribution agreements with the following European insurance companies: Scottish Provident, Aviva and Hansard, as well as with six Swiss private banks. In 2004, PARADIGM increased its institutional reach: pension funds in the US, France and Spain invested in PARADIGM’s funds of funds. Furthermore, in 2004, Cyril Finance, a subsidiary of Mutuelle du Mans Assurances, a major French insurance company managing more than EUR 20 billion, selected PARADIGM as the exclusive advisor of a fund of funds product to be distributed to French institutions and high net worth individuals. PARADIGM brought Philippe Alter to this venture, who was the former Chief Investment Officer of HSBC Asset Management Europe. He will manage the new fund called “Cyril Alternative”, which will be launched shortly.

And finally, Key Bank and its subsidiary McDonald Financial, selected three funds of hedge funds in 2004 that are now being distributed through their network of Investment Advisors in the US. These funds are managed by Citigroup, PARADIGM and Lazard.

Provide a chart of the legal structure of the firm and list all branch or affiliate offices:

The legal structure of the firm is outlined in the diagram below: PARADIGM Global Advisors, LLC is headquartered in New York. Currently, we have branch offices in Monte Carlo and Los Angeles. Our distribution network, however, covers a very broad geographic range, as detailed in the world map below:

Provide an organization chart: Please see “Org Chart” attachment.

PARADIGM Holding Corporation

100%

PARADIGMGlobal Advisors, Inc.

PARADIGMGlobal Mgmt, Inc.

(Dormant)

PARADIGM CapitalManagement, Inc.

PARADIGM GlobalResearch Services, LLC

PARADIGM Global Advisors, LLC

PARADIGM CapitalManagement, Inc.

PARADIGMEmployee Compensation

Plan, LLC

PARADIGMFounders, LLC

PARADIGMCompanies, LLC

100%

100%

99%99% 99% 1%1%1%

PARADIGM GROUP CORPORATE STRUCTURE

ASSET MANAGEMENT ACTIVITIES

Does the firm conduct any other business than asset management in alternative investments? State the nature of those other businesses:

No. PARADIGM is entirely focused on its core business of designing portfolios of hedge funds with superior risk/reward characteristics. This focus also includes extensive efforts in research and analysis of the hedge fund/portfolio management industry. PARADIGM has, in the past, been retained to research and publish academic papers on specified topics by various institutions. PARADIGM’s expertise in the area of hedge fund and fund of funds investing has led to many consulting arrangements. As a pioneer in the industry, PARADIGM is well known and retained to gain access to our proprietary analytical tools and effective manager selection process.

Does the firm manage investments of other asset classes (incl. traditional assets), too? If so, explain:

No.

Does the firm manage funds of funds in different strategies? If so, describe:

Yes, the firm manages fund of funds in different strategies. Please find below a chart detailing our range of products:

* Includes Notional Invested amounts as of July 2005

Investment Programs Style Onshore/Offshore Number of managers AUM (*)

PARADIGM Master Fund Multi strategy Onshore 63 $173.1 MM

PARADIGM Enhanced Master Multi strategyLeverage on Master Fund Onshore 91 $30.9 MM

PARADIGM Equities Fund I Multi strategyConcentration+leverage Onshore 93 $18.4 MM

PARADIGM Master Fund Multi strategy Offshore 87 $238 MM

PARADIGM Asian Fund Managers trading Asian markets only Offshore 10 $18.6 MM

PARADIGM Public Fund Multi strategy Offshore 87 $32.7 MM

PARADIGM Tax Exempt Fund Multi strategyOpen to tax-exempt US investors Offshore 89 $3.1 MM

PARADIGM Equities Fund Multi strategyConcentration+leverage Offshore 93 $139.7 MM

PARADIGM Global Fund (Note B)

Multi strategyLeverage on Master Fund Offshore 87 $ 220.8 MM

Sub-Total All Funds $875.3

Sub Advisory, Non-Discretionary Asset $927.0

Total Assets Under Management (Estimate as of July 1, 2005) $1,802.3

Note A Includes Gross Investment By Affiliates of: $530.5

Included in Above Funds PARADIGM Futures Fund I, LLC Onshore 19 $77.2

PARADIGM Multi Strategy Fund Onshore 44 $166.3

PARADIGM Equities Fund II, LLC Onshore 10 $97.6

Note B Includes Notional Amount of funds levered via off balance sheet transactions

Domestic Funds (Note A)

Non US Funds

What percentage of assets under management is in funds of funds?

PARADIGM is entirely focused on designing portfolios of hedge funds. All of our discretionary assets under management are in PARADIGM’s funds of hedge funds. Our discretionary assets represent approximately 49% of total assets under management. Non-discretionary assets (51% of total assets under management) represent consulting clients, who utilize our services for portfolio construction, asset allocation, due diligence, etc.

Which investor group does the firm primarily target?

Institutions including Pension Funds, Insurance Companies, Foundations, Endowments and Family offices. High Net Worth Investors through financial intermediary channels including Private Banking, Broker Dealer and Registered Investment Advisor.

Provide a list of main clients (incl. size of assets, duration of client relationship):

Jean Marc Spitalier (Lehman Brothers London): 44-77-4777-7380 Inna White (Lehman Brothers New York): 212-526-6601 Maria Healy (Beta Capital Management): 305-358-8178

Provide three client references:

Bernard Abdo (Goldman Sachs): 917-697-2777

$1.8 billion (as of July 1, 2005)

N/A

What are the current assets under management?

• Total • Traditional • Alternative $1.8 billion (as of July 1, 2005)

2001 - $1.1 billion 2002 - $1.3 billion 2003 - $1.4 billion 2004 - $1.5 billion 2005 - $1.8 billion (as of July 1, 2005) Not Applicable

Show the growth of assets under management over the last five years?

• Total • Traditional • Alternative Same as total value above

CLIENT CLIENT TYPE SIZE OF ASSETS

DURATION OF RELATIONSHIP

A Family Office (Consulting) 300 Million 4 Years

B Family Office (Consulting) 300 Million 6 Years

C Family Office (Consulting) 300 Million 6 Years

D Institutional (Discretionary) 150 Million 2 Years

E Institutional (Discretionary) 130 Million 2 Years

F Institutional (Discretionary) 60 Million 2 Years

G Family Office (Consulting) 27 Million 3 Years

H Institutional (Discretionary) 18 Million 2 Years

Show a breakdown of assets under management by:

• Client group

*As of March 2005

• Strategy

*As of March 2005

PMF PMSF PTEF PEMF PEI PEMN PFFI PAF

Merger Arbitrage 3% 4% 3% 4% 2% 3% 0% 0% Mortgage-Backed 5% 5% 5% 7% 7% 0% 0% 0% Distressed Securities 9% 9% 9% 8% 7% 0% 0% 5% Event-Driven 11% 12% 11% 14% 13% 22% 0% 0% Convertible Arbitrage 7% 7% 7% 8% 6% 0% 0% 5% Multi-Strategy 0% 0% 0% 1% 1% 0% 0% 10% Fixed Income 8% 9% 8% 7% 6% 0% 0% 15% Long/Short Equity 28% 29% 28% 26% 28% 49% 0% 52% Market Neutral 18% 19% 18% 14% 15% 19% 0% 5% Statistical Arbitrage 5% 5% 5% 5% 6% 7% 0% 0% CTA Discretionary 1% 0% 1% 1% 1% 0% 12% 0% CTA Systematic 4% 0% 4% 3% 3% 0% 88% 0% Global Macro 1% 1% 1% 2% 5% 0% 0% 10%

KEY INVESTMENT PROGRAM

PMF PARADIGM Master Fund, LP

PMSF PARADIDGM Multi Strategy Fund, LLC

PTEF PARADIGM Tax-Exempt Fund, Ltd.

PEMF PARADIGM Enhanced Master Fund, LLC

PEI PARADIGM Equities Fund I, LLC

PEMN PARADIGM Equity Market Neutral, LLC

PFFI PARADIGM Futures Fund I, LLC

PAF PARADIGM Asian Fund, LLC

ASSETS (MIL $)

719

245325

383

708

9271635

15354

GRAND 1689

BREAKDOWN OF ASSETS BY CLIENT GROUP

TOTAL EXTERNAL (DIRECT + INDIRECT)

TOTAL INTERNAL

INDIRECT investment (Consulting Assets) Total INDIRECT Investment

Name(s): PARADIGM Feeder FundsAffiliated entities:

INTERNALG.P. (all employees / principals)

Other - specify:

Total DIRECT investment

Foundation, endowment & hospitalFinancial institution (Banks, Insurance Companies, etc.)Total Institutional

High Net Worth & Family office

InstitutionalTotal employee benefit / pension

DIRECT investment

CLIENT GROUPEXTERNAL

What is the greatest percentage of assets under management represented by any single and by the three largest clients?

Consulting assets: • Single largest client represents 32% of consulting assets • Three largest clients represent 73% of consulting assets

Discretionary assets:

• Single largest client represents 18% of discretionary assets • Three largest clients represent 34% of discretionary assets

PRODUCT INFORMATION

Provide a short description of all products (public and private, where disclosure possible) of the firm, e.g. fund of funds, advisory mandates, client portfolios, structured products, etc. Include at least:

• Investment objective (including target return and target risk)

• Target investors • Legal structure • Number of funds in the portfolio • Current size • Date of inception • Fee structure • Conditions for Subscriptions and

Redemptions

PARADIGM Master Fund, LP (PMF) • Investment Objective: The fund aims to achieve stable, low-

volatility returns. This is achieved through broad diversification. The fund does not employ leverage and seeks to achieve 7%-10% in returns with 3%-4% volatility.

• Target investors: US institutions and private customers. • Legal Structure: Georgia Limited Partnership. • Number of Funds: 63 • Current Size: $174.5 Million • Date of Inception: April 1991 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with a 35-day notice. PARADIGM Multi-Strategy Fund, LLC (PMSF) • Investment Objective: The fund aims to achieve stable, low-

volatility returns. This is achieved through broad diversification, which excludes CTAs. The fund does not employ leverage and seeks to achieve 7%-10% in returns with 3%-4% volatility.

• Target investors: US institutions and private customers. • Legal Structure: Delaware Limited Liability Company • Number of Funds: 44 • Current Size: $166.3 Million • Date of Inception: May 1996 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with 35-day notice. PARADIGM Tax-Exempt Fund, Ltd. (PTEFL) • Investment Objective: The fund aims to achieve stable, low-volatility

returns, which is achieved through broad diversification. The fund has 3 classes:

Class A, which does not employ leverage and seeks to achieve 7%-10% in returns with 3%-4% volatility; Class B, which employs a leverage factor of approximately 2 and seeks to achieve 13%-15% in returns with 5%-7% volatility; Class C, which employs leverage of approximately three and seeks to achieve 18%-22% returns with 7%-10% volatility.

• Target investors: ERISA Pension Funds, tax-exempt US institutions, and tax-exempt US high net worth individuals.

• Legal Structure: BVI International Business Company • Number of Funds: Depends on share class • Current Size: $3.1 Million • Date of Inception: June 2003 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with 35-day notice

PARADIGM Enhanced Master Fund, LLC (PEMF) • Investment Objective: The fund’s objective is to provide enhanced

returns by leveraging PARADIGM’s diversified Master Fund core program. The fund seeks to achieve 18%-22% in returns with 7-10% volatility and employs a leverage factor, whose range is between 2x and 4x.

• Target investors: US institutions and private customers. • Legal Structure: Delaware Limited Liability Company • Number of Funds: 91 • Current Size: $92.5 Million • Date of Inception: May 2002 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with a 35-day notice. PARADIGM Equities I, LLC (PEI) • Investment Objective: The fund was launched as the onshore

counterpart of our popular fund, PARADIGM Equities, Ltd, and has the same objective. A portion of the fund is concentrated and the remaining portion is highly diversified, utilizing the discretionary use of leverage. Leverage ranges between 1.5x and 2x and is currently at 1.8x. The fund seeks to achieve 15%-20% in returns with 5%-8% volatility.

• Target investors: US Institutions and Private Customers. • Legal Structure: Delaware Limited Liability Company • Number of Funds: 93 • Current Size: $18.7 Million • Date of Inception: March 2005 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with a 35-day notice. PARADIGM Equity Market Neutral Fund, LLC (PEMN) • Investment Objective: The fund invests in equity relative value,

long/short equity and risk arbitrage with a very low net exposure to the stock market, through managed accounts exclusively. The fund does not employ leverage. The fund’s objective is to achieve 5%-8% returns with 2%-4% volatility.

• Target investors: US Institutions and Private Customers • Legal Structure: Delaware Limited Liability Company • Number of Funds: 10 (Managed Accounts Exclusively) • Current Size: $97.6 Million • Date of Inception: June 2003 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with a 10-day notice.

For an investment of $ 50,000,000 or more, redemptions can be done weekly.

PARADIGM Futures Fund I, LLC (PFF) • Investment Objective: The fund is single strategy fund of funds,

investing only in CTAs, through managed accounts exclusively. The funds employ a leverage factor, currently around 4x. The objective is 15%-20% per year with 15%-20% volatility.

• Target investors: US Institutions and Private Customers through Registered Investment Advisors.

• Legal Structure: Delaware Limited Liability Company • Number of Funds: 19 (Managed Accounts Exclusively) • Current Size: $20.5 Million • Date of Inception: January 1999 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with 35-day notice. PARADIGM Asian Fund, LLC (PAF) • Investment Objective: The fund is a multi strategy, consisting only of

managers who trade Asian markets. The fund does not employ leverage. The fund’s objective is to achieve 7%-10% returns with 3%-5% volatility.

• Target investors: US Institutions and Private Customers. • Legal Structure: Delaware Limited Liability Company • Number of Funds: 10 • Current Size: $18.7 Million • Date of Inception: August 2004 • Fee Structure: 1% management fee, 10% incentive fee, 0.40%

expenses • Monthly subscriptions. Monthly redemptions with 35-day.

ADVISORY MANDATES/CLIENTS PORTFOLIOS PARADIGM’s expertise in the area of hedge funds and fund of funds investing has also led to many consulting arrangements. As a pioneer in the industry, PARADIGM is well known and often retained by firms, who want to gain access to our proprietary analytical tools and effective manager selection process. Consulting mandates range from manager selection to white-label portfolio construction. STRUCTURED PRODUCTS PARADIGM has been approved by the following banks for structuring products on its funds of funds: Lehman Brothers, Goldman Sachs, Commerzbank, BBVA, HVB, CDC-IXIS and Wachovia. The onshore funds of funds approved are the following:

• PARADIGM Master Fund, Onshore and Offshore; • PARADIGM Multi-Strategy Fund, Onshore and Offshore; • PARADIGM Equities Fund Offshore.

PARADIGM offers a wide range of structured products, including total return swaps, options and CPPI. The minimum size for structured products is $10 million. The new generation of capital-guaranteed products offered by PARADIGM is designed to achieve real returns while guaranteeing the principal during a specified term. The capital-guarantee is linked to the performance of the underlying fund of hedge funds portfolio. It is also structured with internal leverage with no additional risk to client capital. This leverage enhances returns and is designed to offset the additional cost of the guarantee. These products can be structured with holding periods from four to fifteen years. Capital-guaranteed products carry an extra guarantee fee and are often underinvested. They, historically, have been costly insurance policies for the investor. PARADIGM, however, utilizes the CPPI model that uses leverage to offset the cost of the capital guarantee. Guaranteeing institutions, such as Goldman Sachs and CDC, are delighted with PARADIGM’s highly diversified manager selection methodology. Given our extremely low-risk profile and large number of hedge fund managers in our portfolios, the guaranteeing institution will launch a capital guaranteed product with assets fully invested. In addition, as the funds’ NAV steadily climbs, the guaranteeing institution then automatically adds a small amount of leverage to the portfolio, boosting returns to overcome the cap-guarantee fee of about 1% per year. The combination of PARADIGM’s low-volatility returns with the CPPI methodology results in a product where the initial capital is guaranteed by institutions, like Goldman Sachs or CDC, and the return over a 5 to 7 year period is virtually the same as a PARADIGM non-guaranteed product. In other words, the cost of the guarantee is generally offset over a 5 to 7 year period. Finally, this product can be structured without a lock-up so that the investor has liquidity for a small redemption fee that declines over time.

The members of PARADIGM's Marketing and Structuring Team, collectively, have launched more than 100 capital-guaranteed investment products in the American, European, Asian and Middle Eastern markets. PARADIGM has passed the due diligence process of more than ten of the world's largest, most recognized banks and insurance companies and can offer guaranteed products by a variety of issuers rated from A to AAA.

State any other costs and fees borne by the product than the fees mentioned above:

There are no additional fees other than the fees mentioned above.

Describe the minimum investment amounts of the different types of products and services:

• The minimum investment amount for PARADIGM’s fund of funds products is $1 million USD.

• Managed accounts must be $25 million USD in order to ensure proper diversification, excluding managed futures funds, which have a minimum investment of $1 million USD.

• Consulting arrangements are negotiable.

Does the firm specialize on any product or group of products? If so, please explain:

Yes, please see the answer above.

PERFORMANCE

Provide historical performance data for all products (in electronic form, where possible), including:

• Monthly returns • Standard deviation (annualized) • Three largest drawdowns and

recovery periods • Percentage of positive/negative

months

Please see “Fund Performance” attachment.

State in which period performance is actual or pro forma (backtracked)?

The current fee structure for all the funds is 1% management fee, 10% incentive fee, and 0.40% estimated charge for operating expenses.

PARADIGM Master Fund, LP (PMF): The rates of return reflect the

fund’s actual performance, since the fund’s inception in April 1991, adjusted for the current fee structure.

PARADIGM Multi-Strategy Fund, LLC (PMSF): All of the fund's

returns since its inception in May 1996 reflect actual performance of the fund, adjusted for the current fee structure.

PARADIGM Tax-Exempt Fund, Ltd. (PTEFL): From April 1991 until

the fund's inception date in July 2004, performance is based on pro forma returns derived from PARADIGM Master Fund, LP, adjusted for the current fee structure. After July 2004, rates of return reflect actual performance of the fund, adjusted for the current fee structure. Please note that the performance shown is for Class A, the unleveraged share class.

PARADIGM Enhanced Master Fund, LLC (PEMF): From April 1991

until the fund's inception date in May 2002, performance is based on pro forma returns derived from PARADIGM Master Fund, LP and adjusted for the current fee structure. After May 2002, rates of return reflect actual performance of the fund, adjusted for the current fee structure.

PARADIGM Equities I, LLC (PEI): From January 1996 until the

fund’s inception in March 2005, performance is based on pro forma returns, derived from PARADIGM Equities, Ltd. and adjusted for the current fee structure. After March 2005, rates of return reflect actual performance of the fund, adjusted for the current fee structure.

PARADIGM Equity Market Neutral Fund, LLC (PEMN): All of the

fund’s returns since June 2003 reflect actual performance of the fund, adjusted for the current fee structure.

PARADIGM Futures Fund I, LLC (PFF): All of the fund's returns

since January 1999 reflect actual performance of the fund, adjusted for the current fee structure.

PARADIGM Asian Fund, Ltd. (PAFL): Prior to August 2004, performance is based on pro forma returns derived from actual returns of the 6 underlying funds that were in the portfolio on August 1, 2004, adjusted for the current fee structure. From August 2004, rates of return reflect actual performance, adjusted for the current fee structure.

Is performance net of fees to the investor? Yes.

ASSET ALLOCATION / STYLE ALLOCATION

Describe the firm’s asset allocation process

A - INVESTMENT PHILOSOPHY PARADIGM believes the best approach to capturing the premium of the hedge fund asset class is to apply the time-tested principles of Modern Portfolio Theory to hedge funds. PARADIGM implements its investment philosophy in the defined, disciplined, multi-step approach outlined below. 1. DEFINE THE ASSET CLASS PARADIGM’s theoretical model is based on the proposition that hedge funds are Information Age companies – not portfolio managers. A money manager who is long and short at the same time does not have a portfolio of assets, because the asset base cancels out. Hedge Fund Managers are skill-based, profit-maximizing entities that generate a rate of return through their ability to monitor and process constantly changing information, without reliance on market direction. Under our definition, hedge fund managers are “Information Processors.” By allocating exclusively to these Information Processors, our portfolios extract an “information-processing premium” from the market (much like a risk or liquidity premium) that did not exist before the Information Age. 2. DEFINE THE APPROPRIATE BENCHMARK Identifying an accurate performance benchmark against which to evaluate a manager relative to his peer group is essential to creating an optimal portfolio of hedge funds. PARADIGM’s proprietary database is one of the largest of its kind and has been carefully constructed to identify and eliminate the significant biases inherent in published hedge fund returns. These biases include: Survivorship Bias – The absence of performance data of defunct

managers from performance indexes has the unintended effect of inaccurately boosting historical hedge fund returns. Since 1992, PARADIGM has built and maintained one of the world’s largest databases of surviving and non-surviving hedge funds.

Self-selection Bias – Many hedge fund managers generate initial returns through luck and self-select themselves as successful hedge fund managers by reporting initial-year returns to the databases. Since luck does not persist, their performance will eventually decline. PARADIGM’s statistical analysis eliminates this bias from its benchmarks.

Liquidation Bias – Hedge funds that have gone out of business as a result of global information shocks, such as the Asian currency crisis of 1997 and the Russian loan default of 1998, have little incentive to report their final monthly return. As performance reporting is not mandatory, this can overstate the aggregate reported returns of the remaining managers.

PARADIGM corrects for these shocks at the time global crises occur, which can have a dramatic effect on the shape and movement of certain benchmarks.

Bull/Bear-Market Bias – Many hedge funds have not operated outside of the bull or bear market, and their inclusion in hedge-fund databases can somewhat skew the data. According to PARADIGM’s model, a portfolio of hedge funds should have no correlation or beta with any conventional market index.

Maintaining our proprietary database is of paramount importance because it enables us to reduce data biases and construct accurate and reliable hedge fund indexes. PARADIGM's hedge fund index research gives us critical advantage in our screening process of managers and thus contributes to our success in outperforming our benchmark on a risk-adjusted return basis over the long term. 3. BROADLY DIVERSIFY THE PORTFOLIO Because PARADIGM defines hedge funds as Information Age companies, we view a portfolio of hedge funds as equivalent to a mutual fund. It is well established under Modern Portfolio Theory that mutual funds must be diversified to over 100 different companies to protect the portfolio from idiosyncratic risk (i.e. the risk that affects the value of an individual company, such as the loss of a key executive or damage to a major manufacturing plant). Since each individual hedge fund’s performance relies exclusively on the skill of one management team, a portfolio of hedge funds must be similarly diversified to avoid undue idiosyncratic risk. PARADIGM’s published research clearly shows that diversification reduces risk but does not reduce expected returns. To avoid excess portfolio volatility, PARADIGM applies the lessons of Modern Portfolio Theory to hedge fund investing. By including 75 to 100 hedge funds in our portfolios, PARADIGM eliminates more than 98% of the diversifiable risk of the hedge fund asset class. 4. EFFECTIVELY SELECT MANAGERS THROUGH PARADIGM'S QUANTITATIVE AND QUALITATIVE ANALYSES AND DUE DILIGENCE PROCESS PARADIGM’s unique, quantitative research is based on the application of the Capital Asset Pricing Model to hedge funds, which PARADIGM calls the Hedge Fund Alpha-Beta Model. The application of this model entails analyzing the performance of any one hedge fund relative to its peers, using proprietary algorithms, such as Hedge Fund Alpha, Hedge Fund Beta and Park Ratio. Hedge Fund Alpha measures relative risk-adjusted returns and is therefore a measure of manager skill, i.e. the manager’s ability to outperform his/her peer group. As Hedge Fund Alpha may go up with leverage, PARADIGM uses another proprietary statistical tool, the Park Ratio, that accounts for leverage and serves as a more accurate measure of relative skill.

Our research shows that skill, or HF Alpha, along with Park Ratio, generally persists over time and can therefore be indicative of future performance. Our model rewards managers, who consistently beat their peer group on a risk-adjusted basis and who consistently demonstrate exceptional levels of skill at processing information. By identifying managers with a high level of skill, or Hedge Fund Alpha and Park Ratio, we are able to construct portfolios of hedge funds that outperform peers and have almost zero correlation to the stock and bond markets. In addition, we utilize Hedge Fund Beta. For example, a merger arbitrage manager’s annual return of 13% against an industry return of 10% might appear good. However, if the same manager has a 1.3 Hedge Fund Beta, this would indicate that his/her returns are only average, because the manager failed to generate excess return, or alpha, on top of the additional risk. Hedge Fund Beta greater than one indicates that a manager is either leveraged or concentrated. Neither leverage nor concentration is an indication of skill, and both can potentially harm a portfolio. After a manager passes PARADIGM's quantitative analysis, we interview these managers in the order of their ranking. If a manager passed all stages of interview process, members of PARADIGM’s research team will initiate a thorough due-diligence process outlined below. 5. PORTFOLIO CONSTRUCTION, MONITORING & RISK MANAGEMENT Portfolio Construction and Monitoring PARADIGM’s manager selection philosophy involves a bottom-up approach, where a manager’s skill relative to his/her peer group is the driving component in portfolio construction. By using our proprietary and patent-pending quantitative methods and analysis, we are able to develop meaningful expectations about which managers should perform well in the future. In addition PARADIGM diligently monitors the performance of its hedge fund managers on an on-going basis, using both proprietary quantitative tracking and scoring methods and periodic qualitative reviews. Owning a single hedge fund or a concentrated portfolio of a few hedge funds is an extremely risky proposition. Every hedge fund manager, regardless of skill, can suffer traumatic losses, because every hedge fund is exposed to idiosyncratic risk. PARADIGM research shows that a hedge fund benchmark return may be achieved by allocating to 50-100 managers. Our goal is to reduce the risk of the portfolio by allocating the assets to a large number of hedge funds in order to capture a passive index and increase the return through manager selection. Furthermore, positions in managers are volatility-centric, meaning more volatile managers receive smaller allocations.

Consistent with the Efficient Market Hypothesis, we do not view discretionary sector/strategy weightings as the main component of optimal portfolio management. It is our view that macroeconomic and sector/strategy performance predictions do not yield excess return. There is simply no statistical evidence that one can predict which sector/strategy will outperform in any given year. Although we do not view sector/strategy allocation as a main component in portfolio construction, we do conduct monthly sector tilting, based on quantitative methods and our view of the financial markets, as well as expectations for each particular sector/strategy. Risk Management Our risk management philosophy is characterized by several overriding principles. The first principle is an organizational one: it is crucial that there are different entities involved in risk management. There are three PARADIGM entities involved in the process:

• The asset allocation team; • The structuring team; • The risk management and compliance officer.

There are two external entities involved in the risk management: • The risk management department of Lehman Brothers,

CDC-IXIS and Commerzbank monitor our portfolios on a monthly basis to make sure our portfolios are in-line with risk guidelines they set forth for our structured products;

• RiskMetrics produces monthly risk statements providing the following aggregated information: exposure to markets/securities, sensitivity to equities, fixed income, credit and FX risk, stress testing, and VaR.

The second principle is compliance-related: we have a list of guidelines for the implementation of procedures. Our portfolios follow internal risk guidelines as well as guidelines from CDC-IXIS and Lehman Brothers, and are reviewed on a monthly basis by risk management teams of all the aforementioned institutions, as well as the risk management team at Commerzbank. The third principle is an operational one: procedures and risk management tools are in place to monitor the risk of underlying managers, as well as our portfolios on a daily, weekly, and monthly basis. Risk monitoring relies on reward/risk parameters set for each manager, continuous monitoring for red flags, and the careful monitoring of a manager’s performance using individual scoring.

B - ASSET ALLOCATION PROCESS The construction of our multi-manager portfolios consists of a rigorous manager selection process, coupled with the ongoing monitoring of managers that have already received allocations. The Asset Allocation Process consists of 5 steps: STEP 1: Database Utilization

, our proprietary system, has been in development since 1991. It is the backbone of manager selection and monitoring process. The database system includes more than 15,000 hedge funds track records, as well as including automated methods for the selection and monitoring of managers. Data Currently, there are more than 40,000 track-records, of which more than 15,000 are distinct hedge fund track records in our database. If we take into account our indices (proprietary and non-proprietary), our database contains more than 16,000 track-records. The 15,000 track-records represent both existing hedge funds (Active Funds) and hedge funds that have gone out of business (Defunct Funds). There are currently more than 6,600 Active Funds and about 3,000 different active asset management firms. Furthermore, there is a continuous inflow of data into our database from hedge fund data providers and from hedge funds managers directly. We currently subscribe to 8 hedge fund database providers.

100 Managers �-3 Manager Approval

�-2 Due Diligence

� Initial allocation – Portfolio Construction and On-Going Monitoring

�-1 Qualitative Analysis

Gordon Kelly - Robin LiuMarkus Karr - James Park

Matteo Solbiati

� Database Utilization and maintenance

7,500 Active Funds

600 Managers

Allocation Process

More than 16,500 Funds (7,500 Active & 9,000 Inactive)

Shirley XianJim HIrchak

� Quantitative Filtering

Gordon Kelly -Robin LiuMarkus Karr – Shirley Xian

James Park

Nikolay FedorovskiyMarkus Karr - Gordon Kelly Robin Liu - Matteo Solbiati

Automated Methods: (these methods are described in more detail in steps 2, 4 and 5). 1) enables us to screen our universe of

approximately 3,000 active managers, which represents approximately 6,600 different track records.

The automatic ranking of managers and track records, according

to Hedge Fund Alpha and Park Ratio, utilizes only a few human resources, and analysts are not involved in this process. The automation consistently screens out the top 30% of managers within our ratios, in a disciplined and precise manner.

Additional quantitative analyses enable us to reduce the whole universe of hedge funds to about 500 to 600 funds that then undergo our qualitative analysis and monitoring.

2) regularly produces systematic reports that support the manager selection/monitoring process:

Monthly manager scoring that enables us to monitor manager allocation;

Detailed monthly reports for each manager, which provide valuable information, such as manager performance and risk analyses; these reports are used for managers in our portfolios and also serve as support for manager meetings in the qualitative stage of the selection process;

Monthly sector/strategy analysis that enables us to manage sector allocation;

Quarterly cluster analysis, which is used for monitoring both managers in the portfolios and managers under selection.

STEP 2: Quantitative Manager Selection PARADIGM calculates Hedge Fund Alpha, Hedge Fund Beta and Park Ratio for each manager by regressing manager track records against hedge fund aggregate indexes, style indexes, cluster indexes, as well as multiple long-only benchmarks and indexes. The fist step in our quantitative analysis involves the ranking of funds, according to the Overall Park Ratio, which is calculated by regressing manager track records against PARADIGM’s aggregate hedge fund index and adjusted for leverage. Each fund receives a Park score, ranging from 0 to 100, and PARADIGM performs further analysis on the top three deciles. At this stage some managers are screened out for the following reasons: Managers already in our portfolio; Managers without a minimum track record; Managers deploying strategies that we do not invest in.

In the second stage, PARADIGM runs additional analyses to better understand the investment process of each manager and obtain additional rankings: Overall Hedge Fund Alpha: calculated by regressing managers

track records against PARADIGM’s aggregate hedge fund index; the objective is to identify managers that produce higher Hedge Fund Alpha within the top deciles of our Park Ratio ranking;

Peer Group Park Ratio: calculated by regressing manager track records against PARADIGM’s hedge fund strategy index, and adjusted for leverage; the objective is to identify the best managers within a peer group;

Peer Group Hedge Fund Alpha: calculated by regressing manager track records against PARADIGM’s hedge fund strategy index; the objective is to identify managers that produce higher Hedge Fund Alpha within the best managers (highest Park Ratio scores) of a peer group;

Overall and Peer Group Hedge Fund Beta: calculated by regressing manager track records against PARADIGM’s aggregate hedge fund and strategy indices; the objective is to measure the exposure of a manager to the hedge fund industry as a whole (Overall Hedge Fund Beta), as well as his/her peer group. PARADIGM favors managers that produce high alpha and that differentiate themselves from the industry or their peer group (indicated by a low beta). PARADIGM does not exclude managers showing a high beta (which is typically an indication of leverage or concentration), as long as Hedge Fund Alpha and Park Ratio remain high;

“Cluster analysis” is an alternative statistical approach, whose objective is to group and compare hedge funds using statistical regressions based on their past performance. Each manager (each point) in the hedge fund universe is defined by a 12, 24 or 36 dimension/coordinate, which represents the last 12, 24 or 36-month’s returns. Each cluster is defined as a sub universe of hedge funds, linked by some statistical characteristics embedded in the past performance. The algorithm, through an iterative process, looks for clusters that are the most condensed and verifies whether that number of clusters is statistically optimal. We perform additional analysis on outliers, which may indicate: (1) managers with exceptional performance compared to managers in the same cluster, (2) managers who declare using a strategy, while using another one, or (3) style drift;

Cluster Park Ratio: calculated by regressing manager track records against PARADIGM’s hedge fund cluster index, and adjusted for leverage; Cluster Hedge Fund Alpha: calculated by regressing manager track records against PARADIGM’s hedge fund cluster index; these two measures provide additional rankings, which help us better understand the investment style of the managers;

PARADIGM also performs correlation-screening analyses (Hedge Fund Beta) against hundreds of long-only benchmarks and indexes to identify managers who generate skill-based returns. Our filter makes sure we allocate only to those managers who fall within our definition of hedge funds. We do not allocate to stock

pickers, fixed beta managers, trend-followers or directional risk takers.

Managers who pass PARADIGM's quantitative filter are approved for further qualitative analyses. STEP 3: Qualitative Manager Selection, Due Diligence and Manager Approval Once a manager passes PARADIGM’s Quantitative Analysis, the asset allocation team initiates a critical, in-depth qualitative review. This is accomplished through a multi-step interview process that is designed to assess both a manager’s information-processing skills and trading strategy. PARADIGM proactively interviews managers, who pass the quantitative screen, to verify our quantitative understanding of a potential manager. Furthermore, the interviews must reveal a high level of skill and professionalism. Each manager in the selection process is classified into a category, catalogued by degree of progress, as well as denoting the next step for the manager in question. The categories are as follows: Under Monitoring Watch and Wait James Park/Markus Karr Needs to Meet James Park/Markus Karr Approved Investment Committee to Approve Due Diligence to be performed A List

PARADIGM’s Qualitative Analysis also evaluates other factors, including career background, integrity, risk management, organizational stability and asset growth. Initial interviews are conducted by our analysts, and follow-up interviews are conducted

Analysts LevelGordon Kelly - Robin LiuMatteo Solbiati -

Analyze, Screen, EvaluateUnder Monitoring

Head ofAllocation

Dr. Park/M. Karr need to meet

Investment CommitteeLevel

Investment Committee to approve

Invest. Comm.Level

A List

Portfolios

Due Diligence

Shirley XianJim Hirchak

600 Managers

~ 100 Managers

A List

James ParkMarkus KarrShirley XianGordon Kelly

Robin Liu

Analysts LevelGordon Kelly - Robin LiuMatteo Solbiati -

Analyze, Screen, EvaluateUnder Monitoring

Head ofAllocation

Dr. Park/M. Karr need to meet

Investment CommitteeLevel

Investment Committee to approve

Invest. Comm.Level

A List

Portfolios

Due Diligence

Shirley XianJim Hirchak

600 Managers

~ 100 Managers

A List

James ParkMarkus KarrShirley XianGordon Kelly

Robin Liu

by senior members of the asset allocation team. A manager will typically have two or three meetings with various members of the our analyst team, one or two meetings with Markus Karr, our head of asset allocation, as well as one or two meetings with Dr. James Park, the Chief Investment Officer. At the conclusion of the interview process, the Investment Committee [Dr. Park, Markus Karr, Shirley Xian, Gordon Kelly and Robin Liu] makes a “thumbs-up” or “thumbs-down” decision as to whether or not a manager should be approved for inclusion in the portfolio. Upon receiving a “thumbs-up” from the Investment Committee, the manager then undergoes an extensive due diligence process. This process consists of thorough background checks, including confirmation of education and previous employment, confirmation of regulatory compliance status, the contact of prime brokers, administrators or custodians to verify assets under management, reference checks from clients and service professionals, and a manager office inspection. PARADIGM systematically allocates to managers with prime brokers on our approved list, which typically consist of industry leaders. For other service providers, such as auditors or legal counsel, PARADIGM performs random reference checks on principals and their client base, verifies registration and licenses, checks for regulatory complaints or litigations and requires audited financial statements. PARADIGM also requires proof of licensing, audited financial statements and asset verification. The initial due diligence process usually takes approximately 4 to 8 weeks. Upon completion, if the senior asset allocation staff deem the information gathered adequate, the manager is approved for an initial allocation. STEP 4: Initial Allocation, Portfolio Construction and On-Going Monitoring Initial Allocation Typically, an initial allocation to a manager will remain small (less than 2% of the portfolio) for 6-12 months. During this period the return stream is analyzed against expectations. We are more sensitive to any return behavior that does not match with historical behavior before we invested in the manager. Atypical historical return patterns (good or bad), which are out of sample with the historical returns with which we based our quantitative and some of our qualitative analyses on, would be considered red flags. The level and quality of communication are also tested during this period, and we also watch for the operational capacity of the manager to handle subscriptions and redemptions properly. If and when PARADIGM is comfortable with the behavior of the allocation, the manager will be eligible for a more “standard” allocation.

Portfolio Construction The construction of our portfolios is based on the following objectives and principles: Optimization of risk/reward profile of the portfolio; Bottom-up (manager) versus top-down (sector) approach; Broad diversification: 50 to 100 managers for our multi strategy

portfolios; we try to allocate at least to 10 managers for single strategy funds of funds; we also set up maximum allocations for managers and sectors (Please see table on page 35 – PARADIGM’s Guidelines Section: 3. Diversification).

Volatility weighted allocations: more volatile managers receive smaller allocations;

General balance in the portfolio: for example, for the PARADIGM Futures Fund, we try to achieve a good balance of managers according to criteria, such as Trade Horizon, Style and Markets Traded.

On-Going Monitoring Similar to the selection and portfolio construction processes, the on-going monitoring of managers and portfolios involve continuous quantitative and qualitative analyses and due-diligence. The quantitative analysis uses the same performance indicators as the ones used for the selection of new managers: Hedge Fund Alpha, Beta, Park Ratio, Cluster Analysis and Cross Correlation Analysis.

compiles all the previous results in a monthly report for each manager: the PASS Monthly Manager Report. This monthly report includes several different sections: Section 1: General Information;

Section 2 : Detailed Performance (annual and monthly),

compared with the relevant sector index;

Section 3 : Risk/Return and Drawdown Analysis;

Section 4 : Benchmark Analysis

Hedge Fund Alpha, Beta and Correlation analyses conducted by regressing manager returns against a series of indices, for different periods of time: whole history, 60-, 36- and 12-months. Results are sorted (1) by alphabetic order of the indices and (2) by decreasing Hedge Fund Beta;

Section 5 – Summary of the major performance indicators;

Section 6 : Comparison of Performance before and after

investment in the manager;

Section 7 : Historical evolution of Park Ratios and Hedge Fund

Alpha.

produces a cluster analysis report on a quarterly basis.

produces two monthly reports that support manager allocation/monitoring process (described in further detail below on page 32-33) and sector/strategy allocation/monitoring process (described in further detail below on page 33-34). The qualitative analysis is a continuous process, which involves communicating with managers on a weekly, bi-weekly and monthly basis via email, telephone and fax. Face-to-face meetings occur as needed and average once or twice a year, either at the manager’s office or at PARADIGM’s office in New York. During the on-going due-diligence process, we monitor our managers for the following red flags.

Information compiled and analyses conducted for the various stages of the quantitative and qualitative analyses, as well as the due-diligence process, are evaluated and discussed in a series of different meetings. In these meetings, the Investment Committee discusses the status and allocation of each manager (including both managers already in our portfolios and potential managers).

Red Flag Monitoring Red Flag Response

Style drift In-depth quantitative and qualitative analysis

Unusual drawdowns or profits

In-depth quantitative and qualitative analysis

Returns inconsistent with strategy


Loss of focus In-depth quantitative and qualitative analysis

Rapid asset growth In-depth quantitative and qualitative analysis

Regulatory concerns Immediate redemption request

Industry reputation Immediate redemption request

Meetings Purpose Schedule In AttendanceDaily meetings Gordon Kelly

Monday –Thursday Robin Liu Matteo Solbiati

Friday review of the Markus Karrpast week’s meetings Gordon Kelly

Robin LiuMonitoring: Review all managers in Monthly Gordon Kelly

Group Review any level of investigation (By the end of the month) Robin LiuReview all managers who have been designated into the following 4 categories:(1) Dr. Park/M.Karr Approved(2) Dr. Park/M.Karr need to meet (3) Watch and Wait(4) Under Monitoring

James ParkMarkus KarrShirley Xian

Gordon KellyRobin Liu

Sector Review

Review the current sector weightings in the funds and compare with 3rd Party Research and our own optimization models

Monthly(After the 15th)

Markus KarrGordon Kelly

Robin Liu

Monthly (Around the 20th of the month)

Markus KarrShirley Xian

Gordon KellyRobin Liu

Monthly(Around the 10th of the

Month)

Review ofManager Process

PASS Search

Actively investigate the database and utilize our quantitative research to identify candidates for further investigation

Investment Committee

Review of the managers on the A-List for allocation or termination decision

On what basis does the firm define and change the asset allocation of the portfolios?

Once managers have been approved, PARADIGM calculates an optimal allocation for each manager. This allocation model does not rely on an equal-dollar approach, but a more meaningful volatility-weighted approach, i.e. more volatile managers receive smaller allocations. In addition, in order to build diversified portfolios, PARADIGM applies limits to the allocation to each manager and sector/strategy. These limits are shown in the table below on page 35 in PARADIGM’s Guidelines Section: 3. Diversification. MANAGER ALLOCATION PARADIGM diligently monitors the performance of the hedge fund managers on our A List on an on-going basis, using proprietary scoring methods. PARADIGM uses a simple multi-factor model of the primary factors in evaluation of a manager. We currently include 5 factors (we may add others in the future): Park Score, Performance (absolute and sector relative), Volatility, Liquidity, and Analyst Sentiment. These factors are combined into an overall score ranging from 1.0 to 5.0, with 5.0 being the best. Factors can have different weightings depending on the funds. For example, products may have different liquidity objectives and consequently have different liquidity weightings in the overall score calculations. This scoring method is used for all the managers that PARADIGM invests in, as well as for managers that are in the final stage of our manager selection process. Based on the overall score, the Investment Committee will assign an Investment Instruction for each fund. There are 4 instructions:

Scores Investment Instructions Comments

> 3.0 BUY Initiate or increase allocation

> 1.5 and <3.0 (*)

HOLD

or

DECREASE

Allocation cannot be increased at this time

Allocation must be discretionarily

decreased

< or =1.5 FIRE A 100% redemption

notice must be issued to this manager.

(*) At 2.0, we run an in-depth manager analysis and evaluation. These instructions represent guidelines supporting the final allocation decision that may take into account other elements: If a PARADIGM fund has cash needs, redemption notices are

issued for managers on “HOLD” before any “BUY” managers; There may be HOLD's on some managers with scores above 3.0

because (1) the Investment Committee feels the allocation is already large and does not want to increase it, or (2) the allocation is new and still in our test account phase;

Similarly, a DECREASE instruction can be issued if the Investment Committee feels that our exposure to a manager or a hedge fund sector is too large and needs trimming down (which is not directly related to the manager scoring system)

A “FIRE” instruction can be triggered by non-quantitative red flags (ex. Regulatory Concerns or Industry Reputation);

PARADIGM also monitors the behavior pattern of the returns and look for signs of performance that is uncharacteristic of what we believe the manager should be trading;

We may delay termination if we have a particular conviction on the short-term outlook for the manager and attempt to exit the allocation at a higher level.

SECTOR/STRATEGY ALLOCATION PARADIGM does not view sector/strategy allocation as a main component in portfolio construction and does not observe defined sector/strategy weightings. It is impossible to predict which sectors will perform well in a given year. However, we do conduct monthly sector tilting, based on various optimizations to see how quantitative methods may yield weightings different from those we currently employ on our funds. Quantitative methods are categorized as follows: Performance: comparison of the monthly performance for each

of our proprietary sector/strategy indices over different time spans (3, 12, 24, 36, 60 months). For example, we compare the performance of our 3, 12, 24, 36-month fixed income arbitrage index to our 60-month fixed income arbitrage index to identify situation of over/underperformances;

EFF: efficient frontier analysis for optimizing our sector/strategy allocation. We run efficient frontier analyses under different time spans (3yr and 10yr) and constraints (volatility, returns) to get additional information in terms of optimal strategy allocation and to compare this optimal allocation to our current strategy allocation;

EFF - columns Research and 3rd party: our current strategy allocation is also compared to allocation suggested by third party research.

All these analyses, combined with our view on the financial markets, contribute to our final decision on strategy allocation. Modifications for strategy allocation are implemented gradually, taking advantage of subscriptions and redemptions. For instance, strategies we favor will receive more assets and vice versa for strategies we do not favor. For example, 2004 was a difficult year for the merger arbitrage sector, mainly due to the lack of opportunities. This sector represented 2%-5% in various PARADIGM products at the end of 2004, compared to our 10% exposure in January 2004. Another

example is the Mortgage-Backed sector, where a series of bad news involving both managers and instruments increased our concerns as to the extent to which manager-supervised (as opposed to independently-verified) pricing of portfolios pervaded the asset-backed industry; thus, in 2004, a gradual slight paring down of our exposure to this sector was initiated. The sector was trimmed from 12% in early 2003 to 5%-7% in 2004.

On what periodicity is the asset allocation of the portfolios reviews?

The portfolio is reviewed on a monthly basis.

For non-standard products, to what extent can the investor be involved in the asset allocation process?

PARADIGM’s clients engage our advisory services to access our expertise in the area of hedge fund investing. The level of investor participation for non-standard products is accommodated based on investor needs. This can range from joint committee discussions on manager selection to consulting contacts where the investor retains full discretion on the allocation of funds.

Do investment guidelines exist for all products? If so, please provide sample:

Our portfolios follow 2 sets of investment guidelines: PARADIGM’s own investment guidelines; Guidelines set by the investment banks that structured products

using PARADIGM’s funds as underlying, for leverage or capital-guarantee purpose.

A - PARADIGM’S GUIDELINES 1. Manager profile Our managers generally meet the following profiles: Average size: $50 to $500 millions; Monthly performance statistics for 2-3 years; managers with less

than 2 years performance statistics can also be considered through our qualitative analysis and their past experience;

High HEDGE FUND ALPHA; High PARK RATIO; Superb credentials, superior intelligence, highly experienced; Able to articulate the fundamental phenomenon the manager

attempts to capture; Independent operation and ownership, which signals self-

confidence; Single strategy focus, which signals expertise; High percentage of manager's net worth invested in own fund,

which also signifies confidence.

2. Not Allowed strategies 3. Diversification PARADIGM constructs broadly diversified portfolios to mitigate idiosyncratic risk. There are between 48 and 93 managers in our multi-strategy portfolios. In addition, we have maximum allocation constraints for each manager and sector.

* L/S equity strategy, as a whole can represent more than 20%, but there are regional subsets. For example, at the end of March 2005, the regional breakdown for the PARADIGM Master Fund was the following: L/S US (70%), L/S Europe (15%) and L/S Japan (15%). thus, the allocation to L/S US was about 17%, compared to L/S Europe and Japan, which were at about 3.5% each, which is still below the maximum of 20%.

STRATEGIES WE AVOID REASON FOR AVOIDANCE

Trend followers

Directional risk takers

Non-marked-to-market securities (includes private equity, Venture Capitalist)

We will occasionally have minimal exposure to these securities through underlying hedge funds but we do not allocate to these strategies due to the difficult nature of pricing them and potential liquidity dangers.

Very Little in Multi-Strategy managers May signal lack of expertise or the manager’s inability to control style drift.

Mutual Fund Timing

We do not invest in this strategy due to the regulatory issues involved and because it does not fit into our definition of information processing.

Very Little in Emerging Markets

Emerging markets typically have severe restrictions in taking short positions in securities, so these managers are invariably forced to be fixed beta managers.

It is well established that most stock pickers do not outperform the overall market, even before the consideration of fees. We want to ensure the funds in our portfolio derive profits by processing information rather than depending upon market direction.

Fixed beta managers

Investment Programs

Current Number of Managers

Maximum Allocation

to Any Manager

Maximum Allocation

to Any Sector

PARADIGM Master Fund 87 5% 20%*

PARADIGM Equities Fund 93 no limit no limit

PARADIGM Global Fund 87 5% 20%*

PARADIGM Multi Strategy 68 5% no limit

PARADIGM Tax Exempt Fund 67 5% 20%*

PARADIGM Public Fund 87 5% 20%*

PARADIGM Equity Market Neutral 10 20% N/A

PARADIGM Futures Fund 19 10% N/A

Sector Portfolio PARADIGM Asian Fund 10 20% no limit

Multi StrategyPortfolios

Single StrategyPortfolios

B - INVESTMENT BANKS’ GUIDELINES Our portfolios follow guidelines from CDC-IXIS, Lehman Brothers, and JP Morgan and are reviewed on a monthly basis by risk management teams of all the aforementioned institutions, as well as the risk management team at Commerzbank. PARADIGM Master Fund is managed under the following guidelines in agreement with and monitored by Lehman Brothers International (Europe), Commerzbank and CDC-IXIS, all of which shall be referred to as “the banks” hereafter. With respect to PARADIGM Equities Fund, we do not have such guidelines and will typically run that fund in a more concentrated fashion and will also employ the use of leverage. 1. Allowed Instruments The Fund will invest in the following financial instruments (“Permitted Funds”): (a) shares of single hedge funds, (b) managed accounts of single hedge funds, (c) funds of funds, and (d) swaps and options of funds. In addition, for hedging purposes only, the Fund may invest in (e) forward positions in one or more of the following currencies against the US Dollar: Euro, British Pound, Swiss Franc, Canadian Dollar and Japanese Yen. The portfolio denomination currency is USD. Furthermore, the Fund may have (f) residual cash balances in the following currencies: US Dollar, Euro, British Sterling, Swiss Franc, Canadian Dollar and Japanese Yen. For the purpose of earning interest on any cash balance, the Fund may invest in (g) money market cash instruments with a maturity of 183 days at most and with counterparty rated at least A-1 by Standard & Poor's or P-1 by Moody's Investors Service, and (h) shares or units in money market cash instruments funds. All other instruments are prohibited, except for PARADIGM Equities, Ltd., which may invest in any security, derivative, commodity or financial instrument. The investments of the Fund, including borrowing, if any, are hereafter collectively referred to as the “Portfolio.” 2. Allowed strategies The Fund will only invest in Permitted Funds implementing the investment strategies described below: • Equity Strategies • Event Driven Strategies • Relative Value Strategies • CTA • Global Macro Strategies

Investment in multi-strategy managers is allowed, as long as the underlying strategies are part of the list above. 3. Diversification The Fund will invest in at least 30 Permitted Funds. In lieu of a single Permitted Fund, the Fund may hold a cash position of 4% of net assets, this figure being cumulative such that 8% will equal 2 Permitted Funds. The Fund must, at all times, hold investments in Permitted Funds in each of the categories shown below within the specified ranges (defined as percentage of net asset value of the Portfolio). Permitted Funds which implement more than one strategy as defined in guideline #2 (“Multi-Strategy Funds”) will be allocated towards the underlying strategies following guideline #4 below. The above strategy diversification limit can be revised in consultation with the fund manager to appropriately reflect the trend in the hedge fund industry. 4. Limits for Multi-Strategy Individual Funds The Funds can invest in a multi-strategy fund if: • All the underlying strategies are themselves allowed strategies as given in guideline #2. • Reliable information on the actual allocation of capital to the underlying strategies is made available on a monthly basis. • Lehman Brothers, JP Morgan and CDC do not disagree with the Allocation Manager on how to allocate the multi-strategy fund towards its underlying strategies, based on available information.

Investment Strategy Minimum Maximum ALL EQUITY STRATEGIES 0 50

Long Bias 0 45 Market Neutral 0 50 Short Bias 0 10

ALL EVENT-DRIVEN STRATEGIES 0 40 Merger Arbitrage 0 25 Distressed/High Yield 0 15 Special Situations 0 10 Mutual Fund Timing 0 0

ALL RELATIVE VALUE STRATEGIES 0 50 Convertible Arbitrage 0 25 Fixed Income Arbitrage 0 15 MBS/ABS Arbitrage 0 15 Volatility Arbitrage 0 15 Statistical Arbitrage 0 15 Index Arbitrage 0 15 Convertible Arbitrage + Fixed Income Arbitrage 0 40

ALL CTA 0 20 ALL GLOBAL MACRO 0 25 ALL CTA + ALL GLOBAL MACRO 0 35

5. General Concentration Rules Notwithstanding specific concentration rules as set out in guideline #6 and the possibility for the Fund to depart from the guidelines under specific conditions, as set forth in guideline #13 (Amendments & Waivers), the Fund will observe the following General Concentration Rules: 5.1. As Per Net Asset Value of the Portfolio 5.1.1. Concentration at the time an initial investment is made: The Fund shall not, at the time an initial investment is made, (a) invest more than 8% of the net asset value of the Portfolio in any single Permitted Fund, nor shall it (b) invest more than 10% of the net asset value of the Portfolio in Permitted Funds managed by one particular Fund Management group. 5.1.2. Concentration at any time after an initial investment is made: The Fund shall not, at any time after an initial investment is made (a) have more than 10% of the net asset value of the Portfolio invested in any single Permitted Fund, nor shall it (b) have more than 12% of the net asset value of the Portfolio invested in Permitted Funds managed by one particular Fund Management group. 5.1.3. Concentration of top 5 holdings at any time: The Fund shall not, at any time, have more than 25% of the net asset value of the Portfolio invested in top 5 single Permitted Funds. 5.2. As Per Assets Under Management of Permitted Funds: At any time, the investment of the Fund in any single Permitted Fund shall not exceed 17% of the total assets under management of that single Permitted Fund, unless such an investment is implemented through a dedicated managed account. 6. Exceptions to Concentration Rules Following guideline #13 (Amendments and Waivers), the Fund may depart from the limits set in guideline #5 with respect to certain Permitted Funds or Fund Management groups, on a case by case basis and upon the agreement of the banks. 7. Managers’ Experience The Fund will not at any time allocate more than 25% of its net asset value to Permitted Funds whose investment managers have less than 12 months of track record in the strategy followed. For the purpose of this guideline, the banks reserve all discretion to decide whether a previous track record of one or more managers, in the same or in different fund management companies, applies to the Permitted Fund being considered.

It is hereby acknowledged that on a case per case basis, the banks may approve a Permitted Fund proposed by the Fund pursuant to guideline #13 (Amendments and Waivers), whose experience does not satisfy the above provision on the basis of official track record, but which is acceptable to the banks because of other parameters (.e.g. industry experience or recognition). 8. Investments in New Funds • In any calendar year, the Fund can invest into any new single Fund without prior approval of the banks, if the initial allocation in the particular fund is less that 4% of the net asset value of the Portfolio. • In any calendar year, the sum total of the investments in new funds cannot exceed 25% of the net asset value of the Portfolio. Once the above mentioned limit is utilized for the given calendar year, any further investments in new single funds will need the prior consent of the banks. This prior consent is, in effect, a limited veto right, as it does not affect the validity of other guidelines (such as, for instance, #3 Diversification and #7 Managers’ Experience). Procedure of getting the consent will be as follows: • If the new single fund has not obtained prior consent of the banks, then the Allocation advisor should provide the banks all the relevant information (such as the fund fact sheet, historical performance, Fund Manager bio, due diligence sheet filled by Allocation advisor, revised portfolio allocation, etc). Once the complete set of information is received, the banks will get back to the Allocation Advisor with the final decision within 3 business days. Note: Veto is usually exercised by the banks under the following circumstances: (a) The inclusion of the new single fund in the portfolio breaches the investment guideline (b) There exists a strong evidence of manager-specific information, which provides sufficient reason for such exclusion. However, the above mentioned cases for exercising veto rights are not a comprehensive list. Nevertheless, for the avoidance of doubt, provided the Allocation Advisor is operating within these guidelines, the banks shall not unreasonably withhold consent with respect to new Permitted Funds. 9. Leverage The Fund may have borrowings of up to 15% of the net asset value of the Portfolio at any time. In addition, this limit may be increased to a maximum of 25%, on a temporary basis (no more than four consecutive weeks), for settlement facilities or in order to meet temporary shortages of liquidity caused by the need to satisfy redemption requests by investors.

This borrowing limit does not cover any leverage, which might be used by individual portfolio managers within their own funds; it only covers direct leverage at the Fund level. 10. Liquidity Total Liquidity for the purpose of this document is defined as the number of days between redemption dates plus the number of days notice required to effect redemptions. A fund, which offers monthly liquidity, will be deemed to have 31 days between redemption dates. A fund with quarterly liquidity will be deemed to have 91 days, a fund with semi-annual liquidity will have182 days and a fund with annual liquidity will have 365 days. • At least 55% of the net asset value of the Fund shall be invested in Permitted Funds that offer liquidity no greater than 66 days (including most funds with an advertised 'monthly' redemption frequency with a 35 days notice period). • At least 75% of the net asset value of the Fund shall be invested in Permitted Funds that offer liquidity no greater than 150 days (including most funds with advertised 'quarterly' redemption frequency with a 60 days notice period). • No more than 5% of the net asset value of the Fund shall be invested in funds that have lock up period of greater than 180 days. • The Fund shall not invest in Permitted Funds with a remaining lock-up period greater than 365 days. 11. Redemption Fees* For the purpose of this guideline, redemption fees are defined as mandatory fees to be paid upon redemption of part or whole of a Permitted Fund, at the time an investment is made and at any time thereafter, expressed as a percentage of the redemption amount or otherwise. • No more than 30% of the net asset value of the Fund shall be invested in Permitted Funds that apply redemption fees policy with a redemption fee greater than 2.5%. • The Fund shall not invest in Permitted Funds with a redemption fee higher than 5%. * PARADIGM does not charge redemption fees on its funds. 12. Cure Period The above investment guidelines are meant to be respected at all times. In particular, unless explicitly specified otherwise, these limits must be respected throughout the life of the investments, not just at the Issue Date of the Notes. In the event that any of the above listed Investment Guidelines is broken, unless explicitly specified otherwise, the Fund will have 45

business days (the 'Cure Period') to take action to remedy the issue and re-establish compliance. 13. Amendments & Waivers Any of the above Investment Guidelines may be amended, or waived, for all or some particular investments, both on an intended temporary or permanent duration, and possibly under specific conditions, provided that this is done with the mutual consent of the Investment Manager of the Fund and the banks, CDC-Ixis, Lehman, JP Morgan and Commerzbank. In any case, the banks shall reserve the right to subsequently revert to the original guideline(s), as set out in this document, provided that it gives sufficient notice to the Fund, so that it does not break the Cure Period (as set forth in #12 above), while proceeding to unwind or reallocate some investments as a result of that change.

How can the guidelines be altered? Please see Guideline 13 (Amendments & Waivers) above.

DUE DILIGENCE / MANAGER SELECTION

On what principles are the firm’s due diligence process based?

PARADIGM’s due diligence process is based on a theoretical model that defines hedge funds as skill based, profit-maximizing entities, not as diversified investment vehicles. Hedge funds are companies which seek to generate what PARADIGM calls an Information Processing Premium. Just as stock and bond mutual funds diversify risk by investing in many companies across different sectors/strategies, PARADIGM funds seek to diversify the idiosyncratic risk of individual hedge funds by holding a large number of hedge funds across many different strategies. In PARADIGM's view, hedge funds, like stocks and bonds, are Information Age companies and comprise an independent asset class; therefore, a fund of hedge funds is analogous to a mutual fund. By viewing a hedge fund as a company, PARADIGM performs thorough due diligence checks on our underlying managers, as one would in assessing the value of any investment opportunity. The overall due diligence process is the combination and the succession of (1) quantitative analysis, (2) qualitative analysis and (3) checks on the following, without limitation: manager backgrounds, manager organization, assets under management, regulatory compliance, legal and financial checks. These checks are done through meetings with the manager and manager office inspection. Checks are also performed on service providers, such as auditors or legal counsel.

Describe in detail the firm’s due diligence process.

The firm’s due diligence process is described in further detail on pages 23 through 31 above. Examples of reports are also included in that section.

Name the minimum requirements (killer criteria) a manager has to meet, if any, to pass the due diligence:

The killer criteria for excluding managers are as follows: Bad rumor; False statement of education, previous employment and/or

regulatory compliance status; Regulatory complaints and litigations; Inconsistency of assets under management statements with no

satisfactory explanations such as poorly informed marketers or incorrect reporting to databases;

Prime broker not in our approved list (inadequate references for the Prime Broker means no one in our network of contacts knows the Prime Broker);

Monthly scoring equal or inferior to 1.5 (see Monthly manager scoring on page 32-33).

In addition to these killer criteria, our managers typically meet the following criteria: Average size: $50 to $500 million; Monthly performance statistics for 2-3 years; managers with less

than 2 years performance statistics can also be considered

through our qualitative analysis and their past experience; Superb credentials, superior intelligence, and highly

experienced; Independent operation and ownership (signals self-confidence) Single strategy focus (signals expertise); High percentage of manager's net worth invested in own fund; Able to articulate the fundamental phenomenon the manager

attempts to capture. Do you conduct on-site visits with the managers?

Yes.

Often, a manager will have three or four meetings with different members of the PARADIGM team as well as one or two meetings with Dr. Park. Onsite visits are also conducted prior to an allocation. The due diligence process usually takes about 4 to 8 weeks before the test account stage.

How much time is spent with each manager during the due diligence process?

• Before initial investment

• Every following year

PARADIGM communicates with managers on a weekly, bi-weekly and monthly basis via e-mail, telephone and fax. Face-to-face meetings occur as needed and average once to twice a year in a manager’s office and several more times per year at PARADIGM’s office in New York.

How many new managers do you analyze per year? In how many of the analyzed managers do you finally invest?

PARADIGM performs quantitative analysis on all the active funds in its database twice a year, currently 6,600 funds, which are managed by about 3,000 different managers. This first quantitative screening enables use to reduce the universe of eligible managers. This reduced list comprises both managers already on our A List and potential managers. In 2004, we performed an initial analysis on approximately 550 new managers and met with almost 300 during the course of the year. We performed a monthly quantitative analysis on all the funds/managers in our A List: managers we currently invest in and managers approved for first allocation. In terms of final investments in new managers, there is no annual quota we must meet. As mentioned before, PARADIGM seeks to invest only in highly-skilled information processors. Thus, some years may garner more than others.

Do you carry out due diligence checks on the administrator or any other service provider to the target investee funds? If so, please describe:

Yes. PARADIGM performs a thorough due diligence check on the administrator or service providers for the funds that we invest in. Generally, we will allocate to managers with prime brokers on our approved list, which are typically industry leaders. For other service providers, such as auditors or legal counsel, PARADIGM performs reference checks on principals and their client base, verifies registration and licenses, checks for regulatory complaints or litigations and requests audited financial statements.

How many managers are currently on your approved list?

On March 31, 2005, PARADIGM’s approved manager list contained 95 managers, including 93 managers who have already received allocations.

How much capacity is available from managers on the approved list? Please provide breakdown by strategy:

Most of our underlying managers have $50-$500 million under management, which leaves substantial room for additional investments with these funds. We currently have 95 managers on our approved list, of which 72 are open for additional investment with capacity of approximately $5 billion. This capacity broken down by strategy is as follows:

STRATEGY CAPACITY

CTAs $1 billion

Equities (including long/short, market neutral, and stat arbitrage) $2 billion

Relative Value $2 billion

PORTFOLIO CONSTRUCTION

Explain the qualitative and quantitative criteria used in your portfolio construction process:

Manager Selection - Quantitative Criteria

Performance

Hedge Fund Alpha Score (1) Park Ratio Score (1) Calculated from the regression of each manager’s returns against the following: • Overall Hedge Fund Index; • Sector/Strategy Indices; • Cluster Indices; • PARADIGM’s portfolios

Hedge Fund Alpha measures manager’s ability to outperform the overall hedge fund industry, his/her peer group, or his/her cluster group. Park Ratio accounts for leverage, serving as a more accurate measure of relative skill.

Correlation

Beta and correlation against about 100 different indices: • PARADIGM proprietary

indices: Global, Sector, Cluster Indices;

• Long-only industry benchmarks;

• Hedge Fund and Fund of Hedge Funds Indices;

• PARADIGM’s own portfolios.

Beta and Correlation calculation helps us to: • better understand the

investment strategy and confirm the skill set of a manager;

• exclude managers that have high exposures to stock or bond markets or a certain style; we do not allocate to stock pickers, fixed beta managers, trend-followers or directional risk takers.

Cluster Analysis

Statistical grouping of managers, according to the past 36 months of returns

Identifies best managers within a group and also helps us detect style drift

Assets Under Management

Between $50 and $500 million We tend to favor young managers, who have remaining capacity.

Assets Under Management

Asset Growth Rapid growth is a red flag

Track Record 2-3 years

Managers with less than 2 years performance statistics can also be considered through our qualitative analysis and their past experience

Manager Commitment

High percentage of manager's net worth invested in own fund

Manager Scoring

Score between 1.0 and 5.0 calculated for each manager, resulting from a multi-factor algorithm taking into account Park Ratio, Performance, Volatility, Liquidity, Sentiment.

Managers in A List Score must be higher than 3.0 for initiating, maintaining or increasing their allocation.

(1) for a detailed definition and description of Hedge Fund Alpha and Park Ratio scores see pages 24 and 25.

As far as the quantitative criteria for the portfolio construction itself, we seek to construct highly diversified funds and try to allocate to a minimum number of managers in our multi-strategy and single strategy funds of funds; we have limits allocations to managers and sectors.

To monitor manager and sector/strategy allocations, PARADIGM uses the Monthly Scoring of Managers method (see page 32-33) and Monthly Sector Analysis (see page 33-34). Quantitative criteria do not absolutely dictate our decisions. Rather, the quantitative analyses using Hedge Fund Alpha and Park Ratio scores enable PARADIGM to screen the whole universe of hedge funds and to reduce it to a sub-universe of managers that then go through further analysis. Quantitative indicators are also used as support in the qualitative interviews, where results are discussed with managers to better understand the manager’s investment philosophy and process.

Managers Selection - Qualitative Criteria Investment

Process Able to articulate the fundamental phenomenon the manager attempts to capture

Investment Process

Single strategy focus (signals expertise)

Investment Process

There are strategies we do not invest in: See page 35.

Experience/Skills Superb credentials, superior intelligence, highly experienced

Organization High-quality risk management

Organization Independent operation and ownership (signals self-confidence)

Organization Stability Qualitative criteria are used mainly to identify managers that have an edge (in terms of investment style, level of skill, professionalism), have developed a stable organization and reliable operations and have aligned interests with their investors.

Investment Programs

Current Number of Managers

Maximum Allocation

to Any Manager

Maximum Allocation

to Any Sector

PARADIGM Master Fund 87 5% 20%*

PARADIGM Equities Fund 93 no limit no limit

PARADIGM Global Fund 87 5% 20%*

PARADIGM Multi Strategy 68 5% no limit

PARADIGM Tax Exempt Fund 67 5% 20%*

PARADIGM Public Fund 87 5% 20%*

PARADIGM Equity Market Neutral 10 20% N/A

PARADIGM Futures Fund 19 10% N/A

Sector Portfolio PARADIGM Asian Fund 10 20% no limit

Multi StrategyPortfolios

Single StrategyPortfolios

State the average turnover of managers within the portfolios:

Our portfolio turnover is generally 5%-10%, including test accounts. Because we view hedge funds as companies and PARADIGM as a portfolio manager, we agree with Warren Buffet when he says that successful portfolio management is about identifying outstanding individuals and investing in them for the long run. PARADIGM does not trade its managers. We search for and identify talent. When returns are poor, we examine the manager closely and try to determine the reason for the drawdown. If our confidence still remains high, we often add to the allocation to rebalance the portfolio. A portion of our terminations occur after being invested in a manager for 12 months. This is, in effect, a trial period and the final stage of our due diligence on a manager, in which we invest a minimum allocation to monitor the level of communication and behavior of the monthly and mid-monthly performance. Terminations, for the most part, occur due to a combination of the deterioration in our quantitative rankings and poor performance relative to the manager’s peer group.

Does the turnover of managers in different portfolios vary substantially?

No.

What are the main reasons for managers to be excluded from an existing portfolio?

The following are some of the main reasons managers are fired or excluded from an existing portfolio: 1. Did not pass successfully the test account stage; 2. Manager score equal to or below 1.5 (see description of Monthly

Scoring of Managers on page 32-33); 3. Performance not in line with peer group; 4. Inconsistent risk-adjusted returns with strategy or expectations; 5. Style drift - PARADIGM uses a proprietary technique called

rolling Hedge Fund Beta analysis to assist with this determination in addition to the results of cluster analysis;

6. Manager no longer accepts managed accounts (especially CTAs);

7. Tracking error between managed accounts and published fund performance (especially CTAs);

8. Inability to manage rapid asset growth; 9. Regulatory issues;

10. Industry Reputation.

Has a manager included in a portfolio of the firm ever gone out of business due to losses? If yes, what are the lessons learnt from that experience and how have they been applied to your business?

According to PARADIGM’s definition of a hedge fund as an information processing company, we are aware that, like all businesses, it is possible that one can go out of business. However, in our 14-year history, the number of managers who have gone out of business while PARADIGM has invested in them is low. In any case, PARADIGM has learned valuable lessons from such instances.

In 2002, one of our managers lost 54% within a one-month time frame. PARADIGM had been invested in this manager for several years and had always been satisfied with the fund's stable, low-volatility return. The manager had consistently reported solid performance numbers up until September 2002, when the fund blew up. 90 days prior to the manager’s posting the 54% drawdown, however, PARADIGM sent a partial redemption notice as part of its portfolio rebalancing process and was able to collect $1 million of the investment back. Thus, while we were disappointed that this manager had a significant drawdown, this situation compliments PARADIGM’s view on the necessity of diversification and the importance of a continuous monitoring and rebalancing process. With 95 managers in our portfolio and with our consistent monitoring and rebalancing process, no single manager will substantially decrease the overall performance of our portfolios.

Are portfolios transparent to the investor?

At the discretion of PARADIGM and upon signature of a Non-Disclosure Agreement, transparency on underlying managers (name, AUM, background, etc.) is provided to investors. PARADIGM sets realistic expectations for its transparency requirements from underlying managers, because we accept the fact that most skilled and sophisticated managers are not inclined to disclose their proprietary methodology and systems. Although we make an effort to obtain as much transparency as possible, full transparency is not a requirement. Our quantitative screening and qualitative analysis, coupled with a rigorous due-diligence process, allow us to create an accurate profile and set risk/reward expectations for each manager. We currently allocate to 93 managers, one third of which provide full transparency, which currently includes our 27 managed accounts.

How does the firm secure capacity with top class managers now and in the future?

Most of our underlying managers have $50-$500 million under management, which leaves substantial room for additional investments with these funds. We currently have approximately 95 managers in our portfolio, of which two thirds are open for additional investment with capacity of approximately $5 billion. In addition, we continue to enter into side-letter capacity agreements with underlying hedge funds to ensure excess capacity for PARADIGM’s funds. We have signed 24 side-letter capacity agreements. In addition, approximately 30% of our portfolio is exposed to closed funds. Generally, however, due to our high degree of diversification, closed managers are not crucial to our success. Allocating more assets to a portfolio of closed managers will lead to the dilution of returns, because the track record of closed managers cannot be replicated. Nevertheless, we have cultivated various business relationships that occasionally allow us to obtain capacity of closed managers.

What is more important and what we seek to achieve is to identify the next outstanding manager and allocate to him/her, while the manager has a small AUM and has enough capacity. We typically try to enter into relationships with managers at an earlier stage than most large funds of funds, thus getting a foot in the door before the soft close.

What is the competitive edge in the firm’s investment strategy?

PARADIGM’s has a leg up above its competitors in several critical areas, which include: (1) our investment philosophy and process; (2) our proprietary software and database, ; (3) our manager assessment and ranking processes; (4) our sector/strategy allocation process; and (5) our diversified portfolios. Investment Philosophy and Process PARADIGM’s investment process is materially different from other fund of funds managers. Our entire approach to hedge funds relies on a well-researched and unique theoretical foundation that supports and guides every function within our company. We screen the universe of hedge funds and exclude stock-pickers and directional risk-taking managers to ensure the funds in our portfolio derive profits by processing information, rather than depending upon market direction. In our perspective, hedge funds are a separate asset class because they perform a clearly discernible function (information processing), exhibit unique, definable fundamental characteristics (no reliance on market direction to generate returns) and their historic performance provides evidence of their uniqueness (low or no correlation to the performance of the overall stock or bond markets). By allocating to managers that fall into this asset class, our portfolios provide an information-processing premium (similar to a risk or liquidity premium) that does not depend upon market direction. Conversely, other FOF managers select from the universe of self-labeled hedge funds primarily on their performance. This failure to observe a theoretical foundation has serious implications because many so-called hedge funds are detrimental to their investors. For example, consider a privately offered, long-only fund that charges a

20% performance fee. In all probability, this closet mutual fund will call itself a hedge fund. However, investors in this fund are seriously disadvantaged. The fund might generate profits during significant bull markets, but the investors will have paid too much for their long market exposure because they could have obtained the same exposure in a mutual fund for 50 to 100 basis points. Over extended time periods, the outlook for this fund’s investors is bleak. It is well established that most stock pickers do not outperform the overall market (even before consideration of fees). Therefore, in all likelihood, the investors will participate in 80% of market gains, but suffer 100% of market losses. PARADIGM’s Proprietary Database and Software Our competitive edge in terms of choosing information processors, uncorrelated to the markets, relies on our proprietary database and software, , which is critical for the quantitative leg of our manager selection and portfolio monitoring processes. Several major banks, who structure our products, emphasized the fact that less than 10 of our competitors have a information system similar to . The system enables us to screen a universe of about 3,000 active managers, representing about 6,600 active funds, and measures each fund’s performance relative to more than 100 indices we maintain in our database. These include long-only indices, as well as proprietary and third-party hedge funds and funds of hedge funds indices. Furthermore, regularly produces preformatted reports that support the manager selection/monitoring process and risk management. Manager Performance Assessment We do not rank managers based on return and Sharpe ratio. Despite its popularity with other funds of funds and its widespread use, our research shows that Sharpe ratio has several flaws that do not contribute to building a superior portfolio. Sharpe ratio is a comparison statistic that compares the performance of two portfolios at a time. Sharpe ratio and other comparison statistics (like correlation) answer the question, “Which manager is the best?” However, they do not give any insight into the more meaningful question of which managers contribute to an optimal portfolio of managers. We use portfolio measurements such as Hedge Fund Alpha and Park Ratio because they have a basis in portfolio theory and have been proven (both statistically and in real-time fund management) to select the managers that contribute to an optimal portfolio. Sector/Strategy allocation We do not observe defined sector weightings. It is impossible to predict which sectors will perform well in a given year. However, by using proprietary, quantitative methods and analysis (patented or patent-pending) we are able to develop meaningful expectations

about which managers should perform well in the future. Therefore, we strive to provide superior, risk-adjusted returns based on manager skill. We allocate to the managers who exhibit the highest level of skill relative to their peer group. By selecting the best available managers, regardless of sector/strategy, our portfolios become immune to the unpredictable success or failure of any given sector. Even though PARADIGM does not view strategy allocation as a main component in portfolio construction and does not observe defined sector weightings, we do conduct monthly sector tilting, based on various optimizations to see how quantitative methods may yield weightings different from those we currently employ on our funds. For further details, see page 33-34. Broad diversification PARADIGM also differs from other fund of funds managers, because its hedge fund portfolios are highly diversified in accordance with Modern Portfolio Theory. Other managers do not diversify to the extent we do because, they believe diversification reduces returns. While it is true that portfolio concentration can generate high returns, the level of resulting risk is too high. One manager or one event can easily destroy a concentrated portfolio. The safer way to generate returns is through a diversified portfolio of skill-based managers. Our unleveraged portfolios will generate equity-like returns with bond-like volatility. In addition, those seeking higher returns can achieve this by leveraging our low risk portfolio rather than concentrating their portfolio.

How sustainable is this competitive edge?

PARADIGM uses the same investment strategy for all of its funds and has shown in its 14-year returns that this strategy will yield continuous profits, regardless of market direction. We constantly challenge, test and refine our modeling assumptions to validate its significance and effectiveness. We also research, examine and implement economies of scale as assets grow.

RISK MANAGEMENT

Does the company maintain a written risk management policy?

Yes.

What risk management concepts does the firm apply to its portfolios?

Our risk management philosophy is characterized by several overriding principles. The first risk management concept is an organizational one: for double-checking purposes, it is crucial that there are different entities involved in risk management. There are three PARADIGM entities involved in the process: The asset allocation team; The structuring team; The risk management and compliance officer.

There are two external entities involved in the risk management: The risk management department of Lehman Brothers, CDC-

IXIS and JP Morgan monitor our portfolios on a monthly basis to make sure our portfolios are in-line with risk guidelines they set forth for our structured products;

RiskMetrics produces monthly risk statements providing the following aggregated information: exposure to markets/securities, sensitivity to equities, fixed income, credit and FX risk, stress testing, and VaR.

The second risk management concept is an operational one: procedures and risk management tools are in place to monitor the risk of the underlying managers as well as our portfolios on a daily, weekly, monthly basis. Our internal risk management personnel includes Markus Karr, Head of Asset Allocation, Shirley Xian and Gordon Kelly, all of whom monitor our portfolios on an intraday basis (for our portfolio of CTAs), as well as on a daily and monthly basis (for all our portfolios). Risk monitoring relies on: Reward/risk parameters set for each manager; Continuous monitoring for red flags (which include style drift,

regulatory concerns, and/or an inability to manage rapid asset growth);

Careful monitoring of a manager’s performance using individual scoring.

In addition, our structuring team, which consists of Stephane Farouze and Gerald Toledano, also contributes to the process. They discuss risk guidelines on a monthly basis with banks that structure our fund of funds products and serve as the third internal checkpoint in our risk management process.

Jim Hirchak, our risk management and compliance officer, monitors our portfolios on an intraday, daily and monthly basis, serving as a secondary opinion, separate from the asset allocation team. He is also in charge of managing PARADIGM’s use of RiskMetrics and providing our investors with monthly customized risk reports. As for external resources, the risk management department of Lehman Brothers, CDC-IXIS, JP Morgan and Commerzbank monitor our portfolios on a monthly basis to make sure our portfolios are in-line with risk guidelines they set forth for our structured products. See guidelines on pages 36 to 41. Refco and Cargill Investor Services serve as the FCM, clearing most of our CTAs’ trades in our Futures portfolio. They monitor the activity of the CTAs on a real-time basis for any abnormal trading behavior and excessive positions or losses, all of which would be reported immediately to PARADIGM.

Describe the firm’s quantitative risk management tools. Provide examples, where available:

Quantitative Risk Management Tools

Intraday P/L Monitoring

and Stress Testing

Spreadsheet for our futures portfolios, providing P/L for each contract, markets and geographic sectors on an aggregate basis and on an individual manager basis. Real time P/L is compared to thresholds, corresponding to losses in the case that all the markets move 1, 2 and 3 standard deviations at the same time against our portfolios.

Daily P/L and Drawdowns Monitoring

Daily performances of all the managers we are invested in. Monitoring focuses on drawdowns.

Monthly Manager Monitoring

Reports for each manager detailing performance, standard deviation, drawdowns, as well as the evolution from one month to another of PARADIGM indicators such as Hedge Fund Alpha and Beta, Park Ratio. Monitoring focuses performance evolution, style drift. Please see page 28-30.

Monthly Manager Scoring

Score below or equal to 1.5 will trigger redemption.

Monthly Portfolios Risk Indicators

Through RiskMetrics we get the following risk reports at the manager level: Exposure of NAV to hedge fund strategies Exposure of NAV to markets/products Sensitivities to equity and fixed income markets Stress testing, parallel shocks VaR analysis

Diversification

Monitoring Manager and sector/strategy allocation has to stay within limits. Please see description on page 35.

Red Flags Monitoring

We have a table of red flags that we monitor and would trigger specific response in case of their occurrence. See table below.

Quarterly Cluster Analysis

Contribute in conjunction with other analysis to identifying “Style Drift”.

In addition, we evaluate a fund’s internal controls over trading limits, credit limits, and stop loss policy through our qualitative review. We perform due diligence on the fund’s risk management system, stress

Red Flag Monitoring Red Flag Response

Style drift In-depth quantitative and qualitative analysis

Unusual drawdowns or profits


Returns inconsistent with strategy


Loss of focus In-depth quantitative and qualitative analysis

Rapid asset growth In-depth quantitative and qualitative analysis

Regulatory concerns Immediate redemption request

Industry reputation Immediate redemption request

test procedures, and marked-to-market procedures. PARADIGM continuously monitors major news feeds, particularly those specific to the hedge fund industry, to find independent news regarding our existing allocations. Other sources of information are manager-reported returns, proprietary analytic models, proprietary indices and sector sub-indices, and external databases of indices. We also maintain close contact with third-party service providers, and our network of business associates provide us with background information. Two areas we are particularly sensitive to are legal issues (regulatory violations, lawsuits, etc.) and dramatic increases in assets managed.

Does the firm apply leverage to some or all of its products? If so, please explain:

PARADIGM uses a line of credit to manage additions and redemptions, capture managers and enhance returns. PARADIGM’s core programs (Master Fund, LP,Master Fund, Ltd. and PARADIGM Multi Strategy) do not employ leverage. PARADIGM Equities Fund employs the discretionary use of leverage of approximately 1.8, with a maximum leverage of 2.0. Our enhanced return programs (see pages 12 to 15) provide 2x, 3x or 4x leveraged exposure to our Master Fund core program. The use of leverage on a fund of funds level is a multiple of the total investment; hence, $20 million in capital leveraged 3 times equals a $60 million investment.

Does the firm maintain a firm wide risk management system including operational, legal, reputational and business risks? If so, please describe:

The firm has an official Policies & Procedures Manual, which includes operational, legal, reputational and business risk management systems. This manual also includes the Disaster Recovery Plan, which details all the necessary steps to take, should an unforeseen disaster occur.

ADMINISTRATION/OPERATIONS

Is the fund administration performed in-house?

No.

All fund and corporate accounting is provided by Global Fund Services, LLC, an Atlanta-based accounting firm. Offshore fund accounting and servicing for our offshore funds is provided by Folio Administrators, Ltd. The Administrator handles all shareholder registration and custody issues including subscriptions and redemptions and computes the net asset value for each fund. The custodian for all onshore funds is Bank of America, and the custodian for offshore funds is JP Morgan.

The time frame of our relationships with our service providers are as follows: Global Fund Services, LLC – 13 years Folio Administrator, Ltd. – 3 years

If services are outsourced: • Which tasks are fulfilled by external

service providers (include names of companies?

• How long have the relationships with those service providers lasted?

• Has the firm ever terminated any service providers (including auditors)? If so, explain the circumstances:

PARADIGM terminated its working relationship with Arthur Anderson, the auditor, due to their inability to continue providing professional and timely services.

CLIENT INFORMATION/REPORTING

What kinds of reports are sent to investors? Provide sample reports:

Client account statements are mailed to clients on a monthly basis and are also available on our website. In addition, clients in all our funds receive quarterly and yearly reports. Please see “Client Reporting” attachment.

Can investors receive customized reports? Institutional investors and distributors may request customized reports.

What is the periodicity of the reporting? PARADIGM reports on a monthly, quarterly and yearly basis. However, if necessary, weekly or bi-weekly reporting will be provided.

Are audited reports available to the investor? Yes. Does the company publish regularly in the press? Provide sample:

Yes.

Has the company published or commissioned any research/academic papers?

Yes. PARADIGM has published numerous research reports on the topic of hedge funds and hedge fund investing.

COMPLIANCE/LEGAL

Is the firm registered with any regulatory and/or supervisory bodies?

PARADIGM Global Advisors, LLC is registered with the SEC as an investment adviser and with the Commodities Futures Trading Commission as a commodity pool operator and a commodity trading advisor and is a member of the US National Futures Association. PARADIGM Capital Management, LLC, the General Partner for our domestic products, is registered with the Commodities Futures Trading Commission as a commodity pool operator and commodity trading advisor and is a member of the US National Futures Association.

When was the last inspection of those bodies?

The NFA performed an audit in 2000, and the SEC audited PARADIGM Global Advisors in Oct 2003. Both were routine exams. Additionally, PARADIGM Global Advisors, LLC and PARADIGM Capital Management perform an annual self exam for the NFA.

Are any lawsuits pending against the company?

There have been no material, civil, criminal or administrative actions against any of the PARADIGM companies, their principals or employees.

Does the company have a full time compliance officer?

P. James Hirchak, Jr.

Does the company have a written compliance manual?

Yes - The firm has an official “Policies and Procedures Manual,” which includes our compliance policies and is signed by every employee. Custodian (onshore funds): Bank of America Custodian (offshore funds): JP Morgan Offshore Administrator: Folio Administrators, Ltd. Legal: Henderson & Lyman (US) Legal: Smith Hughes Raworth & McKenzie (BVI) Auditors: Ernst & Young (onshore and offshore) Bank of America JP Morgan Various U.S. Broker Dealers Independent third party Marketers

Provide a list of professional counterparties the firm maintains a business relationship with:

• Custodians • Administrators • Legal advisors • Auditors • Banks • Distribution channels • External marketers • Other important business partners Abaxbank (Italy); Cargill Investor Services, IXIS, Cyril Finance

McDonald Financial (Key Bank).

How does the firm ensure an alignment of interests between the firm, as fund manager, and the investor?

All of PARADIGM’s partners are invested in the firm and the firm’s products, and several senior staff members have their 401(k)’s and IRA accounts invested in our funds. In addition, many of the investors in our funds are close acquaintances and family members of our staff members.

How much of the firm’s or the partners’ money is invested in the firm’s products?

All of PARADIGM's partners have significant amounts of their liquid net worth invested in the firm’s products or in the firm itself to expand the operations of the firm.

Are there any conflicts of interests the investor should be aware of?

PARADIGM does not participate in any situation that may be considered a conflict of interest. It is a common knowledge that some funds of funds negotiate down fees with underlying hedge funds and profit from the difference. PARADIGM considers it a conflict of interest and has never participated in this type of activity. As a result, PARADIGM will not accept any financial or other direct or indirect compensation from our underlying managers (including equity participation and soft-dollar arrangements.

Please state the name and title of the officer at your firm who has prepared and reviewed this questionnaire.

Name: Jean-Michel Savre; Nick Markola Date: August 2005 Position: Senior Vice President, Marketing & Structured Products

due diligence sv onshore 08-09-05[1]

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